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3M Company (NYSE:MMM)
Q2 2018 Earnings Conference Call
July 24, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 3M second quarter earnings conference call. During the presentation, all participants will be in 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, July 24th, 2018. I would now like to turn the call over to Bruce Jermeland, Director of Investor Relations at 3M.

Bruce Jermeland -- Director of Investor Relations

Thank you and good morning, everyone. Welcome to our second quarter 2018 business review. On the call today are Inge Thulin, 3M's Executive Chairman; Mike Roman, our Chief Executive Officer; and Nick Gangestad, our Chief Financial Officer. Inge, Mike, 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, found on Slide 2. Please mark our calendars for our Q3 earnings call on October 23rd. Also, our next investor day, which will be held at our headquarters in St. Paul, Minnesota, with a welcome reception the evening of Wednesday, November 14th, and a formal presentation program 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 3. During today's conference call, we will make certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent form 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. Reconciliations of the non-GAAP measures can be found in the appendices of today's presentation and press release.

Please turn to Slide 4 and I'll hand off to Inge. Inge?

Inge G. Thulin -- Executive Chairman of the Board

Thank you, Bruce. Good morning, everyone. As you all are aware, Q2 was my last quarter as the CEO and I have now moved on to my new role at Executive Chairman of the 3M Board. Mike Roman is our new CEO and I am pleased with the orderly transition between me and Mike, which we have worked on for the last year. In a moment, I'll turn the call over to Mike and our CFO, Nick Gangestad, and you will se that once again, we had a very strong quarter with robust, organic growth, margin expansion, EPS growth, and good cash flow.

But before doing that, I would like to make a few comments. First, I would like to recognize all of you who have covered, analyzed, and invested in 3M. I have enjoyed our many interactions and I have always appreciated your input, along with your integrity and professionalism. I would also like to take all of our 91,000 3Mers around the world for your contributions and support. Working together, I'm pleased at what we have accomplished over the last 6 years.

We've enhanced and focused our portfolio and as a result, today we are far more relevant to our customers and the marketplace. We have strengthened our innovation engine and improved our cost structure and begun to transform 3M for the future. We have reached for our vision of advancing every company, enhancing every home, and improving every life.

All of this is reflected in our financial results and in the premium value we have created for our customers and premium returns for our shareholders. At the same time, I'm equally confident in our future. The Board of Directors and I have no doubt that Mike is the right person to lead our company as CEO and continuing building strengths on strengths. As I look across our enterprise, it is clear that we have the leadership, market position and capabilities to continue to build on the fundamental strength of 3M.

With that, I will turn the call over to Mike for a summary of our second quarter. Mike.

Michael F. Roman -- Chief Executive Officer

Thanks, Inge. Good morning, everyone. Let me begin by saying that I am honored to serve as the Chief Executive Officer of this incredible enterprise and lead our team into the future. I would like to express my gratitude to Inge for his vision, leadership, and ongoing partnership in his new role as Executive Chairman.

Over the last 6 years, we've made great progress in building out the 3M playbook, which has created a tremendous foundation for us. Moving ahead, we are focused on continuing our momentum, generating extraordinary value for our customers, and premium returns for our shareholders.

Now, let's review our second quarter results, starting on Slide 5. We had a strong quarter, highlighted by broad-based organic growth and a double-digit increase in earnings per share, along with record sales and rising margins. Looking at the numbers, total sales were $8.4 billion, an all-time high for 3M. We delivered strong, organic growth of 6%, with positive growth across all business groups and all geographic areas.

Please note that we have an upcoming ERP rollout in the United States. In anticipation of that deployment, some of our customers decided to accelerate their purchases. We estimate that this added approximately 50 to 100 basis points of growth in the second quarter. All of it in the U.S. results.

Moving on to earnings, we posted GAAP earnings of $3.07 per share, up 19% year-on-year. Adjusted earnings were $2.59 per share compared to $2.25 a year ago. This demonstrates that our teams around the world continue to execute well. Underlying margins were strong at 24%, with all business groups above 21%.

Beyond financial results, we are committed to building 3M for the long run, while returning cash to our shareholders. In the second quarter, we invested $468 million in research and development and another $365 million in capex. We also returned $2.4 billion to shareholders, including both dividends and share repurchases.

Please turn to Slide 6. There is a lot to like this quarter across our entire portfolio. Our industrial team posted good organic growth of 6%, a nice pick-up from the first quarter. Growth was broad-based, with particular strength in our filtration platform, where we are leveraging our Membrana acquisition to accelerate penetration in biopharma and life sciences.

Safety and Graphics delivered another outstanding quarter of 9% organic growth, along with robust margins. For the fourth consecutive quarter, our Personal Safety business grew double digits, as we continue to build and extend our industry leading portfolio in this market. In Healthcare, we continued to expand worldwide with organic growth of 4%, led by our Medical Solutions business with mid single-digit growth. Healthcare also posted double-digit growth in developing markets, as investments in those areas are paying off. This is a great business for 3M and we will continue to invest to strengthen it for the future.

Organic growth in Electronics and Energy was 5%, on top of 10% growth in last year's second quarter. Within this business group, we have done a lot of portfolio work over the last several years to improve our relevance to customers in the marketplace. This has led to improved growth and a sustained improvement in margins.

