3M Co (MMM) 2014 Outlook Meeting Conference Transcript December 17, 2013 1:00 PM ET
Matt Ginter - Vice President, Investor Relations
Inge Thulin - Chairman, President and CEO
David Meline - Senior Vice President and CFO
Brad Sauer - Executive Vice President, Industrial
Frank Little - Executive Vice President, Safety & Graphics Business
Joaquin Delgado - Executive Vice President, Health Care
Mike Kelly - Executive Vice President, Electronics & Energy
Mike Vale - Executive Vice President, Consumer Retail Business
H.C. Shin - Executive Vice President, International Operations
Fred Palensky - Chief Technology Officer
Andrew Obin - Bank of America Merrill Lynch
Steve Winoker - Sanford Bernstein
Shannon O'Callaghan - Nomura
Joe Ritchie - Goldman Sachs
Nigel Coe - Morgan Stanley
Good afternoon, everyone. I’m Matt Ginter, 3M’s Vice President of Investor Relations. And welcome to our 2014 Outlook Meeting. I’ll also welcome investors today that are listening via webcast.
We’ve got a great line-up of speakers today. Of course, you will hear from our Chairman, President and CEO, Inge Thulin; and our Senior Vice President and CFO, David Meline. Also presenting today are the leaders of each of our five business group, plus our Head of International. We have Brad Sauer, who leads Industrial; Frank Little runs the Safety & Graphics Business; Joaquin Delgado, Heads up Health Care; Mike Kelly leads Electronics & Energy; Mike Vale runs our Consumer Retail Business.
And you can thank Mike for the (inaudible) sensor that I just received today. We deliberately try that put -- not put any [eagle] helmet next to the giant helmets, but we’ve made a mistake there, so feel free to swap.
Finally, H.C. Shin is going to present today. He heads up our International Operations. Each of them will describe their key strategies going forward and I think you walk away with a better understanding of the depth of the 3M portfolio. Chief Technology Officer, Fred Palensky is not formerly presenting but he'll join us today for Q&A at the end.
I’d like to mention a few upcoming events while we are here today. First, our 2014 earnings calls will be on January 30th, April 24th, July 24th and October 23rd, and all calls are scheduled for 8 a.m. Central Time.
And second, if you please mark your calendars for next December 16th, we plan ahead, when we will host our 2015 Outlook Meeting, we now plan on 8 o’clock to noon that day with the location yet to be determine and we will provide more details, obviously, as they develop.
Please take a moment to read the forward-looking statement. 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.
So very quickly here is today’s agenda, Inge will open up followed by each of the business heads and David will be our final presenter for the day. We’ll have 30 minutes of Q&A at the end, with all presenters up on stage plus Fred and we will adjourn no later than 5 p.m.
So thanks again for joining us today. And now, I'd like to introduce 3M’s Chairman, President and Chief Executive Officer, Inge Thulin.
Thank you, Matt, and good afternoon. It’s pleasure for me and the whole 3M team to be here today and talk to you. And a reflective on today is to say that it’s little more than a year ago we had a meeting which was November 8th last year when we laid out our plan as we move ahead and that’s where we go back to today very much.
So what you will see here, there we go. So what we will do here initially is, I will talk about the five-year plan and give you an update what we have done in the last 12 months. And I will talk about three levels that we have worked on during the last year and that is processed as we move forward on the plan, which is Portfolio Management, Investing in Innovation and then Business Transformation.
Each business group will come up. They have now been placed for 12 months. So this is a good time for them to come up and tell you relative to the strategies as we aligned organization. And then as Matt said, David, will in the end talk about the capital structure and allocation as we move ahead and then also give an outlook for 2014.
And let me start by giving you an update relative to what we have done the last year and its start all with our vision. Let’s start with the vision, how we can advance, enhance and improve every company, every home and every life. And as you know that for us we do that through technologies, products and innovations.
We also laid out six strategies in order to enhance and enable our vision and four of them are around growth, one is around people and one is around operational excellence. And that was a key element for us as we move into the year relative to how we laid out both importance of 3M and enable us in order for us to execute on the vision.
A lot of things happened during the year 18 months ago we launched six strategies in the company. And the way we laid it out was basically top-down direction and then we work it upwards relative to toolkit of how to execute the strategies and how to measure that and what type of metrics and toolbox we use produce.
After we have done that we realigned organization and we formed five business groups that are much better aligned to the market and that was introduced basically 12 months ago, 1st of October last year, so the business leaders that you see today that have now the opportunity to drive the businesses safe in this alignment little more than a year.
And then we also focus on all three levers, Portfolio Management, Investing in Innovation and Business Transformation. And as I said earlier, David will later talk about the fourth lever which is our capital allocation and very strong balance sheet that we now reduced slightly different as we move ahead.
So one other thing that we talked about last year was how we categorize the portfolio and we categorize them in Heartland, Push Forward, Strategic Review and then businesses that we evaluate for us they go in market that are in transition.
Heartland division there was one-third of our company and our businesses does a big, very profitable, use multiple technologies and are globally in scale and providing all good lever for 3M today as we go ahead.
Push Forward is an important element for us because those businesses and markets are growing faster than average of 3M. We are by definition smaller in those market segments that had not leveled them totally on the global scale.
And then businesses on the Strategic Review, all of them are doing very well, but based on our performance as we move ahead, we need to look upon them as we laid out the five-year plan. So that was an important element for us as we laid out at that point in time.
And a lot of things have happened, you can see here we combined the touch system with electronic solutions, we combined security system with traffic safety system and in addition, we purchased FSTech in order to build the business that have more relevance than the market.
But we will be Infrastructure Protection together with Electronic markets which gave them much more relevance in the market and reduce overall cost in the infrastructure of our business.
We move Mobile Interactive Solutions into Optical System and we combined a couple of brand into consumer area into the Home Care. And we in fact divest one business which was in the fishing area that we sold off in during the year. So a lot of activities happened as we move ahead.
On Heartland division as you can see good performance this year, 5% CAGR this year and we believe that this will continue as we go ahead and I would talk about it for the next four years of the plan. And with 5% growth, which is ahead of the average of the company for this year. You can see here the businesses that we are talking about.
You can also see in our performance in both developed and developing market was very good. We talked about 1.5x IPI as we laid out the plan last year. And in both developed and developing economies, we have outperform that metric and we feel very good about that specific goal of the company.
We talked about additional investment in research and development that we will into the five-year period closer to 6% then to 5.2% that we have had historically. And you can see here three programs that we are focused on and is under way to introduce, one is the Quantum Dot Enhancement Film that you seem to move to billion dollar market that has basically enhanced the LCD panels as we move ahead. And Mike Kelly will talk more about that in his presentation.
You also see here the construction air barrier film. And around the world, government supporting new regulations in place relative to energy assumption and savings. And our product here is really helping relative to that opportunities, both in terms of applications and in terms of savings. So incredible opportunity for us.
And then advanced composites that is something we have worked on for some time and you can see here it’s going into an $800 million market. So you will hear about those opportunities later today that three of the programs that we have been working on as we ramped up investment.
And then finally our ERP system that we have rolled out started last year, and we are on plan and this is an important rollout for us relative to efficiency and productivity in the company. So we have, as you can see here, started 2012 with the rollout of Taiwan and then we have a couple of more companies that we enterprise with subsidiaries that we rolled it out this year.
So we are basically on plan with that rollout and it’s important element of the three level. So let me now go forward and talk about the plan for 2013 to 2017 and type of the leave that 2013 in terms of the programs we have made. As you recall, we laid out very clear specific targets last year and we believe they are both aggressive and realistic which is 9% to 11% EPS growth over the time, 4% to 6% organic growth and then around 20% both for return of investment capital and around 100% in free cash flow conversion.
They all be active. So on a five-year basis and we will see some year to be variation driven by some decision that we have to take over time. David will talk about one of the larger changes we will make going forward which will be around adjustment of our capital structure and how we would deploy capital going forward.
So we build a plan of 1.5x IPI which we know that we had capacity and capability to deliver on and that is also what we are doing as we move ahead. And you can see this year, we are over delivering on that objective. That’s something that we know since 2002 up to 2012 that we have the capacity and capability in organization to do and that’s also what we based the plan on up to 2017.
This is just to remind us what we talked about year ago and we stick to that relative to the contribution in terms of growth rate from the different businesses in the company also which we can see 4% to 6% total company, then you see 3% to 6% for Industrial, 4% to 7% for Health Care, 3% to 6% for Consumer, 4% to 6% for Safety & Graphics and then finally 3% to 7% for Electronics & Energy.
However, we look upon, international, you can see that when we put developed and develop together, you can see that as we’re looking for developed 2% to 4% and developing 8% to 12% and this is of course including the globe as total and H.C. Shin will talk specifically around international later today.
But again, you can see that we have had good performance in 2013 and we look forward to the plan as we move ahead to really be aggressive both in developed and developing economy. And my view is that in the developed economies, we are very strong and by definition, we never left developed economy. We build out in developing which I think starts now to pay very good feedback to us relative to our goal.
So let me talk about the six strategies and how we operationalize them as we move ahead. And the first two ones are around how to win and where to play. And they are important because they are really the way that we have to accelerate growth in terms of penetration and taking market share around the world.
That’s three elements into that. That is portfolio price decision which will deliver more growth to us. It’s about maximize the global opportunity to build out around the world and then is to also do some acquisition as we move ahead. When we look upon the portfolio, it’s important for us to make this very clear, not only from how we should allocate resources but also how we should select and appoint leaders for the business. It’s very clear for us that we need to win into Heartland Division everywhere.
So they are very important for us. They are one-third of our business and it’s absolutely critical that we need to have the best leaders there and we also need to have very clear program since we move ahead.
We have to invest in growth in Push Forward division in high growth market space. So as I said earlier, there is a faster growth that this is average of the company and we have a very good position but we have not filled out everywhere around the world.
And then we have to address businesses and Strategic Review and then realign other business that it maybe in a market that is under consideration. And as one, you saw in traffic safety system, one example of that, that we realign and try to make sure we combine and build it out in that case together with one acquisition.
But we look forward for Heartland Divisions, you can see here there are $10 billion today. We expect another $3 billion as we move ahead. They are very large. They are very solid and they will have a very strong global penetration opportunity as we go ahead.
They all have leading brands and they have accretive margins for the company and induce fundamental technology. So very, very important for us and the key product is in all countries around the world.
This example of Push Forward and you can see here that they are all type of domestic businesses. So they are global by definition but they are very good in terms of local domestic market and where we connected with more. And you can see here, there is a critical and chronic care solutions in health care, oral care and a construction from an improvement market.
So very good business it is where we can lever both our brand equity, our technology and our global footprint throughout the world to execute more aggressively. So construction & Home Improvement markets, called for many, do it yourself market. You can see that we expect is to go from $1.4 million to $1.9 million in the planning cycle. Very good opportunity for us that we would lever to the account management around the world and market that’s constantly are growing. However they execute that with the local market. So very, very good for us and brands that is well known is demand can feed them and Touch Blue et cetera is the products that we used in that.
Critical and Chronic care solution is an important business for us in the Health Care space but with still huge opportunities all around the world. And you can see this is very much into the skin area and have tremendous opportunity both in developed and developing economy and this is today a US$1.1 billion business. We expect this to go to $1.6 billion organically in the plan. So very good position for us and we can do much more as the economies are developing around the world and I will talk about that in a second.
And then finally oral care, that is a combination for us in between orthodontic and the dental business where we would drive material innovation and digital technologies to provide for true-side productivity. And you can see here that’s very much a transition from product-based to procedure-based solutions for us. A big opportunity, we have a very strong precision both with ESPE and Unitek and we would build that out as we grow organically. And again, it’s domestic local business that is very good for us as we grow the business around the world.
Finally, a couple of comments on what we had in Strategic Review. We talked about that. Last year, we had around $2.5 billion in that category, as we work our way through today it’s just slightly below a $1 billion. And we take a methodology relative, so we address that either it’s fixed, combined, all this to divert. Those businesses are doing very well and are going to do well in most other companies where we look upon in both internally and externally.
And externally, as we look upon, it’s the space that is big enough. It is a space that is growing fast enough. It’s the space where we are relevant and it is the space where we can used multiple technologies. And that’s the criteria for us to see if we should try to fix it. If it is not a fixed solution, we try to combine it in order to give it more relevance inside of 3M and both give relevance to front end but drive out cost in the back end.
And the third alternative is products and if that’s not possible for us, then we also would think about diverse and so we had one of those activities going on last year. So we have a methodology here where we are working through in order to make sure whatever we do has the right value for the shareholder in today’s competition.
When I think about maximizing the global opportunities for us, as the world is moving on, our portfolio is aligned very well through the evolution of any country in the world. And as the evolution is as always sought by infrastructure, we build out in the country. Followed after that, that manufacturing is expanding and moving in from export companies into domestic market. When that has happened, safety regulation is improving. When that is up and going, we know that people will start to spend money in retail and consumer area.
And then finally, healthcare is building out around the world. And that doesn’t mean that there is no healthcare immediately, but healthcare system and the solutions is becoming more advanced at the end of the cycle. If we think about that for our portfolio, we are growing very early in the infrastructure with multiple businesses, then followed by one third of the business that is in industrial space into manufacturing.
And then safety and security are able to follow with personal safety, and then we have consumer and then finally healthcare. So this is for us a very powerful model and we are able to leverage it very well and also when you look at upon the margins of the company, we believe this is a very good opportunity for us as we move ahead. And it’s a proven model for us. We have done at many places during many years, so we know how to do with them and feel very good about them.
And there is a slight different way that we look upon developed and developing economies. So in developed, it is very much to make sure that we go after and penetrate large underpenetrated market. It's also for us to drive profitability and productivity in those countries, especially United States, West Europe and Japan. And then make sure that we come with leadership in new product platforms for new markets, also in big technology that is all coming from developed economies.
In the developing world, it is important for us to invest in more domestic markets businesses, healthcare, consumers, Safety and Graphics. It is very important for us to make sure we build the fundamental strengths relative to the platform of our business. Also important to build out, local research and development, so we can adapt product solutions for that market based on price points. And then of course to make sure that developed the local human capital that we invest in those countries, so two slight different models, as we execute the plan but holding together very much with our spring around technology is important to the company.
