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3M Company (NYSE:MMM)
Q1 2018 Earnings Conference Call
April 24, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by. Welcome to the 3M first quarter earnings conference call. During the presentation, all participants will be in listen only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 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 Tuesday, April 24th, 2018. I would now like to turn the call over to Bruce Jermeland, Director of Investor Relations at 3M.

Bruce Jermeland -- Director, Investor Relations

Thank you and good morning, everyone. Welcome to our first quarter, 2018 business review. On the call today are Inge Thulin, 3M's Chairman, President, and CEO, Mike Roman, our Chief Operating Officer, and Nick Gangestad, our Chief Financial Officer. Inge and Nick will make some formal comments and then we'll take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on our Investor Relations website at 3M.com under the heading Quarterly Earnings.

Before we begin, let me remind you of the dates for our upcoming investor events in 2018, fond on slide two. Please mark your calendars for our upcoming earnings calls on July 24th and October 23rd. Also, we have established a date for our next investor day, which will be held at our headquarters in Saint Paul, Minnesota, on Thursday, November 15th. More details will be available as we get closer to the event.

Please take a moment to read the forward-looking statement on slide three. During today's conference call, we'll 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 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions.

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 measurement adjustment for the tax cuts and Jobs Act and the previously disclosed legal settlement with the State of Minnesota. Reconciliations of the non-GAAP measures can be found in the appendix of today's presentation and press release.

Lastly, we filed a form 8-K on March 15th updating our business segment reporting for dual credit and reflecting the adoption of the new financial accounting standard relative to pension and post-retirement benefit cost. Both of these updates are reflected in our reported results on a ahistorical basis starting this quarter.

Please turn to slide four and I'll hand off to Inge. Inge?

Inge Thulin -- President and Chief Executive Officer 

Thank you, Bruce, and good morning, everyone. Coming off a strong 2017, our team opened a new year with broad-based organic growth across all business groups. We expanded margins and posted a double-digit increase in earnings per share while continuing to invest in our business and return cash to our shareholders.

Looking at the first quarter numbers, we delivered earnings of $2.50 per share, a 16% increase year over year. Total sales rose to $8.3 billion, which is an all-time high for our enterprise. Companywide, organic growth was 3%. Three of our business groups -- Safety and Graphics, Electronics and Energy, and Consumer -- all posted good growth that was within or above the expected full year ranges.

Safety and Graphics delivered another robust performance, with 7% organic growth coming off 6% growth in 2017. As you know, we have significantly adjusted the Safety and Graphics portfolio over the last several years and those actions continue to pay off in terms of improved growth and margins.

Electronic and Energy posted 2% growth in the quarter, with strong growth in data center and semiconductor markets. Within this business group, we have also adjusted the portfolio in recent years and we now see, in addition to growth, continued and sustained improvements in margins. Consumer also delivered 2% organic growth, its fourth straight quarter of positive growth, with particular strengths in our home improvement business.

Our Healthcare and Industrial business groups, which grew 3% and 2% respectively, each had many areas of strength, but also a few areas of softness that temper overall growth. Within Healthcare, we delivered good growth in medical consumables, health information systems, and food safety. We saw flat growth in oral care and sales in drug delivery were down against a tough comparison.

Turning to our Industrial business group, Industrial opened the year with 2% growth with good performance in abrasives and industrial adhesives and tapes. Automotive OEM business also grew well and once again outperformed global auto builds despite negative build rates for the total automotive industry. Finally, growth in our automotive aftermarket business was softer than we anticipated going into the year.

Looking at our entire company's performance from a geographical perspective, we continue to capitalize on opportunities in developing markets. In Q1, we posted 7% growth in developing markets, including double-digit growth in China, along with strong growth in India, Southeast Asia, and Brazil.

Turning to margins, our team expanded margins to healthy 23% with four of our five business groups at 23% or higher. We also continued to build for the future, including investing 10% of sales into the combination of research and development and CapEx, while returning significant cash to our shareholders. In the quarter, we returned $1.7 billion to our shareholders to both dividends and share repurchases.

As a reminder, we increased our Q1 dividend by 16%, which marks 60 consecutive years of dividend increases. In summary, we delivered good growth in the quarter throughout much of the portfolio, while a few markets were softer than we anticipated going into the year. As a result, today we're adjusting the top end of our full year guidance for organic growth and earnings per share.

We expect organic growth of 3% to 4% versus 3% to 5% previously, along with EPS of $10.20 to $10.55 against a prior range of $10.20 to $10.70. Going forward, we remain confident in our ability to keep generating premium value for our customers and premium returns for our shareholders. We will continue to execute a 3M playbook and strengthen our competitiveness and are well-positioned to deliver strong results in 2018 and beyond,

With that, I would turn the call over to Nick, who will take you through the details. Nick?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Thank you, Inge, and good morning, everyone. Please turn to slide five. Let me begin with two topics that impacted GAAP earnings in the first quarter that Bruce touched on at the beginning of the call. Recall that following the passage of the tax cuts and jobs act, we recorded a provisional tax expense in Q4. As expected the IRS has issued subsequent guidance resulting in updates to these amounts.