Last month, we continued to build on this portfolio work with the sale of our Communication Markets business. After a thorough review, we decided that selling this business would result in the greatest value creation for 3M and our shareholders. This is a good example of how we are actively managing our portfolio to best utilize the 3M model. Going forward, we will continue to prioritize high-growth opportunities in Electronics and Energy, such as automotive electrification, data centers, and semi-conductor fabrication.

Finally, organic growth in Consumer was 4%, which included good performances across our leading brands. We saw continued strength in Home Improvement, along with a strong start to the back-to-school season. In summary, I'm pleased with our performance in the second quarter and I thank our teams for their many contributions. Our playbook is working and we are just getting started. We are well positioned to grow into an even stronger and more successful company.

Looking ahead, we'll continue to optimize our portfolio, strengthen our innovation, and accelerate our transformation, while developing our people. Nick will now take you through the details of the quarter. Nick.

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Thank you, Mike. Good morning, everyone. Please turn to Slide 7. Sales grew 5.6% organically in the second quarter. Increases in selling prices contributed 110 basis points to sales growth in the quarter, and were positive across all geographic areas. The net impact of acquisitions and divestitures contributed 80 basis points to sales growth in the quarter. Foreign currency translation increased sales by 1 percentage point. All in, second quarter sales in U.S. dollars increased 7.4% versus last year.

In the U.S., organic growth was 5.6%, led by Electronics and Energy, Safety and Graphics, and Consumer. EMEA increased 5.8% in Q2, driven by strong growth in West Europe, that was led by Electronics and Energy, Industrial, and Safety and Graphics. Asia Pacific delivered 5.5% organic growth, led by Healthcare and Safety and Graphics. Organic growth was 12% in both China/Hong Kong and India, while Japan was down 2%. Finally, Q2 organic growth in Latin America/Canada was 6%, led by Healthcare and Safety and Graphics. At a country level, Canada was up high single digits, while Mexico and Brazil both delivered mid single-digit organic growth.

Please turn to Slide 8 for the second quarter P&L highlights. Companywide, second quarter sales were $8.4 billion. Operating income in the second quarter was $2.4 billion, which included a $400 million benefit from the Communication Markets divestiture gain net of related actions. Second quarter underlying operating margins were 24%, excluding the net benefit from the Communication Markets divestiture.

Let's take a closer look at the components of our margin performance in the second quarter. Leverage on organic growth improved productivity and lower year-on-year portfolio and footprint actions contributed a combined 290 basis points to margins. Selling price benefits more than offset raw material inflation, adding 30 basis points to operating margins. Foreign currency net of hedging impacts, reduced margins by 20 basis points.

Lastly, during the second quarter, we settled several respiratory and oral care-related lawsuits, which decreased margins by 70 basis points.

Let's now turn to Slide 9 for a closer look at earnings per share. Second quarter GAAP earnings were $3.07 per share, up 19% year-over-year. Underlying earnings were $2.59 per share when adjusting for the Communication Markets divestiture gains, net of related actions.

Let me now discuss the primary drivers of the year-on-year increase in Q2 earnings per share. The benefits of organic growth, productivity, and lower year-on-year portfolio and footprint actions added a combined $0.47 to per-share earnings in the quarter. The previously mentioned legal settlements reduced Q2 earnings by $0.07 per share. Higher year-on-year net interest expense and retirement benefit expense decreased earnings by $0.06 per share.

Our underlying Q2 tax rate was 19.8%, which increased earnings by $0.16 per share. The lower tax rate was driven primarily by U.S. tax reform and the continued benefits from our supply chain centers of expertise. Lastly, lower shares outstanding added $0.04 to per-share earnings.

Please turn to Slide 10 for a look at our cash flow performance. Second quarter free cash flow was $1.5 billion, up 14.5% year-on-year. Free cash flow conversion was 83% in the quarter. This includes a 16 percentage point headwind from the divestiture gain of the Communication Markets business and related actions.

Second quarter capital expenditures were $365 million, up $63 million year-on-year. For the full year, we continue to anticipate capex investments in the range of to $1.5 to $1.8 billion. During the quarter, we paid $802 million in cash dividends to shareholders and returned $1.6 billion to shareholders through gross share repurchases. Through the first half of the year, we repurchased $2.5 billion of stock and now expect full-year repurchases to be in the range of $4 to $5 billion versus $3 to $5 billion previously.

Let's now review our business group performance starting with Industrial on Slide 11. The Industrial business group delivered second quarter sales of $3.1 billion, up 5.7% organically. Industrial's growth was broad-based across all geographic areas and businesses. Our Advanced Materials, Abrasives, and Separation and Purification businesses led the way with high single-digit growth in the quarter.

Looking at the rest of the Industrial portfolio, our industrial adhesives and tapes, auto and aerospace, and automotive after-market businesses all delivered mid single-digit growth in the quarter. On a geographic basis, Industrial's organic growth was led by a 7% increase in EMEA, followed by mid single-digit growth in each of the other areas. Industrial delivered second quarter operating income of $724 million. Operating margins were 23%, with underlying margins up 180 basis points, excluding the impact of last year's second quarter portfolio and footprint actions.

