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3M Co  (NYSE:MMM)
Q3 2018 Earnings Conference Call
Oct. 23, 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 Third Quarter Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session.

(Operator Instructions) As a reminder this conference is being recorded Tuesday, October 23rd, 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 third quarter 2018 business review. With me today are Mike Roman, 3M's Chief Executive Officer and Nick Gangestad, our Chief Financial Officer. Mike and Nick will make some formal comments and then we'll take your questions.

Please note that today's earnings release 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 found on Slide 2. First, we will be hosting an Investor Day at our headquarters in St. Paul, Minnesota in a few weeks with a welcome reception in the evening of Wednesday, November 14th, where we will be highlighting how 3M science is advancing our priority markets for growth along with the formal presentation program on Thursday, November 15th. The presentations we'll discuss; our new five-year plan along with a preview of our 2019 outlook. If you plan to attend the event and have not yet responded, please RSVP right away.

Second, our Q4 earnings conference call will take place on Tuesday, January 29th, 2019.

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 will 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 Mike. Mike?

Michael F. Roman -- Chief Executive Officer

Thank you, Bruce. Good morning everyone and thank you for joining us. In the third quarter, 3M delivered a double-digit increase in cash flow and earnings per share along with strong margins, despite slower growth. We also continue to execute on business transformation while deploying capital to invest in our future and return cash to our shareholders.

Looking at the numbers, our team posted total sales of $8.2 billion in the quarter. We delivered organic growth of 1%, which is on top of 7% growth in last year's third quarter. As you recall from the discussion on our July earnings call, our ERP rollout in the US resulted in revenue shifting between Q2 and the second half of the year. Today, we estimate the pull forward into Q2 was approximately 100 basis points with the vast majority coming out of Q3.

Moving on to earnings per share; we posted EPS of $2.58, an increase of 11% year-over-year. Our company continues to deliver a strong return on invested capital along with premium margins. Companywide, we generated margins of 25% with all business groups above 22%. Our team also increased free cash flow by 24% year-over-year with a conversion rate of 114%.

This is a testament to the strength of our portfolio and business model and our focus on driving productivity every day. We also continue to invest in R&D and capital to support organic growth, while returning cash to our shareholders. And in the quarter, we returned $1.9 billion to 3M shareholders through both dividends and share repurchases.

Please turn to Slide 5 for a look at the performance of our business groups for both the third quarter and year-to-date. In the third quarter, three of our five business groups, Electronics & Energy, Industrial, and Safety & Graphics posted organic growth of 2%. Health Care and Consumer each had areas of strength, but also areas that were softer than expected. Health Care's growth declined by 1%, primarily due to continued weakness in our drug delivery business.

Organic growth in Consumer was down 2%. This business group was impacted by channel adjustments between quarters with our major retail customers, though the sell-out of our products remains strong. In his comments, Nick will provide more detail on the third quarter performance of each business group.

Given the shift of sales between quarters due to business transformation, it is also helpful to look at our performance through nine months. Safety & Graphics posted 6% growth followed by 3% growth from both Industrial and Electronics & Energy. Health Care posted 2% growth with Consumer at 1%.

Companywide, we have delivered organic growth of more than 3% year-to-date. I will come back to share our updated guidance after Nick takes us through the details of the quarter. Nick?

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

Thank you, Mike, and good morning everyone. Please turn to Slide 6. Sales grew 1.3% organically in the third quarter and are up 3.3% year-to-date. Increases in selling prices contributed 120 basis points to sales growth in the quarter, with positive price growth across all geographic areas. The net impact of acquisitions and divestitures contributed 20 basis points to sales growth in the quarter. Foreign currency translation decreased sales by 1.7 percentage points. All in, third quarter sales in US dollars were down 20 basis points versus last year.

In the US, organic growth was 0.5% with positive growth in Electronics & Energy, Industrial and Safety & Graphics. Q3 organic growth was impacted by the deployment of our new ERP system in the US during the quarter. Year-to-date, organic growth in the US is up 3%.

Asia Pacific delivered 3.2% organic growth, led by Health Care and Safety & Graphics. Organic growth was 10% in China/Hong Kong, while Japan was down 7%, or up 1% excluding our Electronics related businesses. Year-to-date, Asia-Pacific is up 4.5% organically.

EMEA declined 90 basis points in Q3 with West Europe down 2%. From a year-to-date standpoint, EMEA is up 2%. Finally Q3 organic growth in Latin America/Canada was 2.1%, led by Health Care and Consumer. At a country level, organic growth in Brazil was 5%, Mexico was up 3%, while Canada was flat. On a year-to-date basis, Latin America/Canada is up 4% organically.

Please turn to Slide 7 for the third quarter P&L highlights. Companywide third quarter sales were $8.2 billion, with operating income of $2 billion. Third quarter operating income margins were 24.7%, up slightly versus last year. Let's take a closer look at the components of our margin performance in the third quarter.

Organic volume, productivity, and lower year-on-year portfolio and footprint actions added 70 basis points to margins. Selling price benefits more than offset raw material inflation, which added a net 30 basis points to third quarter margins. For 2018, we now expect full year raw material headwinds, inclusive of tariff impacts, of minus $0.15 per share versus a prior range of negative $0.05 to $0.10 per share.

We continue to expect benefits from selling price to more than offset raw material headwinds. Nearly offsetting these margin benefits during the quarter was a 50 basis point headwind from foreign currency, a 30 basis point impact from acquisitions and a 10 basis point headwind from the Q2 divestiture of the communications markets business.

Let's now turn to Slide 8 for a closer look at earnings per share. Third quarter GAAP earnings were $2.58 per share, up 11% versus last year. The benefits of organic growth, productivity, and lower year-on-year portfolio and footprint actions added a combined $0.12 to per share earnings in the quarter. Acquisitions added $0.01. While the divested income in transition costs from the communications markets divestiture were an earnings headwind of $0.03 per share.

