3M (MMM) 2001 Q1 法說會逐字稿

MINNESOTA MINING & MANUFACTURING CO. FIRST QUARTER EARNINGS CONFERENCE CALL

Ladies and gentlemen thank you for standing by. Welcome to the 3M first quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question you will need to press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded today, Monday, April 23, 2001. Your speakers for today are Jim McNerney, Chairman of the Board and Chief Executive Officer and Bob Burgstahler, Chief Financial Officer. I would now like to turn the conference to 3M. Please go ahead.

Thank you and good morning. I am Matt Ginter, with 3M Investor Relations. Before we begin, let me remind you that during this conference call, we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. The MD&A section of our annual report on form 10-K lists some of the important risk factors that could cause actual results to differ from our predictions. Now I would like to turn the program over to our Chief Financial Officer, Bob Burgstahler.

Thank-you and good morning. Also with me this morning are Jan Yeomans, our Treasurer and Ron Nelson, our Controller. Our plan for this morning is; I will begin by reviewing our financial results for the first quarter. Then Jim will discuss the steps we are taking to further improve our cost structures. After that, I'll comment on our outlook for the remainder of this year, and we will be happy to respond to your questions. If you've seen our press release, you will know that our earnings for the quarter was at $1.16 a share that's up about 3% from the same quarter last year, excluding one-time items in both quarters. Our earnings benefited from continued good international volume growth and from our aggressive actions to reduce SG&A spending. We held SG&A flat with the first quarter of 2000, and we reduced this spending by $50 million from the fourth quarter of last year. Actually, by well over $60 million, excluding the SG&A added, as a result of 2 first quarter acquisitions and a joint venture. These positive elements enabled us to overcome confluence of powerful negative forces namely extremely difficult US economic conditions, continued weak euro, dramatic weakening of the yen and other Asian currencies, and respite in US energy crisis. Currency effects reduced our earnings for the first quarter by ¢7 a share. Our higher energy cost reduced earnings by an additional ¢4 a share. Overall, we delivered solid results given the challenges that we faced. We'd like to look at our results now for the quarter in greater detail beginning with sales - worldwide, we increased volume nearly 7% from the first quarter of last year. Selling prices were unchanged and that's versus a decline of 1.6% for the total year of 2000.

Currency translation reduced sales by 4.5% which is nearly 1 point greater than we expected entering the first quarter. In dollars, sales increased 2.3% from the same quarter last year. Acquisitions provided about 4 points of growth on a global basis. Looking at our organic volume growth, we saw good increases, around 7% in both our Health Care and our Electro and Communications businesses. In our Health Care business, we showed strong growth in pharmaceuticals, Health Information Systems, and Dental Products. In our Electro and Communications segment, we saw continued strong demand via telecommunications products, which were primarily used to upgrade copper-based systems. We did, however, experienced softness in product lines which serve the electronics manufacturing in semiconductor industry. In our consumer and office and our transportation graphics and safety business, we saw organic volumes gains of 3% to 4%. In our transportation segment, our optical systems business continued to post strong organic growth, and overall, growth was further boosted by two recent acquisitions in this segment. Volumes in our industrial markets business which is the world leader in tapes and abrasives, declined close to 3% plus the weakness in the manufacturing part of the economy. In our sixth segment, especially materials, unit sales declined nearly 7%, impacted by the product line phase out that we've discussed with you in the past. Internationally, we continued to do well. Overall, our international unit sales increased over 14% on a nominal basis and 8% adjusted for acquisitions. This came on top of the 12% volume increase in the first quarter last year. Our international growth was again broad based.

In the Asia Pacific area, we increased volume 13% with unit sales up 11% in Japan, 17% in the rest of Asia. Our people continued to do an excellent job of increasing our market penetration in the Asia Pacific area. In Europe, we increased volume 18% more than 6% excluding acquisitions. This followed a 10% volume increase in the first quarter of last year. Latin America's volume increased about 8%. Our international top-line growth, as I mentioned, was again significantly impacted by a stronger US dollar. Currency reduced our sales by 10% in Asia Pacific and by 7% in both Europe and Latin America. In United States not surprisingly, we felt the effects of a weak economy. Our US sales declined 2% on a reported basis and around 4% excluding acquisition. Our Health Care business posted solid growth, and our consumer and office business posted volume gains, but US organic volumes declined in our other business segments and businesses serving the automotive in the general industrial markets were the most effective. Now lets look at cost, numbers I'll be quoting exclude one-time gain in the first quarter of last year, and one-time cost in the first quarter of this year. This year's one-time cost primarily relates to the two acquisitions and a joint venture that we completed during the quarter. SG&A expense at 23% of sales was down nearly 1.5 percentage points from the fourth quarter that's declined 50 basis points the same quarter last year. As I mentioned, we reduced this spending by well over $60 million from the fourth quarter of last year excluding the impact of first quarter acquisitions.