Please turn to Slide 12. Second quarter Safety and Graphics sales were $1.8 billion, up 8.5% organically, with strong growth across all businesses and geographies. As Mike mentioned, our Personal Safety business continued to post excellent growth, up double digits in the quarter. The integration of our Scott Safety business is performing well and we are pleased with the performance of the business.

Commercial Solutions was up high single digits, while the Transportation Safety and Roofing Granules businesses were both up mid single digits. Geographically, organic growth was led by 10% growth in EMEA, with high single-digit increases in both the U.S. and Asia Pacific. Latin America/Canada grew 6% organically in the quarter. Operating income was $480 million with operating margins of 26.4%.

Please turn to Slide 13. Our Healthcare business generated second quarter sales of $1.5 billion, up 3.8% organically. Our Medical Solutions business, which is our largest segment in Healthcare, grew mid single digits in Q2. Oral care was up 3%, with continued good growth internationally, particularly in developing markets. Food Safety grew high single digits while Health Information Systems grew mid single digits.

Finally, our project-based drug delivery business declined low single digits year-over-year. On a geographic basis, Asia Pacific and Latin America/Canada led the way, both up high single digits. EMEA grew 5%, followed by 1% in the U.S. We saw continued strength in developing markets up double digits led by China/Hong Kong growing in the high teens.

Healthcare's second quarter operating income increased 7% to $435 million. And underlying operating margins were just over 30%, adjusting for the impacts of a legal settlement and the commercialization investments for our new Clarity aligners.

Next, let's cover Electronics and Energy on Slide 14. Electronics and Energy organic sales growth was 5.2% in the second quarter. Sales were $1.3 billion. The electronics side of the business grew 4% organically, led by mid-single-digit growth in electronics material solutions. Our Energy-related businesses were up 9% organically, led by electrical markets up double digits. As mentioned, we closed on the sale of substantially all of the Communication Markets business in the quarter and expect to close the remaining portion by the end of the year.

On a geographic basis, the U.S. led with high single-digit organic growth followed by mid single-digit growth in both EMEA and Asia Pacific. Latin America/Canada was up low single digits. Second quarter operating income for Electronics and Energy was $865 million, with underlying operating margins of nearly 28%.

Please turn to Slide 15. Second quarter sales in Consumer were $1.2 billion and organic growth was 4.3% year-on-year. Our Home Improvement business grew double digits organically, continuing its track record of strong performance. Our leading brands continue to win in the marketplace, particularly Command and Filtrete, both up double digits. The Home Care business and Stationery and Office Supply business each delivered low single-digit growth in the quarter, while Consumer Healthcare declined.

Looking at Consumer geographically, growth was led by a 7% increase in the U.S., followed by mid single-digit growth in Latin America/Canada. In the second quarter, we continued to see strong consumer demand for our products in the U.S., particularly in the e-commerce channel. Finally, operating income was $261 million, with operating margins of 21.4%. That wraps up our review of the second quarter results.

Please turn to Slide 16 and I'll cover our updated 2018 guidance. Our full-year organic growth expectations remain unchanged, in the range of 3% to 4%. With respect to earnings, we now expect full-year adjusted EPS to be in the range of $10.20 to $10.45, versus a prior range of $10.20 to $10.55. The update to the range reflects the impact of the divested income associated with the Communication Markets business.

Finally, please note that we now expect that foreign currency translation will add approximately 1% to full-year sales growth, versus a prior expectation of 2%. With that, we thank you for your attention and we'll now take your questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you would like to register a question using a landline phone, please press the 1 followed by the 4 on your telephone keypad. You will hear a 3-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 lift 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.

Michael F. Roman -- Chief Executive Officer

Good morning, Scott.

Scott Davis -- Melius Research -- Analyst

Inge, you will be missed. You did a fantastic job, as you know. Mike, big shoes to fill, but I'm sure you'll do great as well.

Inge G. Thulin -- Executive Chairman of the Board

Thank you, Scott.

Scott Davis -- Melius Research -- Analyst

You're quite welcome. Guys, one thing that caught my eye just in the prepared remarks was your ERP rollout comments. Can you tell us, is that in every segment? How big of a deal is this? What's your confidence level that the pull-forward was just 50 to 100 and not something greater than that. Is it possible to have that kind of precision?

Michael F. Roman -- Chief Executive Officer

Scott, we've been working on deploying our business transformation, our ERP rollout globally, for a number of years. We have largely completed our deployment in Europe, West Europe, in particular. Now, as we came in 2018, we are focused on the U.S. It is a very well laid-out plan of deployments by region, by business, by supply chain operations. So, we are, over the next 18 months now, deploying in the U.S. with a very specific deployment by business.

We did deploy our Healthcare business at the end of last year, so we have experience with that business in the deployment already complete. And now we're deploying the rest of the businesses in the U.S. as we go through the next 18 months. So, we have a pretty clear view on which customers are impacted with the deployment at which periods of time and so we have very good, I think, a pretty clear view of how much of the accelerated sales are in line with the deployment now that's taking place in the U.S.

Scott Davis -- Melius Research -- Analyst

Okay, fair enough. Then as a follow-up, we've seen some pretty big moves in EM currency over the last quarter. What's the playbook? Do you have to go in there and raise prices? Do you realign some supply chains? What's the playbook to manage that volatility?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Scott, the playbook there really isn't really changing. We seek to have natural hedges against currency risk and how we set up the supply chain. And then we layer on top of that some financial hedges. Those financial hedges don't ultimately change the underlying financials over a longer period of time, but we have hedges that we enter into going out 1, 2, 3 years to buy time for us to adjust our cost structure, our supply chain, in order to end up with a competitive supply chain in a revised FX environment.