Foreign currency, net of hedging, reduced per share earnings by $0.08, as the US dollar strengthened against many currencies throughout the quarter. For the full year, we now expect an earnings headwind from foreign currency of minus $0.05 per share versus a prior estimated benefit of $0.10 or a reduction of $0.15 per share versus previous expectations. Higher year-on-year net interest expense and retirement benefit expense decreased earnings by $0.05 per share.

Our Q3 tax rate was 21.3%, which increased earnings by $0.22 per share. This earnings benefit was primarily driven by the US tax reform. Lastly, a reduction in shares outstanding added $0.06 to per share earnings.

Please turn to Slide 9 for a look at our cash flow performance. As Mike noted, we continue to generate strong operating cash flow, allowing us to consistently invest in the business and return cash to shareholders. Third quarter free cash flow was $1.8 billion, up 24% year-on-year with a conversion rate of 114%. Third quarter capital expenditures were $377 million up $52 million year-on-year and we expect these investments to be approximately $1.6 billion for the year.

In addition to investing in our businesses, we returned significant cash to shareholders in Q3 including $794 million in dividends. We also returned $1.1 billion to shareholders through gross share repurchases. We continue to expect full year gross share repurchases to be in the range of $4 billion to $5 billion.

Let's now review our business group performance; starting with Industrial on Slide 10. The Industrial business group delivered third quarter sales of $3 billion, up 2.2% organically with growth across all geographic areas. Our automotive OEM business continues to drive increased penetration across applications such as structural tapes, adhesives, acoustics, light weighting and electronic solutions. Overall, our business was up 5% in the quarter compared to a global car and light truck builds which were down nearly 2%.

The Automotive aftermarket business declined low single-digits organically, due to softness in the collision repair market. Our Industrial adhesives and tapes business and filtration business were both up low single-digits in the quarter. Finally, the Advanced Materials business led the way with double-digit organic growth in the quarter. On a geographic basis Industrial's organic growth was led by a 3% increase in Asia-Pacific followed by the US, up 2%. Industrial delivered third quarter operating income of $667 million with operating margins of 22.1%.

Please turn to Slide 11, Safety & Graphics sales were $1.7 billion, up 2.2% organically in Q3. Growth was led by our personal safety business, up 5% organically on top of a 14% increase last year. The integration of Scott Safety is on track and the business continues to exceed our expectations.

Transportation Safety grew mid-single-digits while commercial solutions was up low-single-digits. Finally, our roofing granules business declined mid-teens as shingle manufacturers slowed production in the quarter.

Geographically, organic growth was led by 5% growth in Asia-Pacific. Operating income in the third quarter was $412 million while operating margins were 24.8%, which includes a 150 basis point headwind from the Scott Safety acquisition.

Please turn to Slide 12; our Health Care business generated third quarter sales of $1.4 billion, down 1.1% organically versus a 7% comp last year. Holding back both third quarter and full year organic growth in Health Care has been the continued softness in our drug delivery business, which is dependent on pharmaceutical regulatory timelines and customer R&D budgets.

This business saw a 25% year-on-year decline in Q3 organic growth which negatively impacted overall Health Care organic growth by 250 basis points. While our drug delivery business is experiencing near term challenges, the pipeline continues to strengthen and we expect the business to stabilize in 2019.

Oral care grew 2% organically, with improved growth in the US and continued strength in developing markets. Our 3M Clarity clear tray aligners launch is off to a good start as the number of new cases ramps quickly and we expect continued momentum going forward. Our Medical Solutions business declined slightly against a strong comp of 7% from a year ago. Through nine months, this business was up 3% with particular strength in vascular access and advanced wound care solutions.

Food Safety continued to deliver strong organic growth in the quarter up high-single-digits while health information systems grew mid-single-digits. On a geographic basis, Asia-Pacific led the way, up 10% with Latin America/Canada up 4%. EMEA was down slightly, while the US declined mid-single-digits, primarily due to last year's strong comp. Health Care's third quarter operating income was $446 million and operating margins were nearly 31%.

Next, let's cover Electronics & Energy on Slide 13. Electronics & Energy organic sales growth was 2.3% in the third quarter. Sales were $1.4 billion. The Electronic side of the business grew 1% led by a mid-single-digit increase in electronics materials solutions. This business continues to experience strong demand particularly in the semiconductor and data center markets. In addition, we continue to see our content per mobile device grow globally as we apply 3M science to the advancement of this market.

Our Energy related businesses were up over 6% organically with strong growth in renewable energy and pipe coating solutions. On a geographic basis, the US was up 5% while both Asia Pacific and Latin America/Canada were up low single-digits. Third quarter operating income for Electronics & Energy was $457 million with operating margins of 31.7%.

Please turn to Slide 14. Third quarter sales in Consumer were $1.2 billion and organic growth declined 2% year-on-year. Our Home Improvement business grew low-single-digits organically, while the other three businesses each declined in the quarter. Looking at consumer geographically, organic growth was led by a 5% increase in Latin America/Canada. The US was down slightly, impacted by our Q3 ERP rollout.

We continue to see strong consumer demand for our products with mid-single-digit point of sale growth. EMEA declined mid-single-digits as we have been actively managing our product portfolio. Lastly, Asia-Pacific declined 7%, as we have seen lower channel demand for our consumer respiratory solutions. Third quarter operating income was $291 million with operating margins of 23.5%.

That wraps up our review of third quarter results. Please turn to Slide 15 and I'll hand it back over to Mike to review our updated 2018 guidance. Mike?