Thanks to the rapid actions of 3M organizations across all businesses and geographies. We fully met the targets which we communicated to you in January. Our cost of sales was 52.1% of sales that's up 80 basis points versus the first quarter of 2000. We aggressively managed our discretionary spending in the manufacturing operations. The factory cost was negatively affected by soft US market demand, by higher energy and raw material costs. Despite the natural gas prices, raised the cost both to produce our products and to heat our plants. That increased our first quarter cost by $26 million. At current prices, we expect only about half as large an impact in the second quarter, basically no impact in the second half of this year. Raw material costs in the first quarter were up by almost 2.5% from the same quarter last year, the highest increase since 1995. The good news is that our raw material costs have peaked, and we expect lower year-on-year material prices in the second half of the year, due both to fall in prices for many of our key feed stocks and to our global sourcing initiative. Looking at margins, operating income was 18.2% of sales. All this was down six-tenths of a point from our strong first quarter performance last year. It was up eight-tenths of a point from last year's fourth quarter. Non-operating expense was $6 million higher than in the first quarter last year due to increased borrowing for our recent acquisitions. Our tax rate was 33.5%, which is one point lower than we experienced for 2000 in total.

Our tax rate continues to benefit lower overall international tax rates and from our management focus. We expect to maintain this rate throughout the year. Our share earnings, as I mentioned, increased about 3% from the same quarter last year. The currency effects reducing earnings by ¢7 a share or about 6%. Now let me say a few words about the balance sheet. Our inventory index was unchanged from the fourth quarter of last year. Day sales outstanding declined by two days for year-end. Our financial position remains strong with total debts at 33% of total capital. Our capital spending for the quarter totaled $281 million. For the full year, we now expect this spending to total less than a billion dollars reflecting our increased focus and discipline in this area. But that's a brief look at the key elements of our P&L and our balance sheet for the quarter. Now I would like to turn the program over to our CEO, Jim McNerney. Then I will come back to discuss our outlook for the rest of the year. Jim.

Thanks Bob and good morning everyone. I am glad you could join us today. After running 3M for nearly four months now, I am more excited about our prospects than I was the day I accepted the job, that, with the acknowledgement that we have some big challenges to address, but the long-term strategy is intact and our future is limited only by our ability to execute. First a few comments on the economic environment we were dealing with, which Bob characterized very well. The fact is conditions are very uncertain at the moment. US remain weak, Europe and Asia Pacific were good for us in the first quarter, but growth is clearly moderating there. There are no clear signs that the picture is improving anytime soon. Obviously, we are not immune to these factors. In this uncertain environment, we are focused on the things that we can control, such as investing for future growth, tightly managing working capital, and of course sizing our cost to match revenues. And in fact, we are aggressively reducing costs. Bob told you about our first quarter success and reducing SG&A. This is a good start. I commend our employees for doing an outstanding job in the first quarter. But without any sign of an improving economic situation, we need to be even more aggressive. Today, we announced a strategic and selective restructuring plan that will make us faster, more productive, and more competitive. We will reduce worldwide headcount by 5,000 positions or about 7% within the next 12 months. Every business segment, staff group, and geographic area across the company will be affected to some extent. They will not share the burden equally, however. Headcount reductions will be more significant in those businesses and or geographies that face the greatest long-term economic challenges and where larger opportunities exist to eliminate unnecessary structure.

The members of our senior management team are individually committed along with their teams to implement this plan. At the same time, those businesses that continue to show strong growth and use longer-term growth prospects are more certain and less impacted by economic cycles will be less affected by the restructuring. We cannot and will not starve our best performing businesses, and we will continue to invest in high-growth areas such as optical systems, fiberoptics, Health Care and immune response modify research among others. Company wide, this plan will save us 300 million annually, a quarter of which we expect to see in the second half of this year. We are going to take the time we need to communicate the details of this plan to our employees. So, I am not in a position today to provide specifics regarding which parts of the company are most effective. So, while we have good detail developed for the restructuring plan, we will be able to share some of these details with you at a later day. We are relentlessly working to strengthen our market positions in all of our businesses during this economic downturn. Eventually, the global economic picture will improve and the sun will indeed shine again, and 3M will emerge stronger than ever before. As I meet with employees throughout the company, I continue to stress the importance of improving our accountability and execution capability. Our first quarter response to a precipitous sea change in the US economy was a good start. Now with our restructuring plan in place, we are better positioned to deliver in 2001 and in a far better position to resume normal growth rates in 2002. Now, I would like to provide a brief update on 3 of the 5 initiatives that I introduced in our first quarter earnings conference call.