So, in the short term, what we often do, especially in emerging markets, we will adjust prices to partially offset the FX impact. Then we will adjust our supply chain, adjusting where we're manufacturing based on FX movements. That tends to take a little longer time though, Scott. Not in a short term, but we often have to change and requalify sources of supply to make that happen.

For the year, Scott, I will say we started the year guiding that FX with rates as they stood at the end of the year. We thought that they would positively impact our earnings by about $0.10. Through the first months of the year, the dollar weakened more and that pushed our EPS benefit that we were expecting slightly above that $0.10. In the last few months, we've seen the dollar strengthen. We now see ourselves slightly below that $0.10. Through the first half of the year, we have seen a $0.06 EPS benefit from FX. If we see meaningful changes to that $0.10 we originally guided, we'll provide updates on that accordingly.

Scott Davis -- Melius Research -- Analyst

Fair enough, OK. Good luck, guys. Thank you.

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Thanks, Scott.

Operator

Thank you. Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with your question.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Good morning.

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Good morning, Andrew.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Inge, congratulations. Thanks, Mike. Look forward to working with you on the team.

Inge G. Thulin -- Executive Chairman of the Board

Thank you.

Michael F. Roman -- Chief Executive Officer

Same here, Andrew.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Just a question on guidance, if I look at income before taxes, as you guys have on Slide 22, basically I think prior outlook was $7.7 billion to $8.2 billion. Now it's $7.8 billion to $7.9 billion. I think the press release indicates that most of it is just adjusting for missing revenue and earnings from the divestiture, but the composition sort of doesn't make sense. Can you tell us what the big moving pieces are as we move from $7.7 to $8.2 billion range to $7.8 to $7.9 billion?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Andrew, there's a few moving pieces there. First of all, as you noted, now that we have divested of our Communication Markets division, there's some income that would've been generating in the last 7 months of the year that will no longer be generating. That's what's encompassed in our adjustment to our EPS guidance for the year. In particular, what you're talking about there, there's also an impact from net interest expense. So, in terms of our earnings bridge that we laid out at the beginning of the year, there's a couple moving parts in addition to this Communication Markets adjusted that we announced today.

First is we are buying back more shares. We originally guided that would be $0.10 to $0.15 of benefit. We now see ourselves at the high end of that range. So, that's on the positive. We also are borrowing more money, so our net interest expense is going up. We started the year guiding that net interest expense would be a benefit to our EPS of $0.05 to $0.10. We now think that will be approximately flat for the year.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Okay, gotcha. So, these are the three moving pieces. Then just a question going back to the ERP question, I assume your guidance sort of incorporated, did you guys anticipate this pre-buy in the second quarter? And the second, how do you guys think about sort of managing disruptions from ERP implementations in North America because Western Europe, and I do appreciate that Western Europe was a much more significant undertaking in terms of shutting down facilities, moving stuff around, but you did have negative top line comps there for a while. So, going to the second half, as you have to manage ERP disruptions in North America, what gives you confidence that there will not be hits to organic growth? How are you going to manage it? Sorry for the lengthy question.

Michael F. Roman -- Chief Executive Officer

I would maybe start with, as we've talked a lot about with our business transformation, it really starts and ends with the customer for us. In our deployments, that's where we start. We focus on how to do the best of our customers. Minimize impact and provide benefits with where we're going with business transformation. I would say, as we deployed in Europe, that was true. You are asking the customers to significantly change how they interact with us, but on the other side of that change process is a lot of benefit for how we work together. So, I think we saw that in Europe.

We had the deployment and some of the same things we're seeing now in the U.S., where we had some accelerated purchases. I don't think I would characterize it the way you did, that we saw growth impacted by that business transformation. That was other dynamics in the marketplace and even some of the things that we're doing around portfolio and maybe, to a degree, maybe some of the things we're doing about some of the strategic investments there.

But the layout with the focus on customers and how we manage that, that's part of what we're doing in the U.S. now. We're engaging them day in and day out, communicating with them early about how this is progressing. Working with them very closely about managing through any disruption as we scale down the legacy systems and scale up the new ERP and surrounding capabilities.

So, that process, we are managing supply all the way through the calendar of those steps. This accelerated buy -- we expected some accelerated buy. We were working with our customers as we got closer, how much interruption would they see? How much accelerated buy makes sense? It's really up to them, ultimately. They're making the decision on what they buy based on the information we're communicating with them. I would say it's in line with what we've seen as we've deployed through West Europe and I think it's projecting that we're doing a good job with deployments. They're on track and progressing well.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

So to your perspective, there is a high degree of visibility on organic growth in second half?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Yes. Related to the ERP deployment? Absolutely.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

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

Andrew Kaplowitz -- Citigroup -- Analyst

Good morning, guys. Inge, congrats. Good luck again.

Inge G. Thulin -- Executive Chairman of the Board

Thank you.