Michael F. Roman -- Chief Executive Officer

Thank you, Nick. With three quarters behind us, we are updating our guidance for the full-year. We now anticipate organic growth of approximately 3% versus a prior range of 3% to 4%. With respect to earnings, we expect adjusted EPS in the range of $9.90 to $10, against the previous range of $10.20 to $10.45. Our change in EPS guidance is largely due to three factors; our updated growth expectations along with our updated guidance for currency and raw materials that Nick mentioned earlier.

Looking at the remainder of 2018 and beyond, we know there is a lot more we can and will do to deliver for our customers and shareholders. Going forward, we are focused on driving growth, being relentless in putting our customers first, and continuing to transform 3M to deliver greater productivity. This means we will continue to work to optimize our portfolio, prioritizing resources to our most attractive opportunities.

We will strengthen our innovation model and continue to invest in research and development, which enables us to create unique solutions that advance, enhance, and improve outcomes for our customers. In addition, we'll continue to invest in high-growth, high-value product platforms such as automotive electrification, advanced wound care, and data centers.

We will also step up our efforts to fully leverage the progress we've made on business transformation. With our most recent deployment in the United States, we have now successfully deployed 70% of our global revenue on the new ERP system. I am pleased with the success of our rollouts in Europe and the US. This was a significant undertaking and I thank our team for their tireless efforts.

Moving ahead, we'll be able to focus even more on leveraging the power of business transformation to improve service levels to our customers, improve productivity, and accelerate value realization. And at our Investor Day next month we look forward to sharing more details about our plans.

With that, we thank you for your attention and we'll now take your questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question comes from the line of Scott Davis of Melius Research. Please proceed with your question.

Scott Davis -- Melius Research -- Analyst

Thanks. Good morning guys.

Michael F. Roman -- Chief Executive Officer

Good morning Scott.

Scott Davis -- Melius Research -- Analyst

I don't recall -- you know I've covered your stock a long time, I just don't recall this -- the type of volatility you had in the Health Care business, the drug delivery you mentioned was down 25%. Is this -- can you give us a little bit more granularity behind what causes or is causing that kind of volatility right now?

Michael F. Roman -- Chief Executive Officer

Yes, Scott, as we talked about on the opening here, the organic growth was impacted by drug delivery down double digits and also we did have a strong year-over-year comp as we came through Q3 of 2017. Broader, we see solid growth in oral care. Our Food Safety business continued its strong growth; health information systems, strong pipeline right where we expected. So much of the rest of the portfolio is in line with expectations. I would say that the drug delivery business continues to be the challenge against what we saw for the growth for the total year.

Scott Davis -- Melius Research -- Analyst

So, I'm not sure that answers my question. Is there an inventory destocking at the customer level? I mean, I trying to just think about that, I'm assuming the customer -- the end consumer is still consuming these drugs. So what's going on in the part of the pharmaceutical companies, at least? That's what I'm asking.

Michael F. Roman -- Chief Executive Officer

Yeah. So our Drug Delivery business, it's a -- we've talked about it as a project based business in the past. It really is -- we work in partnership with pharmaceutical companies really dependent on their regulatory cycle. Also, we have a significant R&D partnership as well. And those are project-based business as well.

So we see a strong pipeline ahead. We are working through a challenging performance in 2018. We see stabilization as we get into '19 and then strong growth. So we have a good view of our pipeline but not -- it's not impacting positively as we go through the second half of this year.

Scott Davis -- Melius Research -- Analyst

Okay that's a good answer. And then Consumer, you talked about the inventory channel destock, is this kind of a new normal where seems like the retailers are just holding less inventory. Do you view it as a new normal adjustment kind of onetime or is this something where you anticipate some additional destock here going forward?

Michael F. Roman -- Chief Executive Officer

Yeah. It's been something that we've seen with the office channel over the last year-and-a-half, almost two years now where you see a restructuring of the channel and you see a destocking as the traditional office channel restructures around the new normal for them. I think we see it more broadly as well that we are -- our point of sale is strong, up mid-single-digits across our portfolio. But the retail channel is, at least as we come through this second half of the year, seeing additional restructuring.

And we expect some of that to continue as we move ahead. This is a space that's been disrupted significantly and it's something that we expect to see some individual channels as we move ahead. But really it's the broader base in the second half that's impacting us now.

Scott Davis -- Melius Research -- Analyst

Okay. Thank you guys, good luck.

Michael F. Roman -- Chief Executive Officer

All right, thanks Scott.

Operator

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

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks, good morning guys.

Michael F. Roman -- Chief Executive Officer

Good morning Joe.

Joe Ritchie -- Goldman Sachs -- Analyst

Can we maybe start on just US growth, so I recognize that the ERP transition probably impacted growth a little bit this quarter and I think, Mike, you mentioned a 100 basis points earlier. I'm just trying to parse out, like how much of the 50 basis points of growth you saw this quarter is related to ERP versus like what you're seeing from an end market perspective, just given that the US has been so strong across industrials for most of the year?

Michael F. Roman -- Chief Executive Officer

Yes. So if you look at that 100 basis points that we talked about, that's a worldwide view. It's really 250 basis points of impact on the quarter in the US. And as I mentioned, we saw most of that, the vast majority of, given back in Q3.

So year-to-date, the up 3 % is more in line with -- when you look through that what we're seeing and we see positive growth in Industrial, Safety & Graphics, Electronics & Energy; and really we see the macro more broadly in the US positive and steady. It was -- I would say we're back talking about our Health Care organic growth being impacted by our drug delivery business in the US and a strong year-on-year comp in the US, especially strong in that area.

And then, I would say Consumer organic growth was impacted by that US ERP as strong as any one of the businesses in our portfolio. So, they had their full share of that 250 basis points.

Joe Ritchie -- Goldman Sachs -- Analyst

And Mike, is your assumption going into 4Q that the ERP overhang kind of subsides or is that something that just carries into 4Q as well?

