Q4 2019 Earnings Call
Thank you are saying Bob may have your name.
First thing David velocity Enbrel.
I'm sure your first thing was.
David.
David Brown would any or without.
Brian look at color.
And to copy worker.
Our euro A.I.E.R.A.
Hey, I.E.R.A.
Yes.
Please see incident. Thank you.
Thank you.
I think everyone.
Welcome to our fourth quarter 2019 business review and 2020 outlook.
With me today.
Our Mike Roman.
Three EMS, Chief Executive Officer, and Nick Gang said, our Chief Financial Officer.
Mike and Nick will make some formal comments and then we'll take your questions.
Please note that today's earnings release in slide presentation accompanying this call.
Posted on our Investor Relations Web site at three am dotcom under the heading quarterly earnings.
Please turn to slide two.
Before we begin let me remind you of the dates for our 2020 quarterly earnings Conference calls.
Which will be held on April 28.
Slide 28 in October 27th.
Also note, we are planning to hose and Investor meeting in 2020.
We will update you once we have finalized the date for the meeting.
Please take a moment to read the forward looking statement on slide three.
During today's conference call, we will make certain predictive statements that reflect our current views about 300 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 one eight of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions.
Finally, please note that throughout todays presentation will be making references to certain non-GAAP financial measures.
Reconciliations of the non-GAAP measures can be found in the appendix of today's presentation and press release.
Please turn to slide four and I'll hand, it off to Mike.
Mike.
Yes.
Thank you Bruce.
Good morning, everyone and thank you for joining us.
Our team executed well in the fourth quarter and delivered results that were inline with our expectations.
Although we continue to face growth challenges in certain end markets, our focus on productivity and cost management help generate solid underlying margins and robust cash flow with a conversion rate of 186%.
We also continued to build invest and transform for the long term success of three him.
Earlier today, we issued a press release on the next big Phase of our transformation journey a.
New global operating model and streamlined organizational structure, which I will discuss in more detail.
Today I will also provide an update on our ongoing commitment to sustainability and environmental stewardship, including PFS.
Later in the call I will come back to discuss our full year performance, including record cash flow and good progress on our strategic priorities along with our outlook for 2020, where we expect to return to growth.
Please turn to slide five where I will begin with a summary of our fourth quarter results.
Organic growth company wide in the fourth quarter was minus 2.6%.
In line with our guidance.
We continue to face softness in certain end markets, namely, China, automotive and electronics, which impacted overall growth.
We delivered adjusted earnings of $1.95 cents per share, which includes a 20 cents Q4 restructuring charge that I will discuss shortly.
Excluding that charge, we delivered EPS of $2 in 15 cents at the high end of our guidance.
Finally, we generated underlying margins of 20.7%, which includes a 140 basis point impact from the us solidly acquisition.
While reducing inventory levels by $115 million.
Overall, I'm pleased with our team's execution and our ongoing progress in driving operational improvements.
Please turn to slide six.
I've talked to you often about the strength and vitality of the three m. value model.
We have deep competitive advantages unique technology platforms advanced manufacturing, leading brands and global capabilities.
All of which make three am greater than the some of our parts.
At the same time, we constantly evolve and build on our foundation, which we are doing through our four strategic priorities, including transformation.
Over the last several years, we have been on a journey to transform how we serve our customers how we work and how we compete.
The deployment of our ERP system has enabled new standardized business processes, New service models, and new digitalization capabilities across three EM.
In EMEA, and Canada, where we are furthest along in our transformation. We are seeing enhance customer service improved margins better use of data analytics and lower inventories.
We are starting to see the same improvements in service analytics and inventories in the U.S. as well.
Which gives us continued confidence in our transformation journey.
Importantly, our progress has enabled us to realign the company and further leverage our transformation capabilities.
As you know in April of last year, we move from five to four business groups to better align around our customers and our four go to market models.
This was the first step in our realignment.
Since then we have been working on reorganizing the entire company around our new business groups to take full advantage of our new capabilities.
On January Onest, we implemented a new streamlined global operating model designed to improve growth and operational efficiency.
In the new model our business groups now have full responsibility for all facets of strategy portfolio and resource prioritization across our entire global operations.
Under the prior model area and country teams had responsibility for setting priorities in their respective regions.
I have a distinct international organization.
Now all of our international people report directly into the business groups and functions that they are part of.
And there is no longer a separate international team.
This new model has clear benefits to both three ham and our customers.
First it will drive more accountability to our business groups to strengthen performance and serve both global and local customers.
Second it will enable stronger customer insights in order to drive more powerful innovation.
Third it will empower our people with more freedom to make decisions and increased speed and service to our customers.
Fourth that will make us more efficient and help us continued to drive margin expansion by reducing layers streamlining structure and simplifying reporting lines.
Finally, it will allow us to leverage similarities across markets, while maintaining the robust local capabilities and expertise that help differentiate three him.
Three I'm has both experienced in success operating in a global models such as this.
For several years, our electronics and auto OEM businesses have operated in a global model and we've seen stronger customer alignment along with better service innovation and efficiency.
In addition to our new model. We also made changes in 2019 to the way we support our business groups.
To optimize the customer experience in each of our go to market models, we consolidated manufacturing supply chain and customer operations into a seamless end to end enterprise operations organization.
This team plays a critical role and tailoring service and expertise to the needs of our customers and has been a key driver and enabling us to reduce inventory levels.
We also brought together key capabilities around the world as part of a new global Corporate Affairs organization.