And then finally, acquisitions, we are building out on the portfolio, very much now based on privatization really around the portfolio. And we will emphasize high-growth spaces. And we will also look upon increased focus on technologies that we can add and/or, of course we can leverage our own technologies into the commercialization goals for the company that we are purchasing.
And then we will also lever our enhanced integration capabilities that I will talk about in a second. So we believe at this point in time that we are ready to move a little bit more aggressively here and you can see a US$5 billion to US$10 billion target in the plan as we move ahead. Here is the way the playbook is working -- is first of all to make sure that the portfolio intent is to move ahead where it will bolster technology position and pursue adjacencies in the Heartland.
And the Push Forward is to build scale and facilitate market penetration around the world. And we have also made a slightly change to the process where we historically always had a bottom-up process and that is now level, albeit also with top-down process in order to make sure that we look upon businesses that we can acquire and make sense for our base of the company.
And then during the last year, we have really made sure that our integration team is in place and trained in order to make sure that we can maximize the value very fast as we do that. So we put that integration team in place a little bit more than a year ago and during this last year, we had kind of trained them to take on some of the acquisitions we have done in the past. And we feel very good relative to the capabilities from that Cuno.
And we look upon the process here, we feel good in terms of able to based upon the portfolio and plans, make sure that we really understand that it can transform all businesses, whatever category they are and then has an integration model in place that works well. So as we move ahead, we would like to move businesses from Strategic Review upwards and as you know this is an ongoing process for us, and I think the important thing here is to make sure that we now ready for potential for multibillion dollar deal.
So we have really done the work relative to process of being ready to move forward. And we understand where we will like to do that as we go ahead. Just to give you a couple of comments on some of the acquisitions that have been done over the years, we have Cuno that later becomes Purification acquisition that we did many years ago, and that lately have done very, very well for us.
So we are very pleased with the performance, very pleased with the team in place, our new leadership team since a couple of years. And this is a huge opportunity for us, still to be able to build this out on a global base and still need to add some technology platforms that can be done in different ways. And one is of course organic. But very good place for us and the space is interesting and the business is doing very well for us.
The Winterthur was a different acquisition, that was to build out in a Heartland division and now they are able to add multiple components to that business. It is being in place for a little bit more than a year and suddenly our relevance in that whole market build-out big time.
And then finally, Federal Signal Technologies that was an addition of the new technology into a business that was in transition where things start to change from only vertical signage and licensed based to now becoming more enhanced and that’s why we made that acquisition. So sizable acquisitions -- we are doing very well that’s an example of how you should think about how you will try to do acquisitions as we move ahead.
In terms of investing innovation, innovation is heartbeat of 3M. It’s very important element and it’s the center of the plan. It means a lot for us and as you can see here there is 14 key platforms that is really driving our growth as we move ahead. But important for all businesses and you will hear much more from each business today relative to what we are doing.
We announced November 8th last year that the step-up in the plan from 5.5 closer to 6, and three is categories that we work on. First is improve products for existing market, second one is new products for existing and adjacent market. And then, finally, new products for new market, which is basically where the increased investments are going. And the reason for that is they are more in terms of new-new and take longer time and sometime may be a little bit more risky. So, when we wholly financed that outcome of divisions, it took longer time and maybe we are not exactly the focus we will like to have on it in the past.
But as long we have called it out and they all are very important relative to our growth for the future. And you can see here when you think about this improved product for assisted market, I think one of the elements is also the way we have build this out around the world. We have today 41 customer technical centers. We have 85 local laboratories around the world, and we have that connected with local manufacturers. And you can see if that’s in China, Russia, India, or Brazil, that is now will start to payoff and our MPVI new products facility and they have got really improved and increased in that part of he world.
Now, NPVI is an important metric for us but it is the secondary metrics. That is an important end metric for us in order to make sure that we get a new flow of products at the whole time. But the real growth driver is of course organic local currency growth but NPVI is here. We will stay and it’s an important element as we move ahead. But that is a product for existing market.
When you go into reinvigorate some core franchisees, you can see here that we take existing technologies, the market inside and our global capabilities and here you can see some example of the out jump that are more globally in a way as we move ahead. So you have a non-PVC film that you see into the whole suitability of product into the graphics area. And you can see we have a slim intra-oral scanner that is right into the business that talks about earlier on oral care. That is an element where we really will exchange existing and then you can also see into the consumer area where we have an ace brand that is a compliment to our procural brand relative to braces.
So things are going on in both areas at the whole time. But here is example of things that are important because they are coming into the element of the additional growth. And you can see here five programs that we can talk more about later. We had a flexible composite films that we talked about during the last earnings call, that is a huge opportunity for us in many areas.
In advance lighting and the things about 3M very much in film and light management, it’s a big deal for us and this is something that we are building out also on the design side as well as into the manufacturing or construction. And then you have negative pressure wound care that is going into the whole business, so what I talked earlier about wound care, which is something that is a bigger business that can be grown out over the world and there is some new fantastic technology access we can capitalize on.
Healthcare analytics is an important business for us. We are going into Health Information Systems and with Kindergarten, we will comment on that but fantastic opportunity for us. And then finally, smart grid sensor cables, that is a global need but very much driven that we see in West Europe. So we also think that around 20 product platforms that we have highlighted today is based on the investments we have done during the last 18 months.
We have also improved our capabilities around marketing and commercialization and there is basically two processes. We have one that we call customer-inspired innovation, which is related to spec-in businesses. And then we have one that we called a consumable businesses that we call i2i, Idea 2 Innovation. Also those processes -- they are very important for us to get input very early in the process from the customers.
And then you will see from Mike Vale in consumer that i2i is a very natural way for them to work relative to consumer insights, because this business is about spec-in or using the famous customer-inspired innovation, have been used for many years. But I would say during the last two years, we have built it out in all businesses, when we have those two processes as we move ahead. We feel good about that capability as well relative to get better inputs from customers early in the process and then improve the commercialization process as well in the company.
In terms of our build out around the world, in terms of high capabilities, we see regional self-sufficiency is an important element for us. We have today 65% of our business outside of United States and we have multiple big customers around the world. And there are lot of technologies that is of course developed, both in West Europe and certain parts of Asia as well as United States, but important for us to build out capabilities outside of United States as we move ahead.
The way we do that is we always starts with the sales organization in the country. We build that next step with the technical service. We start the small converting go-to manufacturing and then with also product development. It’s a very effective model for us and is very good return, and is a model that we have used all over the world as we have build out with some subsidiaries with very early in West Europe like U.K., Germany, France and Italy to lately in Azerbaijan and Kazakhstan and Russia and so forth.
And as you probably know, Latin America is one of the most developing economies. But this is a way that we start to build out our business in the country, very efficient. So we do not bring -- initially we bid capital, big capital investment for manufacturing, build out over the time and that has resulted in incredible strengths around the world with subsidiaries and peoples at locally, can serve our customers even if they are global, so very important.
The other thing we are doing is we have to deploy suppressions in terms of excellence, globally. This is a efficient model for us and the latest one is in Basel, in Bern in Switzerland which is supply chain and engineer manufacturing and technology for West Europe specifically. But we have Singapore as the center of excellence in Asia and we have Panama City in Panama for the America, so very aggressive layout relative to supply chain which is important element for us as we move ahead.
In terms of the people, of course that’s nothing will happen without people and very good programs in terms of not only attracting people to the company but to develop and retain them.
Diversity is of course important for us, but diversity for us is about business model. So when we look upon our strategy, the way we measure diversity around performance in the business. So everything is done in 3M relative to diversity is actually a strategy number two because if we don’t do it right from a diversity and diversity is many things you will not win the business.
And then finally the way we would pay all these which is around, drive consistent superior levels of operational excellence. For us it’s about supply chain optimization and it’s about business transformation, two things that are important for us.
We all by definition as very well respected and very well known for good operational excellence and I think you see that through our margins. But still this is something that we are focusing day out and day in.
And one way we are doing that is of course to lean Six Sigma, we have revitalized that during the last two years and you can see that it’s important relative to both maximized profits via elimination of ways, improve our cycle time and then have a common language that can probably solve -- solving problems around businesses and around geographical areas around the world.
And you can see here in terms of belts that we have, since last year we have increased Black Belt by 25% and grown from 360 to 450, and it’s a big lever for us as we move ahead. So, we have a history of Six Sigma and we are basically taking that back to where we were couple of years ago.
And as I said, finally, Business Transformation, important for us to get more productivity and efficiency from the company and you can see here is one global business practice to expand IT capability and it’s growing through the whole organization, okay. In terms of both back office and the front relative to commercialization and would take us seven years to execute this fully that would be big benefit that David will talk about here later.
So by that, if I started, we go back to the vision that is important for us relative to know to first in terms of how we advance, enhance and improve for all companies and every home and every life around the world that’s a stretch, but that is what the vision is all about and that you know we do that best through technologies and products and innovation.
So if you look upon as we move ahead, the strategies as we laid out, you will hear them from each and every business group today and you will hear from H.C. Shin on International and it’s around three levers, Portfolio Management, Investing in Innovation and Business Transformation. And in addition, what David will talk about which is the fourth lever is our strength in terms of capital allocation and balance sheet.
So by that, I give this over now to Brad Sauer that is our Executive Vice President for the biggest business, Industrial Business group and he will take us through his plan for the next five-year. So thank you very much.
So, thank you, Inge. Hello and good afternoon, everyone. As Inge said, I have the great privilege of leading 3M’s Industrial Business group. My pleasure to be here today to give you a short update.
Over the next 20 minutes, I am going to walk you through an overview of our current business that what we do and how we do it, our performance over the last several years, and then I am going to specifically focus on telling you about, what we are doing to propel our growth both in revenues and earnings by utilizing four key strategic priorities as shown on this slide.
We are very fortunate. This is a very strong business and frankly, one, I would characterize as a power house of innovation. We have nine divisions. We utilize 38 of 3M’s technology platform and we innovate and deliver unique solutions all around the world and for a wide variety of large and very dynamic vertical markets.
Now these core markets provide about $60 billion of space for us to play and virtually endless opportunities to grow, paid value for our customers and shareholder. Exceptional teams and unrivalled connection to customers is at the heart of this innovation engine and is a tremendous source of competitive advantage for us.
So here are the nine divisions that make up this powerhouse. Industrial Adhesives and Tapes is a global leader providing solutions to advance companies in a myriad of industrial market. Automotive Aftermarket provides solutions to keep cars looking as nice as the day they were off the assembly line.
Abrasives system provides surface modification products to help companies in wood working, metal fabrication, casting and forging industries all around the world and as Inge showed you, these three divisions are part of the Heartland in the corporate portfolio and I’ll talk more about them in a minute.
Automotive, here we help OEMs through solutions that help them to meet customer and regulatory requirements. Advance Materials fueled by the Ceradyne acquisition as materials companies deliver solutions that are lighter and stronger. Personal Care improves lives with products for baby care, incontinence and feminine hygiene.
Purification, Inge talked about this business, purifies drinking water and provides solutions to industrial companies that help insure our safety and well being. Aerospace and Commercial Transportation provides solutions to those industries to help them create safer, quieter and lighter vehicles. And finally, Defense Markets takes all 3M products into military markets. So this is a very strong collection of businesses that really bring the 3M vision to life by bringing innovative solutions that leverage both 3M technology and the global footprint.
This ability to bring innovative solutions to the market has enabled the Industrial Business to continuously delivery solid top and bottom line growth of 6% and 9%, respectively, while maintaining industry -- leading operating margin.
And in 2013, we will deliver over $10 billion in revenue for the first time in our history, very nice milestone and we have been able to accomplish this with sales that are nicely diversified across both businesses and geographies, and this diversity provides us with both stability and the ability to create and quickly align the growth opportunity.
So now let me take you through our path forward for building this business and we are focusing our businesses on four key strategic priorities that align to the six corporate strategy and they are active portfolio management, which includes for us assessing and aligning our portfolio in Industrial Business group and making very specific choices about resourcing and where to drive growth and we are doing this at the business group level and at the division level.
Accelerating new product innovation and commercialization, and here we are sharpening up our focus on customer insights to prioritize more revolutionary globally launched programs with larger impacts.
Third, penetrate in international with a focus on developing markets and we have a tremendous global presence in our business that is grounded in our success in the U.S. and other developed economies, and we are executing plans to leverage that strong base to accelerate in the fastest growing parts of the world.
And fourth, drive operational excellence. Our business has extensive manufacturing operations in over 30-country and we have launched a very significant global effort to continue to drive down our cost to goods sold and included in this is taking our lean Six Sigma program to a level of intensity that I would characterize as rivaling wave 1 from 1,000 years ago. Those of you that knew that are start on new Six Sigma, and in fact this you're on track to deliver $380 million in cost benefit in our business.
Underpinning it all, we are fortunate to have the world’s best team, this relentlessly executing strategies that will be strengthened as we deploy SAP globally. Now I want to give you some example of our strategic priorities and action. I’m going to start with how we are managing our portfolio and one of the key drivers of our success is our ability to adapt our portfolio to the mega trend that are impacting the markets in which we serve.
So here on this slide, I’m showcasing alignment of our portfolio to the energy crunch. For example, we have solutions that increase the productivity of drilling deep offshore wells, like it’s been done in Brazil and many places of the world with the use of our glass bubble technology.
We’re introducing ceramic sand screen from our Ceradyne acquisition that are more resistant to clogging which can increase the productivity of existing wells flat to two times. On the other end of the value chain, there is significant need for more fuel efficient transportation solution.
Here we’re developing and producing composite surfacing films that produce stronger lighter weight solutions for next-generation composite aircraft that whole industry is moving in that direction, helping to reduce fuel combustion.
In another exciting innovation, that was actually on Inge’s chart under advanced composite to the development of a compressed natural gas tank, 30% lighter in weight has 10% more capacity and compare to market leading alternatives. And this enables commercial vehicle customers to use compressed natural gas that a diesel fuel which achieves about 50% cost reduction for them.
Another key mega trend is sustainability and here our business is a leader in developing solutions that help our customers address the sustainability standards. For example, we have key technology and products that are integral components of exhaust system leading to reduced emissions and all types of commercial and personal vehicle in area facing increased regulatory pressures around the world.