Michael F. Roman -- Chief Executive Officer

Yeah, I think that's the view. We saw the vast majority come out in Q3. So that's not the big impact as we go into Q4.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay. And then, my one follow-up, just on China, obviously through the first three quarters of the year, things have held up very good. We're seeing signs of things slowing down, particularly on the Consumer side. I'm just curious if you can give any color around the trends that you saw through the quarter and what you're seeing specifically with the Chinese consumer?

Michael F. Roman -- Chief Executive Officer

Yeah. We mentioned the slowing in the Consumer respiratory protection space as one of the impacts. We see other signs of slowing in China. The automotive build rates are down significantly and that has a knock on effect and so you see some broader softness in Industrial as we go into Q4. So we're seeing the same thing, that's why we'd see ourselves tracking more to an 8% to 10% range for China for the year.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay thanks guys.

Michael F. Roman -- Chief Executive Officer

Yes, thanks Joe.

Operator

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

Andrew Kaplowitz -- Citi Research -- Analyst

Hey, good morning guys.

Michael F. Roman -- Chief Executive Officer

Good morning Andy.

Andrew Kaplowitz -- Citi Research -- Analyst

Mike or Nick, can you give us more color on what happened in Europe this quarter? We know you're expecting a slowdown in the US given the ERP, you just talked about China. But EMEA seem to fall off significantly for you versus last quarter. I think Western Europe was up 6% last quarter and down 2% this quarter. So as Western Europe -- is the European decline acquired just more lumpiness or is there something a little more worrisome there?

Michael F. Roman -- Chief Executive Officer

Yeah. So our broader Europe is tracking to the low end of the range that we had for year, Andy, of 1% to 4%. As we came into the quarter, the industrial and auto build rates softened a bit and we saw softening across West Europe and organic growth declined in the quarter, up slightly year-to-date, and we think up slightly for the full year, so at the bottom end of the range.

I think it's also being impacted by some of the portfolio actions that we're taking as we talked about as we've gone through the year, part of our plan to improve the overall performance of the portfolio and the profitability of West Europe as we move ahead, but tracking low single-digit, at the bottom of our range for the year.

Andrew Kaplowitz -- Citi Research -- Analyst

Mike, do you have decent visibility though into that sort of low single-digit growth as you go forward because it's been a very lumpy region for you?

Michael F. Roman -- Chief Executive Officer

Yeah, I think we have good visibility across the portfolio and the markets, and I would say that the softening in the automotive and the build rates have an impact there. We've been talking about this being toward the low end of the range all year really because of the outlook we have across the markets and our portfolio and also some of those actions we've been taking. So I think it's consistent, a little softer than expected in Q3. But again, for the full year, we think it's about in the range where we expected it to be.

Andrew Kaplowitz -- Citi Research -- Analyst

And Nick, your price versus raw material is at plus 0.3%, pricing up 120 (ph), obviously good results there. Can you maintain positive price versus raws even if tariffs continue to ramp? And could you talk about how you're adjusting raw material sourcing and/or supply chain to adjust to the inflationary environment especially as we see more tariffs moving forward?

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

Yes Andy, we are continuing to see raw material price increases, and so far our pricing has more than been offsetting that. And Andy, it's our expectation that that will continue. We are anticipating continued increase in raw material prices and layering on tariffs that we expect our pricing strength to continue to more than offset that.

If I fast forward a little into 2019, we think tariffs will be having a negative impact on our total sourcing costs. There is a number of things we're doing around that, sourcing changes, supply chain changes, but also pricing changes and I'll talk more about this on November 15th, but our view is, we have approximately $100 million headwind from tariffs and that our pricing will more than offset that, and raw material price increases into 2019.

Andrew Kaplowitz -- Citi Research -- Analyst

That's it from me, thanks guys.

Michael F. Roman -- Chief Executive Officer

Thanks Andy.

Operator

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

Julian Mitchell -- Barclays -- Analyst

Hi, good morning.

Michael F. Roman -- Chief Executive Officer

Good morning Julian.

Julian Mitchell -- Barclays -- Analyst

Good morning. Just a question around the moving parts in the P&L. Particularly, I guess your SG&A was down sort of 90 bps as a share of sales, R&D down 40 bps as a share of sales to offset falling gross margin. Is there any change to the view that R&D to sales of 6% is the right number? And what's the risk, I guess, that the R&D and SG&A expenses have to sort of snap back up over the next 12 months?

Michael F. Roman -- Chief Executive Officer

Yes. Julian, let me, maybe, take the R&D part first, Research and Development as you've heard us talk, is the heartbeat of 3M, it's the center of our innovation and it's the key for us sustaining our performance, premium margins, our growth, our return on invested capital. So it's still a top priority for us and a top priority for me as CEO. We're going to continue to invest in it, continue to target that approximately 6% to sales.

If you look at the quarter, majority of the year-over-year decline in the quarter was really due to a couple of factors; FX of course, the contract R&D work that I talked about in the drug delivery business was part of it, and also the divesture of the communication market so that it's really -- and there are some quarterly up and downs as we make investments and experiments in a number of projects and so it's still very much the focus there.

If you look at SG&A, I think that's another one that we -- our spending is not completely smooth but we're making improvements as well on productivity. That's one of the things that we're getting as we move forward with business transformation. As we -- as we take now 70% of our revenue on the business transformation, we have opportunities to leverage our service models and gain some improvements there.

So at least a little bit of what we saw in the quarter we're starting to see some productivity there. And I think of the actions that we've been -- strategic investments we've been making impacting that as well.

Julian Mitchell -- Barclays -- Analyst

Thanks. And then my follow up question would be around Health Care . You had laid out or the management team had laid out the 4% to 6% topline growth aspiration 2.5 years ago. Health Care has consistently run at or slightly below the bottom end of that range even prior to the drug delivery issues. So do you think that's the addressable market growth coming in light or do you think there's a need for 3M itself to step up M&A and/or R&D to close the gap with the growing market?

