3M Co., 2013 Guidance/Update Call, Dec 12, 2012

Seeking Alpha

3M Company (MMM)

December 12, 2012 9:30 am ET

Executives

Matt Ginter - Manager-Investor Relations

Inge G. Thulin - Chairman, Chief Executive Officer and President

David W. Meline - Chief Financial Officer and Senior Vice President

Analysts

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Andrew Obin - BofA Merrill Lynch, Research Division

John E. Roberts - The Buckingham Research Group Incorporated

Nigel Coe - Morgan Stanley, Research Division

Jeffrey T. Sprague - Vertical Research Partners, LLC

David L. Begleiter - Deutsche Bank AG, Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Deane M. Dray - Citigroup Inc, Research Division

Jeffrey Schnell - Jefferies & Company, Inc., Research Division

Abhiram Rajendran - Crédit Suisse AG, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 3M 2013 Outlook Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, December 12, 2012. I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Matt Ginter

Thank you. Good morning, and welcome, everyone, to our 2013 outlook meeting. With me today are Inge Thulin, 3M Chairman President and Chief Executive Officer; and David Meline, Chief Financial Officer. Both will make some formal comments today, and of course, we will take your questions, and we plan to finish in about 1 hour.

One item of note, we recently announced the realignment of our major business groups to better serve global markets and customers. Segment reporting for the new organization will begin in the first quarter of 2013. We will file an 8-K with 3 years of restated segment financials, and this will happen sometime after we file the 2012 10-K in February and before we announce first quarter 2013 earnings on April 24. Note that in today's outlook, we will articulate sales growth objectives by segment based on the new organization structure. Finally, we will report fourth quarter earnings in a conference call scheduled for Thursday, January 24th, 2013.

If you'd please take a moment to read the forward-looking statement on Slide 2. During today's conference call, we will make certain predictive statements that reflect our current views about our future performance and financial results. We base these statements 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. Now I'll turn the call over to Inge, and please turn to Slide #3.

Inge G. Thulin

Thank you, Matt, and good morning, everyone. Thank you for joining us for our 2013 outlook call. I also thank everyone who joined us either in person or by webcast on November 8. At that meeting, we talked about the fundamentals of 3M, world-class and world-leading technology, advanced manufacturing processes and exceptional people. We discussed the power of 3M's global capability and our underlying financial strength, overall, a very strong and sustainable business model. We spent some time on our approach to prioritizing our portfolio, about how we will protect and grow our Heartland businesses, invest in and push forward our best opportunities and how we will take action on businesses under strategic review.

Consistent with a prioritization process, we put forward credible goals for the next 5 years and laid out clear strategies to achieve those goals, goals that, in my mind, are very realistic. But the focus today is on 2013. As you saw in the press release, we look to grow our 2013 EPS to the range of $6.70 to $6.95. This range implies earnings growth of between 6% and 10% for the year. And for those wondering, Q4 is running about as expected, and we see no change to our overall sales and EPS outlook for the close of this year. David will take you through more details shortly.

We expect to grow 2013 earnings even if we invest to strengthen and build our business. Investment in innovation is the primary example. Last month, we talked about innovation as the center of our plan, and about our intention to steadily increase R&D investment over time starting now. In fact, our innovation oversight team meets tomorrow to review some 50 proposals for additional R&D investments. The focus is on new products for new markets, on the international opportunities and disruptive technologies. As we said, our target is to be investing close to 6% of sales annually in R&D by 2017, and the process is already underway.

Another significant R&D investment is taking shape, a new state-of-the-art laboratory facility at 3M headquarters. The new lab, scheduled to open in early 2015, will house some 700 scientists who currently work in other facilities here. With the latest in the equipment, it will be an environment designed specifically for the development of innovative technologies, and will be an important hub in 3M's global research network.

At the same time, we continue to build capability around the world. Nearly 2/3 of our sales today are international, and about 1/3 of sales come from emerging markets, so we continue to invest around the world, not just in R&D, but in manufacturing and marketing as well.

For example, to serve the developing markets of Central and East Europe, plus Middle East, we broke ground last month for a new manufacturing and distribution center in Turkey. We will continue on this path of building out capability, and you will likely see the formation of several new subsidiaries in 2013.

We're also building our capability and acquisition integration. On November 28, 3M successfully closed the Ceradyne acquisition. Our new integration team immediately introduced Ceradyne employees to 3M at 15 facilities around the world. They also got off to a fast start to identify specific growth opportunities enabled by the combination of Ceradyne's ceramic technology and 3M technology platforms. As we discussed in November, Ceradyne, for us, is a very strong technology play, and the ceramics platform touches every one of 3M business groups.

So in summary, we accomplished a great deal in 2012. In the big picture, we delivered on our promises, and we continue to build our future. We recommitted the company to increasing our funding for innovation. We improved our ability to drive growth through new capabilities in marketing, sales and eTools. We strengthened our operational excellence to focus on acquisition integration and Lean Six Sigma. We expanded and strengthened our global presence. And consistent with our strategies, we aligned our organization toward increased relevance with customers and markets. We will continue on this path in 2013. And now, I will turn the call over to David.