As a result, we booked an additional tax expense of $270 million or $0.36 per share in the first quarter. We expect further IRS updates throughout the year. Also, we incurred an $897 million charge for the legal settlement, which amounted to a $1.16 impact to earnings per share. This charge is reflected within corporate and unallocated. Excluding these impacts, first quarter earnings were $2.50 per share, an increase of 16% year on year. Please note that the balance of my prepared remarks today will exclude the impact of both items on 2018 earnings.

Please turn to slide six to review first quarter sales. Sales growth in the first quarter was 2.8% organically. Selling prices increased 70 basis points in the first quarter. Excluding our electronics businesses, selling prices were up 90 basis points and were positive across all geographic areas. This marks our strongest underlying price performance in several years. The net impact of acquisitions and divestitures contributed 70 basis points to growth in the quarter.

In addition, foreign currency translation increased sales by 4.2 percentage points. All in, first quarter sales in US dollars increased 7.7% versus last year. In the US, organic growth was 2.3%, with selling prices up 80 basis points. Growth was led by Safety and Graphics and Consumer.

EMEA was flat in Q1 with West Europe down 1%. Asia Pacific delivered mid-single-digit organic growth, led by safety and graphics and healthcare. Organic growth was 11% in China-Hong Kong. Japan was flat or up 3% excluding Electronics. Finally, Q1 organic growth in Latin America Canada was 3.5%, led by Healthcare and Safety and Graphics. At a country level, Canada and Brazil delivered organic growth of 5%, while Mexico was up 3%.

Please turn to slide seven for the first quarter P&L highlights. Companywide, first quarter sales were $8.3 billion with operating income of $1.9 billion, up 9.3%. First quarter operating margins were 23%, up 30 basis points year over year.

Let's take a closer look at the components of our margin performance in the first quarter. Leverage on organic growth, productivity, and lower year on year portfolio and footprint actions contributed and a combined 120 basis points to margins. Acquisitions net of divestitures reduced margins by 40 basis points.

Selling price benefits more than offset raw material inflation, adding 10 basis points to operating margins. Foreign currency net of hedging impacts reduced margins by 40 basis points and higher retirement benefit costs decrease operating margins by 20 basis points.

Let's now turn to slide eight for a closer look at earnings per share. First quarter earnings were $2.50 per share, up 16% year over year. The benefits of organic growth, productivity, and lower year on year portfolio and footprint actions added a combined $0.17 to per share earnings in the quarter. Foreign currency impacts net of hedging added $0.05 a share. Other expenses decreased earnings by $0.07 per share, due to higher year on year net interest expense and retirement expense.

Our underlying Q1 tax rate was 17.6%, in line with our expectations, which increased earnings by $0.18 per share. The lower tax rate was driven by tax reform and continued benefits from our supply chain centers of expertise.

Please turn to slide nine for a look at our cashflow performance. First quarter free cash flow was a minus $161 million, impacted by the legal settlement that I referred to earlier. The net impact from the legal settlement and tax reform adjustment decreased free cashflow conversion by 72 percentage points. First quarter capital expenditures were $304 million, up $17 million year on year. For the full year, we continue to anticipate CapEx investments in the range of $1.5 billion to $1.8 billion.

As Inge mentioned earlier, we increased our first quarter per share dividend by 16%, resulting in $810 million in cash dividends paid to shareholders during the quarter. We also returned $937 million to shareholders through gross share repurchases. With this in mind, we are increasing our full-year range to $3 billion to $5 billion versus $2 billion to $5 billion previously. Let's now review our business group performance, starting with industrial on slide 10.

The Industrial business group delivered first quarter sales $3.1 billion, up 2.2% organically. Within Industrial, growth was led by abrasives, up mid-single digits, and industrial adhesives and tapes up 3%. Our automotive OEM business was up over 3%, outpacing growth in global car and light truck builds by over 400 basis points.

In automotive aftermarket, we saw good growth in our products and solutions for retail car care, which was more than offset by softer demand from autobody shops. On a geographic basis, Industrial's organic growth was led by a 5% increase in Asia Pacific, followed by low single-digit growth in both Latin America-Canada, and the United States. Industrial delivered first quarter operating income of $719 million, up 7.3% with an operating margin of 22.9%.