Michael F. Roman -- Chief Executive Officer

Yeah. Julian, I would say they -- I've talked about the broader portfolio. We have much of the rest of the portfolio beyond drug delivery, that's in line with our expectations, and if you step back and look at the 4% to 6% and where we are now in the 2% to 3% range versus that 4% to 6% or even as we kind of reset and set 4% as we came to the year, it's largely drug delivery and slower oral care.

We saw a better oral care performance in the quarter as we move through the year, kind of what we expected, but still when you look against that 4% to 6%, those are the two impacts that are biggest impact and the year-over-year comps are part of it in the quarter. But if you look at the total year now, it's -- those are the impacts. We expect Q4 to be a return to our historical growth rates in Health Care, so as we lap some of the drug delivery comps and we get those broader performing portfolios to have a bigger impact.

Julian Mitchell -- Barclays -- Analyst

Great, thank you.

Operator

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

Steven Winoker -- UBS -- Analyst

Thanks, good morning.

Michael F. Roman -- Chief Executive Officer

Hey Steve.

Steven Winoker -- UBS -- Analyst

Hey Mike. I just want to characterize what you're really seeing out there. You've already -- from a growth perspective, if you take out the ERP impact, if you take out what you would describe as kind of disrupted channel related to distributor and retail destocking, I guess you have slowing China and some European challenge and you take out the Europe -- the drug delivery. Are you seeing kind of any short cycle slowing globally from a demand perspective or do you think these are all kind of more 3M specific issues that you're going to be getting through and then normalizing?

Michael F. Roman -- Chief Executive Officer

Yes. So I think you characterized it well, the areas that we've talked about already and we have highlighted a number of businesses where they're specific to our markets and our businesses in those markets. I would say we performed well in automotive. As Nick noted, we performed well in the automotive OEM's, relative to their build rates. But their build rates continue to move down negative, actually, in the quarter and part of the slowing in China and part of the impact in Europe as well.

We highlighted as well Safety & Graphics has been at the top of the range that we've guided for the year and really was -- we expect them to be there at the end of the year. But we're impacted by negative mid-teens growth in our Industrial Minerals business, so that's another one. But again, it's a kind of a -- maybe it's our focus on the construction markets and some of the challenges we see in some of those end markets but that was definitely softness in one of our markets.

So, broader, we see a steady and positive macro and broader are our portfolio, the majority of our businesses continue to do well against that, that broader macro.

Steven Winoker -- UBS -- Analyst

Okay. And then -- and I suppose on that. It doesn't change your sort of normal 1.5 times IPI thinking?

Michael F. Roman -- Chief Executive Officer

Well, yes. It's -- on the broader portfolio, absolutely. And as we move ahead, that's the model that we look at. Individual businesses impacting the way they did here in the quarter and maybe a couple of them as we go through the second half it's -- those are, those will take away from some of that near term. But, yeah that's our -- that's absolutely our performance, that's our focus, that's our expectation, that's our capacity and capability that we've demonstrated.

Steven Winoker -- UBS -- Analyst

And I don't want to misread your portfolio optimization comment toward the end of your prepared remarks. But that is something that 3M certainly had been emphasizing for some time with Inge and with you before. So do you need something different here? Is this -- what do you mean by that?

Michael F. Roman -- Chief Executive Officer

Well you said it, portfolio management has been one of our key levers; it's a driver of value for us. You look at the performance we have in Electronics & Energy and Safety & Graphics as we come through the year, those are -- those businesses are performing well and they've been an area that we've focused a lot of our portfolio actions around. It's what we've done to reposition and reshape those portfolios through acquisition and divestitures and other actions. I think that's an example of where we take that lever and really create value and so we're always looking at that.

We're always realigning our businesses around our portfolio priorities. It's how we reshape the company for near term and long term success. So it's -- I guess I said it at the last call as well, we are an active portfolio manager. This is what we do to take full advantage of the 3M model as we move ahead.

Steven Winoker -- UBS -- Analyst

Okay. And if I can just sneak in one specific thing for Nick, on the inventory days post (ph) receivables, just slight increases that are going on there. I assume that's all ERP related or is there something else going on?

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

No Steve, that's exactly it. We had built some inventory in advance of going live in the US with our new ERP system. We wanted to do that in order to ensure we were fully satisfying our customers and their supply chains and the increase you're seeing there is that not bleeding off not quite as fast as we had planned, but we feel over the next couple of quarters that inventory coming down.

Steven Winoker -- UBS -- Analyst

Okay, thanks guys. Good luck

Michael F. Roman -- Chief Executive Officer

Thanks Steve.

Operator

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

John Inch -- Gordon Haskett -- Analyst

Thanks. Good morning everyone.

Michael F. Roman -- Chief Executive Officer

Good morning John.

John Inch -- Gordon Haskett -- Analyst

Hey guys. So Mike, It sounds like you're characterizing Europe and maybe Asia-Pac a little bit as relatively stable. I think that's kind of the messaging that I'm getting, maybe at a slightly decelerated basis.

I want to just kind of confirm that's what you're seeing that Brexit or any other issues are not necessarily sequentially affecting your businesses. And on that basis, is this causing you this kind of low level activity stability, because you're a very big company in Europe. Is it causing you to allocate your R&D or your growth initiatives in any kind of a different way to try and stimulate things more quickly to circumvent auto. Just curious on those fronts.

Michael F. Roman -- Chief Executive Officer

Yes, John, I think you characterized West Europe and Europe overall though the way we kind of view it right now -- and again, we see some markets like auto impacting Europe as well 00 drug delivery of course impacting Europe as well. But more broadly, we see a steady economic backdrop. We're not looking at other significant changes there.