In order to advance our brand and reputation and build on our history as one of the best places to work around the world.
As a result of these actions today, we are announcing a restructuring charge as we moved quickly to our new alignment.
The restructuring includes streamlining our organization by reducing approximately 1500 positions spanning all business groups functions and geographies.
On a pre tax basis, we took a restructuring charge of $134 million in Q4.
And we expect annual pre tax savings of $110 million to $120 million with $40 million to $50 million in 2020.
In our new structure, we will also report geographic results under three areas beginning in Q1 of 2020.
The Americas.
Europe , Middle East Africa, and Asia Pacific.
With the same level of detail and transparency as we always have.
Ultimately as I've communicated to all three numbers. This is a defining moment for our enterprise. We are modernizing how we run our business and building an organization for the future and I'm more confident than ever in our journey to transform into a more agile more efficient and more competitive enterprise.
Please turn to slide seven.
Being a leader in sustainability and environmental stewardship is core to three out of.
And as a value that matters deeply to our employees, our stakeholders and to me personally.
We started our groundbreaking pollution prevention pays program more than 40 years ago.
And we have continued to step up our leadership to address climate and environmental challenges.
Last year, we moved our Saint Paul headquarters to 100% renewable electricity.
While committing to move our entire global operations to renewable energy by 2015.
Three I'm also produces a broad range of solutions that help our customers reduce their greenhouse gas emissions.
From our smog, reducing roofing granules to our films that make homes electronics and automobiles more energy efficient.
From a governance perspective, we are also strengthening oversight of strategies related to sustainability R&D and commercialization.
In November our board established a science technology and sustainability Committee to ensure we are building on our strong innovation capabilities, while advancing our already high standards for product and environmental stewardship.
This commitment to sustainability includes stewardship of water one of our most precious resources.
As part of our responsibility we are proactively managing PFS.
Guided by the principles of sound science, corporate responsibility and transparency.
We are committed to being part of the solution to ensure communities have confidence in their water.
This includes addressing contamination at sites, where we produced or disposed of PFS.
In addition, we will work with our customers and our other stakeholders in connection with other sites where people's concerns exist.
Our efforts under these commitments led to a litigation related pre tax charge of $214 million in the fourth quarter.
Split roughly equally between the following two items.
First.
We updated our assessment of environmental matters and litigation related to our manufacturer and disposal of PFS.
Which included expanding our evaluation to other three m. sites that may have used certain p. fast material.
Second we updated our assessment of customer related litigation based on ongoing settlement discussions.
At the same time, we continue to work with the EPA and other authorities to ensure we are fulfilling our ongoing commitment to environmental stewardship.
As previously disclosed in 2019, three am discovered and voluntarily informed the EPA and appropriate state authorities that discharges from our Decatur, Alabama facility may not have complied with permit requirements.
We immediately idled the relevant processes and took steps to address these issues.
In connection with our Decatur disclosures three M. received a grand jury subpoena from the US Attorney's office for the Northern District of Alabama in late December 2019.
And we are cooperating with this inquiry.
In addition, and Q4 of 2019 as part of our compliance assessment of similar sites, we identified and also disclosed to the EPA and appropriate state authorities similar discharge issues at our Cordova, Illinois facility.
We continue to support the EPA and the Alabama, and Illinois State environmental authorities to help resolve these matters.
We have a strong cross functional team in place that is actively managing our environmental stewardship and PFS.
And moving forward, we will continue to update you as developments unfold.
If you Havent already I encourage you to visit our PFS stewardship web site.
Which can be found on our Investor relations site under the heading about three him.
That wraps up my opening remarks, I will come back to discuss our full year performance along with our 2020 guidance. After Nick takes you through the details of the quarter Nick.
Thank you, Mike and good morning, everyone.
Ill start on slide eight with a recap of our fourth quarter sales performance.
Fourth quarter organic sales declined 2.6%.
Volumes were down 340 basis points, while selling prices were up 80 basis points.
The net impact of acquisitions and divestitures increased sales by 5.1 percentage points.
While foreign currency translation was a 40 basis point headwind to sales.
All in fourth quarter sales in us dollars grew 2.1% versus last year.
Looking at growth geographically, you less organic growth declined 3%.
Merely due to declines in the transportation and electronics and safety and industrial businesses.
Asia Pacific declined 3% in Q4, with Japan down 7%.
Primarily due to a decline in our electronics business.
Organic growth was up 1% in China.
This result is primarily due to last year's easier comparison.
EMEA declined 3%, while Latin America, Canada was flat.
Please turn to slide nine for the fourth quarter PNM highlights.
Companywide fourth quarter sales were $8.1 billion with adjusted operating income of $1.5 billion.
Adjusted operating margins were 19%.
Which included a negative 170 basis point impact from restructuring.
Considering this impact fourth quarter operating margins were right in line with our expectations.
On the right hand side of this slide you see the components of our margin performance in the fourth quarter.
Lower organic volumes and our continued efforts to reduce inventories to improve cash flow.
We're both headwinds to margins year over year.
Partially offsetting these headwinds were benefits from our Q2 restructuring actions.
In total these factors resulted in a 110 basis point reduction to margins.
Versus last year's fourth quarter.
Acquisitions, and divestitures combined reduced margins by 140 basis points, mainly related to our acquisition of a salary.
Higher selling prices, along with slightly lower raw material costs contributed 70 basis points to fourth quarter margins.
And finally foreign currency net of hedging impacts increased margins by 10 basis points.
Let's now turn to slide 10 for a closer look at earnings per share.