Please turn to slide 11. First quarter Safety and Graphics sales were up 6.9% organically to $1.8 billion, with growth across all businesses and geographies. Our personal safety business continued to post excellent growth, up double-digits in the quarter. This business continues to see strong global demand for our personal protective equipment across all land markets.

The commercial solutions and roofing granules businesses were both up mid-single digits. Transportation safety also posted positive growth, driven by our core sheeting and pavement marking segments. In addition, this business recently won contracts with the State of California to upgrade their infrastructure and enable the roadway of the future.

Geographically, organic growth was led by high single-digit increases in both Asia Pacific and the US, with mid-single-digit growth in both EMEA and Latin America-Canada. Operating income was $483 million and operating margins of 27.1%, up $140 basis points year on year.

Please turn to slide 12. Our healthcare business generated first quarter sales of $1.5 billion, up 2.7% organically. Growth was led by a high single-digit increase in both food safety and health information systems. Our medical consumables business, which represents the largest segment within healthcare posted mid-single-digit growth in Q1. Oral care was flat with continued good growth internationally, particularly in developing economies, offset by softness in the US.

On a geographic basis, Asia Pacific led the way, up 8%, followed by 5% growth in Latin America-Canada. We saw continued strength in developing markets, which were up 10% in the quarter, led by China, Hong Kong and Brazil. Healthcare's first quarter operating income increased 7% to $460 million and operating margins were nearly 30%.

Next, let's cover electronics and energy on slide 13. Electronics and energy, organic sales growth was 1.7% in the first quarter. Sales were $1.4 billion. The electronics side of the business grew 3% organically, including low double-digit growth in electronics materials solutions. Growth continues to be very strong in semiconductor manufacturing and data centers, with robust demand for cooling fluids and interconnect solutions. Partially offsetting this growth was a decline in display materials and systems due to softness in consumer electronics.

Our energy-related businesses were down low-single-digits organically, with electrical markets flat and telecommunications down. Please note, we continue to expect a close on the sale of our telecommunications business later this year. On a geographic basis, organic growth was led by a 4% increase in Asia Pacific. First quarter operating income for electronics and energy was $337 million, with operating margins of 24.9%.

Please to turn to slide 14. First quarter sales in Consumer were $1.1 billion and organic growth was 2.1% year on year. Our home improvement business grew high single digits organically, building on its track record of strong performance over the past several years. Home care also delivered post growth in the quarter, while consumer healthcare declined. Looking at Consumer geographically, growth was led by a 4% increase in the US, followed by 3% growth in Latin America-Canada.

We continue to invest and expand our category-leading brands, such as Filtrete and Post-It. During Q1, we launched the first ever Bluetooth-enabled Filtrete Smart Air Filter. We also launched Post-It Extreme Notes, which are designed to hold to rough surfaces, even in challenging conditions.

Finally, operating income was $218 million with operating margins of 19.3%. Operating margins were impacted by year over year portfolio and footprint actions, along with the investments associated with the new product launches I previously mentioned. For the year, we expect margins to be in the low 20s, similar to 2017.

That wraps up our review of first quarter results. Please turn to slide 15 and I'll review our updated 2018 guidance.

As Inge summarized in his opening remarks, we are updating our full-year organic growth expectation to a range of 3% to 4%, versus previous guidance of 3% to 5%. With respect to earnings, we now expect full-year adjusted EPS to be in the range of $10.20 to $10.55 versus a prior range of $10.20 to $10.70.

Our full-year expectations for return on invested capital and free cashflow conversion remain unchanged. With that, we thank you for your attention and will now take your questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you would like to register your 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're using a speakerphone, please life your handset before entering your request. Please limit your participation to one question and one follow-up. One moment please while we compile the Q&A roster.

Our first question comes from the line of Scott Davis of Melius Research. Please proceed with your question.

Scott Davis -- Melius Research -- Analyst

Good morning, guys.

Inge Thulin -- President and Chief Executive Officer 

Good morning, Scott.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Morning, Scott.

Scott Davis -- Melius Research -- Analyst

Is this Inge's last call that he's hosting before he becomes Chairman, the special new job thing?

Inge Thulin -- President and Chief Executive Officer 

No, it's not. I will be here in July as well. I own the next call as well. So, I'm not going anywhere.

Scott Davis -- Melius Research -- Analyst

Well, good. We're glad to keep you or have you still around.

Inge Thulin -- President and Chief Executive Officer 

Well, thank you.

Scott Davis -- Melius Research -- Analyst

I've got two questions, one just one the business and one really on succession. But first on the business, electronics -- is price decelerating in electronics? Is there some sort of change in supply demand dynamic or is it on the same curve that it's been on now for several years?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Yeah, Scott, what we're seeing in price in the electronics and energy business, I'd say there's no discernable trend of it getting better or worse. It's typically a slight decline in price as we compete on the electronics side of the business. We've been seeing that and we continue to expect that going forward, but not a trend of it accelerating down or accelerating up. It's pretty constant, Scott.