And Asia, I guess I would characterize it maybe at the low end of our range that we had looked at for the year. So softer overall, but again, steady across more broadly with some signs of slowing, as I said, in China. And so, if you look back at West Europe, your question there, we are -- we deployed the business transformation there over the 2015, '16, '17 and we're now taking advantage of that and we are, I would say, doing a couple of things where it's enabling us to prioritize better where we really do invest in our best parts of our portfolio.

It's the models that we have in place, the service model that we have in place there up and running, being able to leverage an areawide ERP capability, those are really enabling us to, I think, bring even sharper focus on prioritizing and that's part of our active portfolio management, it is prioritizing where we put our resources for growth, shifting resources to those higher growth areas.

We're also, as planned, taking some actions to, I would say, streamline our structure in EMEA and even Latin America as we get ready for the go-live, taking advantage of business transformation. So that's really -- also helping us to focus on the markets and areas that are most important and best opportunities for growth as we go ahead.

John Inch -- Gordon Haskett -- Analyst

So, on that point you just raised about business transformation ERP, maybe this is for Nick. Nick, do you have a sense of how much BT you may have actually net contributed in the quarter? And I know you haven't really updated your $500 million to $700 million target in a while, right, from business transformation specifically, but can you give us at least an elementary sense that this is coming through? Are we looking at the low-end or the high-end of that range or a new range altogether?

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

As far as the savings, John, what we've been saying and continue to say is that by 2020, we expect this to generate between $500 million and $700 million of operating income benefits. This year we're on track for approximately $100 million of savings versus last year. That will bring our total savings, since we started it on an annual basis, up to $250 million. And we remain track on the $500 million to $700 million. Not ready to call whether we think more likely low-end or high-end, but we still see ourselves in that range by 2020.

And as Mike mentioned earlier on this call, we have a lot of the deployment behind us now and that's allowing us, in 2019, to be putting even more energy and resources into realizing the value realization that we've been projecting. So a little bit of a shift of little less on deployment and more on the value realization and the business process changes that will create that.

John Inch -- Gordon Haskett -- Analyst

And to be clear, the $100 million is a net number, right? Like that's all flowing to the bottom line pre-tax?

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

That's exactly right John.

John Inch -- Gordon Haskett -- Analyst

And then, one more just nitpick here, why haven't you updated the $500 million to $700 million? I mean this goes back a few years ago, right? Is there some obvious reason why, just based on the nature of the way this stuff is working that you can't -- you haven't actually provided some sort of look forward based on progress or realized results? Is that just because the US was saved for the last and it's the biggest slug or is there some other reason why this thing is not being updated or would have been updated sort of more quickly?

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

Yeah, we last updated that number in 2016 when we laid out a five year plan and we've continued to progress as we expected toward that. November 15th, when we lay out our next five year plan, we'll be updating that of where this goes even beyond 2020. And so, partly John, it lines up with longer term plans that we lay out and you can expect to see more from us on this in November.

John Inch -- Gordon Haskett -- Analyst

Got it. Thanks very much, appreciate it.

Michael F. Roman -- Chief Executive Officer

Thanks John.

Operator

Our next question comes from the line of Josh Pokrzywinski from Morgan Stanley. Please proceed.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hi good morning guys.

Michael F. Roman -- Chief Executive Officer

Good morning Josh.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

I know there've been a lot of questions on growth and maybe not quite what we would have expected in terms of some of the bigger global controversial end market like auto or the Consumer on US and China don't seem to be as big of a drag, a lot more 3M specific stuff, which I think some of the earlier questions have noted.

Do you feel like over the next couple of quarters and I don't want to get into '19, too specifically, but do you think there's a smooth handoff where some of the 3M specific issues or some of these sub markets start to balance out and we can still kind of swim upstream versus some of the more controversial ones like auto or is there a potential for say some of that to bleed down further into your business?

Michael F. Roman -- Chief Executive Officer

Yeah Josh, if you look at some of the businesses we've highlighted today that are impacting growth as we come through Q3 and the second half. You know we'll -- a couple of things will happen. One, we'll lap some of those comps as we move ahead, and they're going to improve. I mean, we expect to improve those businesses and I mentioned in drug delivery that we stabilize based on what we have in the pipeline as we get into '19 and we return to growth as we come out of that.

And so we can look forward and we can see that stepping into it. Automotive is a -- is maybe a little more complex and the dynamic. I mean, we are outgrowing the build rates and have consistently done that. And with what we're doing with automotive electrification, we see our ability to do that to continue and even leverage our innovation further in the future. But we're still dependent on the build rates.

And so what happens in those build rates as we move ahead, where it goes key markets like US, Europe, China, those are those are going to impact that. The outlook right now is for fairly nominal low growth -- negative growth as we come through the quarter -- in third quarter, but slow growth as we move ahead.

So I would say we'll continue to outgrow that. That'll continue to be a growth contributor with what we've been able to do there. Other markets, Industrial Mineral the -- what happens in the end market demand will dictate that more than us as we go -- as we get into the future quarter. So, I think it's a little bit market dependent, but the examples that we've talked about, I think we do see ourselves being able to continue to rise up in our growth relative to those markets. If you turn to Consumer, the thing I would look at is, our sell out continue strong.

Our brands, we've got category leading brands that are performing well off the shelf and we've got to work through and I think our team has done a very good job of working through the channel disruption that's going on there and managing through that. We've got very good visibility as we move through that, especially in developed markets and we expect that sell out to eventually rise up and carry the day. And so, we'll look for that as we go ahead too.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got you, that's helpful. Maybe I could just follow on with -- as a teaser for what you may talk about here in a few weeks in November. Clearly a lot of questions about growth here on today and I think business transformation Phase 1 has been a lot more margin centric and there's always been an aspiration for Phase 2 would have a growth component. Is that something we could start to hear a little bit more about in the coming weeks or is that still a few years off in terms of being in qualified?