Fourth quarter adjusted earnings were a $1.95 per share and as Mike noted included a 20 cents impact from our Q4 restructuring.
Which was not factored into our prior guidance.
Accounting for this item earnings were $2.15 per share right inline with the high end of our guidance range.
Looking at the components of our year on year earnings performance, the net impact of organic growth inventory reductions and other items I covered on the prior slide.
Reduced fourth quarter per share earnings by 13 cents.
Acquisitions, and divestitures combined reduced fourth quarter earnings by 11 cents per share versus last year.
Primarily due to a selling.
Please note that this result includes the impacts of both financing and tax costs.
Well early.
Hello, Kitty is off to a good start as our team delivered results better than expected.
Turning to tax rate.
Our fourth quarter adjusted tax rate was 20.3%.
Versus 20.5% last year.
As noted with acquisitions.
M&A and restructuring categories. In this table include their own year on year tax impacts with the remaining impact of five cents reflected in this line.
And finally average diluted shares outstanding declined 1.7% versus Q4 last year.
Adding three cents to per share earnings.
Please turn to slide 11 for a look at our cash flow performance.
As Mike noted, we delivered another quarter of robust free cash flow with fourth quarter free cash flow of $1.8 billion.
For the full year free cash flow increased 10% to $5.4 billion as our teams delivered strong working capital management throughout 2019.
Fourth quarter conversion was 186%.
Which included a 27 percentage point benefit from the significant litigation related charges.
Fourth quarter capital expenditures were $538 million.
With the full year totaling $1.7 billion.
Also during the fourth quarter, we returned $1 billion to shareholders.
I have dividends and grow share repurchases.
And for the full year, we returned $4.7 billion.
Please turn to slide 12, where I will summarize the business group performance for Q4.
I will start with our safety and industrial business, which declined 2.8% organically in the quarter.
Our personal safety and industrial minerals businesses.
Delivered mid single digit organic growth in the quarter, while the balance of the portfolio declined.
Looking geographically organic growth increased in Latin America, Canada, while Asia Pacific the us and EMEA each declined.
Safety and industrials fourth quarter operating margins were 20.9%.
Overall margins continued to be solid when considering negative organic growth inventory reductions and restructuring impacts.
Moving to transportation and electronics as expected fourth quarter sales were down 5.9% organically compared to last year.
Impacted by end market softness worldwide.
Our electronics related businesses showed sequential improvement despite year over year being down mid single digits organically.
As demand remained soft in consumer electronics and factory automation end markets.
Our automotive OEM business was down 5% a bit better than fourth quarter global car and light truck builds which were down 6%.
Transportation and electronics fourth quarter operating margins were 20.8%.
Similar to safety in industrial margins were impacted by lower sales inventory reductions and restructuring.
Turning to our health care business.
Organic growth was flat year over year against last year strong comparison.
Growth was led by mid single digit increases in health information systems and food safety.
Medical solutions, our largest business was up slightly.
Well oral care declined low single digits in the quarter.
Looking geographically growth was led by Latin America, Canada, and EMEA, while the us declined.
Healthcare fourth quarter operating margins were 21.3%.
Impacted by nearly eight percentage points from the combination of fee and modal and to sell the acquisitions along with restructuring.
Taking these factors into account margins were up 100 basis points year over year.
Lastly, fourth quarter organic growth for our consumer business was flat.
Sales were led by mid single digit growth in home improvement and low single digit growth in home care.
We'll stationary and office and consumer healthcare declined.
Looking at consumer geographically.
Latin America, Canada grew mid single digits.
The yield this was up nearly 1%.
While EMEA and Asia Pacific declined.
Consumers operating margins were a strong 23.4% up three percentage points year over year, driven by portfolio and footprint actions, we have been executing in this business.
That wraps up our review of fourth quarter results.
Please turn to slide 13, and I'll hand, it back over to Mike Mike.
Thank you Nick.
As I look at 2019, I am encouraged our team responded to the challenges we faced in our end markets stepping up our execution improving operations and driving strong cash flow as we move through the year.
We finalized the restructuring we announced in April effectively managed costs and reduced inventory levels by $370 million.
With respect to the full year numbers organic growth company wide was minus 1.5%.
We posted adjusted earnings of $9.10 per share.
Which included a 21 cents benefit from the divestiture of our gas and flame detection business.
We increased cash flow by 10% year over year to $5.4 billion, an all time high for our enterprise.
While delivering a strong conversion rate of 118%.
Additionally, we posted a good return on invested capital of 18%, including the impact of acquisitions.
In 2019, we also returned $4.7 billion to our shareholders through dividends and share repurchases.
And last year marked our 60 onest consecutive year of dividend increases.
Please turn to slide 14.
Beyond financial results I view 2019, as a fundamentally significant year for three of them.
As we implemented major change to position us well for the future.
Earlier I talked about how we are accelerating the pace of our transformation.
And we also made significant progress on our other three priorities for long term growth and value creation.
I'll make a few comments on each starting with portfolio.
The ongoing review and reshaping of our portfolio is critical to maximizing value across our company.
Since 2012, we have moved from 40 businesses to 23.
While completing more than 10 divestitures and 14 acquisitions.
In 2019, we continue to actively manage our portfolio.
With particular progress and strengthening our health care business.
We acquired a solid which accelerates three m. as a leader in advanced wound care.
Along with M. models technology business and ideal fit within our health information systems business.
The integration of a solid he is going well and the business is off to a good start.
And then modal is outperforming our expectations for both growth and income.