In conjunction with this, we also have thermal acoustic solution that offer superior insulation to maintain cabin temperature inside commercial vehicle so that the drivers can rest in comfort because now the regulations actually limit the amount of time of vehicle can run idle while they are on mandated non-driving time.
Our water filtration products are now the first in the industry to be certified under new sustainability standards developed by the water quality association. And finally our 3M air barrier film that Inge referred to is using commercial construction. It can later reduce the energy use and cost by up to 25% to 35%.
A big mega trend continues to be the growth and increase consumption in emerging market. As many 100 of millions of more people relocate to urban centers and disposable income increases. Here we’ve develop products to align to the very significant housing and transportation needs in this market. For example, 3M Thinsulate brand insulation allows automotive OEM to meet expectation to reduce cabin noise.
Well, those cars that are produced in developing economies are very noisy and the consumers don’t want them to be noisy. And our materials also utilize lighter weight-enabled -- our customers use lighter weight seal for these growing customers.
In construction, our 3M all weather flashing tape helps to reduce energy use by filling gaps and joints. We provide surface modification solution that allow manufacturers to achieve a high-end look at a lower cost, same with our new VHB tape. So these products uniquely help our customers meet the needs of that new middle class that’s seeking a high-end look with improved quality and better performance but they still wanted that at an affordable level.
These are only a few examples, I mean, of how we are aligning our portfolio product innovation that the mega trend is impacting the world around us. And I could go on and on but suffice it to say that our teams don’t want to connect 3M technology with customer needs and response to where markets are going and in so, doing remain leaders in the market place.
At the color managing the priorities in our portfolio is winning in our three Heartland divisions, which have $6.5 billion, represent two thirds of our sales. These businesses are currently performing very well and they are winning in their markets. I have shown on this slide a few elements that how we’re going to continue there. So industrial adhesives and tapes has prioritized 15 countries.
Six key markets along with a sharp focus to increase penetration to accelerated new product development and our larger, higher value solutions like the air-barrier product I just talked about. Automotive after market is expanding its sales force in key segments and key countries that continue increasing customer enormously.
It is a really key success factor in this film and they’re leveraging our best-in-class product portfolio to increase productivity and reduce costs for our customer. Abrasive systems is utilizing the Winterthur acquisition that Inge mentioned for precision shaped grain and expansion of the Scotch-Brite branded products to drive growth in prioritized market segment. These plans are in place and the momentum we have -- we're actually confident that we are going to continue to drive solid growth with the core of the industrial business.
A key move in our portfolio was a Ceradyne acquisition that expanded our footprint in ceramics technology. This technology is providing us with the opportunity to up trend to expand our offerings in markets we already serve, to drilling gas and defense while creating exciting opportunities for us to move in the new markets with innovative product.
We currently have development projects underway in nine divisions across the entire corporation ranging all the way from roofing granules to dental crown. An example of new innovation is our new enhanced combat home to sell most the film of the first of its kind because of its unparalleled ballistic protection over today's standard.
With new product innovation being recognized by the Department of Defense, we placed an $80 million order in September for delivery to United States marine. Further, this product was recently selected as one of the hundred best innovations of 2013 by popular science magazine, which, in their words were making our world safer and more efficient.
Another key element of bringing this acquisition to its potential leveraging 3M’s global footprint, we’re currently driving this technologies and products to 25 additional countries in a wide variety of applications. Our execution on this acquisition has been solid.
We’ve utilized the company's new capabilities on integration and the integrations have been achieved on plan and EBITDA is the ahead of target. Another example of active portfolio management within our business is the emphasis we are putting on our aerospace business, in and of itself a great space, a really good business for us.
But as you can see we’re supplementing that focus with additional focus on commercial transportation. This is a large segment and due to similar customer structure and need, our team was now focusing efforts on specification driven sales to this market, increasing the size of the segments in which we play from $2 billion to $3 billion. And likely doing aerospace, we’re aligning the full breadth of 3M technologies to these markets, provide solutions that fulfill customer needs within this case are safer, lighter, quieter vehicles produce faster.
Our next key strategic priority is accelerating growth from our new product innovation and commercialization. Here we are raising our game and customer intimacy and insights to ensure that we prioritize our efforts on fewer and larger growth opportunity. Our goal is to increase new product sales to 35% annual sales by 2017, with the particular emphasis on bringing higher value new products to new market and customer.
We have technical capabilities in 35 countries. This allows us to quickly react to the needs of both local and global customers and we’re further strengthening our capabilities with global knowledge centers and countries such as German, China, Japan, which expands our ability to meet global needs.
This slide depicts several examples of product platform at various stages of development in our innovation process. Now the word platform here is significant and that it means either not single product. These are platforms that form multiple new products. While touching on just a few shown at the top of the slide, the precision shaped grain platform leverages a revolutionary 3M technology to create disruptive products that literally provide step function increase and performance over the competition and we are currently in great success with this platform and we’re now expanding this platform from flexible abrasives to bonded abrasives with many new product launches planned in the next couple years.
Our Automotive Acoustic solutions provide a cost-effective lightweight, high-performance thermal and acoustic absorber for the automotive market. We have many applications on the car and our newest focus includes high temperature applications in the engine compartment of the vehicle. The push for more fuel-efficiency is making the engine compartment harder that’s the need for our absorber.
Our Bio-Pharma Filtration platform, part of our purification business provides purification of biological-based pharmaceutical drugs as a manufacture. It is one of the fastest-growing segments in pharmaceutical industry. And our newest push to expand this platform is to go into both upstream and downstream operations, and its showing early promise to potentially change the way these drugs are produced. So these new product platforms and others generate long-term growth with these nine alone creating sales potential of $1.6 billion annually at maturity.
So here are more specifics on one of this platform, this is Paint Application Systems, which was provided significant growth through Automotive Aftermarket division. So since launch, this product platform is spread four different product lines and 14 new product innovations generating over $1 billion in cumulative sale.
So it was born in 2002 in United Kingdom, came out from deep customer insights and it all started with the original PPS brand paint gun and expanded our relevance in collision repair industry by continuously spinning off great products that exceeded the needs of our customers. By providing them with an easy-to-use solution that enhances quality, efficiency and reduces solvent used in the body shop, our team has been able to disrupt and change an industry.
Addition to our platforms, our new product pipeline is robust. Here I’m showing nine products that were launched this past year to the application of multiple 3M technology. To touch on a few, for example Gear Grinding Wheels utilize technology from the Winterthur acquisition combined with our Cubitron II branded precision shaped grain technology create a whole new products that develop us super high quality finish with far superior productivity on many power train application.
Another example is Paint Defender Spray Film. This is a spay-on film that protects the cars paint against rock chips and other hazards. This product recently received Popular Mechanics Editors Choice Award for the top car tech at the Specialty Equipment Manufacturers Association show in November.
And according to Popular Mechanics, “We love this product, not only because it is useful but also because it is a fascinating application of material science.” A very nice statement of exactly what we do.
So these products and others are created from our ability to leverage 3M technologies, bring innovative solutions to our market. These nine will generate $200 million in annual revenue in a couple of years and represent just a fraction of what's in our pipeline.
Our third key strategic priority is accelerating international growth with particular emphasis on developing markets. We have a strong global business growing at 6%. We have good growth in all geographies, including developed economy, which represent two-thirds of our business.
However, the developing world, which is one-third of our business is currently and projected to continue growing at least two times developed in terms of IPI. And in particular the five markets shown on the right, Mexico, Southeast Asia, Russia, Brazil, China, have very strong projected growth in our segment, the segments we participate in. We are aggressive going for accelerated growth above market growth rate in these geographies and where we have outstanding capabilities and relatively low penetration.
Touching on these in China, our acceleration plan include the sharp focus on penetration in the domestic segments, the large part where that economy is going such as transportation, appliance and construction, while utilizing our very deep capabilities in R&D and local manufacturer.
In Brazil, our acceleration plan includes a major focus on penetration in our three Heartland divisions along with the very significant Oil & Gas market. Russia is a big emerging growth opportunity with one of the fastest projected growth rates in Europe for our segment. Oil & Gas and Automotive are central to this growth and align very nicely to our strength.
Many of our OEM customers, automotive, aerospace and others, aggressively moving in the Mexico or back in the Mexico and there we are building and leveraging our capabilities in a much bigger way going forward.
In Southeast Asia is trying to be a new growth engine for us. Again, many of our customers are aggressively moving into this region and our ability to follow and support them is absolutely unparalleled.
Our business there is already amongst the fastest growing in our portfolio and we’re going to fuel it even further. So in all we’re going for $2 billion of growth opportunity in these countries alone and of course, more than that when you consider the rest of the developing world.
So that covers three of our four key strategic priorities, Inge covered the fourth, Operational Excellence, which gives us the foundation upon which to invest and drive our growth. So this completes my overview of our Industrial Business and our plans to propel a success.
And in conclusion, I'll say the Industrial Business group is really the embodiment of the 3M vision. We invent all the kinds of companies in all types of industrial and manufacturing industries to the application of our Abrasives, Adhesives, Tapes, with thousands of great solutions with the challenges.
We enhance homes by purifying water, enabling energy-efficient construction and helping consumers keep their cars in great shape and we approve lives with our baby and family care products, with products that protect the great men and women of our military. We are truly bringing the 3M vision to live.
Thank you very much and now, I would like to introduce Frank Little.
Thank you, Brad. It’s my pleasure to share the direction for our Safety & Graphics business group with you today. Let me start by describing the group. Safety & Graphics group is a dynamic that have really great 3M businesses.
Our Heartland Personal Safety division provides product which help keep people safe on their job around the world. Our Traffic Safety and Security division provides product which help improve public safety and security.
Our Commercial Graphics division provides graphic films and service solutions, which enable dynamic brand messaging. Our Building and Commercial services division provides products and solutions which improve the maintenance and productivity of commercial environment.
Our Industrial Minerals products division provides protected material for roofing applications. Architectural Markets Department provides innovative lighting and service materials solutions for commercial structures. And finally our Mining, Oil & Gas division brings together the breadth of 3M’s technology and products for that entire industry.
The Safety & Graphics group has been a solid and resilient financial contributor to 3M with about 3% sales in OI CAGR over the past five years. Within that group the Personal Safety division, Traffic Safety and Security division, Commercial Graphics division are the largest business group with that operation. Our business is well-balanced across the globe with about two-thirds of our sales from international and about a third of our sales from developing economy.
I think it’s important to know that the markets that we compete a very large and attractive, totaling more than $160 billion. They are all projecting good growth with CAGR’s ranking from 4.8% in government to over 7.2% Mining and Oil & Gas, and although, we have a sizable scale of sales in each, it’s important to know that we have plenty of room for growth.
And now we had a brief introduction of the group, I’d like to share few key elements from our playbook. First, prioritizing our portfolio, second, expanding our customer relevance, third, gaining share in attractive markets, and fourth, making investments in disruptive innovation to fuel our growth. This is all part of working our innovation magic into our business structure.
So let’s begun -- let’s begin with the work we have done to prioritize our portfolio. For the past couple of years we have taken a number of actions to strengthen our portfolio. First, we integrated our Track & Trace division into our Security Systems division, adding scale and delivering cost reduction synergies.
Next, we merged our Security Systems division with our Traffic Safety Systems division adding scale and delivering cost synergies, while also increasing our customer relevance. Further, with the FSTech acquisition we had Intelligent Transportation management capability for the Traffic Safety & Security division further increasing scale and customer relevance. And then finally, we created a market focus Mining, Oil & Gas division, bringing scale on relevance to this vibrant growing industry. This stronger portfolio positions us for greater success.
Now let me share more about our second element of our playbook, expanding our customer relevance. With such a large market opportunity, let me share how we bring relevance in each of these four key markets that we participate in.
In Workplace Safety, our focus is to enable better safety, security and productivity for our customer’s workers. We bring personal protective equipment, conspicuity and reflective materials, traction strips, sorbents and matting, as well as access control, tracking and communication systems into this environment.
In the Mining and Oil & Gas market we work to bring innovative solutions from all of 3M to customers in this initiative. We not only provide personal protective equipment and conspicuity and reflective materials, but also work site safety solutions and maintenance repair and operation support material.
In the government markets we work with our customers to improve public safety and security. We bring reflective sheeting, pavement marking materials, road marking, motor vehicle registration systems, tolling and vehicle identification systems, as well as biometrics and security systems
Finally, in commercial markets, we help our customers enhance their brand image and create inspiring and sustainable environment, like graphic films and services, architectural surface and lighting materials, and a variety of building surface maintenance solutions. Overall, our innovation and capability bring relevance to our customers in these key markets.
Now an example of what we have done in prioritizing our portfolio, through portfolio actions in creating the traffic, safety and security division, we are now able to play bigger.
So starting as a personal safety product sheeting materials and conspicuity wraps supplier to government, law enforcement agency, we now can bring ID and facial recognition, protective ceramics, electronic monitoring and license plate recognition systems to aid our customers in the full cycle of detection, investigation and correction.
With organic solutions and innovation matched with acquired technology, we now have the capability to play bigger with more relevance as we help enable our customer’s success.
Another example of playing bigger is with the combined portfolio across our Commercial Graphics, Architectural Markets and Building Commercial Services division, where we now can bring a comprehensive array of branding, design, protection and maintenance solution to our commercial market customers, whether it’s the attention grabbing, building wrap on the Kansas City public library on the left, the creative and inspiring lighting design which use 3M’s light management and dispersion technologies in the middle or the innovative surface polishing, finishing and protection materials using commercial flooring on the right, we have an exciting portfolio of products, services and solutions sets for our commercial customers environment. I want to add that this part of our portfolio is over $1.6 billion in sales growing at 9% in a $55 billion market opportunity.
Now let me talk about the actions that we have done to strength our portfolio and expand customer relevance as it relates to gaining share at attractive markets. Not only are we well-positioned in attractive growth markets, we have favorable megatrend which can help leverage our growth.
Brad, talked about a few ID, let me talked about a few here. In a world with increasing security need, our automated license plate recognition and biometics systems provide state-of-the art performance solutions to enable tracking, enforcement and identity matching to help keep our public environment safe. And as the awareness and needs for workplace safety continue to increase, Inge mentioned that in the natural evolution of economies, our personal protective equipment solutions like Versaflo powered air system help provide a comparable -- comfortable comprehensive worker respiratory protection in a number of different danger types of environment and similarly our E-A-Rfit Hearing Protection Validation System provides a way to accurately and objectively assess the effectiveness of hearing protection used by enforcement.