Andrew Kaplowitz -- Citigroup -- Analyst

So, there's obviously been a little more noise here with the ERP rollout, but can you give us a little more color in how we should think about our organic sales growth guidance by segment? If we look at your annual guidance, and you guys talk about Healthcare, you know, it's 4% to 6%. Maybe you're trending a little below there, but Safety and Graphics is trending way above. So, is there a bit of a trade-off there and then are the other segments generally in line for the year? Is that how we should think about it?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Andy, thanks for the question. Just a few things. As far as the impact of this ERP Go Live impact and the way it's impacting different segments in the U.S., we see these impacts primarily in our Industrial, Safety and Graphics, and Electronics and Energy business groups. It's not really having a material impact on Consumer and really no impact on our Healthcare business. So, in terms of how you think about that impact in the second quarter and third quarter and fourth quarter, it's really those three businesses that were impacted.

In terms of our guidance for the year, we continue to see Industrial globally. We had originally guided 3% to 5%. We see that most likely in the bottom half of that range. That aligns with the updated total company guidance that we provided in April. We do see Healthcare probably closer to the 4% growth for the total year. And Safety and Graphics, which we'd originally guided at 4% to 6%, we see that at the high end or possibly higher than the high end of our original guidance.

The others are Consumer and Electronics and Energy. We see those solidly in the ranges that we first put out.

Andrew Kaplowitz -- Citigroup -- Analyst

Nick, that's helpful. Maybe I could ask you about pricing. Obviously, very strong pricing in the quarter. When you look at price versus raws, it actually accelerated or was better in Q2 than Q1. We know you said it was going to be an elevated year for pricing, but is there any particular end markets where pricing is particularly strong and then do you think the headwind on price versus raw material costs could be less than the $0.05 to $0.10 for the year that you updated us on last quarter?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Yeah, the $0.05 to $0.10, Andy, just to be clear. That's just the raw material headwind that we updated that. As far as price growth, it's actually, Andy, quite broad. I won't point out one business or one geography as driving these results. It's really quite broad and deep where the price growth is. In terms of impact on margin, I think I said earlier that we continue to see that as being positive for the year. And halfway through the year, we continue to see that, highly confident that our price increases will more than offset whatever we see for raw materials headwinds for the year.

Andrew Kaplowitz -- Citigroup -- Analyst

Thanks, Nick. Appreciate it.

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

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

Julian Mitchell -- Barclays -- Analyst

Hi, good morning. I'll echo the comments on thanks to Inge and welcome to Mike. In terms of I guess maybe a first question on a couple of the end markets, any update of sorts on the automotive outlook in your Industrial business? Also, within Electronics and Energy, there had been this bifurcation earlier in the year where device sell-through was soft but the sort of capex or electronics materials business was very strong. Just wondered how you've seen that playing out more recently. I know you worried about the capex portion or EMS decelerating, given what's happening with device sell-through.

Michael F. Roman -- Chief Executive Officer

Thank you, Julian. Starting with the automotive, we continued, at year-to-date through the first half, we continue to see strong growth relative to the build rates globally. Remember, we're managing a global automotive business focused around key account relationships with the OEMs globally. We're seeing continued good performance on spec ends and penetration into the marketplace. So, good growth year-to-date relative to the build rates.

Some improvement in the build rates in the second quarter. Still looking at IHS projections up over 4%, slightly over 4% second quarter. Again, total year still in line with that 2.2% kind of number. Always watching quarter-to-quarter the ups and downs there. But performing well and when you bring together our automotive electrification capabilities and what we're doing in our technology and the applications around that, we continue to see a very robust outlook for outgrowing the build rates.

If you turn to Electronics and Energy, we continue to see I would say strong growth in what we've been talking about as high-growth electronic segments, around automotive electrification, around data centers, semi-conductor fabrication. That continues to move forward. Semi-conductor fabrication, behind maybe part of question there with where capex is being spent, still seeing significant growth opportunities for us.

The rest of the Electronics, I would say Electronics in general is playing out in line with the way we laid it out at the beginning of the year. That was more, I would say, modest growth in the Consumer Electronics part of our portfolio and stronger growth in those higher growth segments. There's some, I would say, some shifts here or there in the quarter, but pretty much as we expected in our Electronics and Energy business, pretty much right down the middle of the range that we had laid out at the beginning of the year as well.

Julian Mitchell -- Barclays -- Analyst

Thanks. Then my second question would just be around if you look back to your EPS roadmap from Slide 8, way back at the December outlook meeting from Nick's presentation, I think you've given a very thorough update on sort of two of the main chunks in that. But maybe any color on the productivity piece? How that's trending in terms of footprint optimization, business transformation, and the manufacturing productivity in terms of I guess what are the saving, how are the savings from those various programs tracking in the first half versus what you expected and any gyrations in the sales line causing you to accelerate some of the productivity plans?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Julian, in terms of the 2018 roadmap that I provided last December and then we updated it in January after Tax Reform, the other components are staying where we expected. But let me give a little color on it. Even organic growth with the roll-down that we had in our total year organic growth expectation for the year, we see more of our growth coming from price, which is accretive to EPS. So, our organic growth impact on earnings remain unchanged.

Footprint optimization, much of that, Julian, was just not repeating the charges that we took in 2017. There was some incremental and some charges and some benefit. Those largely washed in 2018. We are expecting the majority of that true benefit to be coming in 2019 and 2020. So, that is progressing exactly as we expected. Raw materials, as I noted, we adjusted that down from that original guidance. Business transformation and productivity, both of those are tracking to the ranges that we put in. They're performing exactly as we expected.