Scott Davis -- Melius Research -- Analyst

Right. Just as a follow-on, Inge, what has Mike Roman been working on? What's the focus? Any early read on CEO transition of what might change or be different?

Inge Thulin -- President and Chief Executive Officer 

Yeah. Mike is here. He will give some comments about that. But yes, a couple of comments -- the transition is going very well. Mike and I, first of all, we have worked together for many years, as you know. The first time we worked together was back in Europe, early 2000s, I think 2003 or so. Then Mike was also working with me on the strategies that were laid out in 2012 and 2013.

Currently, we talk every day. I feel like we text every hour and are totally aligned on what needs to be done. He's here, so he should make some comments relative to his initial thoughts and so forth. Most importantly, he is very much focused on delivering Q2 together with all of us and of course, also in Q1. So, Mike if you'd like to answer.

Mike Roman -- Vice President and Chief Operating Officer

Yeah, Scott, that's where I would start too. I'm focused on delivering 2018, starting with Q2 now. But you know, over those 15 years, I've really enjoyed working with Inge. Especially the last six years, I've been proud to be part of his leadership team that has helped advance the company. We've accomplished a lot under this leadership.

I would say what I focus on is the things that we've been building. Really, where we have a lot of similarities in our focus is on that playbook and our commitment to that playbook, including the opportunities we have in portfolio management and innovation and business transformation as we move ahead. That's where the focus I s right now.

Scott Davis -- Melius Research -- Analyst

Okay. Good luck to you, Mike, and Inge, I'm glad we got you for another quarter. See you, guys.

Inge Thulin -- President and Chief Executive Officer 

Okay.

Mike Roman -- Vice President and Chief Operating Officer

See you.

Operator

Our next question comes from the line of Steven Winoker of UBS. Please proceed with your question. Mr. Winoker, your line is open. Proceed with your question.

Steven Winoker -- UBS -- Managing Director

Yeah, sorry. Okay. Sorry. Thanks, guys. Good morning. Welcome, Mike.

Mike Roman -- Vice President and Chief Operating Officer

Thank you, Steve.

Steven Winoker -- UBS -- Managing Director

I just wanted to make sure I understood the reduction at the high-end of guidance. Is that whole $0.15 just sort of high incrementals on the 1% reduction at the high end?

Mike Roman -- Vice President and Chief Operating Officer

Yeah, Steve. The EPS change in guidance really is a result of what we're doing on the adjustment to our outlook for organic growth and really making that adjustment from three to five to three to four and doing that really focused on those businesses in markets where we saw some of the specific market softness as we came through Q1.

Steven Winoker -- UBS -- Managing Director

Okay. And that market softness mostly, in this discussion, what I heard sounds like a little more clarity around western Europe, what's going on there in terms of what you're seeing on the short cycle side?

Mike Roman -- Vice President and Chief Operating Officer

If you look at West Europe, organic growth came in as expected. I would come back to what we've talked about in the past. We're taking portfolio and footprint actions in West Europe to improve our growth in margins. We're going to continue to do that. It's part of our plan and focus on delivering on that 20% income margin by 2020. That's built in. We still see West Europe tracking with our expectations to be low single digits.

Steven Winoker -- UBS -- Managing Director

Okay. In that case, just broadly speaking, the weakest organic growth on a short cycle basis you saw globally, can you nail that down for us?

Mike Roman -- Vice President and Chief Operating Officer

I think we called our several specific markets. So, automotive aftermarket, oral care, and I would say our consumer electronics is tracking as we expected as we come into there.

Steven Winoker -- UBS -- Managing Director

Okay. Great. I'll handit off. Thanks.

Inge Thulin -- President and Chief Executive Officer 

Thanks, Steve.

Mike Roman -- Vice President and Chief Operating Officer

Thanks, Steve.

Operator

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

Joe Ritchie -- Goldman Sachs -- Analyst

Thank you. Good morning, everyone.

Mike Roman -- Vice President and Chief Operating Officer

Good morning, Joe.

Inge Thulin -- President and Chief Executive Officer 

Hey, Joe.

Joe Ritchie -- Goldman Sachs -- Analyst

Can we maybe talk on the organic growth guidance, the step down to three to four? When we spent some time together in March, it still seemed like the higher end of the range was going to be achievable for the year. I'm just wondering from a near term perspective, have things changed at all? Have things gotten off to a slower start than originally expected in April?