Finally, increasing energy needs are driving new solutions and exploration production and usage. 3M solutions can help energy usage as our translucent light film enable the same brightness for signs using fewer LED.
In the exploration and production side our Mining, Oil & Gas solutions enable safe work in difficult environments, as well as advance additive materials to aid fluid flow and advance filtration media to improve water filtration performance. These are just a few of the megatrends in areas where are position to drive growth.
In addition to participating in favorable megatrends, we are well-positioned to help our customers with our regulatory expertise. Despite increasing safety awareness, the statistic below illuminate the challenge is still presence in the workplace and public environment today, today every 15 second the worker dies from a related accident or disease. There are over 1,000 eye injuries daily in U.S.
Falls are the second-leading cause of accidental death in the U.S. and over 1 million people die in traffic crashes around the world annually, with 92% of those happen in developing economy.
As a result, in the work safety and public safety areas, regulatory standards continue to increase in both developed and developing economy. Now we have shown just a sampling of the various regulatory and standards body that 3M expertise work with the around the world, wherever our customers are, our expertise enables them to provide efficient, effective and compliance protection. We are uniquely position to help with our extensive footprint of local expertise, regulatory regime around the world.
In the safety market we have taken actions to accelerate our global growth in our Heartland Personal Safety division portfolio. We have ignited organic growth as evidence by an accelerating new product vitality index in the upper part of this stage, a key measure of the percentage of sales driven by products introduced in the last five years, with an increase of over 2.5 times in a five-year period.
In addition, we have executed a series of transformative acquisitions in key product categories, increasing our overall capability and relevance in the market. This combination of both organic innovation and inorganic acquisition has helped us move from the leading provider of respiratory protection in the early 2000 to the global leader in personal protective solution today, celebrating 40 years of safety leadership. With this customer relevant breadth and category of leading depth, we are able to leverage 3M’s global subsidiary support capability to grow at a much higher market rate growing our share.
Now similar to our approach in safety, we used a combination of organic innovation and strategic technology acquisition that move from a leading sheeting and reflective materials buyer in the early 2000 into a leading materials and integrated safety and security supplier today. Whether it’s keeping drivers alert, or our road safer, our Diamond Grade DG3 reflective sheeting roof effectively doubles the brightness of conventional road signs.
Similarly enabling the security of our communities, 3M’s automated fingerprint identification systems offer the National Institute of Standard and Testing’s highest rated performer. Clearly our comprehensive and compelling integrated solutions are enabling market penetration beyond our traditional core of this material.
Within the commercial markets, we are now able to play bigger, increasing our customer relevance as we broaden our capability to offer both products and services to major industry leaders. An example is shown here, where we are able to offer brand owner services by managing the rollout of integrated signage, brand identity, environment design and maintenance solutions.
Here we are able to leverage a single phase of 3M to our large customer enabling a broader array of solutions and services which help them deliver and maintain their brand value. And as you know, 3M has long been a technology rich company. You saw just an example in both Inge’s and Brad’s presentation as a rich technology of 3M, however with an extensive portfolio like that connecting all of that relevant products and technologies for our customers in the Mining and Oil & Gas market has long been a fragmented effort amongst a number of divisions within 3M.
Now we created a division with a focus of bringing that single phase to 3M and the depth and breadth of our technologies in products to this industry. With over $1.5 billion of sales in the safety and graphic group alone and over a billion dollars in total company sales, we are well on our way in building scale and relevance, to enable to faster the market growth rate with customers of this dynamic industry.
Now let’s turn to the last of our four-part playbook investing in innovation. As we investing in our innovation, we are building our product development capability globally. And these are just a few of the exciting new product platforms from our labs around the world.
From our Sweden labs, the X-Series and next generation of high performance ear protect ion with the highest attenuation levels in the industry. From our U.K. lab, the aura series of higher performance in comfort respirator, offering a flexible design and comfort that’s not been seen before in a flat-fold respirator.
In Brazil, a new high-gloss reflective material which is establishing a new performance in value capability for motorcycle delivery personnel. From China, a new high-intensity retro reflective sheeting material and a 3,000 Series mid-range performance re-usable respirator, both establishing a new level and platform of performance, value, capability combined together.
And then finally from Japan, a new series of graphic film media opening a new range of promotional market opportunities for our competitive solutions. So, all in all as Brad said, we have a robust global pipeline of new product development program with over $1.7 billion of growth percentage.
Now at the same time, that we are increasing our overall R&D investment and building our global development capability, we are also creating new integrated systems solutions. We are taking our core material position and expertise in areas such as non-verbal, reflective materials and films and we are leveraging them with sensors and software system to enable our new level of intelligent solutions for our customers.
Whether we are enabling active safety solutions which help monitor and report worker protection and compliance and workplace safety and mining, oil & gas markets or developing integrated auto recognition systems for control monitoring, tolling and access for vehicle and ID management, government market or developing sophisticated flexible optical illumination systems and vision monitoring attention mapping systems for our customers in the commercial markets.
We are creating smart solutions that help our customers become more capable, compliant and competitive in each of these grade markets. And we are just at the beginning.
With that I hope you have seen the value that we bring as we execute our playbook for success. As we execute this playbook, we will make the 3M a division of advancing every company, enhancing every home and improving every life very real for our consumers. Thank you very much for your attention and support for 3M.
At this point, I will turn it over to Joaquin Delgado who leads our healthcare business.
Hello, good afternoon. In the next 20 minutes, I am going to give highlighting to you the direction that we are taking our healthcare business in 3M and also a tremendous opportunities that we have in front of us in both developed and developing economies and to continue the trajectory of growth that we have been having in the past three years.
In our recent industry envision and in a market that is changing very fast, we are seeing two elements from the division that resonates a very strongly with our customers. The first one is 3M Technology advancing every company.
We are seeing more and more of the participants in the healthcare industry whether they are healthcare providers or failures, that have taken our help to improve outcomes and lower their costs and also we see the element of 3M innovation improving every live resonate with each one of our employees because really what the passion that we have, that a passion our employees have is about savings and improving lives around the world.
We see that about 87,000 is our number of deaths per year in the United States from preventable hospital infections. 3 million people die each year of food poisoning, 150 million suffer from asthma, and may breathe easier this year with our 3M inhaler. 300 million plus around the world suffer from diabetes and other chronic diseases that have been alleviated by many of our products that help protect and restore the integrity and more than 100 million of people have healthier and more beautiful smiles, thanks through our respiratory -- orthodontics products. So you see that really our passion in what we do really well is about solutions based on 3M technology that improve health outcomes and lower their cost of health care.
The agenda that I have in front of us is to look at our business overview and the market that is changing rapidly in this past few years, what is this strategic playbook that we have, how we are growing in developed and developing economies and then how we are using our portfolio and our technologies to fuel that growth.
The business that we have today is about preventing health care associated infections with our infection prevention business. It’s about innovation in wound and skin care and vascular access with our critical and chronic care solutions divisions; improving healthcare efficiency, quality and reimbursement with our health information systems; making smiles healthier and more beautiful with our oral care business both in orthodontics and in the dental care business; customizing pharmaceutical drug delivery solutions with our drug delivery systems; and monitoring food safety in our food safety businesses. This is a very unique portfolio like nowhere in the industry with a depth and breadth which across the whole span of health care in a very integrated way.
The health care business is generating solid and consistent profitable growth with $5.0 billion business in sales. It has grown in the past six years by 5% with operating income compounding annual growth rate of 7%. The last six years which have grown our sales by $1.1 billion and which has grown our revenue by $0.5 billion on that.
50% of our portfolio is in the medical area, 25% in oral care and the other 25% the health information system, drug delivery and food safety. Geographically 78% of our sales take place in developed economies and 22% in developing economies and this is the way that we see our business developed versus developing economies where we want, we are growing in both type of economy.
Our portfolio, it is very synergistic and leveraged very strongly 3M core strength. The technology platforms, the supply chain, the 3M brand that is our prevalent brand across our products and grow our presence. And when we look at the portfolio, they interact in a very synergistic way and you see how the different businesses have moved into the bubble that there is an intersection of what we can provide with our businesses to our customers as I said whether they are healthcare providers, whether they are payers in the industry.
We conduct business in a large and global market, $7 trillion of healthcare expenditures, growing at about 4.6% for access for the next four years. Our addressable market is $92 billion growing at 5.6% and we have about 6% market share there. In terms of developing economies, developing countries expenditure, healthcare expenditures are estimated, projected to be at about 3% and in developing countries about 10%. You can see there in the chart that we have both in developed and developing countries, tremendous opportunities to penetrate and continue our growth.
The healthcare landscape has been changing. Perhaps it has been more dynamic in the recent history and it is fueled by few key mega trends that are changing the way the healthcare is being handled and is being delivered around the world. Increased demand for access of healthcare around the world; people living longer and we know that we’ll live longer, we put more pressure in the healthcare systems; the increase of incidence of chronic diseases, not yet being developed but also in developing countries; and the use of comprehensive data becoming more ubiquitous and allowing to provide better standards of care and better pathways of care; and also tremendous advances in biologics and regenerative medicine that are having very, very positive impact in the health of each one of us.
What are the global forces that these key markets trends are putting simply as stated two things, better quality at lower cost. And you can see that this is a theme that we as a company know how to do well. You have heard my colleagues talk about it what companies know how to improve outcome at a much lower cost for our customer.
And the enablers that our industry is capitalizing upon to have this transformation of better healthcare outcomes at a lower cost is about prevention, digitization, the shift of care to lower cost delivery points and then evidence solutions -- evidence in terms of clinical and health economic data.
Looking at our strategic playbook, the way that we put this 3M strategy seems to play is our strategic playbook. Our goal is to grow both in developed and developing economies and the way that we go about it is by focusing first in operational excellence to get or what we used the term liberate once for investment and than we prioritize in terms of the platform and the geographies where we’re going to be making this investments via portfolio, tools and then we invest in innovation, market coverage and localization which really are on two themes, people and capabilities and research and development really give us the right formula to provide growth store.
Let me go a little bit on how we’re going to achieve this goal of growth both in developed and in developing countries. When we look at developed countries, it’s about gaining profitable market share in developed countries, the way the healthcare expenditures are going -- projected to be at 3%, our goal of growth is more ambitious than that is 427. We have to take market share. We have taken market share.
And the way that we are going above that is number one, expand coverage across the continuum of care and I will give you an example in the U.S. how we are doing it. And the tremendous opportunity that provide us aligning our portfolio to targeted care delivery point. The delivery points are changing from acute center from hospitals to other points and different portfolio products is needed because the care and the clinicians and caregivers that are spread across the continued health care have different expertise, I think cost and then increase the number of new-to-the-world products.
Our portfolio on our platforms is very, very relevant for these developed economies and highlighting here in the slide, in each one of our businesses, what are the key platforms for growth in developed countries. It clearly has been moved from acute center hospitals to alternative care centers. So you want to look in this slide is moving from hospitals to surgery centers, wound clinics, long-term acute care, physician office, extended care all the way to home care and of course the oral care is coming from the other end and is being integrated with many health care provider system.
You considered our penetration is very modest across the continuum and that we have tremendous opportunities to grow as we are expanding our coverage in these alternative cares, the more in the U.S. is transferable to any developing countries. In fact, it will be transferable to developing countries because developing countries are adopting many of these strategies to lower the cost to deliver to other cities.
In developing countries, it’s about building growth faster and more productively and the emphasis in product will be to bring to our resources to the people that we are hiring, the people that we are training to full speed much faster. It’s about expanding coverage. It’s about active participation in advancing the standard of care in developing countries. It’s about tailoring our portfolio by expanding local laboratory manufacturing capabilities and it’s about investing, enhancing our competencies in sales, marketing, clinical and regulatory areas.
It is about continuing, doing what we have been doing in the past few years to strengthen our commercialization and market development capabilities, which is working really well as I’m highlighting in these two key countries. China, with growth of estimated for this year to finish at 15%, Brazil at 21%, where we have invested very thoughtfully on local labs, increased our R&D capabilities, localizing clinical research, expanding our regulatory capabilities.
At the same time in China, we have built our medical products plan, our orthodontics products plant is the platform for the whole oral healthcare businesses. And in Brazil, we have an oral care front, also medical products but we are building and we continue to build our local efficient capabilities.
In terms of technology and portfolio, if we want to grow in both developed and developing countries, we are tailoring our new product strategies to each one of this different economy. In developed countries, it’s about innovation. It’s about shifting our innovation pipeline towards adjacent and transformational products. In developing countries, it’s about penetration. Penetration by first, localizing our core portfolio and then once we have localized our core portfolio, look at the local needs and developed, are new to that market of products.
The way that we do is similar to the way that I showed to you last year. We look at the healthcare megatrends, we look at technology platforms and we innovate in four different areas -- detection, prevention, intervention and digitization. And extend force of the high impact programs that we have to create our future and continue our growth. In terms of detection, I would like to highlight novel food safety detection technologies is about the safety, toxins, allergens and residues include the tremendous market opportunity of over $700 million.
In the area of prevention, we do a lot of work and we have a very strong portfolio in our medical businesses and we are developing in oral care. This portfolio is about in-office preventive dental care, new materials, new devices to identify and prevent oral conditions with the market opportunity of $150 million.
In the area of intervention, biologics wound care, using bio-active wound closures to accelerate healing over $650 million opportunity that we see, looking at assisting surgeons in open and minimally invasive procedures with brand new technologies with over $0.5 billion opportunity.
And in the area of digitization, two key areas of emphasis for us is transforming the dental care from the analogue state that today is primarily to a digital and we see a $750 million opportunity there and then in healthcare data analytics, improving the quality and mitigate risk in care delivery. A huge opportunity, we are growing really faster and this is over a $3 billion opportunity that we want to see.
Acquisitions have been very important to healthcare success. I’m highlighting the timeline of key acquisitions that we have enabled to combine with innovations to expand the breadth and depth of portfolio. It started in this timeline in 1987, Code 3 Corporation that is today what has formed our Health Information Systems, the acquisition that we have done in the oral care space to have a tremendous portfolio that we have today and in the area of the medical business.