Julian Mitchell -- Barclays -- Analyst

Great. Thank you.

Operator

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

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone. Inge, wish you all the best and congrats again to Mike.

Inge G. Thulin -- Executive Chairman of the Board

Thanks, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

I'd like to follow up on some of the business line specific questions that Julian started there. Mike, can you address how auto after-market did in the quarter versus some of the fall-off we saw in the first quarter? Then, in oral care, we saw the total growth. How did the U.S. market do specifically as the distribution channel calmed down? And maybe talk a bit more about this launch. It looks like Clarity will compete directly with Invisalign. What are the competitive dynamics there?

Michael F. Roman -- Chief Executive Officer

Sounds good to me. Starting with the industrial automotive after-market kind of question. Industrial, we saw broad-based growth across all geographic areas, all businesses. We highlighted some of the leading growth there. We saw mid single-digit growth in our automotive after-market business in Q2.

Coming out of Q1, we were really looking hard at the market. We saw end demand soften as we came out of Q1, but the total year was projecting nominal growth for that marketplace that we expected to improve as we move through the year. We saw that start in Q2. We saw the demand pick up. We saw our opportunity in the marketplace pick up across developed economies, in particular and the U.S. leading that. So, we saw the kind of improvement we expected with automotive after-market and we're projecting the total year in line with what we started at the beginning.

Turning to oral care, oral care is an important business for us. We're recognized as a leader in a number of positions, leveraging our material science. We continue to innovate and look to invest and grow this business as we move ahead. It really does leverage our strengths. If you look at the overall growth in second quarter, 3% for worldwide growth, down slightly in the U.S., improving over Q1 and, again, what we're expecting is to see is some improvement globally, and led again by developing markets, but improving as we go through the year. Still some room to go in improvement in the U.S. as we move ahead.

We did announce and introduce our Clarity aligners at the American Association of Orthodontists show in May. We believe that this now positions us to have the broadest set of solutions across orthodontic platforms. We're actively onboarding orthodontists right now. It's really a play for us to help have a broad-based suite of solutions for the orthodontists in the global market. We're so far getting good and very positive feedback.

Deane Dray -- RBC Capital Markets -- Analyst

Got it. Just as a follow-up on tariffs, maybe Nick can clarify the point that you expect to be positive in price cost? Does that include the tariffs that have been announced and enacted? What's the look forward on potential risk as this may get escalated?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Deane, the guidance that I said is inclusive of tariffs that have been enacted. When we're talking tariffs, there's a number of tariffs. First, the steel and aluminum under the National Security Act. That impact, as well as the Section 301, List 1, those two that have already been enacted, we see having a fairly immaterial impact on us. We estimate that to be approximately $10 million or $0.01 a share on an annualized basis. The direct and indirect impact of those tariffs. We are actively monitoring and assessing the potential impact from Section 301, List 2 and 3, if those were implemented, and any potential retaliation that could with those.

We're prepared to act with sourcing changes, supply changes, and pricing changes if enacted. My initial statement stands that we think pricing will offset raw material impacts there and if tariffs expand, we continue to see that happening. We're not quantifying the impact of those latter two since they haven't been enacted yet, but we are prepared with actions to minimize the actions of that.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you.

Operator

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

Laurence Alexander -- Jefferies -- Analyst

Good morning. Two quick ones. First on the price versus raws dynamic, if raw material pressures peak out, do you think you can maintain the same pace of price or is a certain amount of the price mix just the raw material offset?

Secondly, on Asia, specifically in China, can you parse out a little bit the trends driving the pick-up in Chinese growth, the acceleration from Q1 to Q2? Is that just Consumer and Health or is there something else going on there?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Laurence, on the price raw materials, we are likely seeing that our commodity prices and the increases we're seeing there likely at a peak level. Our pricing projections, our selling price projections are consistent with that. That's part of our anticipation that in a more stable world going forward with commodities, we'll continue to have our selling price increases more than offset what we're estimating now for commodity price increases. We really don't see that changing. If the commodity prices start to change again, we will be prepared to act.

Michael F. Roman -- Chief Executive Officer

Laurence, just taking a look at China. We had strong growth in second quarter. Electronics performed very well as we continue to, I would say, win business with the companies based there, including the China OEMs. We also saw strong growth in our domestic-facing businesses, kind of the domestic economy-facing businesses. We've had a strategy to prioritize growth here in line with what China is doing to develop their economy.

As you noted, healthcare is a strong leader of that growth in the first half of the year. A big part of our Consumer business is performing very well. Safety & Graphics, also, really with a domestic-facing portfolio doing well. And even if you look at our Industrial business, we have platform businesses in our Industrial business group that are performing well too. That would be a good example. Our industrial adhesive and tapes business doing very well in China. SO, it's broader than Healthcare and Consumer, really centered around where the growth is occurring in the broader China market.

Laurence Alexander -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Nigel Coe of Wolfe Research. Please proceed. Hello, Mr. Coe? Your line is open. Please proceed with your question.

We will proceed with --

Nigel Coe -- Wolfe Research -- Analyst

Sorry, hey, guys. Am I live?

Michael F. Roman -- Chief Executive Officer

Yeah, you're live, Nigel.

Nigel Coe -- Wolfe Research -- Analyst

Sorry about that. Some technical issues here. Apologies if it's been addressed already, I was a little bit late joining the call, but the $0.15 probably [inaudible] associated with the gain on the Comms business, is that just split to the E&E Comms segments or is it broader? And maybe just some color in terms of what actions you're taking with the $0.15.

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Nigel, the actions we're taking are to address stranded costs that are left after the divestiture of our CMD business. So, they're addressing structural costs that this divestiture is leaving. We started those actions in Q2 and we expect to take more in the second half of the year to offset what could've been a negative impact if we had left those stranded costs in the company going forward.

Nigel Coe -- Wolfe Research -- Analyst

Okay. Would that be a relatively quick payback? A 12-month payback or a little bit longer?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

We expect that will be paying back for us next year. Some of those actions will trail into next year in terms of when the cost savings start to happen. But we'll be starting to see that benefit in 2019. Nigel, one other thing. I'm not sure if you were asking this earlier. This charge is almost entirely being taken at a corporate level and not in our Electronics and Energy business.

Nigel Coe -- Wolfe Research -- Analyst

Got it, OK. Then just a follow-on question on the guidance, the way the guidance is set up, first half versus second half. We're getting questions in terms of it's still somewhat back-ended loaded, particularly when we think about the FX is coming through the P&L and, of course, comms comes out first half or second half. What's best in the second half versus the first half to get us to the mid-point of the guidance range?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

For the second half of the year, we do expect that we'll be seeing more benefit from share repurchases than we saw in the first half. We do think productivity will be better in the second half than what we saw in the first half. Then, in terms of commodity prices from a year-on-year basis, we expect that'll be fairly neutral between the first half and the second half. Pricing will likely be better in the second half than in the first half.

Nigel Coe -- Wolfe Research -- Analyst

Pricing for sure. Okay. Thanks, Nick.

Operator

Our next question comes from the line of Jeff Sprague of Vertical Research. Please proceed with your question.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Thank you. Good morning, everyone. Just a quick clean-up for me on Healthcare and then maybe a bigger picture question for Mike. Healthcare U.S. growth has been a little on the soft side year-to-date and in the quarter. Perhaps it's dental. But are we observing some hangover from pull-forward on sales there from ERP last year in the Healthcare business?

Michael F. Roman -- Chief Executive Officer

Jeff, healthcare in the U.S., where you're seeing the impact, broadly we had strong growth. Our Medical Solutions business is leading the way there. Maybe just a note about that too. We've been talking about this as our medical consumables business in the past. But it really is focused on value-based care, and health economics. It's a much more integrated portfolio around that, so I'm going to be talking about it as Medical Solutions. So, leading the way, we saw good growth in the U.S., also in food safety and health information. Oral care was down slightly. The bigger drag in second quarter was our drug delivery business. Again, we've talked about project-based business. We saw a decline in Q2 from that business and that was the bigger impact. So, broader base, stronger growth as we move ahead.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Just, Mike, on the portfolio, obviously you've been working closely with Inge all along and I guess things will always be kind of under review, but with CMD out of the way here now, do you view the portfolio as relatively stable or there's more than you're working on internally and want to reevaluate?

Michael F. Roman -- Chief Executive Officer

If you look at where we are focused as we move ahead, the playbook is working. Our playbook is working. But there are opportunities in each of those three levers, including portfolio management. We are now an active portfolio manager. We do have a robust pipeline of how we look at our portfolio and we'll be working to best utilize the 3M model and optimize a portfolio around our model for value creation. So, we're going to continue being an active portfolio manager as we move ahead. It's about prioritizing resources. It's about targeting where we go with M&A. It's also about reviewing our businesses as we go. I see that as very much part of our future for value creation opportunity and it's a priority for me as I step into the role.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Thanks and best wishes to Inge.

Inge G. Thulin -- Executive Chairman of the Board

Thanks, Jeff.

Operator

Thank you. Our next question comes from the line of Steven Winoker of UBS. Please proceed with your question.

Steven Winoker -- UBS -- Analyst

I'll echo everybody's comments here. A lot of ground. I just want to dig a little more into that important price point, the 1.1% in the quarter. You mentioned it was quite broad. But you usually also talk about sort of setting our currency impacts and other impacts versus underlying business year-on-year relative to taking pricing on existing items and new products sometimes driving a big part of it. I'm just trying to get a sense for the kind of operating robustness of that number and the repeatability of it as we're looking through not only implied in the rest of the year, but later into next year, too.

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Steven, as I said, it's broad based. 100 basis points up in the U.S. EMEA was up 180 basis points. Latin America/Canada 210 basis points and APAC up 40 basis points. That 110 basis points is inclusive of our Electronics business, which is normally a price-down model. If we pull Electronics out, our underlying price growth was up 130 basis points.

As far as geographies and what we see as potential there, we don't see that going down. Part of your question, Steve, was also on FX impact. Right now, we estimate there is only about 20 of that 110 or 130, depending on how you look at it, of price growth that was coming from FX. The vast majority of it is coming from core underlying price growth. It's really a reflection of the value we create for our customers. And, this is a new point I'm making here, it's partially being driven by improvements in our global price management that our business transformation initiative is enabling. The ability to have better governance and better control over that pricing, we are starting to see that benefit. That's part of what you're seeing change here.