Mike Roman -- Vice President and Chief Operating Officer

Joe, back to March, we started to see the softness in Q1 coming through as we went through the month. Even at that point, t was specific to the market segments that we called out. Those played out as we thought that they would through March. If you look at April, April is starting in line with our expectations. I think the adjustment to the range was really looking at those specific markets that we saw coming through Q1. We expect to see some improvement in a couple of those areas, but that's what's driving the adjustment.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay. Fair enough. If I were maybe to touch on price cost for a second -- clearly, pricing is coming through a little bit better than expected, but also from a cost inflation standpoint, it seems like it's a little bit difficult this year to try to offset with substitute products. Maybe just an update on the expectations for the year for both pricing and also on the cost inflation side.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Yeah, Joe. You're picking up on those two points accurately. We see ourselves as off to a good start with our selling price with it up 70 basis points and positive across all geographies. For the year, we expect price growth to remain strong and that it will more than offset raw material inflation.

To that end on raw material inflation, we are seeing some increases in raw material prices, in fact, more than what we originally estimated when we gave the guidance back in December. It's particularly around crude derivatives and transportation and logistics expenses. For the year, we're still expecting our stronger price growth to more than offset the raw materials. If you think back to the guidance that we set out for raw materials -- this may answer a little bit of Steve's earlier question too -- we started the year expecting raw materials commodity prices to be about a push, somewhere between a $0.05 benefit to a $0.05 headwind, depending on net of the projects that we do to offset that.

Right now, we see that somewhere between a $0.05 to $0.10 headwind. That's part of what we're seeing impacting our earnings for the year, but that's been more than offset by the higher pricing that we're also expecting for the year.

Joe Ritchie -- Goldman Sachs -- Analyst

That's helpful, Nick. Maybe one clarification there -- does the new $0.05 to $0.10 range from a headwind perspective, does that include the increase freight cost as well?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Yes, it does.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay. Great. Thanks, guys.

Operator

Our next question comes from the line of Stephen Tusa of J.P. Morgan Securities. Please proceed with your question.

Stephen Tusa -- J.P. Morgan -- Managing Director

Hey, guys. Good morning.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Good morning, Steve.

Inge Thulin -- President and Chief Executive Officer 

Good morning, Steve.

Stephen Tusa -- J.P. Morgan -- Managing Director

Congratulations to all on the announcements with management. So, could you give us maybe a little bit of color on how we're going to trend over the course of the year from a growth perspective? I know you had the Easter timing here in the first quarter you had called out before. How does that play into second quarter? Is there any lumpiness or volatility in growth in the second half as well around the third and fourth quarter? Just high-level.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Yeah, Steve, as I look out over the rest of the year, April we're seeing off to a strong and expect start for us. So, as I look at the three remaining quarters of the year, I don't really see any discernable trend difference among those three, all of them coming in in line now with our expected 3% to 4% organic growth for the year. I don't really see any lumpiness there.

Stephen Tusa -- J.P. Morgan -- Managing Director

Okay. Is there anything you think abnormally impacted the seasonality of the first quarter here? The price cost was still kind of neutralish. I wouldn't think it would be price cost, but anything in the quarter here that depresses the result from a seasonal perspective?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Other than the one thing we mentioned with the timing of Easter, as far as anything else seasonal, I don't think we see anything like that, Steve.

Stephen Tusa -- J.P. Morgan -- Managing Director

Okay. Great. Thanks a lot.

Mike Roman -- Vice President and Chief Operating Officer

Thanks, Steve.

Operator

Our next question comes from the line of Andrew Kaplowitz of Citi. Please proceed with your question.

Andrew Kaplowitz -- Citigroup-- Managing Director

Hey, good morning, guys.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Hey, Andy.

Andrew Kaplowitz -- Citigroup-- Managing Director

So, in Healthcare, growth has been solid over the last couple quarters, but maybe a little below expectations. You mentioned oral care was flat, a little weaker than the last couple quarters. You did seem to outperform in oral care last year, but can it improve this year? What can get better in healthcare to reaccelerate as the year goes on? We know your long-term expectations for Healthcare growth are above the high 2% that you reported in the quarter.

Mike Roman -- Vice President and Chief Operating Officer

Yeah. Thank you, Andy. You look at Healthcare, we had good growth in our medical consumables business, our food safety, our health information systems businesses and we expect that trend to continue as we go through the year. Oral care was flat. We did see good growth internationally, especially in developing economies, but that was offset by some softness in the US. So, if you look at that playing out, we expect to see some improvement there, but that is what's weighing down the organic growth in the first quarter.

Also, our drug delivery business, as we know, is a project-based business and that can be up and down quarter to quarter. We saw Q1 down year on year against a strong comp that we had last year. That was maybe more of a first quarter issue, but oral care flat was the real focus.