I would like to highlight the Arizant acquisition that was done in 2010, if you remember this was an acquisition to bring a new solution to our portfolio with forced patient warming during procedures and pre-operating procedures. We have combined it with 3M capabilities. We have introduced multiple new products, we have expanded solutions beyond the traditional operating room setting and we have expanded the footprint because to grow our presence and as a result, we are well ahead in executing our original growth forecast.
In developed countries, we are growing at 6%, and in developing countries at 15%. We are delivering the savings and sales revenue synergies are taking hold. So really we have a very well acquisition portfolio to strive in this very dynamic healthcare market that we really like the dynamism, because it provide us very, very good opportunities around the world. We have an attractive portfolio, we have the global footprint, we have an arsenal of leading technologies and our growth is funded by operational excellence.
In closing, it’s really an inspired and dedicated team where we are passionate in improving every life, every day and in every place around the world.
Thank you and I’m going to introduce now, Mike Kelly to talk about the electronics and energies business.
Good afternoon. For the next 20 minutes, I would like to review the electronic energy business status. It is a new business formed about a year ago and I will use the following agenda. I will start with little bit of review of 2013 to be more clear about how we use our year, our first year together. And then we will talk through the market segments portfolio on what we see as a growth drivers, as we go on offense now to ’14 and beyond.
As I said, about last year in the fourth quarter, our electronics and energy business group was formed. The formation -- the rationale for the formation was quite clear. It increases our relevance around two major market segments, the electronics which is termed as a very large market and energy likewise.
So this gave us the ability to strengthen our alignment, an organizational alignment to these major markets. Additionally going on offense, it enhanced our ability to direct and drive key technology manufacturing marketing assets towards these important markets in the future.
So that was the rationale for the formation, I think it’s proving to be very successful from our standpoint. I hope you will feel the same. As we look at this now, we have -- here is our divisions. We have three electronics divisions -- the optical systems which is very well known, electronics markets and materials division and electronics solutions division.
On the energy side, we have two pure energy divisions, electrical markets division which is more of Heartland division that Inge highlighted earlier today and renewable energy. And then we have sort of a crossover division in communication market. What I mean by crossover is they have the technology certainly to the electronic side, but their markets and their customers behave more like the energy related or utility related customers. So we have kind of a foot in both there.
And I want to point out also film manufacturing, E&E has the responsibility for film manufacturing for the whole company, so that is based on the management on behalf of the entire corporation.
Our strategic objectives as a result of our time in this business, is to become the preeminent leader in martial solutions to the electronics industry. 3M is a leader today. It’s a very strong participant in the electronic materials area and one of the biggest companies and the most relevant companies in this space. We think we can be number one and so that’s where we want to go with that.
We are also number two is to establish the 3M Energy franchise. When we came together these businesses we are really in four different organizations within the company and so we really haven’t had a comprehensive energy strategy that we have been able to address before. We have had the chance now to take a look at that, do a deep dive and determine where we want to take this set of business and what can 3M do with this, we have some direction there that we are driving for us.
Additionally, we also think we want to shift a little more of that portfolio in the energy direction, give us a chance to manage just the inherent volatility to takes place in electronics industry.
There is two ways of volatility occurs there, of course, one is front position not having it and that’s the one way to create volatility. The other is just market condition. And so, you have to get those both right in the electronics industry, but if you get one wrong, it’s nice to have the ability to manage the outcome little more stable.
So, aggressive portfolio management will deliver that long-term growth in the margins and this decrease volatility that we see. So, as we look in the upper right, you can see our divisions, the six divisions, we have three big divisions, the optical being the biggest, the EMMD and EMD being a likewise, those three are the big cornerstones of our business group with smaller position in renewal energy, electronic solution and the communication market.
But if you can see our sales CAGR of 2% and our OI CAGR of 4%, somewhat matched by the fact that we have two years of decline in sales, over the last two and three years declines in operating income. And so when we look at our 2013 work and what we had to do that was a practical thing we had to face and our business wasn’t performing to the levels we want it.
So we took some actions and Inge has highlighted a very early, we had to take some aggressive portfolio actions to begin to turn this business group back into the consistent upward performer we needed to be.
So what actions did we take? Some were mentioned, but first of all, we integrated mobile interactive solutions divisions back into optical and we existed digital projection, we determine that there was not a technical or business solution that we had that would make that 3M performing business.
Second, we integrated touch and made some changes in back into the electronic solutions division, made some changes when we focus that business to increase profitability. Also in touch space, we have a joint venture with the partner in Asia that we had to redo the business model. We were doing piece parts and we want back to our all good business model which quickly actually improve the performance of that business.
Fourth, we integrated the Infrastructure Protection division into our Hartland division, the Electrical Markets division to help that business to reduce the cost and help that business increase the relevance and gauge the scale, and that has proven to be very successful very quickly.
So these are examples, there are other smaller examples that happened at business unit levels but at division level these are examples of portfolio actions we have taken in order to improve the business performance and we believe going forward we are in a much better position to do that.
And there is a good reason for us to do this. So the space that we play in and obviously, I think, electronics and energy are both well known market space, but even our relevance and our addressable market and this $93 billion and these markets are growing, our addressable markets are growing at 5%.
So there is a good reason for us to both participate and be very relevant in these spaces. We are -- we currently actively participate in 26 sub-segments of these large market spaces, so we have the relevance today and we just want to build on them.
So building on that, let me start by going into a little bit our electronic playbook and telling how we looks and how we view this and what we want to do going forward. Now that we have all the businesses at one place, we can have much more cohesive strategy.
The three divisions I’ve mentioned to you before, electronic solutions, optical systems, electronic market and materials, very interesting divisions and actually, they are very complimentary but distinct in the technology capabilities to those have.
For example, electronic solution has two business units, flexible electronic solution and systems and component. But this is a division that has had long history of flexible electronics and also very capable signal management capability, which is obviously very important when you are dealing with the solving electronic problems.
On the other hand, our optical systems division, our biggest division has three business units set up more around market segment, TV and monitor and display area, mobile and handheld, dealing with tablets as well and specialty displays.
Optical is a world-class leader in light management technology. In fact many of the films that Frank highlighted in the Architectural Markets area come out of technologies has been developed in the film area from optical, this I believe in the IP space, 3M is a top three optical company and is largely house in this division and the corporation, so a very capable division.
And the third set, the third business we have that deals with our overall portfolio and electronics with EMMD which has a rich material set and really has a lot of electronic materials, adhesive, clean adhesives, chemicals and has a very strong footprint in the semiconductor space. This is really the pivot point for us in addressing semiconductor market which is very important market for us and probably the -- and this is least volatile space within the electronic segment.
So when I think about electronics and our strategy going forward and the short time we have here, let me just put it in the other way. First of all, the megatrends in electronics are fairly clear, thin, cheap, faster, increasingly more sustainable and also as we move forward flexible.
So the trends of their, to address those mega trends are really material challenges, there are challenges that are customers comes to us and ask us to solve within these materials. If you look at the sketch all the way on the left, you see a component of a handheld unit that might even built just two years ago and would have been the stack of materials and components.
And of course, the way we were going in the market, we are going in a component mode, we were taking component through them, they were integrating the components and they are making materials to do that, which is fine and we are very -- we have got very successful run with that.
So that mentality has to change now. Now we have to actually take all the capabilities of our three division and co-engineer materials that actually reduce these layers to create that next-generation thinner, lighter material and so we end up taking solution, having our business work as one, to take five materials down to four, four to three, three to two, all in the quest for meeting the electronics megatrends.
They has the additional benefit by the way of being more cost-effective solution and that’s necessarily cheaper to 3M, cheaper to our customer as we start to take things out of the stack as they enable them to meet their goals.
There is a very-very important strategy for us, we are probably one of the very few companies in the world that could execute such a strategy given the breadth the materials now that we have and the capabilities that we can stack together.
This becoming increasingly important in electronics because one of the megatrends is really on the horizon is variable. Variable electronics is a clear megatrend is coming, for active projecting, 100 million devices by 2016 and that will still be the very nescient market for them. The ability to compete everywhere all the time, very natural way, its clearly the way this market is going, it will be a material solution that provides that.
So we are very excited about, where our role will be in this, being together, housing one business group it allows us to go to market and execute our teams can co-execute to meet this very aggressive goal.
So let me now wrap with the electronic piece by just talking about our three top growth areas for the next year and beyond. First of all, Optically Clear Adhesive, we have -- we currently have very big footprint in Optically Clear Adhesive.
We intend to continue to develop that platform with ITO-hiding, high peel strength, different dispensing methods of applying, it was very important of our customers and their manufacturing process. These are all for very important display applications and will help to enable next generation display.
The second one is touch sensor film that we have developed an array of touch sensor materials and I think everybody knows touch sensors are somewhat ubiquitous technology now and (inaudible) to display in folks and if it doesn’t talk back then we think it’s broken. So I think, it’s frankly a clear trend and we have multitude of technologies that are film-based, high precision conductors that address the next generation into that market.
And the third one I’ll highlight here, I want to point out somewhat Brad said, this is free of a pipeline of products that we have in the laboratories right now. It is one that Inge mentioned Quantum Dot Enhancement Film. It’s a very exciting technology where we actually in case quantum dot materials into a 3M air barrier films. We hit it with a blue LED light and enables an LCD color saturation to perform to levels of OLED materials.
So it’s really a game breaking and we’re very excited about. We have one product in 2013, we’ll fully commercialize this in 2014. So we’re looking at just those three products alone. We’re estimating more than $100 million of growth in 2014. These are platforms. These are not product. These are platforms that will have extendibility for several generation. So we expect multiple years of growth out of these three exciting areas. And again there is others that I would point out as well.
Now let me turn my attention to energy, just to talk a little bit about this space. This is little bit different. We have much more cohesive strategy in position in electronics today. We have more niche-oriented position in energy, strong businesses by the way but more fragmented against the whole energy backdrop. We’re growing $45 billion addressable market and we want to use our strong niche positions to identify new differentiated product and systems and we’re working to built new products here.
One of the differences on the bottom that you can see is the adoption cycle. The electronic adoption cycles can be in quarter and years but the energy adoption cycles will take longer than that. So we have to have a little bit of time and patience story as we build out next generation platform for energy for this company.
We have four positions, we start from. First one, very strong Heartland Division electrical markets. It’s as 40-plus year old division maybe which has incredibly relevant positions with utility, energy-related OEMs and maintenance to repair organization as well.
Renewable energy is somewhat newer division within the last five or six years. Two major position there, one is the materials for solar wind applications and then also our energy conservation area where window films are principal contributor there which helps to provide energy conservation in building the car.
Electronic markets and materials is you saw that on energy side and on the electronic side, you won’t expect to see it here. But actually the four chemical platform that EMMD has a responsibility for, has tremendous crossover between electronics and energy related market. We have leading positions and know that fluids have a lot of applications that fix replacement in other areas where energy and global warming potential are important.
And then lastly communications market, I talked about this being a bit of a crossover area. We have three passive areas wireline access, wireless access and premises components that we currently provide to the industry, increasingly we move towards fiber and wireless application. So how do we expand our relevance here.
We got three platforms, I want to highlight as well. One again Inge highlighted was grid automation. And this is very important for us, grid automation, there is a high desire storing in Europe. We are spreading rapidly throughout the world to give more awareness on what's going on with the grid.
When you get into things like what happened here with hurricane or super storm sandy, the utilities don’t even really know what's going on because there is no sanctification or intelligence on the grid. So we have a desire to increasingly deal with that and we have products and materials that are going into that grid that can provide that sanctification.
Horizon 1 is very simple sensored cable accessories but Horizon 2, you see the ability now with our positions, that a little bit what Frank describe in the PSS area that is we start to build on our footprint and add other things such as sensor which are electronic solutions as fundamental capability and then communication so that you can get the information out on ground. So it’s a very holistic strategy, won’t play out in a quarter but it’s been thoughtful on the way we’re going about it today.
Second platform we want to build out and prioritize as one you’ve heard about in the past is the vast composite conductor. I’m going to tell you that, that has been just a consistent growing steady business as we have predicted, it would be a decade ago. It meets our need as a material solution of high-end capacity current conductor that just simply meets our need in the world for increased capacity where you can’t get permitting or put in other power-lines. So you get that and increased capacity without the need to take down our pole.
That’s a very important thing today in his world because getting the permit through that are quite hard. So that said, the business grown and right now by next year, we’ll fill the capacity we have for that. And lastly, I mentioned that our floor chemicals, trade named Novec fluids. This is magic material. It has so many capabilities, used across so many industries, each transfer fluids cleaning and coding in semiconductor extinguishing agent and data centers, SF6 replacements which I have mentioned.
It’s a fantastic material. We just expand a capacity in our plants and that also continues to go excessively well. So the energy space, these three alone and again is a little bit more of a time and patience through but $40 million of additional sales will happen in 2014 on these three platforms alone.
And one of the things of course we do see on the energy side is much stickier sales. These sales once you get them, they continue wants for decade. I mean, one of our biggest product lines in our electrical markets materials is electrical tapes and items that have been around for many decades. But we do continue to improve them but they have incredible relevance for many years to come.
So how we going to take these market-leading positions we have today and build on and start to take advantage of the fact that we’re together and we go after these market in a more holistic fashion and it is innovation. We are going to have to use innovation. We’ll be a rich user of the company's platform in order to develop unique and differentiated solutions for our market.
And we recognize the fact that each of our markets those have some unique and differentiated characteristic. They talked about electronics that they are very fast clock cycle and we have to have an organization that can move at that speed, energy-related little slower but also regulated markets. We have to have an organization that knows how to deal in a regulated environment. Unfortunately 3M, as those skill set so we can go and play in both of those areas very effectively.
But innovation is one of the cornerstone that how we’re going to be successful. Electronics and energy-related companies are both technology enabled market. They really -- they quest new technology that's how they differentiate the product or meet next generation needs. And so we’ll be pulling a significantly on the 3M periodic table to address next generation solutions.
Let me give you a few areas of highlight and focus for us in all three segments. First of all in the electronics world and you can see we pull a material set eight of the periodic tables to drive increased functionality in areas such as semiconductor material. Semiconductor materials are of course quite technically rich. They need other materials. We have existing footprint that we build off in customer relationships today. Display material, display materials are probably are biggest existing business. Our confidence and capability within display stack is quite extensive.