Michael F. Roman -- Chief Executive Officer

Josh, it goes to John's question and Nick's discussion earlier too. Our business transformation was focused on putting the ERP and much broader than ERP, other system capabilities in place, new models, transaction, efficient models in place in our supply chain and in our back office. And that's what we're doing with business transformation. But as we do that, as we now get 70% of our revenue on the new systems, we can start to leverage that in other ways as well and we'll be talking about that at the November 15th Investor Day. We'll talk about where we see opportunities to do that on the Commercial side and also in supply chain.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Perfect, thanks Mike.

Operator

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

John Walsh -- Credit Suisse -- Analyst

Hi, good morning.

Michael F. Roman -- Chief Executive Officer

Good morning John.

John Walsh -- Credit Suisse -- Analyst

I guess, just trying to put a finer point on the new organic growth guidance. A squiggle does imply a range, so I was just curious, as we think about Q4, would you expect to see organic growth accelerate from the 1.3% we saw this quarter or how should we think about that?

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

Yeah John, we're just a little over 3% through the first nine months of the year for growth. And when we're estimating 3%, that's our best estimate of what the total year growth will be. I don't see a very wide range on that, maybe 20 basis points plus or minus, but not a very wide range on that. And yes, included in that is an expectation that we see higher organic growth in Q4 than what we saw in Q3.

John Walsh -- Credit Suisse -- Analyst

Great, thank you for that. And then, you touched on the savings portion of business transformation, how to think about that, but how should we think about the spending? Obviously this year there were some restructuring around getting out of those stranded costs but how do we think about the actual spending levels that you are absorbing in your earnings construct as we think about that into 2019?

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

And John, you're specifically talking about our business transformation and what we're spending on that.

John Walsh -- Credit Suisse -- Analyst

However you want to kind of define it. If you want to take a broader term that's fine; if you know just kind of specific to one program.

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

John, in terms of the business transformation, over a number of years we've been saying, this is going to be an incremental spend of a little over $1 billion. And as I look -- as we look at our spending over the last few years, in terms of cash out flow, that has been declining, in terms of total in -- spending hitting our income statement as we start to amortize some of what we've built there, it's been remarkably flat year-on-year of the total spend that we're putting into our business transformation initiative. And right now, my view is that's going to continue in a pretty stable level for the next couple of years.

John Walsh -- Credit Suisse -- Analyst

Great, thank you.

Michael F. Roman -- Chief Executive Officer

Thanks John.

Operator

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

Hey good morning. Can you hear me?

Michael F. Roman -- Chief Executive Officer

Good morning Andrew.

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

Just question on Safety & Graphics, I think you guys highlighted a lot of headwinds when you were at Laguna, but that one is a bit of a surprise to me and a couple of things, organic growth 2%, margin decline year-over-year, and particularly you guys highlighted the roofing granules declining double digits and as I recall this was one of the businesses that was supposed to drive big growth and big margin expansion post everything you've done to it in terms of repositioning this business. Can you just talked what happened in the quarter and has something changed here or is it a one off?

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

Andrew, the roofing granules business is the smallest business we have in Safety & Graphics, and it's a business that has been enjoying, in the US, some of the construction increases that are going on in construction, as well as there's a cyclical or a temporary nature depending on what's happening with storms.

So -- and this business is very closely tied to shingle production. And right now, single manufacturers are making less -- making less shingles and we're very -- it's a very tightly integrated supply chain. So, for the last couple of years this business has been on a path of high growth and we reached a point in the third quarter that that growth has come down. And the growth going forward is going to be tightly correlated to what happens with shingle manufacturers and the amount of production they're doing.

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

And just broader for Safety & Graphics margin decline year-over-year and sort of this growth at maybe 2%, because I always thought this was the business that was supposed to go high -- this was the showcase of how you can sort of realign your portfolio and achieve better margins and better growth. I guess maybe a broader question here.

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

Yeah, broader question. So, right now we are estimating this business to be about at the midpoint of the 4% to 6% organic growth that we guided at the beginning of the year and that midpoint is absorbing what we're seeing as the impact from the roofing granules business. As far as the total growth in the third quarter, seeing mid-single digit growth in our personal safety business against a 14% comp in our personal safety, that is by far our biggest business.

Andrew, we continue to have a lot of confidence in our Safety & Graphics business and its ability to grow and be a leader in growing 3M's total organic growth, lot of confidence there. As far as the margin, we are absorbing a 150 basis points of margin impact from Scott Safety and we'll be starting to lap ourselves on that as we acquired that fourth quarter last year and I no longer will see that as being a drag to the margin going forward and potentially accretive going -- after that.

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

And just a follow up, sort of the counterpoint to Safety & Graphics, everybody was concerned about Electronics & Energy and you guys actually posted really good growth relative to expectation, and margin was north of 30%. Is this margin sustainable or was it a one-time items or how should we think about that?

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

Yeah. Andrew if you look at -- if you look at the history of Electronics & Energy, Q3 tends to be the high point for our revenue and our margin for that business. Year-to-date our margins are 28.4%, that's up 170 basis points and that includes the impact of exiting our communication markets business. So, yes, the portfolio management we've been doing and the things we're doing in investing in research we see as being accretive to our margins in that business, but I would not call the 31%-plus that we were at, at this -- in this quarter as a new level. It's more -- third quarter is typically the high point.

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

But it's just, there is nothing -- there is no one-time big item, it's just everything went right for this business in the quarter, is that fair with what you're describing.

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

That's exactly right, everything going right in this business this quarter, no one-time issue.

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

Terrific, thank you so much.