We also announced that we will divest our drug delivery business.
Which will enable us to focus more resources on our core healthcare portfolio.
Beyond our efforts in healthcare last year, we sold our gas and flame detection business and earlier. This month, we finalized the sale of our ballistic protection business.
Managing our portfolio is an ongoing process and we will continue to act on opportunities to maximize value across the ramp.
Our next priority is innovation, which is the heart of our enterprise.
It differentiates three I'm in the marketplace and supports organic growth and our long track record of delivering premium margins and return on invested capital.
In 2019, we invested $3.6 billion in the combination of R&D and Capex.
These investments enable us to invent unique products and solutions and then deliver them efficiently to our customers there are disruptive manufacturing process technologies.
That is more than the breadth of our technology that sets us apart.
It's also our ability to share combine and apply our technologies across three in businesses.
Our adhesives for example, our end cars and airplanes electronics and medical tapes and in the products are most familiar with such as command strips and posted notes.
And as the needs of our customers evolve, we constantly develop new capabilities and applications to stay at the forefront of innovation.
Last year, we expanded our periodic table to 51 technology platforms as we further refined our expertise in areas like Metamaterials computer vision and advanced robotics.
We also continue to see strong returns from investments in our priority growth platforms.
Which serve emerging and fast growing markets.
For the full year these platforms grew 10%.
As we create differentiated solutions for customers around healthcare transportation safety and infrastructure.
For example, automotive electrification grew 9% as we continue to drive good penetration with particular strength in automotive displays and Lightweighting solutions.
Going forward, we will continue to use three him innovation to solve tough problems for our customers improve people's lives and help create a more sustainable world.
Turning now to people in culture, which is foundational to each of our other priorities.
In 2019, we took significant action to develop our people and invigorate our culture.
And the transformation initiatives I discussed earlier, our at the center of our efforts.
Our transformation journey is as much a cultural change as it is a technology change.
We're simplifying workflows equipping our people with new systems, and tools and empowering them with more autonomy to make faster decisions.
Given the level of transformation within three M. A key focus of our development is managing change.
And I am pleased how our team is stepping up to embrace these changes.
At the same time, we are deepening our commitment to three arms core values, including diversity and inclusion.
60% of our top 100 leaders are diverse.
One third of our corporate officers and board members are women and we are doing more to integrate inclusion into our daily life.
Of course underpinning everything we do as our code of conduct and last year. Three am again was named one of the world's most ethical companies.
Overall I'm pleased with the progress we made against each of our strategic priorities in 2019.
And I am confident in how we're positioned heading into 2020.
Please turn to slide 15.
As a result of our work we are well positioned to return to growth in 2020.
Our plan reflects our improved performance and an expectation for low but positive global macroeconomic growth.
We anticipate organic growth of flat to 2%.
Along with earnings of $9 in 30 cents to $9 in 75 cents per share.
We expect another year of robust cash flow with a conversion rate of 95% to 105%.
Finally, we anticipate a strong return on invested capital of 18% to 21%.
In the appendix of our slide presentation, you will find additional details on our guidance, including a breakdown of our expectations for organic growth by business group and area.
Before turning to Q in a I have one additional announcement.
Our executive Vice President of International Julie Bushman has informed us of her intent to retire in April .
Throughout her 36 years at three am Julie has been an exceptional leader and has created tremendous value for our company and our shareholders.
Julie's leadership has been invaluable throughout her time, leading our international team.
Including her role and working closely with me to lead the transformation announcements we discussed today I.
Hi, Thank Julie for her many years of service and many contribution.
That concludes our prepared remarks, and we will now take your questions.
Ladies and gentlemen, if you'd like to register a question using a landline phone. Please press the one followed by the four on your telephone keypad.
You will hear a three tone prompt to acknowledge your request.
If your question has been answered I knew we'd like to withdraw your registration. Please press the one follow up with a three.
If you are using a speaker phone. Please ask your handset before entering your request.
Please limit your participation to one question and one follow up.
One moment, please well we compile the Q when a roster.
Our first question comes from a line of Scott Davis with Smelliest Research. Please proceed with your question.
Hey, good morning, guys.
We set.
Okay.
As far as state.
Some noise out there with this.
This virus in China, and stuff and you sell a fair amount of products and too.
The benefit but at the same time, there's some offsets and slower growth in China overall, but.
When you think about Mike the cadence of returning to growth in 2020 is there is there a sense of.
When it was at one Q.
To start to get into some easier comps or is it is it more towards the back ended the year.
So Scott.
Start with the the model for returning to growth in 2020 is based on that that broader macro that outlook for the broader macro. It also is looking at some of those key markets that we've talked about that were challenges for us in 2019, China. For example, one of the challenges in 2019, we see that in our model for 2020.
Returning to low to mid single digit growth for the total year.
In both cases, I would say, we see growth strengthening as we move through the year. So Q1 positive growth for the overall enterprise.
In the middle range middle of the overall guidance of the range, maybe a little slightly lower end of the guidance of the range and China in particular.
Before we got to the last couple of weeks with the krona virus really really becoming the focus where you were looking at.
A sluggish start to China in first quarter really based on automotive and the build rates expected to be down mid single digits, and maybe even high single digits and so it's that was kind of our pacing now krona virus, it's kind of changing things as we go in and we're seeing what you're saying, we're seeing it increased demand for our respiratory.
Protection products, and we're ramping up our our production worldwide in China around the world to meet that demand at the same time youre seeing what everybody else is saying that there is a.