But we need to be doing is developing next second third-generation, now is to protect that position but to build beyond that. So I think there is very little question that displays ubiquitous solution for transferring information for many years to come.
Device interface, increasingly as I mentioned, the ability to touch something get a response is very important. We have generations of solutions that range from small displays to quite large and those are becoming the big growth area for us.
And finally wearable, we don’t know exactly, we’re working on wearable electronics with many companies. We don't exactly know what the first big hit is going to in wearable. It doesn't matter necessarily.
We have to play with all of them. We will be present with the one that happens. But once when we know about wearable, it is going need to be playable, flexible, spin, capable, feasible. All the elements of materials that we have the capabilities to do, that we are able to do that.
On the energy side, equally, we pulled from the innovation engine that we have in this company around three years of principle. One is Green Building. When you say Green Building, you think of systems that kind of control the building and that’s true and I mean that those exist. When, I’m talking about from a 3M players materials that the system were out there talking to. So, for example, window films have increased functionality and other systems in the building where materials were actually making those changes to happen with the facility.
We think that’s a big area of emphasis. Energy infrastructure, I talked about and then high energy density materials. A very big trend and desire that with many of our customers and we are working on solution for next generation high energy density materials. And then lastly in the smart infrastructure world that Frank talked about played well, we have a similar play around our incredible position in electrical markets division. Connected systems, embedded systems and smart grids were all things that are underway today. They are pervasive. They will be building to the next level of decade and we intent to be part of that as well.
So to summarize, the electronics and energy business group is currently $5.4 billion and is still playing in a very big space. We have tremendous opportunity for penetration. Now that we’ve had a chance to analyze, get our organizations instead to this market and kind of get the rhythm of what we have to do. I think we have that now.
We are executing some portfolio management actions and that’s necessarily and that’s okay. We want to -- off course don’t want them to be a drag on the company and we will continue to do until we are not a drag on the company. Technology, I talked about very extensively, so I won’t do that more. But that is what customers want from us. That’s when they call us, that’s what they want, what we got in here, what are you going to do next?
We intend to become the solutions later for materials and electronics. And again build that strong foothold for our energy business, which will build for many years to come. We have a proven capability. We’ve proven the ability to managing these areas of manufacturing, technology and business standpoint, not to mention our global reach. So we will continue to leverage that very extensively in 2014 and beyond. So thank you very much.
Now, I’d like to introduce Mike Vale.
Good afternoon. It’s a real pleasure to come up and talk to you about the consumer business group today. I’m going to talk a little bit about the business and the marketplace that we plan, some of the strategic imperatives that we face within this business as well as how we are fundamentally taking the technology of the company in our brand right after the global opportunity in front of us, particularly international. This is a business that really drives all aspects of the 3M vision into retail markets globally.
So when you look at about on our products and our brand, we are in every market, we are in every company, we are in every home, we are in every life. And we do this by effectively driving the strategic goal that this business has. The company affectively is extending industrial technology into retail markets globally. While executing what we see as our consumer mission of simplifying life, enhancing lifestyles for our global consumers wherever they may be, in the office, at home, at work, at play at whatever stage of life they may have.
This is a business that has driven stable and effective growth over a number of years in various economic environments. Typically growing at 1.5 to 2 times the market that we are in and effectively leveraging that growth to the bottom line and expanding already industry-leading operating margin. We are diversified from a portfolio standpoint with four operating division across multiple channels. And from a geographic standpoint with a tremendous opportunity to continue to drive our penetration into developing markets globally.
We compete in markets that are large, that are global, that are stable and they are growing. And you can come to this conclusion, whether you look at it from a macro economic perspective at an area level, or looking at different consumer spending segments, size, the growth rates of those segments or even the overall penetration of our product in the addressable markets that we’ve heard and trying to create new consumer habits around the world. This is a very attractive market space for us to be in.
We fundamentally drive a retail model, but a retail model that is tailored towards the strength of 3M, which means we lead with technology and the technology platforms that you've seen in the various presentations this afternoon to create category defining brand that we then take across various channels to be wherever the consumer is shopping and/or buying.
This is where we would call the heritage of the consumer approach within 3M over the last 10 to 15 years. So we are fundamentally now expanding the competency and the capability of this model to encompass a broader spectrum, starting with the emergence of consumer insight around the worth of a product and the why of the solution that the consumer needs in the front end of our innovation process and going to the other side which is shopper insights and advanced analytics around the where and how of how a shopper will buy.
The model is very adaptable and flexible which is good, because we operate in a very dynamic marketplace. There are three major megatrends that are fundamentally impacting the consumer. As we go counter clockwise from the top left to this chart, the phase of the consumers is changing in front of us, whether you are talking about age demographics or culture, the middle class incomes of our consumers are contracting or expanding depending on where you are in the world today. And technology is fundamentally powering the consumers to learn, shop, buy, and share in the marketplace in a different way.
Now where the consumer goes is we go counter clockwise around this chart. Retail tends to follow or try to adapt to head up. And so what we see now is a very dynamic picture emerging in the retail markets where, why is the cross channels are blowing, different formats are coming into play, the digital in-store experience and the always on-consumer shopping habit is becoming more prevalent.
And the explosion of advanced analytics and big data and retail market is becoming much stronger thing. And then you have the -- where brands, where consumer branded companies go an adapt within this dynamic phase, becoming more values-based, building brands, becoming more digital content marketing, getting closer to their customers and really focusing on the core portfolio that they are driving.
The actions that we have taken over the last -- I would say two to three years within the group, I've enabled us to continue to drive that profitable growth before and this were actions that are balanced across a range of either growth and/or operational excellence. So when you look at portfolio management where we've consolidated the group from seven offering divisions on the four over the last 18 months, including a divestiture that Inge mentioned earlier in the presentation as well as acquisition.
The GPI acquisition in France, which gave us the fundamental foothold into the DIY space in Western Europe, building out new competencies and designs with insights, getting more customer centric by structure as well as moving into different channels where the consumer is shopping.
We are fundamentally focused on driving the fixed core corporate strategies, aligned to our imperatives for the consumer business group, which were fundamentally around bringing new users into the space in both developed and developing markets, driving consumption.
Our strategic plan priorities are focused around building out competencies that will drive growth through technology application as a market, brand experience or analytics, as well as localizing aspects of our business model into key geographic subsidiaries around the world.
Fundamental to our business is the application of technology in this space. So we are a technology-based company and we have the tremendous advantage of having access to the technology platforms that you have seen showcased here today in the other businesses.
We are driving towards a balance of new product vitality, increasing from 30% to 34% over the course of next five years, balancing out the need to continue to bring innovation impactfully into retail markets but also recognizing the fact that a lot of our platforms will take years to drive global penetration. So we are fundamentally increasing our capacity to leverage the core technology platform across the company over the course of next year.
When you look at some of the products that we are bringing to market now in the last six to 12 months, you start to see the application of some of the extension of these technologies into retail. So when you look at products such as the Scotch blue tape which is a combination of our micro-replication technology, as well as film technology from other parts of the company to extend a platform that was predominantly or interior design to the exterior paint market or you see the command franchise that continues to expand using optically clear adhesive and new adhesive materials to go from what was again an interior to an exterior type application or the Nexcare sensitive skin line where we are adapting and extending silicon adhesive technology for gentle skin applications in the Consumer Health Care market, a lot of our product lines and platforms are coming out are fundamentally built around extending technology that has been developed in industrial markets across the company.
But in retail, it’s the technology that we bring is only one fact of a success story. Over the last three to four years we have also been building out a design competency to augment our technology and innovation story.
So in retail it’s not enough to have the functionality of the product, you have to have a design experience that goes beyond just the packaging of the product it’s aesthetic, it’s brand experience, it’s in-store experience and this was a competency that I would say was not there four years within our business groups.
Four years ago, this phase that you see here, which is our design lab in St. Paul was not there, we had maybe four people globally assigned to design, today we have over 50 people on design internally in Milan, in St. Paul, in Shanghai and in Tokyo.
So this is again a competency that’s overlaying and amplifying our technology story, it’s changing the way we are connecting with our consumers and changing the dialogue we have with our channel partner.
You take that design competency now and you start to overlay an inside driven approach that goes deeper into the what and the why of the consumer needs and you start to build and even stronger story and an even stronger impact into the consumer retail market.
Our issue is not a lack of technology, as you have seen this afternoon. There is a tremendous amount of technology within 3M that the consumer group can fundamentally tap into and extend into retail markets.
Our challenge and our opportunity is the ability to harness and target that technology in a very impactful ways into the marketplace in both developed and developing markets. And this is where we continue to build out this competency on deep consumer insights as we have built out competency on design is going to help us amplify the power of technology, because when you get design, when you get deep consume insight, augmented with great design on top of a functional technologically differentiated performance product, you really win with the consumer.
And when you connect that product with a brand that consumers know and trust, you get a truly powerful story in the marketplace globally and we have strong brand in the portfolio of brand that is not only category defining in many cases they are category creating, okay.
These are the brands that have become staples or part of our consumer’s daily lives, many of them have been here for many, many decades and we are focused on continuing to evolve the brand story and the brand connection with consumers globally as becoming again part of their daily lives.
So when you look at a brand like Post-it that has been here for 30 to 40 years and the evolution of what’s going on in the office market space and the generational change is occurring, we focused now and we push to continue to make Post-it more relevant to the new millennial generation that is coming into the workforce now, starting first with introducing ourselves in areas and venues that these consumers will frequent, such as the do something award that are sponsored by VH1 then moving towards targeted vertical marketing program in the educational market, adding a component of caused based marketing that is resonates both with the consumer, in this case the millennial, as well as it’s very, very authentic to what the brand stands for, because in many cases it’s not just about the functional nature of the product, it’s what the brand stands for and is authentic to the brand.
And then moving on to different habits that these new consumers are coming into play, so here you see an example of Post-it becoming more relevant to the increasingly digital tablets within the workplace. We see the Post-it brand, it’s being the brand that is going to expand the analogue collaborative face-to-face environment with new consumer needs of being able to digitize, manage and share, this analog collaboration in a very effective and efficient way.
But retail is different around the world and the consumer in different places around the world. So when we look at our opportunity international, you see that we have very large opportunities predominantly in the developing markets and we see this whenever we look internally at our own percentage of the overall 3M portfolio across the world or we look at it externally at the level of household penetration in middle class, households across the world.
We are fundamentally focused on driving positions in developing economies. We have established positions in a number of countries as you can see here, as well as a focus on driving growth rates that are going to approach two to three times the level of market growth in developing markets predominantly in these high population clusters in Asia.
Our model is flexible and effective and adaptable to wherever the consumer is. So when you look at our brands and our products, what I will say is that we actually target universal consume needs.
The need to clean and protect the household is a global consumer habit that looks very different wherever you are in the world. So our goal and our challenge is to adapt the portfolio to the local needs of a consumer but still fundamentally drive the technological differentiation and brand cohesiveness of the story across the world.
When you look at the portfolio, we also drive a model that is flexible across different maturity levels of the channel. So when you look at retail, retail looks very different across the world, we have businesses that are fragmented very traditional models. We have a larger number of countries that are in modern concentrated position and we have number of countries that are moving forward with a very big push into post modern online position.
Each one of these segment of retail required different operating models, different success factors, and our model and our competencies are flexible across all over. So information, I hope what I have been able to show you in the short time that I have been up here, is this is a very powerful franchise for 3M company that is executing a strategic role of effectively extending technology from industrial spaces into retail markets globally, consistently delivering industry-leading metrics, lead by innovative technology, world class technology category of funding brands that continues to drive 3M vision into every company, every home, every life globally.
Thank you very much. And I would like to introduce the Head of our International Operations H.C. Shin.
Good afternoon audience. My name is H.C. Shin and I am heading Austrian international operations. I share with you our business, exciting business, I have to say, that’s happening, I took over some landscapes from different parts of the world and we’ll spend some time with 3M international business model and also some key growth strategy based upon our corporate strategies laid out by Inge Thulin.
I am going to show you some examples of how these strategies are executed in different parts of the world. So here is our kind of a universe that I see. We have sizable business $20 billion in sales, a very profitable 23% operating income. We are operating at 73 subsidiaries within its global footprint and capabilities to execute locally, that’s a unique 3M comparative or managed and that is the growth platform for 3M.
We have laboratories in 35 different countries. We keep adding our technical capabilities in different parts of the world. But right now we have over 4,000 people in R&D headcount. Recently you might have seen the announcement, they separated greater China area from Asia-Pacific to create kind of standalone area to bring more focus to this strategically very important region of the world.
3M is very recognized for its brand and reputation everywhere you go in the world. We are recognized as one of the greatest place to work, Number one by the way in Austria and number four in Brazil. We are ranked as the best place to work in the entire west Europe.
We are also very recognized for social and environmental responsibility. 3M has been traditionally a strong advocate for sustainability in virtually every country we operate. We have been selected the best innovator in the whole country of Brazil for the last two consecutives years.
So here is our five-year view of the world, different parts of the world. Despite some short-term slowness in China, we still think China is the biggest opportunity for 3M. We like the [awareness] as it continues to gain momentum. This is some pretty robust local currency growth coming from Japan.
We think India is a long-term opportunity despite some short term issues they have as a country. So we are just investing accordingly. A lot of our colleagues talked about Southeast Asia region for the right reason. We also think Southeast Asia region is one of the brightest growth opportunities for 3M.
We liked West Europe being more stabilized. In fact, we see our organic volume growing -- actually accelerating in West Europe for the last three or four quarters. Latin America, we have a very strong business. It remains a very attractive content for 3M.
There are some pockets of areas like Venezuela, Argentina. Recently, Mexico is going through some kind of tough time that’s by and large natural resource based economy. I strongly request people, consumers, we like this continent and we continue to invest in Latin America. When it comes to Central East Europe and Middle East Africa, we are kind of picking and choosing different areas to invest, obviously a country like Turkey or Russia continuing to be a good opportunity.
I don’t -- I’ll talk about 3M’s approach around in Africa. It is actually becoming a high sizable and pretty exciting growth opportunity for 3M. So because of our $26 billion in size by 2017, obviously from a geography mix point of view, yes, there are some good Asia business, Greater China, West Europe, but I would like to point your attention to our business in Latin American and Canada, actually, representing 19% of our sales.