Steven Winoker -- UBS -- Analyst

Okay, that's helpful. Mike, Jeff just referred to it on the divestiture side of the portfolio, change side. But as I'm looking at acquisitions, Scott Safety was a great strategic play for you guys. What do you see in terms of the pipeline right now? Should we be expecting anything in the bigger size range soon or are things on hold at all as you're going through the transition? What should the expectations be on the acquisition?

Michael F. Roman -- Chief Executive Officer

Thanks, Steven. For me coming in, as always, organic growth remains our first priority. So, we're going to continue to prioritize investments in R&D, capex, and product commercialization. With that in mind though, in managing our portfolio, we're looking at M&A as an opportunity to create value. We're going to maintain the flexibility to pursue additional strategic acquisition opportunities like Scott Safety.

We have been very clearly focused on strategies that leverage our fundamental strengths, unique value creators to 3M. Our ability to integrate successfully these acquisitions and to create market leadership positions like we've been doing in personal safety. So, we are active. Our top priorities as I look ahead are Healthcare and Industrial. Safety and Graphics continues to be a priority, although they are very much focused on integrating Scott Safety at this time.

With that said, All five businesses are active. We have strong overall pipelines for us to work with. So, for me, it's about really moving ahead and identifying those opportunities that are clearly linked to those strategies where we can create differentiated value.

Steven Winoker -- UBS -- Analyst

Great. That's helpful. Thanks and good luck.

Michael F. Roman -- Chief Executive Officer

Thanks.

Operator

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

Stephen Tusa -- J.P. Morgan -- Analyst

Good morning.

Michael F. Roman -- Chief Executive Officer

Good morning, Steve.

Stephen Tusa -- J.P. Morgan -- Analyst

Just a better understanding some of the moving parts here, back to Nigel's question on the kind of seasonality. You pulled forward a bit of sales here in the second quarter. You've got a pretty tough comp in the third quarter. Anything on that kind of comp that we should be aware of? Is it kind of like successful looks like first half, whereas first quarter was lower than second quarter kind of a 3% range? Is that kind of how we're thinking about the second half split between 3Q and 4Q on organic?

Then also on EPS, you had a low tax rate. The tax rate kind of the low end of the range this quarter. Maybe that steps up a little bit in the third quarter? Will you grow earnings here sequentially in the third quarter?

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Steve, in terms of growth, let me give some guidance of how we're seeing growth between the third and fourth quarter. Mike talked earlier about the impact of our U.S. Go Live with our ERP system and the amount of the revenue. So, that impact, as we expect us to be giving back some of those sales in the second half of the year, we expect that to disproportionally impact the third quarter. As you noted, between the two quarters, Q3 in the tougher of the two comps between the third and the fourth quarter.

That all in, we are looking at the third quarter being lower growth than the fourth quarter. Both of them aligned with our expectation of 3% to 4% for the total year. But I'm not going to be surprised if we have a lower number in third quarter given what we're seeing so far for the year and it's in line with our 3% to 4% guidance. Then in terms of EPS for each quarter, I try to avoid giving EPS guidance on a quarter-by-quarter basis, buy we continue to see ourselves very firmly delivering on an adjusted basis the $10.20 to the $10.45 for the total year.

Stephen Tusa -- J.P. Morgan -- Analyst

Okay, great. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Joshua Aguilar with Morningstar. Please proceed with your question.

Joshua Aguilar -- Morningstar -- Analyst

Hey, everyone. Thanks for taking my question. So, drug delivery kind of down, low single digits year-over-year. I think last quarter kind of was the same case off of tough comps. Obviously, this is more project-based business, as you guys said. I remember in your investor day in 2016, you were talking about some of the advantages from drug delivery, like analytics, patient compliance. More long-term, are you guys still optimistic about the future trends there generally with drug delivery and can you give us an update about what you're excited about?

Michael F. Roman -- Chief Executive Officer

Josh, you're referring to some of the opportunities that we see for growth in that business. We still, we see opportunities to take that business to a positive growth business as we move ahead. It will continue to be a project-based business, so quarter-to-quarter it can be lumpy and up and down. But we do see opportunities. We have some unique capabilities and technology there that we can apply as we move ahead.

Joshua Aguilar -- Morningstar -- Analyst

Okay, great. Thanks.

Operator

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

Michael F. Roman -- Chief Executive Officer

To wrap up, we had a strong performance in the second quarter led by broad-based organic growth, expanded margins, and a double-digit increase in our earnings per share. We executing our playbook and are positioned to deliver a successful 2018. Thank you again for joining us this morning 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: 66 minutes

Call participants:

Michael F. Roman -- Chief Executive Officer

Nicholas C. Gangestad -- Senior Vice President and Chief Financial Officer

Bruce Jermeland -- Director, Investor Relations

Scott Davis -- Melius Research -- Analyst

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Julian Mitchell -- Barclays -- Analyst

Andrew Kaplowitz -- Citigroup -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Laurence Alexander -- Jefferies -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Steven Winoker -- UBS -- Analyst

Stephen Tusa -- J.P. Morgan -- Analyst

Joshua Aguilar -- Morningstar -- Analyst

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