Businesses are shutting down extending their shutdown beyond lunar new year. So were really watching day to day, what thats going to mean for our outlook for China, but I give it kind of the frame we had and then how we're kind of looking at it as we as we see the updates day by day.
Okay. So from I can just as a quick follow up it will essentially be accretive to your growth rate in 2020 will that be above your guidance range and your view.
So Scott this is Nick we sell today of course incorporated in the guidance that we're giving their throughout the year most of its growth will be coming through what we report for acquisitions versus organic growth, but when we compare it to the underlying growth that was of revenue that was there before we acquired it we see its growth as it.
Credit to the overall three on growth rate that we're projecting.
Okay Super helpful. Thanks, Good luck guys.
Thanks Scott.
Our next question comes from a line of Nigel Coe with Wolfe Research. Please proceed with your question.
Thanks, Good morning.
Idle.
Hey, So just wanted to touch on the.
The additional PFS charge here I mean, I think on stem the the Alabaman and Illinois plant issues, but what's the trigger for the the customer litigation charge I mean, Lcs via trigger to get you.
To segment that charge, maybe just touch on as opposed to a speculation about EPA regulation when you stand on the issue.
Yes, so maybe I'll take the charge Onest nigels, but we we played out in prepared remarks that there are two aspects to the charge one is in our ongoing commitment to resolve the issues, where we manufactured disposed of PFS. The other part of the charges related to two really on.
Going in negotiations with customers that as part of our commitment has to do our part to help customers address the PFS issues, they face and we've got our our negotiations and mediation as far enough along that we can identify what's probable and estimable around a group of customers multiple customers.
Yeah.
It does a call for the Wolverine.
The Wolverine cases that we've been we've talked about in the past, but its multiple customers and and really the next step of what we can understand as probable and estimable.
So then in working with one of the commitments. We did make it last fall is to work in support of the EPA as we move forward with their regulatory plan around PFS, they've got to up they have laid out a plan to to move forward. We are working to support that with our investment in research and understanding a helping.
The understanding of paper, thus, providing our data and really doing things like helping to provide a clearing house for all of the information and data around PFS and so we continue to be.
Working in support of the EPA and in our.
Work on our our resolving our manufacturing disposal sites and then also on moving the regulatory standards forward.
Thank you.
A quick follow on on the.
Turning to any guidance.
On the cash flow by point $3 billion to $6 billion of free cash flow are you simply assuming delevering the balance sheets in the in the bridge.
Yes Nigel.
Not.
As we end nine ended 19, we had debt to EBITDA ratio of roughly just a little over two and half times, we see that side coming down probably about 50 basis points to the two or just slightly over two times debt to EBITDA. So that that's part of our overall capital structure planning.
And not in 2020.
Okay. Thanks, Nick Thanks, Mike.
Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
Thanks, Good morning, everyone.
Well.
Hey, Mike can you expand a little bit on on the commentary on this the new restructuring initiative, they haven't place and how that how that differs from business transformation fully recognizing that it sounds like you're streamlining the organization as well that any any additional color you can provide there would be helpful.
Yes, and Joe what I laid out is really the next phase of our transformation journey units, it's taking advantage of everything that we've done deploying the ERP the ecosystem around it.
Service models that we put in place the capabilities of technical capabilities to really manage our business digitize a lot of what we do to manage our our operations in our business processes and so it became clear that we could take full advantage of that with how we operate our businesses globally and last spring, we announced moving from five to four.
Our businesses.
At the time it was looked like.
Realignment of the company, but where does it go and this is really the next part of the story, we aligned around our customers in our go to market models and with the launch in the new here of the new model, we are going to operate globally around those those go to market models and that includes how we operate our businesses everywhere.
Around the World and two includes taking advantage of the the capabilities will put in place with business transformation in it. It also includes this really consolidation of our manufacturing supply chain and customer operations end to end to really optimized for those go to market model. So it's a significant change in really how we aligned the customer.
Here's how we bring our innovation to market always streamline and simplify three m. around the world. It's is it is taking advantage of business transformation, but it's really multiplying that impact as we move ahead.
Okay. Thank you and then maybe just my follow on focused on the transportation Electronics segment clearly that's a segment that is.
It is at a tough 2019, and I think that there's some optimism in 2020 net will potentially start to see a rebound, particularly in electronic side of things and so.
If we were to start to see better growth.
What kind of operating leverage would you guys expect to see out of that business and in your commentary Mike earlier around positive organic growth in the first quarter is this a segment that is also going to be positive in Q1.
Yes, Joe let let me take that one first of all from to the second part of your question.
Transportation electronics leave for the year, we've guided that negative to the positive to organic growth.
Our view right now as we see all four quarters in in that range.
Right now and just just go a little off track the.
Safety and industrial businesses, the only one that that we see a potential that that one would be below its range in the first quarter and then in the next three quarters within the range that Weve guided.
As far as leverage that we expecting transportation electronics. This is one of the businesses where.
As we see us returning to growth in that that this would be accretive and and would be adding to our leverage that that to that we see that a specific percentage.
Typically don't put out but it would be.
It would be beneficial and we see the margins.
On the accretive margins, they're very similar to what we see for the total company that as Weve rebuild this the revenue there.
That we would be seen that.
May be in an extra 10% going to lot increasing the margin as as that side as that.
As the revenue improves there.
Okay. Thank you both.
Thank you.
Our next question comes from the line of Andrew Obin with Bank of America. Please proceed with your question.
Good morning to this is David Ridley Lane on for Andrew.
Good morning, David Good morning.