So this well balanced geographic mix actually is what we’re really proud of. If you look at five years down the road, from a growth opportunity point of view, our greater China and Latin America. If you combined tool, they will generate $3.2 million versus growth opportunity.
So if you think about $6 billion additional growth from 3M international, Greater China and Latin America represents more than half of our five-year growth coming from those two areas. However, Southeast Asia region will generate $600 million of growth and Middle East and Africa of $400 million.
So those are the areas that we see very good growth opportunity. So let’s talk about our business model for expansion. Actually, our Chairman showed this kind of a 3M’s business model, the fact that we have products and solutions that can cater to virtually every stage of economic development whether it’s developing or developed, infrastructure manufacturing all the way down to healthcare and consumer.
So keep this model in mind, when you look at the next chart. So how they use this model actually is the way that we convert our local megatrend to business opportunity. So there are many local megatrends that are shaping the world today.
I will just take one example. Our organization is clearly the megatrend everywhere you go. The creation or emergence of very large cities like Mumbai, Ho Chi Min city, Shanghai or [Chengdu] just to name a few. One of the issues that these mega cities are dealing with is try to congestion obviously.
In the major air pollution and in fact the air quality in Beijing and now Shanghai is getting a fair share of air pollution and virtually every cities particularly in Asia pacific is becoming a major health problem. It is not just the health hazard for the public living in that area.
So 3M recognized this megatrend, 3M obviously tapped into the opportunity. In China we developed locally the respirator to protect human health in China using local raw material that is sourced in China and prized locally, so that we can compete in the open market. And we are selling this respirator almost ubiquitously.
We are selling in drug store, we are selling in supermarket. We are also selling it over the web in alibaba.com. So that’s basically our 3M business model, is in place in every part of the world.
If you look at five years down the road, you think about half of our business is still coming from developing economy, obviously growing faster but the other half, almost 6% of it still comes from developed economies. So for us, it’s not just either or it’s an end. We should win in developing markets. We should win in developed markets. That’s why we have a distinct playbook that can work both in developing and developed economy.
So we have been kind of holding on this model for years, so it’s becoming literally a playbook in any certain geography. In developing market, typically they localized our supply chain and R&D capability. We expand our market coverage, sales coverage. We also continue to invest in brand in developing markets. It is very-very important that 3M invest in brand in developing economy and then the ride the wave of economic development of the particular country. It has been one of the cornerstone of our strategy.
In developed markets, we clearly have many opportunities like global key accounts strategy or disruptive technology innovation, or the healthcare opportunity in developed markets. So we have those distinct strategies both in developing and developed markets.
I will just take one example, developed market -- in fact three examples. Europe and Japan, we clearly think Europe is an opportunity -- in fact, a growth opportunity. If you look at Europe in general, is a big market for 3M. It still represents 25% of global GDP, lots and lots of great customer base, highly educated consumer base.
So while Europe was going through some slow period, 3M again executed a distinct slow growth market strategy. You think it’s on playbook. How to do it? Portfolio prioritization -- we cannot hire people, so we move people around from strategically view to a Heartland division or Push Forward. We moved 500 people last year without increasing a single headcount in West Europe, from not so performing business to Push Forward division.
Second strategy is to focus on uniquely European innovation -- like smart city, like smart grid or sustainability. There are lots of areas that are growing double digit in West Europe. We just don’t look for those hard enough, that’s already found out. So those are the ones that we are doing in terms of productivity and growth. At the same time, I will show you the chart. It is a major event in our supply chain strategy in West Europe.
We combined all of our supply chain into Switzerland to create operational and non-operational efficiency. I’m going to tell you little more bit in detail relative to the strategy. So our organic growth in West Europe actually is accelerating. In Q3, we saw a positive 2.8%, this momentum will continue. I see no reason why this momentum will increase not decrease going forward, including this quarter by the way.
Japan, we were able to size our business over $2 billion very profitable business. We have a great capability in manufacturing in research and development. If you look at post-tsunami Japan as an economic entity, it provides some very unique opportunity for company like 3M. If you look at the reconstruction effort, recovery effort in northeast regions of Japan, which was affected by tsunami, there are lot of opportunities that we are working with local authority.
If you look at energy saving products that we have, it’s not a product. It’s a solution that we have energy saving solution. It’s a great opportunity for Japan. We are about 30% of National Grid, while power generation was made to stopped because of the nuclear power plant, all stopped by. That’s about 30% of power generation capacity in Japan. Anything related to energy savings is a great opportunity for us. Also ageing population, ageing society in Japan provides us a very unique healthcare type opportunity. So we can grow in developed markets like Japan and West Europe.
So, I’m going to talk about our key strategy, basically follow our corporate strategy. First one is prioritization. We have been doing this in international for a number of years. We have strengthened Heartland division, that’s a must. We will also take action on Strategic Review divisions, move people around and improve our profitability. Probably lesser know part of portfolio prioritization is how much we are focused on Push Forward division to grow it faster? In fact, we have a goal to grow Push Forward divisions at least twice as fast as the rest of portfolio, so that is our goal in international.
There are a number of Push Forward divisions, but mostly these Push Forward divisions are geared towards tapping into local opportunity. So more domestic type opportunity, like health care, domestic infrastructure, like domestic retail, consumer type opportunity, domestic securities, personal safety, there are lots of these kind of a uniquely domestic opportunities that we move a lot of resources to grow faster in these stable and growing, and profitable domestic opportunities that is our key strategy when it comes to portfolio contribution.
The other cornerstone of our strategy is to continue to improve our productivity and commercialization capability in international. Right now, we are running at 35% NPVI or new product vitality index. We have a goal to bring it up to 38% by 2017. Out of $26 million in the year of 2017, $10 billion will come from new products. The key to this is to generate low cost innovation. So, not that we cannot rely on anymore, but it is imperative that being a 65% of revenue, we need to bring local innovation, not just innovation but game changing innovation, new to the world, change to the basis or competition. High innovation is what we are looking for in every region of the world.
For example in West Europe, we developed, in Europe not in the United States but in Europe for European customers, biodegradable surgical drapes. Huge hit because that what’s needed in West Europe. In Asia Pacific, particularly in China, we developed multi-layer acoustics solutions that dramatically reduce the noise inside the vehicle for Chinese automotive OEMs. So these types of locally developed game changing innovations will be the cornerstone of our R&D strategy in international going forward.
We do that by continuing to invest. We will invest 6% of sales in R&D. That’s the picture of recently opened our customer innovation center in India and we continue to add this capability around the world. The other thing is we keep moving people around, why don’t we share the resources accordingly to continue to develop our capability.
Another cornerstone of our strategy is what Inge showed already. This has to do about operationalizing our corporate strategy called regional sales efficiency. Instead of going country-by-country when it comes to supply chain by creating a regional criticalness, we can be a lot more effective and efficient. What do I mean by criticalness, there are many elements, engineering capability, manufacturing capability, sourcing the entire spectrum of supply chain capability can be a lot better manage it, if we take a regional approach.
So we have embarked on this journey for several years now, we have established three centers of excellence as Inge pointed out, one is Switzerland, the next one in Singapore, next one in Panama City.
How this along all three is actually our West Europe supply chain center of excellence. This is up and running. This is in operation already. So this is not just west, it is actually EMEA regional transport, Europe, Middle East and Africa. So entire European, Middle East and African supply chain is managed out of one location in this case, our Switzerland location. It connects 63 different plants around these vast geographical areas.
We already moved, relocated, by the way 230 people to be in operation. One of the key enablers today is our ERP system, with our robust ERP system like SAP, which we have implemented in part of our operation here in center of excellence we just cannot create this type of efficiency. So one thing I have to share with you is how powerful the ERP system is in implementing this regional system self-efficiency critical mass model. So it enables significant savings in cost working capital and tax rate as well.
I will show you several areas that we operating as to how old our strategies are executed. First of all, China, we have a sizable operation in China. We have over $4 billion business in China. Now we have planned to bring it up to somewhere between $5.5 billion to $6 billion in the several years. We have R&D centers. We have customer centers. We have seven customer centers in Greater China area. We have many plants. So we have a sizable presence already in China area.
Now, our China plant goes for taking into the next level. So we have three distinct strategies to make it happen. Number one, a lot of our China business has been relying somewhat on specification expert type business and we continue to focus on that at the same time, even like China as a country especially after third planner meeting, it’s quite obvious that China is going more towards domestic driven economy. In fact it is a stated goal, right. So we are trying to tag into those domestic type opportunity to balance our strong specification business or export business with domestic, so focusing more on Health Care Retail or Personal Safety that’s our strategy number one.
Strategy number two, we have very strong in eastern seaboard area in Southern China, that people call Pearl Harbor Delta area. We have major opportunity in west inland, particularly Sichuan area and then Northeast area. So we are investing a lot more sales present in those two areas and we are setting a branch and we are bringing more of higher power frankly into those regions, that’s our strategy number two.
Strategy number three, we want China to be self sufficient in their R&D capabilities, so we truly develop products like the one that I describe using local design, local raw material, locally priced and compete head on in open market in China, still make money by the way. So that is our strategy number three. With those three strategies, we think we have a detailed plan to take China up to $6 billion.
We -- it is not just plan it is happening. So if you look at our R&D headcount, it used to run about 300, now we keep it up to almost 700 people. About half of these R&D individuals in China carry either master degree or Ph.D. about 49% of our 700 people carry either master or Ph.D. It’s no wonder that our NPVIs in China is already running at 43%, so very, very innovative, we are so excited about our R&D capability in China going forward.
Latin America, we have a very good business, a $3 billion business in Latin America, by profitable very strong brand awareness, brand recognition, great sales and marketing security, one area that we really want into strength was technical area. So for the last three or four years we have really strengthening and deepening up our technical capability in Latin America. We are investing in customer technical center. We are investing in R&D in country like Brazil, Mexico, Chile and Columbia.
In fact I saw these are generic customer center, although we also invest in specific industry customer center, in fact in Northern Chile, a barren land of mining site called Antofagasta in Northern Chile, recently opened a mining customer technical center. These are specifically dedicated to the mining industry to cater to mining customers need right there where mining is taking place. So that’s another cornerstone almost through the Latin America is to continue to strengthen our technical capability in that area.
We like south East Asia. A lot of foreign direct investment is basically throwing in, this area is becoming kind of a contract manufacturing category of the world, a lot of companies were thinking about China now is moving to areas like Vietnam, Bangladesh, Myanmar, just name a few.
We have a good business here, more than a $1 billion business. We can double the business here in Southeast Asia region in the next few years. We have identified manufacturing migration, natural resources like Mining and Oil & Gas, as well as emerging malicious consumer as a key growth driver and we have a good presence already in this area. We will make little bit more investment. We will add some more human capability. We see no reason why we cannot achieve $2 billion in this area.
Last but not the least is our Middle East and Africa. It used to be smaller business but right now we have a $600 million business. We have a $1 billion goal by 2017. We formed four distinct teams, one team really taking care of Saudi Arabia, the other team Gulf -- 3M Gulf and then separate team for South Africa and recently we formed 3M Africa.
We are investing heavily in Africa. It’s not the lot of people that we are investing. With about 20 people we can accomplish lot of project in this frontier continent. We are pretty excited about our opportunity. We certainly had Africa meeting right here in northern Africa, I really like what I saw, a lots of growth opportunity for 3M going forward. So this is another growth opportunity, major growth opportunity, still relatively small, but in five, 10 years time this will be a major opportunity for 3M.
So in the nutshell, that’s how we deal business in international. We think we are executing on proven business model for success in every country that we are operating. Innovation and local commercialization continues to be a key enabler and our diverse and high performing local team and leadership are pretty excited about what we can do together in international.
So, with that, thanks very much. I’ll introduce David Meline, our Senior VP and CFO. Thank you very much.
Okay. Thank you very much H.C. All right. So I am going to talk about financial issues here today. So you had a very good update this afternoon on the business. I think as you can see we are really excited about the opportunities that we have got and the momentum of the business right now certainly very good and we expect that’s going to continue here and improve going forward. So today we are also going to as part of this review and as you saw this morning, we are really formalizing today a shift in terms of an enhance capital structure strategy for 3M.
So if you think about this, this compete the -- complete the process that we started when Inge became CEO, which was a process where what we did as we look at what was working well in the company and what we thought we could do to make the company better.
So last year when we had our presentation in November, we really laid out what were we doing in terms of key strategies and focus for the operating business and today we compliment that then with a view as to what’s the right financial policy for 3M going forward.
We started thinking about and taking these then we starting taking the actions during the year here in 2013, which were in support of these enhanced capital structure strategy. We thought today would be the right forum to provide a more complete update and framing of how we are thinking about the business in this area going forward. So in short, our enhanced capital structure strategy is really reflection of the confidence in the health of our business going forward.
If we turn then to the headlines shown here, which I think capture the key strategies from my perspective. First of all, managing towards an enhanced capital structure strategy, financed with additional low-cost debt.
What we will do there? We are going to leverage the balance sheet to grow the business and our first and foremost priority in this area continues to be around organic growth. We will continue to invest strongly in the business via capital investment in R&D over the planning period.
We will also be investing to grow the business with additional acquisition which we range for the five-year period in the $5 billion to $10 billion range and we have indicated today that we believe that it’s reasonable to consider acquisitions that could be in the multi-billion dollar range.
We will also increase cash return to shareholders. As we have announced this morning we will be increasing our dividend in the first quarter of 2014 by 35% and we are increasing our total share buyback program for the period with the expected total repurchases of $17 billion to $22 billion during the period through 2017 versus the prior guidance of $7.5 billion to $15 billion.
And then finally, we expect double-digit EPS growth in 2014 and we are on track here to deliver on the 2013 to ’17 financial objectives that we laid out last year. I am going to do this in two pieces. First, I am going to cover our thinking around capital structure and capital allocation, followed by a review of our 2014 earnings outlook.
So turning to page -- slide five here, what really the question as I have said already said, what is worth well for 3M and what we are going to continue. I mean, certainly the view that we have as a strong capital structure and steady cash flow is essential to support our diverse and global business.
This enables us to invest in the business though all points of the business cycle and we intend to maintain that and maintain flexibility to be able to also invest in strategic opportunities as they arise while returning cash to shareholders.