Andrew Kaplowitz -- Citigroup-- Managing Director

Okay. Shifting to industrial, you did have relatively strong momentum in the second half of the year. You already talked about auto aftermarkets. What's interesting, obviously, is that you also mentioned last quarter you were pulling back on rebates in industrial and obviously, it's had good pricing growth. Do you think that had anything to do with the slowing in industrial? Are you maybe overpriced at all in industrial? How do you look at it going forward?

Mike Roman -- Vice President and Chief Operating Officer

As you heard, we had good growth in abrasives, in industrial adhesives and tapes and auto OEM over build rates. All of those were part of that price performance as well. I think that's a broad part of our portfolio and that didn't see any volume falloff picture of price. In automotive aftermarket, which was the decline in Q1, we saw strong growth in our products and solutions for retail car care. It was really the declines in autobody. So, it was a very specific market. We saw no indications of pull in head of any price increases and really no changes. It was just a soft market for us as we went through the quarter. It was really that. So, I think we continue to see strong growth across the broader industrial portfolio.

Andrew Kaplowitz -- Citigroup-- Managing Director

Okay. And you don't think it's share loss or anything like that in auto aftermarket?

Mike Roman -- Vice President and Chief Operating Officer

We don't see any indication of that at all, Andy.

Andrew Kaplowitz -- Citigroup-- Managing Director

Okay. Thanks, guys.

Operator

Our next question comes from the line of Robert McCarthy of Stifel, Nicolaus & Company. Please proceed with your question.

Robert McCarthy -- Stifel Financial Corp.-- Managing Director

Good morning, everyone. I think following up on Andy's line of questioning, obviously, you got some decent price in the US definitely 1Q. I think it was slide 18 plus 80 basis points there. But you did see some weakness. If you think about your overall formula for leveraging global IPI and having some decent strength in the US, don't you think it's fair to say under-indexed in the US and don't you think it raises some questions that maybe some parts of your product portfolio you might be facing some level of commoditization in consumer and some consumer healthcare? How do you react to that aside from defiance?

Mike Roman -- Vice President and Chief Operating Officer

So, Rob, I go back to we do see broad growth relative to those markets and overall economic backdrop. So, I think it's really isolated to specific market segments. That's what we're seeing in the US right now. When you look broadly across the portfolio in the US, it's automotive aftermarket. It's oral care and it's a couple of project-based business. We had some year over year comps with a couple of project-based business. Those are not price value kinds of changes.

Robert McCarthy -- Stifel Financial Corp.-- Managing Director

Then maybe coming at it a different way, obviously your gross margin contracted by about 60 basis opts. Is there any kind of narrative there in terms of mixed price cost? What's going on there that's kind of the main driver if you look at slide 19 in terms of your Q1A P&L on a consolidated basis?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Rob, one of the bigger things in there that you may not being seeing visibility to is what FX is doing to our gross margin. Clearly, we get some benefit to our earnings per share from a weaker US dollar, but that's partially offset by our hedging strategy that offsets some of our risks from FX. All of those hedging losses become part of our costs of good sold. That brought down gross margin in the first quarter of 2018 as well as bringing down operating margin by 40 basis points.

Robert McCarthy -- Stifel Financial Corp.-- Managing Director

Should we think about that currency translation drop through kind of like low-teens? Is it like a 10% by definition of the rolling of the hedges and structurally? How do we think about the incremental margin coming from FX growth?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

The incremental margin... Rob, I haven't quite thought of it in that direction.

Robert McCarthy -- Stifel Financial Corp.-- Managing Director

Sorry, the drop through from FX to the bottom line.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

It will vary depending where we are in the cycle with FX movements. Right now, we're at a point where we're going against a comp a year ago where we were having hedging gains. Now we're having hedging losses with the weaker US dollar. I can't put out one metric like that because it will vary quarter to quarter.

Robert McCarthy -- Stifel Financial Corp.-- Managing Director

Well, I traffic in over-simplification, but thanks for the answer to the questions.

Operator

Ladies and gentlemen, as a reminder, we ask that you please limit your participation to one question and one follow-up. Our next question comes from the line of Deane Dray of RBC Capital Markets. Please proceed with your question.

Deane Dray -- RBC Capital Markets -- Managing Director

Thank you. Good morning, everyone, and congrats to Mike.

Mike Roman -- Vice President and Chief Operating Officer

Yeah, good morning, Dean. Thank you.

Deane Dray -- RBC Capital Markets -- Managing Director

Just in terms of geographies, the China strength was impressive, up double digits. Maybe give us a context about the end market drivers or the product drivers there. Part of the issue here, maybe this is an overhang with all the headline news about trade war and protectionism and so forth, is that if things came to a boil, any boycott of American brands would likely put 3M at risk. Have you given any consideration to that potential development?

Mike Roman -- Vice President and Chief Operating Officer

So, Deane, I would say we saw broad-based growth in China, as you heard. It was led, again, by our domestic-facing businesses. We talked a bit about the trend here and how we're taking advantage of that. So, healthcare, personal safety, some of the domestic-facing parts of our businesses. Industrial adhesives and tapes was a strong grower. We also are seeing continued strength and some key trends. We're really taking advantage with our innovations, so air quality water quality, food safety and as we star the year, electronics has been in line with the broader China growth. So, broad-based growth led with the broader portfolio and the domestic businesses.

When you look at the contingency plans for all the things that we can face in a particular market, that part of it is our broader portfolio and how we think about it with our different customer set. Right now, we see we're well-positioned with the China markets and China customers to be in a good position whatever the outlook is for the economy there.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Deane, this is Nick. I'll just add one thing. I think you're aware. Our strategy in China has been we are putting local manufacturing there that we manufacture within China for our Chinese customers. We think that's one other layer of protection we have in our strategy as we execute that in China.

Deane Dray -- RBC Capital Markets -- Managing Director

That's helpful. Then just as a follow-up, Nick, we see the increase in buybacks announced today. What's the expectation in terms of adding leverage, beginning of the year, expected range of $1.5 billion to $4 billion being added. Where do you expect to be on that range and that kind of timing?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Deane, I'm not updating the expected range on leverage. I would say M&A is the biggest variable on where we'll end up with added leverage. That's difficult to estimate the timing of that. The range we're seeing right now is our best estimate and one we communicated in December. This adjustment in shared buyback level doesn't impact our total estimated leverage that we expect to add for the year.

Deane Dray -- RBC Capital Markets -- Managing Director

Got it. Thank you.

Operator

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

Julian Mitchell -- Barclays -- Analyst

Thank you very much and congratulations to Mike.

Mike Roman -- Vice President and Chief Operating Officer

Thanks, Julian.

Julian Mitchell -- Barclays -- Analyst

Maybe the first question on the productivity aspect of the earnings or EPS roadmap that you laid out previously. If I look at that, you had maybe $0.60 or so in aggregate coming from portfolio and footprint business transformation and then productivity. So, I just wondered in light of the raw material headwind and also the shortfall on organic volume growth if there was any increased urgency around extracting higher savings from productivity this year, whether just pulling some forward or increasing the amount for the year as a whole.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Julian, for the year, we still estimate our productivity level at how we originally estimated that in December. Looking at first quarter, without margins and the underlying productivity, our margins at 23%, underlying productivity was positive, but for the year, we expect that to improve going forward. Our lower volumes in the first quarter we think were one of the factors causing productivity to be slightly lower than what we were estimating for the total year. As the year goes on, we're confident that we'll have productivity in the levels we estimated in December.

Julian Mitchell -- Barclays -- Analyst

Understood. Thank you. My follow-up would just be around the electronics and energy segment. I'm just trying to understand, you had guided, obviously, for a slowdown there back at the end of 2017. We did see that slowdown very clearly manifest itself in Q1. So, as you look at the balance of the year, is there a sense that may start to accelerate from that Q1 low base as you move through 2018 or you think the current growth rate is representative of the year?

Mike Roman -- Vice President and Chief Operating Officer

I would say Julian, the outlook, as we laid it out at the beginning of the year, it's playing out pretty much in line with that as you look at consumer electronics, we had strong growth in data centers and semiconductor markets and we see robust demand for our products, our fluid solutions, our interconnect solutions in those markets. That's offset by that consumer electronics and the demand we see in those markets. That's playing out as expected and so we're right in our range for what we thought we would be doing as we come through the year.

Inge Thulin -- President and Chief Executive Officer 

This is Inge. One more comment around that business group because I think it's important when you talk about volume going forward and so forth. You have to remind yourself, we have to remind ourselves the work that has been done relative to the portfolio. If you go back many years ago, we had tougher growth rate moving forward. We were really challenged on the margin side. We can see now quarter after quarter after quarter and now a couple of years that the structure is right and the relevance for the market is correct for us. So, the margins is now very positive for us and on the high end even for the enterprise and it's sustainable.

I think that's the important element of that business as part of 3M. We manage that now very, very well despite some ups and downs in volumes. We know business there is more volatile. I think the portfolio work has put out a new place where we feel very good quarter by quarter in order to be able to deliver the return to you.

Julian Mitchell -- Barclays -- Analyst

Thanks, Inge. Maybe on that point, would you characterize the sell-in or sell-through as being in good balance right now?

Inge Thulin -- President and Chief Executive Officer 

Yes, it is.

Julian Mitchell -- Barclays -- Analyst

Are there any inventory -- OK.

Inge Thulin -- President and Chief Executive Officer 

No.

Julian Mitchell -- Barclays -- Analyst

Thank you very much.

Inge Thulin -- President and Chief Executive Officer 

Yeah. Thank you.

Operator

Our next question comes from the line of Laurence Alexander of Jefferies. Please proceed with your question.

Laurence Alexander -- Jefferies -- Analyst

Good morning. Two quick ones -- your comments were sprinkled with various end markets or various product lines that touch on construction. Is the traction that you're seeing there better spending or an increase in spending by your customers or is it an innovation cycle on your side. Secondly, with respect to the litigation settlement, can you update us on where you are, what is outstanding, what you see as the timeline if there are issues before we would reasonably expect to hear news of issues, however small, dropping?

Mike Roman -- Vice President and Chief Operating Officer

Yeah. Laurence, on the construction side, we continue to see strong growth from our home improvement business out of our Consumer business group. A big part of that is the growth we see in construction and the businesses that buy through that channel has been increasing. It's a mix of strong growth in that market as well as the products that we are bringing to them. We've put a lot of innovation into that part of our platform, have expanded it, and we position ourselves well for the growth that's coming in that end market.

Sorry. So, Laurence on your second question, back to your second question on the follow-up to the NRD settlement, we are in the process on implementing the grant to the state and we're working closely with the State of Minnesota, as expected. We think we've got focus there and well positioned as we move ahead.

Laurence Alexander -- Jefferies -- Analyst

I guess maybe just to clarify, is that a precedent for other states or does it rule out any similar issues in other states? There's been a lot of media mudslinging around different scenarios, most of which seem highly improbable, but maybe if you can just give your perspective on that.

Mike Roman -- Vice President and Chief Operating Officer

This is a unique situation. This is our home state and something that we've been working on with them for a number of years. This is a unique situation in both the nature of the case as well as the process we're working through with them.

Laurence Alexander -- Jefferies -- Analyst

Okay. Thanks.

Operator

Our last question comes from the line of Jeffrey Sprague of Vertical Research Partners. Please proceed with your question.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Thank you very much. Thanks for squeezing me in. Just two quick ones from me, if I could -- just back to the consumer question, it is kind of interesting or perhaps concerning some of the anecdotes you shared there. Do you see in your results potentially a cracking in US consumer strength that perhaps is not readily apparent yet from a macro economic standpoint or do you actually think it is some timing news and idiosyncratic things going on in a couple of these channels?

Mike Roman -- Vice President and Chief Operating Officer

Yeah, Jeff, as you look at the US, that was actually one of the strengths of our consumer business as we came through Q1. We saw stronger growth there. As we talked about, it was led by home improvement, but our home care business was also positive. We continued to see some slight declines in our office channel, but it was broad-based stronger growth in the US markets. So, no, very much in line with the improvements in GDP and outlook for retail spending.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

And then just very specifically on dental, oral care -- it's just kind of been a slog for you and Danaher and others, all these distribution changes and things going on. Do you see any opportunity there to change the business model, perhaps go direct, not go through these various distribution channels? Are you doing anything proactive there to reshape, reposition that business in any way?

Mike Roman -- Vice President and Chief Operating Officer

It's interesting. The channel for oral care has become more efficient over time. They've really changed how they managed it. You see that in our balance in the channel and how our sell in and sell out is balanced in the channel. We continue to work with the changes that -- kind of the constant change that's going on in our commerce channels more broadly.

We see that across many of our business, oral care included. I think our focus always is creating new models to serve our customers. We're focused on those end use customers and we work with our channel partners through their changes and really through new models that come as well. We're focused on a broad range of strategies there in oral care and beyond.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Thank you.

Operator

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

Inge Thulin -- President and Chief Executive Officer 

Thank you. As I look at our first quarter performance, there are many positives. Broad-based growth across all business groups, which included strong pricing, expanded margins, and a double digit increase in EPS. Equally important, we continue to evolve and build our enterprise for long-term success. 3M is strong and we have the experience, market position, and capabilities to continue delivering sustained profitable growth in 2018 and well into the future. Thank you for listening and have a good day.

Operator

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.

Duration: 59 minutes

Call participants:

Inge Thulin -- President and Chief Executive Officer 

Mike Roman -- Vice President and Chief Operating Officer

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Bruce Jermeland -- Director, Investor Relations

Scott Davis -- Melius Research -- Analyst

Steven Winoker -- UBS -- Managing Director

Joe Ritchie -- Goldman Sachs -- Analyst

Stephen Tusa -- J.P. Morgan -- Managing Director

Andrew Kaplowitz -- Citigroup-- Managing Director

Robert McCarthy -- Stifel Financial Corp.-- Managing Director

Deane Dray -- RBC Capital Markets -- Managing Director

Julian Mitchell -- Barclays -- Analyst

Laurence Alexander -- Jefferies -- Analyst

Jeffrey Sprague -- Vertical Research Partners -- Analyst

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