Can you provide details on how your core gross margin will trend in 2020.
Given the unusual inventory related effects in 2018.
At the gross margins and our overall margins played a part of a big part of it will be BR.
Through our.
Through our gross margin improvement, we see overall operating margins improving 50 to 100 basis points in in 2020.
And.
In the first quarter, we expect them to be roughly flat plight prior to the impact of a salad selling we again, we because that was not part of our base in the first quarter, we expect that will be a negative impact.
To our total company margins of about 100 basis points in the first quarter and it will impact healthcare's margins by 400 to 500 basis points in the first quarter, but the underlying margins in first quarter, excluding that we we see roughly flat and then some expansion because our our primary.
Inventory reductions that we were executing where occurring in the second third and fourth quarter and as we move into that that range. Then we then that's when we expected to be seen margin expansion.
Particularly gross margin expansion in 2020.
Got it and.
For the follow up.
For the Tailwinds, you see within healthcare and you see potential upside to the 2% to 4% organic guidance for the full year as you get the second half.
The year.
Thanks, Yeah. If you look at the 2020, David It health care is going to be a leader for growth for us and and that is really on some of those strengths that we saw coming out of 2019.
We see continued strengthen health information systems and with the modal addition, being part of that in our food safety business, our medical solutions business, we see that benefiting from the strong market outlook for market growth in health care and so we see.
And again I would say continued strength in developing markets, helping to leave that growth forward. So it's at some of the areas that we saw strength in 2019, and and then some of the things that we've been able to build upon with our acquisitions and leverage even stronger positions against a good.
Macroeconomic outlook.
Thank you very much.
Thank you.
Our next question comes from the line of Sean and with Gordon Haskett. Please proceed with your question.
Thank you good morning, everyone.
John John .
Turning guys. It can we start on the EPS roadmap.
Slide 27, so youve dialed in minus 25 cents for 2019 headwinds I think it's it's interesting it's not a range it's an exact.
Precise number.
What exactly is in that for example, like our compensation headwinds so having to pay people more money is that in there and anything you could say on that was the reflects around what is going on there.
Yes, John there's there's too precise things in there, which is why it's not a range about one third of that is from.
Gains we took in 2019.
On disposal of certain property certain assets, we had that I talked about it during our third quarter earnings call. The other two thirds of that John is coming from variable compensation with our our results that were delivering delivered in 2019, our variable comp is below our plan.
And variable comp level, and we built our plan for 2020.
That we would be least returning to planned variable comp and that's that's why we're calling that out as a 2019 headwind.
And can I ask you Nick quite why is that fixed for instance, let's just say the economy got better as 2020 .
Progressed, and you did much better than your zero to 2% core growth does that variable number also not dial up or is that a kind of a fixed bonus like why when the 25 cents, possibly down a little bit higher as a drag.
Yes, it's selling 2020, if we start to see our compensation being different than that then then our normal practice would be that becomes part of productivity. So we are paying more than our planned variable comp that would become a headwind to our productivity that we're projecting in 2020.
Got it and then just as a follow up Nick.
Can you remind us what's going on or Mike what's going on in Europe I had in my notes I thought that you were sort of on deck to maybe downsize your European footprint I think pro forma like about a third of production facilities with a lot of this happening in the back half of 19, where do we stand on that and I noticed that for instance, Europe on.
The core sequentially got worse with that actually was that self inflicted because of this associated internal disruption or actions or something else. Just is it just macro in Europe , just where do we stand in Europe overall and.
And and the runway even to your 20% plus margins that you talked about at the last analyst meeting.
Yes.
John Thanks for asking that question there and there are several moving parts in their first let me talk to the margin and then I'll talk to the growth.
2019 was a very good Europe progress for us with our with our operating income margins again, expanding and in Europe to approximately 19% very much along their trajectory that we were projecting that we would be on to be moving this to a 20% operating income margin by 22.
20.
As part of that we've been taking a number of action over the last few years some of them have been footprint actions and we are starting to see us some of that benefit at manifest in our 2019 results going forward into 2020 also there's been some portfolio adjustments, where there are certain product lines, where we think going through and prioritized.
And deciding either to exit or the de prioritizing de resource and as we look at our organic growth in 2019 as wells in particular, asking about fourth quarter of 2019.
Thats been impacted impacted by 50 to 100 basis points of organic growth by some of our what we have planned and Don from a portfolio standpoint, as part of our move to to shift our portfolio in in Europe .
Much of the rest has been macro of what we're seeing plus a little bit right now what we're seeing in the fourth quarter is a comparison that we're going against fourth quarter last year in Europe .
This was very much in the range were expecting but macro we're continuing to see auto builds down in Europe and that that does impact our our overall EMEA results.
But to me is up do you think it had to 20% target in 2020, or maybe even a little bit better.
Yeah, we see ourselves very much in line to be hitting that could be a little ahead, but I wouldn't get too far ahead on that we see ourselves right in line to be hitting that.
Got it thanks very much.
Thank you. Our next question comes from the line as we Deane Dray with RBC capital markets. Please proceed with your question.
Thank you good morning, everyone.
Hi, Jane.
Hey, Mike I was hoping to circle back on the restructuring announcement today and I wanted to put it in context with what we're seeing.
Across the multi industry sector, where a number of companies are pursuing simplification Viet larger spin out shell bigger boulder moves versus kind of just.
What I would characterize at three am has been more surgical have you looked as a result, you look more like an outlier in terms of your simplification approach is it.