Michael F. Roman -- Chief Executive Officer

Thanks Andrew.

Operator

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

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

Hey guys, good morning.

Michael F. Roman -- Chief Executive Officer

Hey Steve.

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

So, just so I kind of understand the comments on R&D correctly, are you saying that kind of the productivity that you're getting out of business transformation et cetera is allowing you to structurally spend a lower level of R&D than the 6% going forward?

Michael F. Roman -- Chief Executive Officer

Steve I would -- I guess my message here is that we've not backed off of what we've been targeting with our R&D investment. This idea of investing to enable us to drive more of those priority growth platforms, more of the disruptive new technology, that's what we talked about when we moved from 5.5% to sales to 6% to sales. And so while in the quarter we're down at 5.3%, our strategy and our plan is to invest in line with what we had talked about when we said we're targeting 6%.

It's not an efficiency that we're gaining. There are some one-time kinds of impacts on the quarter, just a little bit of an ebb and flow. We expected a little over spending just by the layout of our R&D programs as we went through the year and then we had the drug delivery contract R&D work down. We had impact of FX and we have the divesture of communication markets. So no, you should expect us to continue to drive that. This is not a BT enabled. I mean we do -- we certainly do expect to get returns out of these investments and we'll adjust as we move ahead, but near term that's not what's going on.

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

Okay, that makes a lot of sense. When we kind of think about how you're kind of positioned and how you're -- what your mindset is for the next several years. The last few years you've had a couple that have been pretty good but not too many in the kind of double digit EPS growth range and that's despite some very heavy stock buyback activity. Will you kind of provide a new framework for EPS at some point, new under your watch at least or is the 8% to 11% still kind of a relevant number and it's really steady as she goes on that front or are we going to get an update on that?

Michael F. Roman -- Chief Executive Officer

Well that's certainly one of the things we'll be talking about at the November Investor Day as we'll be laying out our five year plan and the framework for that five year plan and so I think that's something we'll cover in detail there.

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

Okay, great, thanks a lot.

Michael F. Roman -- Chief Executive Officer

All right. Thank you.

Operator

Our next question comes from the line of Nigel Coe of Wolf Research. Please proceed.

Nigel Coe -- Wolfe Research -- Analyst

Yeah, thanks, good morning. Just two questions from me.

Michael F. Roman -- Chief Executive Officer

Good morning Nigel.

Nigel Coe -- Wolfe Research -- Analyst

Good morning guys. Just want to go back to the E&E margins, you mentioned everything went right. But this is, I think the second or third quarter where we've seen diverging trends between E&E and the rest of portfolios. So maybe just expand on how you're seeing such strong operating leverage in E&E versus the inverse trends elsewhere.

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

So, Nigel, what we've been seeing and I mentioned this earlier on this call, we're continuing to see good penetration and content that we're putting into electronic devices. We're seeing good growth in places where we're selling into data centers and semiconductor. That growth is helping us and is being accretive to our margin. In addition, the divestiture of our communication markets business within that which had been dilutive to our margin, that is now, for all practical purposes, out of that business and we're also seeing some accretive benefits from that. So that's what I what saying that many things going right this quarter as we've focused on that portfolio and what we're investing in and we're seeing a lot of that pay off.

Nigel Coe -- Wolfe Research -- Analyst

Okay. But the key message is that as we exit this year, obviously recognizing the seasonality from 3Q into 4Q whatever E&E has this year is a good base for future years. Okay?

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

Yes.

Nigel Coe -- Wolfe Research -- Analyst

And then Mike, just a broad question again, just kind of thinking about November. When we look at the last three to five years, core growth has being in the 2.5% to 3% range on average 2.7% for last three years. I know that you're not going be satisfied with that kind of growth range. What in your mind is the biggest kind of restraint on growth here? Is it the R&D pipeline, is it commercialization, is it go-to-market, is it some share loss competition? What is the biggest retarding force on core growth here?

Michael F. Roman -- Chief Executive Officer

Yeah Nigel, growth is a big focus as we drive forward. I mean it's what we expect. We expect our innovation model to deliver, I would say, above market growth and premium margins. That's really, I think, the hallmark of successful innovation and for us that's been really our history. When we deliver on that that's what we see. And so we expect to see that outgrow the macro and to be able to do that consistently as we move ahead. And so that is the focus. That's what we'll talk about at the Investor Day. That's what we'll be focused on with our team. That's what our -- that's the way we -- that's where we start our focus as a team.

Nigel Coe -- Wolfe Research -- Analyst

Okay, good luck guys. Thanks.

Michael F. Roman -- Chief Executive Officer

All right. Thanks Nigel.

Operator

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

Michael F. Roman -- Chief Executive Officer

In summary, our third quarter included good performances in many respects, including double-digit increases in cash flow and EPS along with strong margin. As I look across our portfolio, most of our businesses continue to do well but there are also areas that we must work to improve.

Looking ahead, how we allocate capital and continue to reshape our portfolio are keys to delivering even greater value to both our customers and shareholders. These are strengths of 3M and will continue to be priorities for us moving forward. Thank you again for joining us this morning and we look forward to seeing you in St. Paul in a few weeks. Have a good day.

Operator

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

Duration: 66 minutes

Call participants:

Bruce Jermeland -- Director, Investor Relations

Michael F. Roman -- Chief Executive Officer

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

Scott Davis -- Melius Research -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Andrew Kaplowitz -- Citi Research -- Analyst

Julian Mitchell -- Barclays -- Analyst

Steven Winoker -- UBS -- Analyst

John Inch -- Gordon Haskett -- Analyst

Josh Pokrzywinski -- Morgan Stanley -- Analyst

John Walsh -- Credit Suisse -- Analyst

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

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

Nigel Coe -- Wolfe Research -- Analyst

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