David W. Meline

Thanks, Inge, and good morning. Turn to Slide #4. As Inge mentioned, we expect GAAP earnings per share in the range of $6.70 to $6.95 for 2013. We're up 6% to 10% versus the midpoint of our projected 2012 range. We are forecasting 2% to 5% sales growth on an organic local currency basis. This includes organic volume growth, plus changes in selling prices. Foreign currency translation is forecast to be neutral to 2013 sales, and acquisitions closed in 2012 will boost 2013 sales by 1.5%. We anticipate a 29.5% to 30% tax rate in 2013. And finally, we expect free cash flow conversion will be in the range of 90% to 100%. Please turn to Slide #5.

3M has a lot history of generating premium returns on capital, and we plan to continue that performance. We expect $11.8 billion to $12.4 billion of cash available for deployment in 2013. Our first priority for deploying that cash is investing in future organic growth opportunities, supplemented by acquisitions. We plan to invest $1.6 billion to $1.8 billion in capital expenditures in 2013, up from an estimated $1.5 billion in 2012. Approximately 1/2 of this investment will focus on organic growth-related projects. 1/3 will go towards maintaining and improving productivity of existing assets and the remainder will fund corporate strategic investments. These investments include items such as our ERP deployment and the new state-of-the-art R&D facility mentioned by Inge.

Acquisitions helped supplement our organic growth, and we have earmarked $1 billion to $2 billion towards that purpose in our 2013 plan. This will add an estimated 1% to 3% to 2013 sales growth, depending, of course, on the timing of deal closings.

On the pension, OPEB front, we expect to inject $400 million to $600 million into our global plans in 2013, about 50% lower than the $1 billion projected for 2012. On the debt side, we will have $1 billion of maturities in 2013, which we plan to replace via new issuance. As we did in 2012, we are also evaluating opportunities to prefund capital needs beyond 2013, given today's low interest rate environment.

Finally, from a shareholder perspective, we expect to return about $1.7 billion to shareholders through cash dividends, along with $2 billion to $3 billion of growth share repurchases. We have a well-balanced capital allocation plan for 2013 as we invest in future growth opportunities, fund our global pension and OPEB plans and return significant cash to shareholders.

Now let's turn our attention to earnings growth for 2013. Please turn to Slide #6. Here, you see our earnings roadmap for 2013. Approximately, 90% of our earnings per share growth in 2013 will be due to higher operating income, with the remaining 10% coming from lower shares outstanding, net of a higher 2013 tax rate. On the ensuing slides, I will detail the various items in the earnings walk. Please turn to Slide #7.

We expect that higher organic local currency growth will add $0.15 to $0.40 per share to 2013 earnings. Our forecast calls for 2% organic local currency sales growth at the low-end and 5% growth at the high-end. We expect global economic activity to be similar in 2013 versus what we have seen in 2012, and we estimate 2013 worldwide industrial production growth in the range of 2% to 3%.

Organic growth will largely be driven by organic volumes, while selling prices are expected to rise slightly in 2013. Our 2% to 5% range is below the 4% to 6% 5-year objective we discussed at our November investor meeting, reflecting a weaker global economy in the near term. Organic local currency growth in developing markets is expected to grow in the range of 5% to 10% in 2013, while developed markets should grow between 1% and 3%. Let's move to Slide #8.

You see here our projected organic local currency sales growth ranges by business and by geography. Note that the business targets are aligned to the new structure, as Matt mentioned earlier. Let's begin with the 3 businesses least affected by the realignment, namely, Industrial, Health Care and Consumer. We expect organic local currency growth for Industrial of 2% to 5% in 2013. Health Care is projected to grow 4% to 7%, and Consumer is estimated to grow 2% to 5%. In Safety & Graphics, we project organic local currency sales growth of 1% to 5% in 2013. When we begin reporting on the new basis in 2013, this business will include today's Safety, Security and Protection Services business, plus the traffic safety systems and Commercial Graphics businesses from Display and Graphics, minus the infrastructure protection business. Finally, in Electronics & Energy, we anticipate organic local currency growth of 1% to 6% next year. Again, beginning in 2013, this business group will be comprised of the current Electro and Communications business, plus 4 other operating divisions: Optical Systems and mobile projection from Display and Graphics; Renewable Energy from Industrial and Transportation; and infrastructure protection from Safety, Security and Protection Services.

On a geographic basis, we expect organic local currency growth to be strongest in developing markets, with 8% to 11% in Latin America and 9% to 12% in Middle East/Africa. The Asia Pacific region is expected to grow 2% to 7%, and both the U.S. and Canada are expected to be steady at 2% to 5%. Our biggest challenge in 2013 remains Western Europe, where we are forecasting organic local currency growth of negative 3% to positive 1%. Please turn to Slide 9 for a recap of growth and earnings expectations from acquisitions.

Before I address the 2013 impact of acquisitions, I would like to make a few comments regarding Ceradyne. As Inge mentioned, Ceradyne is a strong technology play with ceramics platforms, touching every one of our 3M business groups. During the tender offer period, a couple of items came up I would like to quickly comment on. First, we were fully aware that Ceradyne's Solar business in China had slowed. The same is true regarding the quality issues related to certain models of protective body armor and helmets in the Military business. Both of these items were well understood and factored into our forecast for the business. Looking at standalone purchase price multiples for Ceradyne, we paid approximately 1.5x sales and 9x EBITDA on both a trailing and forward basis. So by implication, we're expecting a relatively flat year in 2013 versus 2012.

Now let's turn to the financial impact of acquisitions for 2013. These figures relate to the carryover impact of 3 deals closed in 2012, namely CodeRyte in our Health Care business; FSTech in our Safety & Graphics business; and Ceradyne in our Industrial business. Total purchase price for these transactions was $920 million, net of acquired cash, marketable securities and debt. We expect that these 3 transactions will add 1.5 points of acquired sales growth in 2013. We also expect associated GAAP earnings, which include the impact of onetime acquisition-related costs, will be negative $0.03 per share. This is similar to 2012. Therefore, the year-on-year earnings impact is neutral. 2013 EBITDA from these 3 transactions, excluding onetime acquisition-related costs, will be approximately $90 million. Please turn to Slide #10, where I will discuss foreign currency.

On the whole, currencies around the world have been reasonably stable of late. This stability is reflected in our plan, as we expect foreign currency will have a neutral impact on both 2013 sales and earnings. Our estimates are based on exchange rates at the end of November, with the euro at 1.3, the renminbi at 6.2 and the yen at 82. Note that these estimates include the impact of our hedging program, whereby we hedge roughly 50% of our foreign currency exposures on a rolling 12-month basis. Let's now move to raw materials. Please turn to Slide #11.

First, let me remind you that raw materials represent approximately 50% of our cost of goods sold or about 25% to sales. This equates to nearly $8 billion of spending per year, with significant ongoing opportunity for improvement. Our sourcing team is a very good one, with a track record that is very strong for a significant cost reduction, year in and year out. For 2013, we expect neutral earnings impact from raw materials, with a plus or minus $0.05 per share range. The ultimate outcome will be somewhat dependent on the path of economic growth. A $0.05 tailwind likely corresponds with the continued weak economy with little, if any, inflation. Conversely, a $0.05 headwind would be linked to stronger economic growth, resulting in firmer raw material prices. Please turn to Slide #12.

Leveraging our Lean Six Sigma efforts to drive operational excellence is an important component of our strategy. It is our primary method of creating space for investment and for maintaining premium margins and returns on capital, no matter the global economic environment. At present, we have over 2,500 trained black belts deployed across the company, and many of our senior leaders have had either a Six Sigma Black belt or a master Black Belt experience during their career. In 2012, we expect to deliver approximately $1 billion of Lean Six Sigma project savings, rising to $1.1 billion in 2013. These programs are critical in order to fund additional technology development, new product launches and plant startups, and to help offset normal inflation and other cost increases. For 2013, we're expecting net productivity benefits in the range of $0.05 to $0.15 per share. This range includes increased investments in R&D, global ERP deployment, the formation of our supply chain, Centers of Excellence, in Europe and Panama, along with offsetting normal inflationary pressures. Let's now review our estimate for pension and OPEB expense for next year. Please turn to Slide #13.

At year-end 2012, we estimate that our worldwide pension and OPEB plans will be 87% funded, with the U.S. qualified plan at 95%. These estimates assume a 13% asset return in the U.S. qualified plan. Our international pension plans are projected to be 85% funded with OPEB plans at 60%. As I presented a month ago, we anticipate that global pension and OPEB expense will decline over the next several years beginning in 2013. In 2013, we expect global pension OPEB expense to decline year-on-year, adding $0.05 to $0.15 to earnings per share. This is a welcome change in trend after 4 consecutive years of pension OPEB expense increases. The main drivers of lower expense in 2013 are lower amortization of prior period losses, strong asset returns in excess of our assumed return on assets and a higher-than-average 2012 contribution. And finally, as I mentioned earlier, we plan to inject $400 million to $600 million of cash into our global plans in 2013. Our pension team has done a tremendous job managing our plans with top decile returns over the past several years. Please turn to Slide #14.

We are forecasting next year's tax rate in the range of 29.5% to 30%, an increase versus our expected 2012 rate. This will result in an estimated earnings headwind of $0.05 to $0.10 per share. As I discussed in November, we are actively building out supply chain, Centers of Excellence, in Europe and Panama, along with increasing our manufacturing capability in Singapore. These actions will help us to better serve our customers, drive manufacturing efficiencies, reduce logistics costs and result in a lower effective tax rate over time. We are targeting an effective tax rate of 27% by 2017 as a result of these efforts. Let's turn to Slide #15, where I will cover the final component of our EPS roadmap share repurchases.

We expect to deploy $2 billion to $3 billion towards gross share repurchases next year or $1 billion to $1.5 billion net of reissuances. Our expected average diluted shares outstanding will decline 1.5% to 2% year-on-year, adding $0.10 to $0.15 to 2013 earnings per share. When combined with anticipated dividends, 2013 will be another year of returning significant cash to shareholders. Please turn to Slide #16.

Let me quickly recap our high-level planning estimates for 2013, prior to taking your questions. We expect earnings in the range of $6.70 to $6.95 or up 6% to 10% from the midpoint of our estimated 2012 range. Overall sales growth will be driven by organic local currency growth of 2% to 5%, with neutral foreign currency translation and 1.5% from acquisitions closed to date. We expect the effective tax rate to be in the range of 29.5% to 30%, and free cash flow conversion between 90% and 100%.

In summary, we have a solid plan for 2013, and are confident that the 3M team will deliver. Thank you for your attention. Now let's get to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Steven Winoker of Sanford & Bernstein.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Just maybe to start simply with the seasonality view in terms of front versus back-end loading and -- or even how are you thinking about how the quarters play out in 2013 in this planning?

David W. Meline

Yes. So if we look at '13, Steve, right now, our expectation is that we'll see the quarters roll through the year in a fairly typical seasonal pattern. So we're not -- unlike '12 where we had some ups and downs, whether it'd be in the electronic sector or first half, second half. Right now, we're thinking it's going to be a fairly typical pattern here.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And that's broadly true across the business units?

David W. Meline

Yes. I would say yes. There's nothing that I wouldn't want to call out for a specific business unit right now.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Okay, great. And then, on the capital allocation, specifically on the CapEx front, how are you thinking about -- what kind of ROIs are you looking for on those, at least the first 2 categories, the growth projects and the productivity projects?

David W. Meline

Yes. So basically, our philosophy is we look at deploying capital to those uses. It's really one where we set out plans for the businesses, where we expect them to deliver both margins and returns on capital that are consistent with the company's expectations. So we talk about ROIC of 20%-plus over time. And basically, we use that as the guide to help us to prioritize against when we're looking at capital deployment, so very much driving towards that longer-term goal. Obviously, if you're starting up a greenfield with startup costs and utilization, that's not initially fully utilizing a plan, if you'll have a lower level of return. But basically, everything we do, we drive towards that longer-term goal.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

And are you -- did you find yourself turning down a lot of projects for this particular year as opposed to prior -- other years?

David W. Meline

As we look at 2013?

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Yes.

David W. Meline

That's a good question, actually. I would say, no, it's nothing -- there's nothing I would note that's unusual about the demand for capital right now. If anything, I would suggest to you that with the weaker growth in '12, we probably got a little more flexibility on availability of capacity than maybe we did coming out of the recession, but nothing unusual that I would call out here.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then just my last question before I hand it on, just maybe for Inge, your perspective here as well, in terms of the business model and M&A and how that fits in, I guess the question is, at what point or ever, how do you think about the opportunity for larger scale M&A? I mean, given the organics growth strength of the company in this environment as things get challenging, as opportunities arise from a value perspective as well in your industries? And did the experience with Avery sort of put you off on the consolidating side of things? I mean, how do you kind of think about the broader M&A opportunity to step that up even to a larger level?

Inge G. Thulin

Well, the way we think about it is, first of all, I think it was an important step we took in order to prioritize the businesses, as we shared with you in -- on November 8 meeting, which is basically the basis for most things we are doing as we go ahead in terms of investment, in terms of making sure that we have the right leadership in place for all those different business models. In terms of the value, as you heard here today and you heard on November 8, we're on $1 billion to $2 billion in terms of allocation, and we will evaluate them based on the business model endorsed categories that we laid out. I think as our pipeline of new products are much stronger today than a couple of years ago, you should see, as we move ahead, slightly bigger than you have seen in the past and fewer, and they will be more strategically linked to our prioritization. And as I'm very, very keen on making sure that we can get leverage and scale, that we can connect them into our technology platforms and make sure that we really can integrate them in a faster and more efficiency, an efficient way, which our new team here, in terms of integration and merging acquisition, we'll make sure we will be able to do. So we are not looking for any transformation on 3M. We have a very solid business model. We will continue in the process we have had in order to roll up acquisition candidates by business. And then, we have, I will say, a very strong and good filter now in terms of challenges based on the strategic fit for the companies we go ahead, when we made those evaluation of the businesses. So it's -- yes, I understand you're looking for a specific timing, but of course, as we do business, you can never give a specific timing. But it's still a part of our path forward, and it's a complement to our strategy, which is around organic growth as primary strategy.

Operator

Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch.

Andrew Obin - BofA Merrill Lynch, Research Division

Just a question, in terms of your strategic review of the businesses, could you just tell us how, from looking from the outside, would we get updates on where you are in terms of your strategic reviews and where the process stands?

Inge G. Thulin

First of all, I think it's important to know that the strategic review, that's not a program. That's an ongoing model that we will work. So I think that's important for us to make sure that we understand. And I think you will see evidence of that as we move ahead, both in terms of our Heartland divisions, in terms of additional actions we will take in order to strengthen them, and also the businesses that these can push forward. In the category of the strategic review, all of that, all of those businesses, they are very solid in terms of profitability, but this is may be, in some cases, not meeting our long-term financial objectives. So that's how you should think about it. And then, number two, they're maybe not in growth market that is growing as fast as we need in order to move the company forward. And in some cases, they are not connected to technology platforms. So if you take those elements in terms of what it stands in strategic review, that is how we will look upon it. Now the first, when we talk about it, we talk about that fixed scale combine or sell. What we will do first is to fix it. We would try to fix it and see how we can leverage it ourself in order to build the business for the future. So I think you will see it as an ongoing element, and it's important. It's not the program, it's not the program where we will report out every month on how we are doing. This is a part of how we do business. It's an integrated part of everyone's expectation as we move ahead in order for us to improve our businesses in performance, which will, by definition, will be to grow faster and improve profitability for the company. That is why we have identified them.

Andrew Obin - BofA Merrill Lynch, Research Division

And could you remind us when was the last time 3M has undertaken such a strategic review of businesses?

Inge G. Thulin

I don't know the timing on that. I think it's maybe some years ago. You have to think about it in a way that maybe, individually, it's done. I have done it personally when I led a division or when I led a geographical area, so it's nothing new. But I think, on a total corporate level, it's quite some time ago. And I think it -- at least, for me and for the management team here, we thought it was very vital for us in order to make sure that we get the priorities right as we move ahead. And that's also why we, later on, have realigned the organization based on opportunities we see in the markets. So on a corporate level, it's quite some time ago. The individual business line and divisions and geographical areas, yes, it's type of ongoing, but in order to get, I would say, move it to a different level to get more material for the company, it was high time and much needed for us to do it in a corporate level. And as I have said before, and as David had said, you will see us be more active in terms of portfolio management because it's a key element for success as you move ahead. And as you recall, what we said in that capital strategic review, which is like 8% of the company in terms of growth rate, have been declining slightly for some years, right? So for us, in order to move that forward, we need those businesses to start to grow at a different level in order for us to be successful.

Operator

Our next question comes from the line of John Roberts of Buckingham Research.

John E. Roberts - The Buckingham Research Group Incorporated

Could you give us an update on what you're seeing in Japan given that it's slipped into recession recently, and China? You've got a pretty wide range there on your Asian outlook.

David W. Meline

Yes, so China and Japan. I would say, first of all, picking up on Japan, frankly, we had expected to see better growth this year in Japan than we actually saw. And right now we're quite cautious on Japan next year. So from a planning perspective, we're thinking that Japan will be somewhere in the area of low single-digits to perhaps flat growth next year. In terms of China we, likewise, are being what we believe is somewhat cautious there. And as we think about China next year, we're thinking about that in terms of low double-digit growth, which is a little bit better than we're now seeing in 2012, but not as high as we have for a long-term growth rate for the company in China.

Operator

Our next question comes from the line of Nigel Coe, Morgan Stanley.

Nigel Coe - Morgan Stanley, Research Division

Just switching to pension, the $400 million to $600 million in funding, is that funding -- your U.S. corporate plan is obviously at a very high level of 95%, so is that cash for international and OPEB plans?

David W. Meline

Actually, the funding of that total, it's split fairly evenly between U.S. and international. And basically, that's what we consider to be a steady state funding rate, which is pretty much matched to the payments out of the plan. So we kind of modulate that to offset the benefit payments that occur annually.

Nigel Coe - Morgan Stanley, Research Division

Okay, now that's clear. And then, switching to optical. So it looks like there's a-- one, it looks like Apple's going to be launching a high-end TV sometime June 2013, and I'm wondering if this is going to spur more of a move towards the high-end within that category. Are you seeing any signs of a turn in attachment rates for films in that space?

David W. Meline

Yes. So if you look at optical next year, a few key things are: one, first of all, an answer specifically to that question, we're expecting attach rates in TV to be in the high-teens next year, so roughly in line with where we've been operating in 2012. Secondly, just to add a little more color, we do see a modest but continued shift away from plug-in devices, those being monitors and TVs, towards battery-powered devices where you're seeing stronger growth in things like tablets and smartphones. So this year, we expect to have about 2/3 of the sales in the division are in those battery-powered devices. And next year, we think that'll be about 3/4 of the sales of the company. So a continued, but more moderate shift away from plug-in. But we still have a position in the plug-in space. We still continue to provide innovation there, which we're pleased with and our customers are. And overall, if you look at the Optical Systems division next year, we expect to have growth again after having a decline this year, but it'll be moderate in the low to single-digit range. And with that, you'll see that Optical Systems will be -- we're predicting now to be about 4% of the revenue of the company.

Nigel Coe - Morgan Stanley, Research Division

Okay. I appreciate the color there, no pun intended there. And then, on the tax rate, just very quickly, looking to be a small headwind versus 2012. You gave some guidance for the tax rate to have it downward by longer term. I'm just wondering, should we be thinking about the tax rate to come down in 2014?

David W. Meline

Yes. What we are expecting is, as we've put, as I've mentioned here today, as we get some of these additional activities in place around the world, that we'll start to see those impacting as we see a shift in our footprint more visibly. And so right now we're thinking that that'll start to become more evident in 2014, yes.

Operator

Our next question comes from the line of Jeff Sprague of Vertical Research Partners.

Jeffrey T. Sprague - Vertical Research Partners, LLC

A couple of things, a lot of ground covered already. The Health Care guide looks much stronger than I would've guessed. I'm just wondering if there's something specific there that you would point to, some product launches or something going on in one of the geographies?

Inge G. Thulin

Well, we have a very good momentum going in Health Care, so you see that we are guiding 4% to 7%, and it's a continuation of the rollout of the plan in the developing economies, which is going very well. And then, it's also to continue to penetrate even faster and deeper in the developed world. There is an improved pipeline of new product that will be introduced and I would say that that's going broad-based today in Health Care. I think they have done a fantastic job to step up the outcome of the research and development. So it's both in our dental space, it's in Infection Prevention, it's in good management, Health Information Systems and Food Safety. So it's very broad-based in terms of new products being able to-- be able to launch a new product. And then, as we have talked earlier, we are -- as the economies are evolving, we are in a very good position in the developing economies with our portfolio today. So it's, I would say, broad-based and we are very encouraged by what that team has been doing. We have a very good position in the market. Our brand equity is strong into Health Care, specifically, so it's type of -- and we have the capacity and capability to execute the plan. So that's why we looked upon this, the 4% to 7% as we go into next year. And we are seeing the momentum so far.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Great. And just on Q4, you indicated things tracking as expected. Obviously, you have a short cycle business. I'm just wondering if you could provide any granularity on just the trends through the quarter. Did they get better, did they get worse, do you see any kind of odd fiscal cliff behavior here in December, anything that's noteworthy?

David W. Meline

Yes, I would say, Jeff, overall, it's trending very much as we had expected. So if you talk through some of the segments, we did turn modestly positive from a growth perspective in Q3 in the electronic space. Not as strong as we'd expected or hoped earlier in the year, but we did see that trend turn positive, which we do expect and this is occurring in the fourth quarter. Although, I would say, again with some caution in that not quite as strong as people had previously hoped. The consumer area's running quite steady. Obviously, this is a strong seasonal part of the year and we're seeing steady performance there in line with the economy. And then, Industrial Health Care, yes, I would say there's nothing that I would call out here that's of an unusual inflection points, if you will.

Operator

[Operator Instructions] Our next question comes from the line of David Begleiter of Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Inge and David, just on the CapEx of $1.7 billion, it not as intensive as it was back in '08 and '09 on a percent of sales basis, but it's the highest since a number -- highest of all-time. Is the business getting more capital-intensive or did you underinvest in the last 3 or 4 years? Can you just discuss the CapEx in '13 and beyond?

David W. Meline

Yes. So I would say, well, first of all, the capital that we'll deploy in 2013 is primarily focused on capacity we'll have in place for '14 and beyond. So it's not something that's typically, really, being utilized in the current period. So I think you can infer from that, that we do, as a business, see the opportunity to continue to grow around the world. We continue now to place -- a lot of the growth capital is in these international markets, which, as you can see in the presentation we made today, we continue to see very good growth in those emerging markets. So we continue to build out our footprint, both in R&D and manufacturing, in those locations and that's continuing, in some cases perhaps accelerating, as our capability improves. Overall, if you look at the intensity of the capital, we don't see that having -- there's no material change, in my view, as to the capital intensity of 3M vis-à-vis in the past, but you do see some increases now this year, not only because we're becoming a larger company, but we are investing in a couple of these projects; that is the -- this R&D Center and also, our ERP program will be peaking the investment this year in '13 and also in '14. So those are pushing up the overall capital level a little bit higher than kind of the underlying growth trend.

David L. Begleiter - Deutsche Bank AG, Research Division

And David, just on working capital and how will it end in 2012, and what's the expectation for 2013 in terms of uses of cash?

David W. Meline

The -- I'm sorry, could you repeat that, David?

David L. Begleiter - Deutsche Bank AG, Research Division

So on working capital, what is your expectation for how it will end in '12 and what will it be in 2013?

David W. Meline

Yes. Working capital, we are a net -- we have an increasing requirement, so year-by-year, as the company grows, for working capital. So we do expect this year, we'll finish the year with a higher deployment of net working capital, and that will continue in '13. We think the best opportunity for us to manage that more effectively, which we think we can, over time, will start to be really realized as we get more fully deployed on our global ERP system where we get better visibility on supply chains across the globe. So for now we expect that, that will continue to be consistent with what we've shown in the past.

Operator

Our next question comes from the line of Shannon O'Callaghan of Nomura.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

The widest ranges are for Safety & Graphics and Electronics & Energy, with the bigger spread than the others. I mean, I guess I understand that in Electronics & Energy, probably, being just the volatility of the electronics business. Could you maybe explain a little on Safety & Graphics why -- what makes up the low end of the range or high end of the range there?

Inge G. Thulin

Well, if you think about that business, there's quite some business units that is going into government spending, right? So you have safety and security or traffic safety, and all of those are type of linked into government spending on a global base. And as the uncertainty is going, not only in the United States, but around the world, that is why we are more cautious into those businesses. Generally speaking, when you look into the business, we have a very strong business there in Personal Safety that will continue to do well and it's a type of in a different space because it's very much into industrial. But there are a couple of businesses, but yes, we'd like to be cautious as there is some uncertainty relative to government spending. So that is why we have put that in that position at this point in time, a little bit on the lower and, of course, but that is the reason, more government business into that business.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Okay, and that helps. And then, could you maybe provide a little bit of color around your margin expectations across the different segments, as well as just overall, where you're thinking R&D goes?

David W. Meline

I'm sorry, could you repeat that, Shannon?

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Sure, David. Just the, kind of, margin expectations within the segments. Any variability there, ones that are going to go up, ones that are going to go down? And then, just overall, where you think R&D to sales is going to go.

David W. Meline

Yes. So starting on the segment margins, what I'd say, first of all, if you look at the year-over-year at the total company level, as you would know, we were quite focused this year on getting some improvement in margins, which we're quite pleased with our performance there. If you then look next year, a couple of things are accretive to margins, those being what we expect from pensions, as well as productivity. That's going to largely be offset next year by the dilutive impact on margins over acquisitions. So we're thinking that overall company margins will be pretty stable in '13 from '12. If then, you go into the 5 businesses, I guess, what I'd say is, we do expect to continue to see our Health Care business to run in the low 30s next year as we've run here through 2012. I expect the Industrial, Consumer and Safety & Graphics all to be near the corporate average. And what we expect from the Electronics & Energy business is that it's going to run in the high-teens next year.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Okay. And then, just R&D to sales?

David W. Meline

R&D to sales. We've got a glide path in the direction of 6%. We expect that you'll probably see some tickup next year on a percent of revenue basis, depends a little bit on how revenue evolves, quite honestly. But what's true for us, as Inge mentioned, as we are kicking off now some of this innovation investment, which will fundamentally raise that base spending, and so on a planning basis, you can expect that'll start to tick up a little bit going forward in '13.

Operator

Our next question comes from the line of Ajay Kejriwal at FBR.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Maybe, if you can talk a little bit about channel inventories, what's your feel there? Do you get a sense that, given the uncertainties of distributors, customers are running on lean inventories? And as things stabilize, what's your expectation? Do you think you could be seeing some restocking there?

David W. Meline

Yes, I think, Ajay, at least from our read right now is that people have been cautious, remain cautious and inventories, broadly, remain quite tight and under control. And certainly, while we're not planning for it, our experience is that as the economy and businesses start to turn up, that you would see some level of inventory build next year. So you could infer, at the high end of our revenue forecast, that would contemplate a scenario where you would see some rebuild occurring in various geographies or businesses. But I would characterize the inventory position as remaining cautious from our customers, and that until we see some other signs to cause us to change our assumption, is that will continue into 2013.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Good, that's helpful. And then, maybe on the net productivities, your expectation is still nicely positive next year, but then, maybe a little bit lighter than what you're expecting for '12. Could you talk about some of the components behind that? I know you said R&D goes up a little bit, but then, how are you thinking about the discretionary cost controls into next year?

David W. Meline

Yes. No, that's good. So if you think about the posture of the business next year, as we go through this planning, I would say, that the baseline that we're working with is very much focused on a conservative outlook for growth, positive but conservative, and therefore, we're trying to be overall cautious in terms of how we're deploying incremental investments and expense. What's also true is we've been doing this year, and we'll continue next year, to be quite focused in terms of where there's opportunities for growth that we are then selectively investing. So if you think about businesses like Consumer and Health Care in the emerging markets, we've been quite targeted in investing in those spaces, and what we see is very good results. So if you look at a place like Mexico as a case study, we've been investing and localizing production R&D and sales for Health Care in Mexico and we're seeing growth rates approaching 50% this year. So we will continue to selectively invest where we see opportunity. And then, I would say, the other theme that is impacting productivity, well, really, a couple. One is, this renewed energy around Lean Six Sigma, which is not only in the factories, but we also use it to improve our business processes across the company. So that's helpful to us. And then, we've got this increase in R&D. We have, as I've mentioned, this 2013 and '14 will be peak years for project expense, also, in our global ERP deployments. So those are impacting us somewhat as well.

Operator

Our next question comes from the line of Deane Dray of Citi Research.

Deane M. Dray - Citigroup Inc, Research Division

I wanted to get some more color on pricing expectations for 2013. Pricing was a nice boost in 2012. You said it'd be up slightly, so maybe you can calibrate what the expectations are for the year. Is that a percentage point, and how that might play out? Because you've got some tougher comps towards the first half.

David W. Meline

Yes. So if you look at pricing, which I think you've summarized well, we were pleased with our performance in 2012 in the price front. We'd started the year with an expectation of 0% to 1% price. In the end, we'll have a little bit better than 1 point for 2012 on year-over-year price performance. And given the overall situation, what we're now planning on is a slight positive price. And so what you'll have is primarily driven by the carryover effect that remains from actions that were taken through the year in 2012. So I think you could foresee a fairly significant drop starting already in Q1 because a lot of the pricing that we took was very early in the year last year. So I would say slight positive, and for planning purposes, thinking about what I've seen, it would be, I would say, fairly steady through the year.

Deane M. Dray - Citigroup Inc, Research Division

Great, that's helpful. And then, as a follow-up, and Inge, you talked about this at the St. Paul meeting in November, the theme of faster to commercialization, so I've been curious in hearing about these projects, the R&D meetings you're having this week, you said 50 new projects. Where -- frame for us what that -- where the focus is, how that might translate into faster to commercialization, these product line extensions targeted for developing markets, but any color would be helpful.

Inge G. Thulin

Well, as I said, we will have the first meeting tomorrow with this innovation board. The proposal, moving forward, to that meeting is, like, 50 projects. We will not approve 50 products at that meeting. When we look upon them, they are broad-based from all business groups. And as I said earlier, it will be around international opportunities, it will be around disruptive technologies and it will be new products to new markets. So that is the focus if you think about it from that perspective. As this is probably, if you think about disruptive technologies and new product in new markets, in terms of seeing the real benefit in the market, that will take some time. But that's also why we do it. This is an investment we do now for future growth. In terms of my comments on November 8 relative to faster commercialization, it is clear for me that the realignment of the organization and alignment versus markets will speed our commercialization on new products. And it's a very strong connection, I would say, in between consumer insights and customer-inspired innovation into our technology platform. So I think we have streamlined the real need in the market back to our technologies and then, should be able to commercialize it faster. Have we seen direct result already? Of course, not. Do I have evidence that is working much better? For sure. So I've seen it myself. I'm meeting many, many customers, and specifically, I will say, the formation of Electronics & Energy is a clear evidence for us that we should be able to move much faster on these elements. And if we really think about it, that's a very fast-moving business, very fast-moving business. It's big and the growth rate in that, if you look upon the -- and that the way we had defined that business space, Electronics & Energy for us, is a big space and has a good growth. And we can play well there. So we will see the evidence as we move ahead relative to faster commercialization. And as I also talked about earlier, we have now a global sales executive on sales excellence and we have a global marketing vice president to marketing excellence. And so we are type of helping with tools and processes in the center of the company, but still, all business is done local, all business is done day by day in an interaction with our customers. So I'm very optimistic, and it's more than hope. Hope is not a strategy, so I think this is very good actions for us in order to accelerate our competitiveness in terms of go faster to market.

Operator

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

Jeffrey Schnell - Jefferies & Company, Inc., Research Division

This is Jeff on for Lawrence. With the fiscal cliff looming, how much variability is there to your U.S. forecast? And also, how much of a slowdown would trigger more cost-cutting? And which regions or businesses do you think would be most affected?

David W. Meline

Yes. So what I'd say, first of all in the fiscal cliff, I think we would observe that there has been some impact in the market as a result of the uncertainty that's out there, generally, in the economy and certainly accentuated by all of the indecisions that we see in Washington right now. So it has slowed the business. We ended up now as we look at the year, towards the low end of where we'd -- hoped we'd be, and certainly, some of it has to do with those activities. As I mentioned earlier, in response to a question, on the other hand, I don't see any specific inflection in point that's new and unexpected for us here in the fourth quarter. In terms of what we need to change for us to start changing our posture in terms of investing in the business and growing, I would say, we'd have to see a visible downward inflection point that's new in one or more regions of the world. Certainly, as you would know, we've seen that in Europe and been managing the business very carefully in Western Europe now for almost 2 years. And we've been pleased with that performance there because we've been able to progressively stabilize the revenue in Europe, while improving our margins by a couple of percentage points here year-over-year. So we know how to manage effectively in the event of downturns and we're -- given the nature of our business, with the kinds of returns and margins we generate, we have to be very sensitive and prepared to flex in either direction as the market changes, and we do that pretty well.

Operator

And our last question comes from the line of John McNulty of Credit Suisse.

Abhiram Rajendran - Crédit Suisse AG, Research Division

This is Abhi Rajendran calling in for John. Just a quick follow-up question on pricing, are there any areas where you might give up on pricing, as the outlook for raw materials appears somewhat more stable and, potentially, modestly lower for some of the base chemicals?

David W. Meline

Sure. So I guess in terms of, if you think about the overall pricing equation, first of all, 3M has very good pricing power in general, right? I mean, we have differentiated products, we're focused on innovation, we're focused on constantly updated and innovative portfolio and we're really looking to provide value to customers. So as a general statement, we have good pricing power and we use it appropriately and we also work with our customers to provide a strong value proposition for them. If you think about specific areas, in answer directly to your question about possible price movements, the area that comes to mind, certainly, is in the electronics space, such as in the Optical Systems division or some of the other consumer electronics areas where you have a structural price down in the business model, and we do that very effectively. So we plan for that in our business planning and we appropriately need to continue to innovate and offer new solutions, as well as make sure that we're driving down our cost in our factories. So I would say, if you -- some in substance here, we respond as we need to, but we don't see anything different facing us in 2013 than, perhaps, we've seen over the last couple of years.

Operator

That concludes the question-and-answer portion of our conference call. I will now turn the call back over to 3M for some closing comments.

Matt Ginter

I would just like to say thanks to all of you for listening today, for your engagement and your very good questions. We wish you all a happy holidays, and thank you for participating. Goodbye.

Operator

Ladies and gentlemen, that does conclude.

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