What's your response there is is it really company specific are there opportunities to do something bigger is that might be another next phase, but if you could give us some color there would be helpful.
Yes, Deane, we what I, what I framed it up as this is part of our transformation journey and if you look back even back to the Investor day in November of 2018, we laid out a plan for margin improvement over our over the coming years and a big part of that was from transformation. So there was a plan by us to really keep.
Moving forward in this this this announcement today is the next phase of that plan due to move forward with alignment around those those or go to market models, our customers better leverage all the business transformation investments, we put in place and and we are we are optimizing as we go we're building.
On the capabilities were put in place to you saw that in 2019 start to come through our EMEA and Canada results in terms of margins and service and inventory management improving their weeks. It was part of getting on top of inventory in North America too as we deploy the new capabilities and so.
I wouldn't call it a.
Hey.
I wouldn't think of it as as a.
One step in the middle of this is part of our transformation journey and so we'll continue to optimize off of this this is enables the charge. We took in Q4 enables us to move quickly to the alignment get the full benefit of it as we go forward is really we think going to be a foreign part of what positions us to deliver growth and better efficiency as.
As we go through 2020 and beyond.
Thats helpful. And then just staying on the restructuring the payback for 2019 did that 40 to 50 million in savings just based upon the the size of the restructuring that seems a slower payback does that have more to do with.
The timing of how you do these reductions.
Yes, Dean that it really is a function of this as we move to streamline that they are operations there.
Not all of it is happening right away, there's parts of it that phase in over the course of the year and that's why it's only having a 40 to 50 million impact some of it.
Minority position part of that will come in the first half of the year. The vast majority of that 40 to 50 comes in the second half of the year.
Got it Thats helpful. Thank you.
Thank you.
Our next question comes from the line of John Walsh with Credit Suisse. Please proceed.
Hi, good morning.
Good morning, John .
I wanted to talk about the price performance in the quarter and you know specific to the us, but happy if you want to broaden it out.
As we think about that 1.7% price increase that's a higher number than we've seen here in the past.
Is that price because of innovation and sustainable or did you hold price and that was kind of impacting why the volume was down in the U.S.
John the price growth first I'll, let me expand it to the to the full year for us price growth the with that 1.7 that brings our full year price growth to 80 basis points, John I think thats. The more helpful number for you to look at and focus on.
Often in a quarter to quarter basis, theres going to be what is that comparing two in the quarter in the prior year.
So I went over react to the 1.7 are our view is the 80 basis points that we did in the U.S. in total 2019, that's indicative of what we're doing and to the first premise of your question.
What we overall seeing price growth is a function of the value we are creating it's the innovation we have in our products.
And continuing to uptight update the of the product lines in the.
The the products that we offer there and that is a big driver of that but I will focus on the 1.7, a focus more on the full year that the 80 basis points.
Gotcha and then.
Maybe coming at the the flat to up to organic just a different way. If we think about 2019, particularly on the automotive side. You did have some impact from channel inventory de stocking you know I don't know if it's possible. It have you thought about what the growth rate.
I would look like just with the absence of those headwinds and how much of that kind of flat to two is just a normalization versus you know the macro getting any better.
Yes, John .
The returned to growth the zero to 2% that is really reflecting the both the macro and then.
I think a closer look at the markets that we've been challenged with in 2019, So electronics automotive China and in 2018 as you as you noted there was the impact from channel reactions as they saw the decline in those markets. They reacted took out inventory so part of the year over year in those markets comparison is going to be a more stable.
Channel, we do see more balanced inventory in those channels I would say electronics, we're seeing the early signs of maybe some encouraging.
Outlook in areas like semiconductor fabrication and Datacenters.
In automotive the outlook for the year is is still negative build rate slightly negative I think is is the broader economic knew we were a little more conservative that in a in us and as slower start to the year, but again I would say our view is also has that idea of balanced inventory in the face of those outlooks.
Great. Thank you.
Thank you.
Our next question comes on line of Andrew Kaplowitz with Citi. Please proceed with your question.
Hey, good morning, guys.
Turning to Andy Andy.
Mike can you can we go back to health care for a second I know that you changed in reporting last June put separation purification and that contain growth a little bit, but you I'm sure recall that healthcare was looking at 2% to 4% grow or 19 upload a little under two and the 4% to 6% do 23, So I know you.
Thank you the floor for 2020.
The impact on health care, Justin I guess unexpected cyclicality or have you sort of reassessed the long term growth of that business and is there any sort of thought about accelerating portfolio optimization in that particular business beyond selling drug delivery.
Well, Andy I would say you know as I highlighted in my speech.
We have been focused with our portfolio actions on health care.
As you mentioned drug delivery and the plan to divest that adding a solid he adding.
Modal into our health information systems, and it and to go back to Q4 the growth organic growth in Q4 was positive across most of the portfolio. It was led by mid single digit growth and health information systems and food safety Medical solutions was up slightly.
In the quarter oral care declined in the low single digits and so that was maybe the the focus of the softer growth in Q4, we did see strong growth geographically in areas like China.
And other parts of the world So.
Thats kind of what we carry into 2020, and we see medical solutions improving the market outlook. There is strong and our position is strong we see health informations food safety continuing we see.
Separation verification getting a little better.
And so we all that together positions us in a stronger growth for the outlook for the dollar.
Thats helpful on the Nick just looking at the walk for 2020 again do you still see the potential for additional property sale. So there may be an element of conservative content, because they're not item and then you talked about a pretty wide range for this year in terms of productivity impacts from zero to 25.