Here is the list of the strategic actions that we've been taking to strengthen the company and we will continue to do to drive long-term shareholder value. So first, active portfolio prioritization, we are really using this to drive all elements as you’ve heard today to how we allocate resources against the best opportunities and certainly we use this in terms of our capital investment in the business, which is a very important part of the model.
So if you look we've averaged in recent years about 5% of revenue. We think that will continue. We think that’s the right level of investment for the company and really this is all around maintaining competitive advantage as we have many of our technology capabilities are embedded in our process technology and those are best deployed when we have the capabilities internal for the company with vertically integrated supply chain.
So we will continue on this path and really we think we do a good job in this area which is reflected by the ongoing return of invested capital of around 20% which will continue here in 2014.
Secondly, strategic investments which are improving the strength of the business model, so this goes to R&D. We've talked about we continue to target a 6% R&D investment level as a percent of revenue by the end of the period.
And here this goes in the category what's been working well, well, clearly for us we have seen as we have had a rising level of new product vitality as measured by our NPVI Index which is the percent of our sales from products launched within the last five years. As we've seen that rise over recent years so this year will be at 33%.
This is clearly been a powerful contributor to superior and sustainable profitability, and this has worked well and will continue to invest in this area. We see our index here increasing by the end of 2017 we expected to be around 37%.
And in terms of what we can do better, we concluded that we have an opportunity here to invest and target incremental investment towards new products for new markets, which we believe overtime will continue to help us to accelerate our organic growth capability hence the increase that we are targeting build for to move forward 6% of revenue.
The next area of internal investment and strategic investment for the company is around our ERP system, we are now in year three of this project of the seven-year project which we expect will yield a $0.5 billion annually of profit improvement once fully deployed and a one-time benefit of $0.5 billion in working capital.
We are managing the risk of this deployment through stage implementation as we roll this out country-by-country and as of now we've done six deployments with more scheduled here in 2014.
In October we launched the ERP system in Canada which was by far the broadest and biggest footprint thus far from the company. In general, the deployments today have been going very well and we are very much on plan and we are moving here to a single integrated IT platform, which is obviously a major undertaking for the company.
We expect challenges along the way, which we are using to then learn from and improve our capabilities to deploy. We are also starting to see even at this early stage the number of benefits in this -- from the deployment, this includes our ability to get operational data on a real-time basis that we have not had available to us in the past.
We have also demonstrated now with these deployments that we the ability to operate in a single instant environment across the enterprise and we've also done this, we've done multiple deployment concurrently, so we validated that we have the ability to proceed on that basis.
So we are continuing now with preparations for starting to launch in the U.S. starting in 2015 and while it is very challenging we are very pleased with the progress to date and we believe we’ll benefit strongly from this effort.
You’ve heard today from a couple of the presenters including now most recently H.C. around our supply chain investment. And this has really enabled by standardizing business processes which are embedded in our ERP rollout and a key enabler to improve operational efficiency.
So we have established the Swiss center of excellence as well as the one in Panama and Singapore and what these centers enable us to do is centralize order flow, broad manufacturing efficiency, enhanced fulfillment capability and also improve raw material sourcing. So the benefits we can see here are reducing our costs to serve our market, improving our working capital capability and we expect this will also enable us to reduce our tax rate by 27% by 2007.
Building our capability in the area of acquisition. So today we are reconfirming our intensive deployed substantial capital towards acquisition as an enabler for growth for 3M. In my view, there are number of capabilities that are necessary for a company including 3M to really ensure we generate returns through time that meet our own expectations for our businesses and I have listed them here.
So the first one is an active portfolio prioritization process that enables us to really define sharply where we should be acquiring and also where we should be divesting. Secondly, we’ve added the corporate top-down deal pipeline process to augment an existing bottoms-up process. So this enables us to have the effective means to transact including potentially multibillion dollar size.
Thirdly, we've been building world-class organizational capability to integrate and also to disentangle businesses. So repeatable playbook businesses have the opportunity to have specialist to help them to supplement their efforts to integrate and we think this will be very effective and we've been using it as Brad mentioned on not only Ceradyne but some of the prior acquisitions.
Fourthly, driving standardized business processes. So the project we’re doing with the ERP system is the key enabler for us to be able to integrate and disentangle going forward. And then finally, I believe it’s very important for us to continue to earn the right to deploy capital in this area and one enabler to doing that is providing transparency and accountability to how we perform when we deploy that capital.
So we've been putting these capabilities in place as I believe they are essential for any company to create value for shareholders. This is then the updated chart I showed last year in November concerning the performance of acquisition that have been done since 2006. This represents $6 billion of acquired businesses which is about 85% of the total.
You can see our more recent deals starting from 2009, continue to perform very well and better than the earlier deal. Also Ceradyne is off to an excellent start using our integrated playbook. And then finally I would say while acquisitions will remain a complement to our core organic business model, we know reason why 3M can't be amongst the best in terms of capability in this area.
Returning cash to shareholders. In addition to continuing to invest in the business to grow the business profitably, we also have plenty of capability and we believe it's appropriate at this time to increase the return to shareholders as well by utilizing our balance sheet.
So we announced that 35% increase in our first quarter 2014 dividend payout to $85.05 per share this morning. This marks the 56th consecutive year of increased dividends and in fact this is the biggest percentage increase that we’ve done on our dividend since 1948. From a planning perspective, we have modeled increases in subsequent years to align the future earnings growth.
This increase reflects the confidence we have in the sustained performance of 3M in the future as well as our decision to deploy capital more aggressively. Complementing the dividend increase, we also plan to return $17 billion to $22 billion to shareholders via share repurchases during the 2013 to ‘17 period.
This includes about $5.25 billion of repurchases will be doing here in 2013, which is up from our most recent guidance of $4.5 billion to $5 billion. Our approach to share repurchase entailed an ongoing minimum repurchase threshold, which we've then adjust up or down depending on other sources and uses of cash as well as relative value.
Finally, reducing our total cost of capital. How we’re going to fund our plan. Recall, last year that we added this free cash flow conversion goal as one of our forward key metrics for the company, which reflects the importance of this goal in 3M’s business model. So we expect here to continue to deliver strong and consistent cash flow from operations.
Since 2008, we have converted 97% of net income into free cash flow. Going forward, we expect to see some conversion improvement including from reduced pension contribution which will add 6 to 8 percentage points annually starting in 2004. As a first step towards increasing our capital deployment this year in 2013, we drew down our U.S. cash position to a minimum and we also reactivated in our commercial paper program in 2013.
We also continued to deploy international cash. We’re obviously investing as we build out the business globally. We’re maximizing the intercompany dividends annually to the extent that this can be done tax efficiently. However, we do not presently have in our base plan consideration of U.S. tax reform which will result in rising cash overtime in our international subsidiary operation.
So this is going to put some pressure for us on return on invested capital as a result. To fund our revised capital deployment plan, we expect to increase net debt in U.S. going forward.
Turning back to our pensions and OPEB contribution, this is another change in our outlook, which I’ve referred to in 2013, which is the improved funded status of our pension plan which are now estimated to be 93% funded at year-end 2013. As a consequence of this improvement, we project additional funding to decline to $100 million to $200 million annually starting in 2014.
This frees up capital for other uses and is a significant decline compared to the over $7 billion contribution that we made during the past decade. So bringing it all together for 2014, we see here the total funds that we’ll have available for deployment will range from $13.5 billion to $16 billion.
This includes the net debt increase of $2 billion to $4 billion next year which we then show here the uses which are directed towards reinvestment in the business, returning cash to shareholders and reinvesting for an employee. So overall a very balanced and very solid plan which is more aggressive than in the past. This approach will continue through the planned period.
So turning now to our 2014 earnings outlook. So in terms of planning estimates, we are estimating GAAP EPS to be in the $7.30 to $7.55 range, which is the 9% to 13% earnings increase versus the midpoint of our current 2013 guidance, organic local currency growth of 3% to 6%. Foreign currency translation is expected to be neutral to a 1% headwind. We are estimating our tax rate of 28% to 29% during 2014. Free cash flow conversion of 90% to 100%. So, I will be walking through these elements.
Also note that we've not included the potential impact of acquisitions in these totals. So as and when those occur, we would be adjusting our outlook to reflect that. So here is a summary of our 2014 EPS roadmap. The point I would make here is 80% of our earnings growth we expect in 2014 will come from operations, with 20% coming from non-operating sources that being taxes, share repurchases and increased interest expense.
Taking each element then, looking at organic local currency growth. We expect $0.20 to $0.50 a share of EPS growth coming from the source, 3% to 6% organic local currency growth. This will be primarily volume as we expect selling prices to be up modestly in 2014. In terms of the growth by market, we expect developing markets to grow 6% to 10%, and developed markets to grow 2% to 4%. And all of this is based on an estimate for global industrial production in the range of 2% to 4% in 2014.
This then is breakdown of how we estimate growth by business group and geography in 2014. With regard to business groups, we expect industrial, consumer and safety and graphics to grow by 3% to 6%, in line with the company range. Healthcare will continue to perform very well, with a 4% to 7% growth rate expected. And electronics and energy, we expect to grow 2% to 6% next year.
You can see, we also expect growth in all regions of the world with Latin America, again leading the way with 8% to 11% growth, Asia Pacific at 3% to 8%, the U.S. in line with the company range of 3% to 6%, EMEA at 1% to 4%, including Western Europe continuing to grow with the range of 0% to 3%.
In terms of the foreign currency impact, we expect this year -- we expect headwind of upwards to $0.05 a share and this is increasingly driven by our developing market presence in countries such as Brazil, India and Thailand. The impact here we called is net of our hedging program where we hedged 50% of our exposures on a rolling basis to the extent of availability of hedge cover.
Raw materials, we expect will be accretive to earnings in the range of $0.05 to $0.15 per share. We are predicting that commodity prices will rise modestly, but be more than offset by our global sourcing program. In terms of our purchases, we purchased about $8 billion annually, which represents 25% of sales or half of our cost of goods. You can see here the major feed stocks or purchasing activities.
In terms of strategic investments, so we have two categories we list here and we are showing $0.10 to $0.20 per share level of investment and in 2014 that will be expensed. So the first category is investing in strategic long-term transformative projects. So this includes our R&D investment, as we push toward a step-by-step approach towards 6% of revenue, we are investing for new products and new markets. We will also have an increase next year as our ERP spending peaked in 2014, as we move towards a single integrated IT platform.
And then the other area of strategic investment for us is around driving operational efficiency. So this is looking at how we can take actions to improve our portfolio and improve our operations and this continues on an ongoing basis in the company. So inside of this area, you would find whenever we are taking actions to restructure to become more competitive as well as the cost of one-time initiative such as the European supply chain center of expertise that we talked about.
In this case, I would mention in the first quarter, we are now estimating in the category of operational efficiency to invest about $20 million to $30 million, or $0.02 to $0.03 a share. So this would be in addition to the incremental spending, we will have on R&D and ERP. And this would be an area where we’ve got some restructuring to do, primarily in Europe as well as the year-over-year cost increase over European supply chain centers.
Net productivity, we are estimating at $0.10 to $0.20 a share next year, so this is the impact on the company of our Lean manufacturing system as we continue to identify and operate more efficiently in the factories, the benefits we’ll reap from our supply chain centers of expertise, and this cost also we including here the cost of new product launches, factory startups and wage inflation.
In terms of retirement benefit expenses next year, we are expecting a positive year-over-year expense profile of $0.10 to $.20 a share in terms of expense reduction, which is really the impact of several things. One is the declining impact of prior period losses, which we amortized over a long period of time. The impact of the increased discount rate we’ve experienced in the year as well as the shift as we see the shift from a workforce, which has been. With the defined benefit plan, we increasingly are seeing the demographic shift towards defined contribution plans. We haven’t placed across the world.
This also includes the assumption. We expect a lower asset return assumption in 2014. This is in the U.S. We've been using in 2013 an 8% ROA. And these expenses that we’re quoting include the cost of our defined benefits pension plans, other post-retirement benefit plans in the healthcare area as well as the cost of our defined contribution plan. And we are expecting continued and further tailwinds in this area during the balance of the five-year plan period.
The effective tax rate for next year, we are forecasting at 28% to 29%, which will be a flat to $0.10 per share increase in our tax expense in 2014. If you look at this, basically what's going on here is our structural tax rate continues to be favorably impacted by the shift that we are experiencing through a more global business footprint, which is why we continue to believe we will land at a 27% by 2017. And then we have -- our annual tax rate is impacted by specific items such as legislation.
So we've included in our plan for next year, the assumption that the R&D tax credit will be renewed in the U.S. and will be available to us. But on a year-over-year basis, we had a double benefit last year from the R&D tax credit.
So, on a year-over-year basis that implies a 40 to 50 basis points increase in tax expense. And annual rate is also impacted by closing of tax audits and other one-time planning expense.
Share repurchase, in 2014 we expect will benefit earnings by $0.20 to $0.30 per share. As we expect our average diluted shares outstanding to decline by 3 to 4 percentage point. We're planning right now for $3 billion to $5 billion of gross share repurchases in 2014 or $2 billion to $4 billion net of reissuances.
As we increase the leverage on the balance sheet, we will see rising interest expense, we are showing here up to $0.05 per share of additional expense as we have an incremental debt balance of $2 billion to $4 billion. So coming back to the guidance, which I have gone through previously, so double-digit earnings growth on 3% to 6% organic growth in 2014.
So summing it all up we are on track to deliver our 2013 to ‘17 objectives. We’ve got a number of key operating strategic levers that are working in support of this goal. Today we've announced that we are managing towards an enhanced capital structure strategy that will be financed with additional low-cost debt.
We intend to maintain our capital structure flexibility to be able to respond to large corporate strategic opportunities that can strengthen the portfolio and we can do that while significantly increasing our cash return to shareholders which we expect that return to be in excess of 110% of net income to shareholder over the five-year planning period.
We are also reaffirming then these four goals that we laid out in November of last year, one year into the plan we remained on track with these objectives, we believe these goals are aggressive but reasonable for the company we expect to achieve going forward.
So that concludes my remarks and what we plan to do is take about five minutes here to get set up Q&A blusters to start the Q&A session. So thank you very much for your attention.
Earnings Call Part 2: