3M Company

Ladies and gentlemen, thank you for standing by. Your conference will be starting in just a few minutes. It is recommended that you use a landline phone if you're going to register for a question. We thank you for your patience and ask that you please remain on the line. Ladies and gentlemen, thank you for standing by. Your conference will be starting in just a few minutes. It is recommended that you use a landline phone if you're going to register for a question. We thank you for your patience and ask that you please remain on the line. Ladies and gentlemen, thank you for standing by. Welcome to the 3M Second Quarter Earnings Conference Call. During the presentation, all participants will be in the listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone keypad. It is recommended that you use a landline phone if you're going to register for a question. As a reminder, this conference is being recorded Thursday, July 25, 2019. I would now like to turn the call over to Bruce Germiland, Vice President of Investor Relations at 3M.

Thank you and good morning, everyone. Welcome to our Second Quarter 2019 Business Review. With me today are Mike Roman, 3M's Chairman and Chief Executive Officer, and Nick Gangstead, our Chief Financial Officer. Mike and Nick will make some formal comments and then we'll take your questions. Today's earnings released and slide presentation accompanying this call are posted on our Investor Relations website at 3M.com under the heading Quarterly Earnings. Please note we are reporting our results under our new business group structure starting with the second quarter. Additional business group performance details can be found in the appendix of this presentation along with our May 30th AK and our Investor Relations website. Lastly, let me remind you to mark your calendars for our third quarter earnings call which will take place on Thursday, October 24th. Please take a moment to read the forward-looking statement on slide two. During today's conference call, we will make certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent form 10K lists some of the most important risk factors that could cause actual results to differ from our predictions. Finally, please note that throughout today's presentation we'll be making references to certain non-GAAP financial measures. In particular, measures which exclude the impact of the deconsolidation of our Venezuelan subsidiary. Reconciliation of the non-GAAP measures can be found in the appendix of today's presentation and press release. Please turn to slide three and I'll hand it off to Mike. Mike? Thank you Bruce.

Good morning everyone and thank you for joining us. I am encouraged by our company's progress and performance in the second quarter coming off a difficult start to the year. While we continued to face slow growth conditions in key end markets, our execution was strong. We implemented our restructuring while effectively managing costs and reducing inventory levels which I will discuss on the next slide. Our team is building momentum going into the second half as we focus on what we control and as a result today we are affirming our guidance for the full year. At the same time we remain focused on our four priorities for long-term value creation. Portfolio, transformation, innovation and people and culture. In the second quarter this included our acquisition of a Celadie, an excellent complement to our health care portfolio and which we expect to close in the fourth quarter. Please turn to slide four. As you recall on our last earnings call we laid out specific and aggressive actions to strengthen our performance. In the second quarter we made significant progress with each of those actions. First the restructuring has been finalized across the enterprise which resulted in a pre-tax charge of 148 million dollars. We continue to expect annual savings of 225 to 250 million dollars. With 110 million dollars in the remainder of this year. Beyond the restructuring we are driving increased cash flow through several other actions. For example, we adjusted our manufacturing output and reduced inventory levels by over 250 million dollars in the quarter. We also curtailed indirect costs by more than 80 million dollars year over year. While we are making positive strides in our operations there is still more to do. And we will remain focused on managing costs and improving productivity. As we do this we will continue to invest in organic growth through research and development and capex. To deliver on our promise to innovate for our customers. Please turn to slide five for a summary of our second quarter. Organic growth company-wide was minus one percent in line with our expectations. Growth was led by our healthcare business at four percent which was a good improvement versus Q1 and consumer grew one percent. We saw continued end market softness in China, automotive and electronics which tempered growth in our other two businesses. Growth in safety and industrial declined by five percent while transportation and electronics was down one percent. With respect to EPS we posted adjusted earnings of two dollars and twenty cents per share. Which includes a 21 cent charge for restructuring and a seven cent benefit from a pending divestiture which Nick will cover in his remarks. Underlying margins were 22.2 percent which excludes 140 basis points of impact from the restructuring. So we are making good progress relative to our Q1 margins of 21.4 percent. Importantly we delivered this improved margin performance even while reducing production and inventory. Which reflects the strength of the 3M value model. I want to take this opportunity to thank our people for rising to the occasion and for executing our plans with focus and urgency. And while there is more work left to do 3M's foundation remains strong. We have deep competitive advantage hence manufacturing, global capabilities and leading brands. We have market leading businesses and strong relationships with our customers. Moving ahead we are focused on investing for the future and continuing to deliver operational improvements. Which will enable us to better serve our customers and maximize value for all of our stakeholders. That wraps up my opening comments. I will come back to discuss our guidance after Nick takes you through the details of the quarter. Nick.

Thank you Mike and good morning everyone. Please turn to slide six. Second quarter organic sales declined 0.9 percent in line with our expectations. Volumes were down 140 basis points while selling prices were up 50 basis points. The net impact of acquisitions and divestitures increased sales by 10 basis points. While foreign currency translation was a 180 basis point headwind to sales. All in second quarter sales in US dollars declined 2.6 percent versus last year. Looking at growth geographically the US was flat organically versus last year's 6 percent comparison. Last year's second quarter was boosted by increased customer demand ahead of our US ERP go life. Health care grew mid single digits with consumer up low single digits. Transportation and electronics was flat while safety and industrial declined. Asia Pacific declined 90 basis points in Q2 with health care delivering positive mid single digit organic growth. Organic growth in China was down 80 basis points with growth in health care and transportation and electronics. Which was more than offset by declines in safety and industrial and consumer. For the year we now expect organic growth in China to be down low to mid single digits versus a prior expectation of flat. As we continue to experience challenging and market conditions particularly in the electronics and automotive industries. EMEA declined 3.6 percent on a nearly 6 percent comparison in last year's second quarter. Latin America Canada grew 70 basis points with Brazil, Canada and Mexico each up low single digits. Please turn to slide 7 for the second quarter P&L highlights. Company-wide second quarter sales were 8.2 billion dollars with operating income of 1.7 billion dollars. Operating margins were 20.8 percent which included a 140 basis point impact from our second quarter restructuring and other actions. As anticipated the biggest impact to Q2 operating margins was the -on-year decline in organic volume. Along with cost absorption penalties from lower production volumes as all business groups work to reduce inventories in the quarter. These factors resulted in a 200 basis point reduction to margins versus last year's second quarter. Acquisitions and divestitures combined brought down margins by 50 basis points primarily due to the acquisition of M.Model. Higher selling prices continued to more than offset raw material inflation contributing 30 basis points to second quarter margins. For the year we continue to expect selling prices to more than offset raw material costs. And finally foreign currency net of hedging impacts increased margins by 40 basis points. Let's now turn to slide 8 for a closer look at earnings per share. Second quarter adjusted earnings were 2.20 cents per share. That was a bit better than we anticipated primarily due to improved productivity along with the held for sale status related to a pending divestiture which I will cover shortly. Let me now cover the reconciling items to second quarter earnings. Negative organic growth along with absorption penalties from lower production and inventory levels. Reduced per share earnings by 19 cents in the stitchers combined increased second quarter earnings by one cent per share versus last year. This result includes a seven cent tax benefit related to the held for sale status of the pending divestiture of the gas and flame detection business that we announced in June. Restructuring and other actions lowered Q2 earnings per share by 21 cents. Our second quarter underlying tax rate was higher year on year which decreased earnings by seven cents per share. And finally we reduced average diluted shares outstanding by three percent versus Q2 last year which added seven cents to per share earnings. Please turn to slide 9 for a look at our cash flow performance. Second quarter free cash flow was 1.2 billion dollars with a free cash flow conversion rate of 110 percent which includes a 14 percentage point benefit from the deconsolidation of our Venezuelan subsidiary. Second quarter capital expenditures were 421 million dollars up 56 million dollars year on year. For the full year we continue to anticipate CapEx investments in the range of 1.6 to 1.7 billion dollars. During the quarter we paid 830 million dollars in cash dividends to shareholders and returned 400 million dollars to shareholders through gross share repurchases. We continue to expect full year repurchases to be in the range of one to one and a half billion dollars. Please turn to slide 10 where I will summarize the business group performance for Q2. I will start with our safety and industrial business which declined five percent in the quarter. Similar to first quarter we saw continued broad-based softness and channel inventory reductions across most of the portfolio. These factors particularly impacted our automotive aftermarket, abrasives, enclosure and masking systems businesses. Personal safety was up low single digits in Q2 against a double digit comparison a year ago and roofing granules turned positive this quarter growing low single digits organically. Looking geographically safety and industrial's organic growth was led by a one percent increase in Latin America Canada while Asia Pacific, EMEA and the U.S. each declined. Safety and industrial's second quarter operating margins were 22.1 percent with an underlying decline of approximately 200 basis points. Margins were impacted by negative organic growth, reductions in manufacturing output and inventory along with our second quarter restructuring actions. Moving to transportation and electronics second quarter sales were down 120 basis points organically compared to last year. The electronics related businesses were down low single digits organically with growth in display material systems more than offset by declines in electronics materials solutions. Our automotive OEM business was down five percent year on year impacted by a seven percent decline in second quarter global car and last year's strong comp. Transportation safety was up mid single digits and advanced materials continued to deliver strong organic growth up high single digits in the quarter. Geographically organic growth was flat in both the U.S. and Latin America Canada while Asia Pacific and EMEA declined. Transportation and electronics second quarter operating margins were 24.1 percent down 240 basis points. Similar to safety and industrial margins were impacted by manufacturing and inventory reductions along with a 30 basis point impact from restructuring. Turning to health care as anticipated this business improved versus first quarter as our team delivered three and a half percent organic growth in Q2. Organic growth was broad across most of our health care business led by a high single digit increase in health information systems. Medical solutions our largest business in health care was up mid single digits and we continue to look forward to a sality becoming part of this business later this year. Up low single digits finally drug delivery was down mid single digits in line with our expectations. On a geographic basis Asia Pacific and the U.S. led the way each up mid single digits. Health care second quarter operating margins were 26.4 percent which included a combined 210 basis point impact from the M.Model acquisition and restructuring. Lastly second quarter organic growth for our consumer business was nearly one percent. Sales grew low single digits in consumer health care stationary in office and home improvement while home care declined. Looking at consumer geographically organic growth was led by a two percent increase in the U.S. and Latin America Canada while Asia Pacific and the MIA declined. Consumers operating margins were 20.6 percent in the second quarter which included a 40 basis point impact from restructuring. That wraps up our review of second quarter results please turn to slide 11 and i'll hand it back over to Mike to discuss 2019 guidance. Mike. Thank

you

Nick today

we are affirming our guidance for the full year. We expect organic growth of minus one to plus two percent along with adjusted earnings of nine dollars and 25 cents to nine dollars and 75 cents per share. Please note that this guidance does not include the pending sality acquisition or the pending divestiture of our gas and flame detection business. We also continue to expect a return on invested capital of 20 to 22 percent and a free cash flow conversion rate of 95 to 105 percent. Though there is uncertainty in the global macroeconomic environment we are maintaining our guidance as we will see continued momentum from the actions we implemented in the first half PFAS. Specifically PFOA and PFOS which are the subject of the litigation we face. As CEO there are a few things that I want people to know about this issue and our company. First 3M voluntarily phased out of the production of PFOA and PFOS in the early 2000s and was the first company to do so. Since then we have been committed to using our expertise and resources to improve the knowledge of PFAS, support remediation and give people confidence in their water. 3M has invested a hundred million dollars in testing water sources. We have invested another 50 million dollars for filtration systems as these substances can be effectively removed which 3M has been doing for more than a decade. We have entered into voluntary agreements with states and communities where we manufactured these compounds. We have also contributed to peer-reviewed journals backed by hundreds of studies conducted by 3M and other researchers on the potential effects of PFAS. At the same time we are continuing to work with the EPA along with state and local governments to support thoughtful regulations and solutions based on science and facts. We also believe that an independent scientific body should partner with regulators to review all available studies. As PFAS continues to evolve, the scientific evidence does not show that PFAS caused harm to people at past or current exposure levels. More broadly speaking, being an environmentally responsible company is core to 3M. We started our groundbreaking pollution prevention pays program more than 40 years ago and we continue to step up our leadership to address climate and environmental challenges. Earlier this year we committed to move our entire global operations to renewable energy. And last year alone 3M solutions helped our customers avoid 15 million tons of emissions. Sustainability is a value that matters deeply to our people, to our customers and to me personally. It is a point of pride for 3M and we will defend with vigor our company's reputation in the court of law and in the court of public opinion. That concludes our prepared remarks and we will now take your questions.

Ladies and gentlemen, if you would like to register a question using a landline phone, please press the 1 followed by the 4 on your telephone keypad. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speaker phone, please lift your hand sent before entering your request. Please limit your participation to one question and one follow up. One moment please while we compile a Q&A roster. And our first question comes from the line of Andrew Kapowicz of Citi. Please proceed with your question.

Hey, good morning guys. Mike or Nick, can you talk about the cadence of the quarter as it went on? Some industrial companies have talked about a bit of a stabilization late in Q2. Did you see that at all in safety and industrial or transportation electronics? And last where you said destocking from your customers cost you something like 100 base points of revenue growth with similar impact in Q2. As it does look like your auto will be on business performance a bit better than the underlying market. So have you seen any signs of industrial or auto destocking is closer to ending?

Yeah, Andy, throughout the quarter, the trends were pretty stable as we saw our sales progress through each of the three months. I can't say we really discerned any positive or negative trend as the quarter progressed. If I shift it internally, we did see our momentum in terms of reducing. In regards to channel inventory, I said about last quarter about 100 basis points of what we impacted channel destocking. We were again seeing channel destocking impacting us in the second quarter, in particular in the .B.G. business, safety and industrial business group. We think that was a very similar destocking impact to what we saw in the first quarter. And as far as automotive, we were most noticeably impacted by destocking in China, and that just was not the same event in the second quarter. It was a pretty much more normal relation of auto builds to our penetration and less channel destocking going on in relation to auto.

Okay, Nick, that's helpful. And then you mentioned in the presentation that you'll see is 110 million in the second half of the year, 15 cents. We still have to have a decent step up in UPS in the second half, even outside the benefit to make the midpoint of your guide. So how much of the step up is in your control? Can you give us some more color on how much of your business transformation and factory optimization and this is can help you in the second half? As you know, these programs in terms of savings are continuing to ramp on the second half in 2020.

Yeah, Andy, a few things are going on. First of all, we have been progressively taking more and more inventory out of our own operations. We think some of that that's going to continue into the second half of the year. So that will continue to be a headwind that we're facing in the second half of the year. We will be getting the restructuring benefits of 15 cents that we talked about as well as I'll just say overall disciplined cost management in light of a a what we would call a slowing economy right now. So some of that our own discipline and execution will be impacting us in the in the second half. On the margin, there are some other things that will impact us. FX which has been a neutral to a headwind in the second in the first half of the year. That will be likely if FX rates stay where they are that they will be becoming positive to us in the second half of the year. But mainly it's just going to be improved execution over what we saw in particularly in the first quarter.

Thanks,

Nick.

Thanks, Andy.

Our next question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.

Thanks. Good morning, everyone. Good morning, Joe. Hey, Nick, maybe just kind of staying on the you know how to think about the the margins for the for the rest of the year. Obviously like a big headwind this quarter was the the manufacturing and inventory reductions and you guys have given some estimates for what you expect, you know, productivity to be like this year and you know, clearly you're also moving ahead with indirect cost reduction. So I don't know is the right way to think about it as you progress through the year that these things are going to offset each other or should we be thinking about them as a tailwind? I'm just trying to trying to understand how to think about how to think this through.

Joe, if I think about where we're going to end for the full year, let me just start out by saying when I look at collectively where all the sell side analysts are in their view of the total year, my view is it looks like you collectively have it dialed in about right. What what I'm seeing collectively amongst all of you means it lines up very closely with our own internal view of of how things will progress for the for the full year. If I look at in particular in Q3, Joe, right now we're expecting organic growth in the second quarter to be somewhere between flats to low single digit organic growth. And as far as margins, what we've been seeing happen throughout the year and what we expect to continue to happen as we progress into Q3, Q1 to Q2, absent the restructuring actions was a sequential improvement in margins as we focus on execution. We think that sequential improvement going into Q3 is going to continue. So we expect our margins to be 23% or higher in in the third quarter. And so what we're seeing there is some momentum building on our margin story. I'd say Joe, those are the headlines to think about and how you're thinking about the second half of the year.

Got it. That's super helpful, Nick. Maybe Mike, very helpful commentary earlier on PFAS. Obviously, it's hard to assess how this all shakes out, but I'd be curious to get your views on like timing on when we could think about when we'll start to get some sort of resolution as it continues obviously to be a bit of an overhang on the shares.

Yeah, Joe, I you know when you think about timing, respect to timing, let me kind of talk about what we can say today and it's not a lot, but it'll give you a couple of things to look at. The first trial, if there is a trial related to the Wolverine cases in Michigan, that's the that would be at the end of first quarter. These are kind of fuzzy timelines. They're not fixed, but that's kind of the expectation when the first trials related that if there is a trial would come would come to us. AFFF, the MDL, the multi-district litigation, we wouldn't expect any actions on that until late 2020. So that those are kind of a frame of the litigation and timing and as we as we learn more as I said in my comments, we're gaining an understanding all the time. As we learn more, we'll update you as we go.

Okay, thank you.

Bank of America, Merrill Lynch, please proceed with your question.

Good morning. Can you hear me? Yep. Good morning, Andrew. Yeah, just a couple of follow-up questions. Could you just walk us through core growth margins, x restructuring sequentially versus the first quarter? And how should we think about progression on that side of the equation through the year? Thank you. That's first question.

Okay, Andrews, a little bit of this will be a repeat from from what I said to Joe, but our core underlying margins, we had margin. No, no, no,

gross margins. Gross margins. Oh, gross

margins. Thank you for clarifying that, Andrew. So our gross margins in the first quarter, if we pull out the costs related to some litigation activity that we had in the first quarter, our core underlying more gross margin was 48%. In the second quarter, that that went down, if I pull out the restructuring down to .5% and that's being impacted. We think we estimate by 100 to 150 basis points in the second quarter by the aggressive actions we're taking and pulling out pulling out inventory in our production. So underlying operations, we're seeing good execution on what we're working there. And we expect those gross margins to continue to be impacted by us taking actions on our inventory. But we also do see our gross margins improving slightly into the third quarter.

So if we pull that out and just to clarify, if we pull that out, you're sort of recovering slowly from that 48% into sort of more historical range of 49.50. That's a fair statement if you take out inventory.

That's it. Andrew, that's a fair statement.

And then on inventory, you know, I assumed that improved free cash flow forecast for the year, I think it's slide 23, if I'm slide 24, that's all working capital, right?

Yeah, our projection, we're keeping our projection of free cash flow conversion. Well, I think you're actually going into a deeper slide. Improved working capital is the biggest biggest thing impacting our free cash flow conversion and dollars for 2019.

And if you were to quantify how much incremental working capital reduction opportunity do you have for the next 12 to 18 months?

We, I'll isolate it just to inventory right now, Andrew, in answering that question. 250 that we took out in the second quarter, we think there's another 100 or two that we can be taking out of the second half of 2019. And then as far as 2020, it's a little early to say, but we've been targeting to get down to 85 days of inventory outstanding. That's where we're targeting to get to the end of this year. If we're going to bring that down further in 2020, we'll likely be giving that guidance later in this year or early next year.

Thank you very much.

Our next question comes from the line of Julian Mitchell of Barclays. Please proceed with your question.

Hi, good morning. Thank you. Hey, maybe just focusing on Q3. So I think you talked about flat to slight organic sales growth firm wide. Maybe just help with a couple of aspects of that. One would be does that assume further channel destocking? And how severe would that be in Q3? Not your own, you know, under production efforts, but channel destock. And then what are you assuming for the transport and electronics business within that after what was a pretty good Q2?

You know, it's probably good to step back. I recognize we've been seeing, you know, the global economy's slowing as we came through second quarter, but this is a trend that we've been seeing since, you know, late last year. And I would say if you look at now third quarter as we move sequentially forward, to, you know, to deliver on what Nick was just talking about, it really is a stabilization of the, you know, the markets that we're facing and the trends that we're seeing. And to go below that, it would have to, the economies would have to degrade even further. And if you look at channel, Nick talked about what we saw in the second quarter relative to the first quarter, we think when you look at the total year as it plays out, a majority of the inventory adjustments in the channel are taking place in the first half. So it'll be a lesser impact even though there'll be some impact in the second half. So that plus a easier comp as you get into Q3, if you look at it with our ERP deployment last year, that would all add up to that trend. And then just on your question about TBG, we would see them down in the second half from where they are in, sequentially from where they are in second quarter. But in line with the market outlook that we've been talking about. We don't, I think early in the year people have been talking about a, been hoping for a stronger recovery in automotive and electronics. But we see a more conservative view of that now with build rates down and continuing to be soft as we go in the second half. Maybe stabilizing a bit versus where they are in in the second quarter, but still down. So we see sequentially down in TBG. Hey Julian,

I just, just to add a little bit to what Mike said there. For transportation and electronics in the third quarter particularly, we expect that to be down low to mid single digits in the third quarter. We've, and that's in line with what we're expecting as far as guidance for the full year for transportation electronics. We've guided that we think for the full year that's somewhere between flat to down 3%. And if you had me, if I had to estimate right now, I'd say we're much, we're leaning more towards the low end of that range for transportation electronics for the full year. That's

extremely helpful. Just following up on that Nick, you know, as you said that's trending towards the lower end. Also, I think from a regional standpoint you took down your China assumption for the year. So maybe help us understand in the context of the overall reaffirmed organic sales growth guide for 3M for 2019, which are the regions or segments that are coming in maybe at the higher end or looking a little bit brighter today than back in April?

Yeah, so healthcare as far as the guidance that we've given for the full year on that. That's one we see more likely in the high end of the range. And transportation electronics more likely towards the low end. Consumer I'd put right in the middle of the range that we've laid out. And SIPG, we see it in the range, but it that also could be in this bottom half of the range. And as we guided negative one to plus two for the full year last quarter and as we're affirming it, there was also a sense that we had of there may be some places where things come in a little weaker and we're seeing that happen and that gives us the ability to continue to maintain that guidance going forward. Perfect, thank you.

Our next question comes from the line of Nigel Koh of Wolf Research. Please proceed with your question.

Thanks. Good morning. Hi, I just want to kind of follow on to that one really. Just trying to think about, you know, what that all means to that minus one to plus two. So seems like you're sort of biasing towards slightly below the midpoint based on what you see today. Would that be fair neck? You know, sort of looking at maybe flat to up slightly for the full year.

Yeah, Nigel, I mean the midpoint of that range is up 50 basis points. So flat to up 50 to 100 basis points. Like that's a, I think a very fair zone for where our most likely landing spot is.

Okay,

that's helpful. I'm not sure. I missed some of the prepared remarks. Did you quantify the impact of inventory headwinds this quarter? So that down 90 bits, you know, what was the sort of the sell through that you saw excluding inventory headwinds?

Now there's, Nigel, there's two different inventory points we talked about. On channel inventory contractions, that last quarter in the first quarter, we said it was about 100 basis point impact to revenue. We think second quarter was something similar to that and Mike also clarified that we think while we still have some ahead of us for channel contraction, we think the majority is behind us. In terms of within our company as we have been reducing inventories ourselves, reducing our production, we've said that, I've said that we think that impacted our margin in the second quarter by 100 to 150 basis points.

Okay, that's very clear. Thanks for the detail. And my follow-on question is really on the, you know, the location and indications of some of the one-timers this quarter. There was a, you know, a seven cent tax gain. Did that land in the tax line or was that somewhere else, Nick? And then secondly, the restructuring is 1, 12 operating, 36 non-operating. You know, the payback, you know, was based on 20 cents of restructuring. Is that the right way to think about it? Or does the payback sort of, you know, come down because some of it's non-operating and maybe just touch on the nature of that non-operating restructuring charge?

Okay, Nigel, just to parse out the two pieces you're asking about. The seven cent benefit we incurred in relation to the held for sale status for our gas detection business, that ran through the tax line, the income tax line of our income statement. The $148 million of total impacting our operating expense and the balance 36 million of non-op. And that's exactly in line with what we were expecting. We were estimating approximately $150 million. The fact that some of it's hitting non-op versus operating doesn't impact at all the projected benefits we have going forward of approximately $110 million yet this year. And on an annualized basis, $225 million to $250 million. As far as where that restructuring happened, I would say geographically it happened around, fairly well dispersed around 3M. And as far as business, of the 112 that was in operating expense of that restructuring, about 75% of that was in our corporate and unallocated section and about 25% of that was in our businesses. Now the benefit, that $110 million of benefit, that will be felt by our businesses through the second half of the year and it will be fairly proportionate to the size of each of our businesses as far as the benefit they'll see in the second half. Great, thanks Nick.

Our next question comes from the line of Josh Pokowinski of Morgan Stanley. Please proceed with your question. Hi, good morning guys. Morning Josh.

Nick, just a point of clarification on the inventory D-stock that you saw externally by your customers. You said that 100 basis points in the first quarter kind of look similar in the second quarter. But auto, I think China auto specifically got better. So within that something must have gotten worse. Where did we see that get worse?

As far as anything that got sequentially worse versus the first quarter, Josh, nothing comes out particularly strong. I think in aggregate in China, we continue to see China D-stocking on a more broad basis, though we didn't see it in our automotive business of any significance. What we saw across our safety and industrial business, that view, Josh, was very similar in terms of the total D-stocking impact that we were seeing of 100 basis points both quarters.

Got it. That's helpful. And then I know it's a little early to think about 2020, but I guess thinking back with historical context for how D-stocking and restocking cycles go, should we expect to just be selling to market demand as we get to the end of this? Or presumably in China, there's a bit of irrational exuberance on both sides of the equation that as soon as things turn, D-stock turns into restock. Has that historically been the case? Or should we just think about 2020 starting point as, hey, maybe we lose some of that D-stocking headwind?

Josh, maybe a couple things. If you look at the channel and I would say the value chains, customer value chains, they react to the dynamics in the end markets pretty quickly. What you saw in the D-stocking in the first half, they were reacting quickly to the build rates in automotive electronics. We expect that to stabilize in the second half. We'll see some additional D-stocking because of some of the slowing that we saw in second quarter, but it'll stabilize. Really, to start to think about what happens in 2020 or even late in the year, it'll depend on the end market dynamics. If they recover and their demand goes up, then you would see a pretty strong turnaround in restocking. If it stabilizes and the projections and outlooks economically are more stable in the second half, then it would be balanced as we get into the second half. Then it depends on what happens in demand as we go into 2020.

Got it. That's helpful. Then just to follow up on business transformation and the savings associated with that, obviously, there's a lot of moving pieces in the organization right now with restructuring and some of the demand dynamics and the internal D-stocking. How are you benchmarking on some of the business transformation savings and non-savings related other benefits that would happen throughout the organization? Is that something where those go by the wayside or harder to execute on? Just an update on how that's tracked.

We've always talked about transformation as a focus that starts and ends with a customer, but it is really making us more agile, more efficient, and more competitive. That creates value. All of those create value. It also helped us realign the company around the four businesses, the -to-market models of customers that we have. It's enabling us to connect our customers even better as we move ahead. It's a lot more than an ERP deployment. It's the entire ecosystem around that, and it's digitizing our enterprise. All of that's adding efficiency. We are committed to the savings that we talked about at the beginning. It's a value realization that we would have by the end of 2020, but it does help us drive productivity. It does help us become more efficient broadly. We talked about how that starts to show up in our margins over time. It's an enabler for us to continue to create premium margins as we move ahead. It is going to be a driver of the savings that we've talked about, but also of that efficiency that will carry us forward.

All right. Thanks, Josh. Thanks, Josh.

Our next question comes from the line of Steve Tusa of JP Morgan. Please proceed with your question.

Hey, good morning. Good morning, Steve. The seven cents of the tax benefit, my tax line was relatively in line. Was there then a higher than expected effective tax rate, and does that sustain itself? Also, is that a seven-cent benefit run rate per quarter here, or is that a one-time discreet item?

Steve, first of all, let me just describe it in a little bit of detail. The gas detection business that we own is in a position where we plan to sell it, and the tax basis that we're holding that asset at is greater than the planned selling price, but it's also the book value of what we hold with that asset is below the planned selling price. So when we sell it, we will take an operating income capital gain on that, but from a tax perspective, it will be a loss. Now, I'm a bit over my skis here describing accounting nuances to you, but the accounting rules are once you place an asset in a -for-sale status, if it's in a tax loss position, you take the tax benefit immediately, even before the deal actually consummates. So that seven cents is a result of us putting it in that status. So that's not an ongoing repeating thing that we'll be seeing. As far as the underlying operations, no, Steve, there's not any big one offsetting that. There's always little nits back and forth in the tax rate, and the underlying tax rate for the full year, we still think, is going to be in the range of 20 to 22 percent.

Okay, and then the gain when it comes to the divestiture, you said, is that still 20 cents, and that's still to come and not in the guidance?

It's still not in the guidance.

Yeah, that's still not in the guidance. Okay, and then one last one just on the second half. Are you planning for kind of, you know, there's a lot of things moving around, but are you planning, is this in your mind kind of normal seasonality for you guys for the second half of the year?

Normal seasonality, if I look at normal, but the only thing that's abnormal is last year was a bit abnormal for us with some of our pull-ahead sales into second quarter. So from a sequential basis, we're not seeing this year progressing on an abnormal path. I think it'll be fairly normal.

Okay, and then just one last quick one. This seven cents, it's in the tax line, correct? That is in the models, that is seven cents? That is correct, Steve. Okay, great. Thanks a lot, guys.

Our next question comes from the line of Dean Dre of RBC Capital Markets. Please proceed with your question.

Thank you. Good morning, everyone. Hey, Dean. Hey, the three problem areas that have been pressuring 3M for like more than the past year, auto, electronics, and China. So the China you called out has continued to be soft, but notionally, on a geographic basis this quarter, it did not stand out as a particular negative. So can you comment on that and what kind of call you see across your businesses in China in particular and related to kind of the tariffs and trade frictions?

Yeah, Dean, we do talk a lot about China auto electronics and kind of get them all together. But maybe just if you step back and look at China 4.3M, we continue to see strength in our healthcare business up high single digits. And so that was driving a strong growth for us. We also saw strength in our medical solutions business in particular. Transportation electronics was up low single digits in the quarter. We saw significant decline in automotive OEM, but that was countered offset by electronics up low single digits. We saw strong growth in our transportation safety business there and our advanced materials business. So there was some strength areas that helped China balance out. As I said earlier, sequentially, we see transportation electronics a little softer in the second half. And so we're taking a conservative view around build rates and electronics outlook as we built our view of the second half. And that's part of impacting China. But second quarter, some strengths and a good performance against a strong comp year over year.

That's helpful. And then on electronics, everyone wants to paint electronics all with the same brush, both product lines and geographies. But you made the comment earlier that display film was actually up and relatively strong and it was electronics material solutions that were softer. Maybe just share with us the nuances about why you would see those different dynamics within the supply chain. Maybe there's some semiconductor exposure there as well, but the color would be helpful there.

Yeah. And I think that your last point is the place to start. Our electronic material solutions business has a broader exposure in electronics, including semiconductor, fabrication, data centers, which continues to be a helpful market and growing. But it's got a little bit of a consumer electronics piece. The biggest part of the revenue there is consumer electronics, but we're also moving into higher growth areas like automotive electrification. And we continue to see growth there. We continue to see some good results. And I would say consumer electronics, we saw a little bit of an uptick in display demand in second quarter, a little stronger than maybe we even expected as we started into the quarter. Some of that is you start to see a little bit of buying in anticipation of the second half season for consumer electronics. And so we saw a little bit of that starting in second quarter. And that hits display materials more so much and a much bigger impact than in electronic materials.

That's helpful. And just last point is more of a comment than a question is. I really appreciate the comments about PFAS and where stands and the level of transparency that 3M is providing here. I'm just struck by how much misinformation is on the internet regarding the chemical, references it to being a forever chemical. And the reality is there are a number of very effective ways to remediate the chemical from water. They're all proven to be effective to question of how much do you want to spend, how big is the water body and your time frame. So the remediation on this looks like it's doable. And you all are taking an appreciated approach to this. I just wanted to add that.

Thank you, Dean. And we understand the concerns people have about their water. We take the issue seriously, but we are also seeing that we can make a difference in remediation. And we'll continue to be transparent and update you as we go ahead. Thank you.

Our next question comes from the line of John Inch of Gordon Haskett. Please proceed with your question.

Thanks, everyone. Good morning. Nick, just to clarify, so the 20 cents when you say it's not in the guide, just to be clear, the 925-975 would not include 20 cents of pending gain from the sale of gas and flame. Is that correct?

John, that's correct. It does not include the pending gain from the sale of our gas detection business, nor does it include any impact that will come from a -a-dee when that if that in and when and if that closes, which we expect will be later this year. Right. And then

Nick, in the P&L, the other expense income line of minus 256 versus 51 a year ago, I'm assuming Venezuela charge of 162 is in that. And is the Delta, the 36 of non-op restructuring kind of getting you to 58? And does that number run through? It doesn't look like it's running through the adjusted number, but maybe you can help me with just the bridge there.

Yeah, that other, that will include the Venezuela. It will also include 36 million from the restructuring actions we took that were not part of operating expense. Those are the two biggest things in there.

And there's nothing else in there of consequence. And the 36 does run through as a cost runs through the adjusted number. Is that correct? That is correct. That is correct. Okay. Are there any, just while we're on gas and flame, are there any other businesses, I guess this was part of safety, right? Are there any other businesses, Mike or Nick, that you're looking at that may be potential candidates for divestiture?

John, portfolio management is one of our top priorities. And as you know, it's an ongoing process for us. And we're actively managing this aspect of the portfolio and their fit with our value model. You know, we've shown that when we don't have the right fit, we'll take action. But that's something an ongoing process will keep updated.

I guess my question is, did this just come about or were you, you know, you've been working on it for a little while or what was the genesis of it?

This particular case, the gas and gas detection business, when we made the acquisition of Scott's safety, this was part of our strategy at the time of acquisition. So this was, you know, we've talked about on portfolio, how we think about complementing our organic priorities with acquisitions that leverage our fundamental strengths. Scott's safety was one of those moves us into a high value space and gas detection. We identified that early that that wasn't part of our strategy. And now we're acting on

it. Got it. And then just a couple more cleanups. I think you said, maybe Nick, can you just update us on your expectation for share of purchase in the second half? And then I think you raised the dividend by 6% in the first quarter. Maybe Mike, philosophically, you've got a lot of, you've got a few pressures on your cash call at the moment. Are you committed still to an annual dividend increase kind of looking out?

Yeah, John, let me take that first. As far as the dividend, our position for many, several years has been that we expected to grow our dividend to grow in line with earnings over time. Now, this particular year is with a 6% increase that's outstripping our earnings growth. But the concept of us continuing to increase earnings or dividends year over year, I'd say that's a philosophy and approach we continue to expect. But I would say as far as expecting a dividend increase that over time it will parallel fairly closely our earnings per share growth. And then John, remind me of the first part of the question. Oh, as far as share repurchases?

Share repurchase, yeah.

I've guided one to one and a half for the full year. That would imply at most just a few hundred million in the second half of the year.

And just, I'm sorry for this last point, but if if the, obviously the earnings are going down, is the philosophy you grow dividends with the earnings, but if the earnings are going down, are you just going to hold the dividend or, or and then wait for the catch up? Is that kind of the implication? I'm not actually trying to hold you to a number. I'm just trying to understand the philosophy. No, the

philosophy would be over time. I would think unlikely that we would decrease, hold flat or decrease a dividend even if there was one year of an earnings decline. If I go back to other times in our history where we've had an earnings decline, we still have some small increases in our dividend. Got it. Thank you very much. Appreciate it.

Our next question comes from the line of John Walsh of Credit Suisse. Please proceed with your question.

Hi, good morning. Morning, John. Morning, John. Hi. So in the prepared remarks, you kind of talked about, you know, higher pricing, being able to offset inflation for the full year. Just want to pull apart that price piece and just, you know, we've seen a deceleration, right, for the full year on an absolute basis.

Yeah, I'll go even further, John. So we've averaged about 70 basis points of price growth in the first half of the year. My best estimate for the full year is we'll be right in that range. So I wouldn't characterize it as a deceleration. I think about 70 basis points first half. I think something in the range of 70 basis points second half is our best view on that now and remain quite confident that it will more than outpace what we're seeing from a raw material and tariff inflation impact.

Gotcha. And then, you know, just thinking about the third quarter organic growth, you know, the flat to up low single digits, that still implies that the growth on growth would decelerate because you have an easier comp in Q3 of 18. Just maybe some color that you saw exiting the quarter, June, July, anything you can kind of talk to us at the trajectory you're seeing currently?

John, the biggest trajectory change that I'll say that that colors the flat to up low single digits in the third quarter as far as versus a comp is my earlier statement that we expect transportation electronics to be down low to mid single digits. I think that will be the thing that colors why sequentially versus an easier comp. It's not quite the same level of growth you would expect. When I look across the rest of our businesses, your analysis you just went through, I think, is a pretty valid analysis.

Great. Appreciate it. Thank you.

Our next question comes from the line of Lawrence Alexander of Jefferies. Please proceed.

Good morning. Two quick ones. Can you just give a little bit more detail on the trends you're seeing in aerospace? It seemed a bit weaker than what we've heard from other companies. And secondly, on PFS or PFOS and PFO, that litigation area, can you characterize whether the US standards are tougher or easier than in Europe and maybe just sort of help us get ahead of where the food contact debate is? Because I think that that's like another cloud of noise that shouldn't really be affecting you, but I think people are sort of focusing on the European side there.

Yeah. Lawrence, maybe starting with aerospace, when we talked about the business, we talked about automotive and aerospace together as one business. And when you look at the divisions that we share and that we report the revenue from, it's together. Our aerospace business actually has shown some good growth as we come through the first half of the year. So it's smaller than automotive business, but it's an important business for us and doing well. So I don't think we're saying anything different in that respect. What I would say about thinking about Europe versus the US and PFAS or PFOS regulations, the regulations are really evolving right now. I don't think it's clear to, I don't think I can clearly compare US versus other international Europe regulations. It's very evolving and we're working with regulators broadly, both federal and local.

Okay. Thank you.

Our next question comes from the line of Jeff Sprague, vertical research partners. Please proceed with your question.

Thank you. Good morning, fellas. Hey, obviously a lot of ground covered. I thought it might be interesting to just flip the script a little bit to things that look okay or a little bit better. In particular, your confidence level in consumer maybe being kind of middle of the guide, healthcare maybe better. Just a couple finer points on what you see going on there. What would drive that? Where are we at in kind of the drug delivery comps, et cetera?

Yeah. I would say you look at healthcare, we talked about it at a good quarter. Behind that is a strong market growth. We're in a place where we've got good market dynamics and our businesses are performing well. We had our biggest business, our medical solutions business up mid single digits. We saw strength in the US. We saw strength in China as I talked about it. Our food safety business was up mid single digits. Our health information systems business was up high single digits. It's pretty broad based performance as we went through the quarter. We did see a decline in drug delivery as we expected in mid single digits in Q2. We had been talking about how we see that stabilizing as we go through 2019 and we do see some improvement sequentially as we go into the half in that business. That will actually help the overall performance of the healthcare business. Second half, we also have the same comparable year over year dynamic. We have a little easier comparable in the second half. Strong market dynamics, a portfolio performing well broadly, and I think strong performance against comps in the second half. You look at consumer, we're at 1% and as Nick's comments said, kind of middle of the range as we look for the total year. We've got good balance between our sell in and sell out. All of our businesses in the second quarter were growing with the exception of our home care business. We see that sell out dynamic setting up a good middle of the range kind of performance in the second half against some growth in retail spending in the macro.

Is there anything to conclude or any comp issue as it relates to that home care business? What was actually going on there?

I think we saw maybe a little bit of a comp year over year. We had some of the same go live of the US ERP deployment impacting that business. I would say consumer is larger in the US than some of our other businesses. It's about half of our global revenue is in the US. It's a bigger footprint. It has a slightly higher impact when you have that pull ahead. It did impact all of those businesses in 2018. Thank

you guys.

Thanks,

Jeff.

That concludes the question and answer portion of our conference call. I will now turn the call back over to Mike Roman for some closing comments.

To wrap up, I am encouraged by our company's progress in the second quarter. Our execution was strong in the face of continued slow growth conditions and key end markets as we effectively managed costs and improved our cash flow. Moving ahead, we remain focused on continuing to drive operational improvements, investing for the future, and delivering for our customers and shareholders. Thank you for joining us.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.