Sense, it seems that slipped a little higher than usual is productivity more dependent on what organic growth is this year and that's what's a little hard to pin down in 2020.
Hi.
Andy I just want to make sure you asked.
The potential for other property sales and if that's what you said no. We're not we're not anticipating anything of.
Any material magnitude on a gains or losses from from property sales in 2020.
In terms of the range that we have for productivity between zero and 25% 25 cents, that's about it might be a little wider than normal and I think it does reflect a as we're coming off a.
A year, where our margins were declining as we were having noticeable drops in in inventory as well as we're going through the transformation.
And the restructuring charges, we've called out in and isolated the restructuring charges, but that's also a driver of our productivity and what we're isolating that and just the interplay of that adds a little more complexity for that and and we see the zero. The 25 is like.
Our best estimate right now and of course, we're going to be striving to be on the higher end of that but but.
It's it's a it's it's where were up where we're building our plans right now.
Thanks, Nick.
Okay.
Our next question comes from one of Josh Pokrzywinski with Morgan Stanley . Please proceed with your question.
Hi, good morning us.
Morning cash.
Just a follow up on on Andy's question, a little bit on productivity, maybe a slightly different way I guess, Nick how does zero wind up in the range you mentioned Kennedy under absorption and Destocking issues, which I think you caught you by surprise in the first quarter of last year in particular on the.
On the volume drops.
What would be the driver of the lower end to that range is a if demand is better and like you said the incentive comp.
Hits, a productivity just just trying to understand what the downside could be or what would even drive the pressures to that.
Josh a couple things first of all.
Yeah, Hey in as would typically be the the the expectation if our growth is on the lower end of our range I think that puts a little pressure to us on the lower end of the productivity range that we've laid out here and included in that productivity range. There's positive things that we're doing such as where we're seeing where.
The utilization of our factories in comparison to 22019.
But it's also we're also facing into a as we do every year wage inflation. So offsetting wage inflation is is part of that.
We also have other things that are impacted in there for for example.
What we've called out.
Under other and.
Other pension expense that hits, the non offline as being flat year on year included in our productivity. There is a between six and seven cents headwind for increased pension expenses. That's that's part of that productivity number so there's a.
Negative headwind Theres headwinds, we're facing in there as we face a zero to 25%.
Got it that's helpful. And then just on the on the demand outlook.
Yes, I think clearly there was an expectation maybe a few months ago that we were on this kind of winning your recovery into.
And maybe a mid year bigger inflection in demand.
Crosstie any industrial universe.
It seems like January has been a little slower for for everyone.
You guys had a snap the line today versus some of the potential you may be green shoots you could have been seeing 30 or 60 days ago. It is anything seem pushed out or off track or is this just kind of a timing issue and we shouldn't read anything into January .
Josh I think you laid it out though the way we looked at that low growth the macroeconomic specially in industrial industrial production index kind of a view of that it was getting better as we went through the year. That's the way we built our outlook for the year. Our plan I would say the biggest change you know.
Since that is as been what's going on in China, and its that'll be the have the biggest impact on how the first quarter plays out and and then you know how we are we moved further into the year. So I think thats. The most important thing to be watching though.
Got it appreciate the color thanks, guys.
Thank you.
Last question comes from a line of Julian Mitchell with Barclays. Please proceed with your question.
Hi, Good morning, Thanks for squeezing me in Hey.
Just a quick question following up on the inventories I think nickel, Mike you'd said that you had a 370 million drawdown in 2019, overrule maybe just help us understand what the margin impact of that drill down was for the full year 19.
And also as you sit here today do you view, you will channel inventories at that your customers and partners as being fairly normal.
Or is that a bit more to go of de stocking in Q1.
And then switching back to three M. itself on inventory you have that old medium term goal of 500 million reduction.
Way to be stand on that.
Julien.
Several questions all at once so so first of all under 370 million of inventory reduction our estimate that that negatively impacted our our operating margins or or our gross margins in 2019 by 50 to 100 basis points. That's true both for the fourth quarter and also true for the.
Full year above 50 to 100 basis points.
And we see that flipping to be part that's part of our guidance of a margin improvement in not in 2020 is having that headwind behind us Sars channel inventories.
Theres always some puts and takes I'd say, we're seen nothing abnormal right now with channel inventories.
Hi, we have of course as we've said throughout the year, we've seen some some reductions in our inventory channel held inventories, but right now I characterize it is fairly normal where we stand with inventories and then we in 2020, we do anticipate that we will bring down inventory.
A bit more not nothing on the magnitude of the 300 870 that we did in 2019, but we expect will be we'll continue our progress of taking down our inventory.
Slightly in 2020 as far as the guidance, we've given prior of 500 million, we see the progress that we made in 2019 as.
Most of that have that reduction getting us back to where where we were when we first said that in some of that starting to make progress on that 500, we still see opportunities in the coming years for us to operate our supply chain, even more efficiently and gather even more about 500 million inventory.
For a reduction.
Through our cash flow in the coming years, we've made some progress in 19 will make more in 20, and we'll make more in 21.
Thats very helpful. Thank you.
Thank you.
That concludes the question and answer portion of our conference call I will now turn the call back over to make room and for some closing comments.
To wrap up in the fourth quarter, we leveraged the strengths of the three and business model to navigate market conditions, while delivering strong cash flow and solid margins. We also continued to make significant progress on our transformation journey with the rollout of our new operating model, we enter 2020 in a strong strategic and financial position poised to reach.
Turning to growth and deliver value 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 lines.