This has been an ambitious effort and it has generated contagious energy throughout the total company. Certain initiatives are further long in implementation than others due to differences in ramp up cycles, but we are already gaining traction in several areas. Lets start from the most fundamental, Six Sigma. We are on a fast track on this one as you might expect. We started by training our top 100 or so executives back in February. In fact, I was there for every minute of it and got involved in helping the instructors. You will have to ask them how helpful I was, however. About 375 Black Belts, Master Black Belts and champions have completed or are in the process in completing Six Sigma training. Black Belts and Master Black Belts, which represent over 200 of the initial trainees, are our sharpest people. They will be pulled off their jobs and fully dedicated to the Six Sigma initiatives for the next 2 years, 35 Six Sigma projects are now underway with 100 more scheduled to launch shortly. By this time, next year, we will have over 1000 projects underway. Earlier this month, we established the Master Black Belt Council, a collaborative organization designed to encourage sharing of best practices across all of 3M. Thereby by gaining leverage due to a common approach, common vocabulary, and common experiences. You will hear about specific Six Sigma projects as the year progresses. I am excited about the value it will create for our company. Six Sigma will breakeven in 2001 after training, ramp up, and other costs, and it will bring significant positive earnings in cash starting in 2002. Second, in January, we began an effort to reduce indirect costs. These are discretionary expenses that we often pay to external suppliers that are not considered direct product cost.

Bob is the champion of this effort. He has quickly built a number of teams charged with studying specific cost categories and making recommendations for expense reductions. This effort quickly produced savings. In fact, excluding energy, US indirects were down 56 million the first quarter, as Bob mentioned, versus the same quarter last year. This is a sharp turnaround from the double-digit increase we saw in 2000. Finally, in the sourcing area, we are beginning to aggressively leverage 3Ms size across our business and across our geographies to reduce procurement costs. We are targeting a 2% ongoing reduction in direct material costs versus absorbing a 1% increase last year. Let me, if you will indulge me, describe a few early wins for you. In the packaging area, we found that almost all of our businesses were buying multiple variations of the same size box. We aggregated our demand requirements, switched to a print-on-demand using 3M Technology, I might add, and reduced our needs to a single box. At the same time, we reduced the number of packaging suppliers from 50 to 5 and our cost went down by 30% or about 16 million annually. In another case, we consolidated a portion of our shipping needs between North America and Asia. Laid out the project to multiple vendors and lowered our cost by 15%. This will save us over $1 million per year and this is only the first phase of this project. So, I expect more savings in the very near future. Sourcing is all about a bunch of singles and doubles and those were a couple of examples. Finally, we conducted a reverse Internet auction involving 8 different 3M plant sites to reduce the cost of purchase Janitorial Services. Costs went down by over 30%, saving another million, another single.

Momentum is building around these and other two initiatives, 3M acceleration and E-Productivity. They all will form the backbone for cost reduction, higher growth, and more aggressive cash management. These initiatives will improve 3Ms execution capability at every level in the organization. Thanks for the opportunity to talk with you this morning. I will turn the program back to Bob who will relay our expectations for the remainder of 2000. Bob.

Thank you Jim. This is an extraordinary time, which makes it very difficult to forecast results. We are confident in our ability to reduce costs and to sharpen our competitive edge. It's difficult to call what the worldwide economy would be like? How that will influence our volume picture? The range of 2001 earnings that we quoted in our press release $4 and ¢75 to $5 per share based on a model, which on the top end of the range assumes organic volume growth of about 3%, similar to our first quarter growth rate. This scenario assumes some economic recovery in the latter part of this year offset by a slowdown in growth abroad. The low end of the earnings range we cited assumes 1% organic sales growth for 2001 in total, which would mean virtually no growth during the balance of this year. This scenario is based on a US economy, which remains weak and assumes that international economic growth declines rapidly for the rest of this year. In both scenarios we assume that exchange rates will stay at current levels. This wider than normal, range of earnings projections results from our inability to predict with any level of confidence, global economic activity for the remainder of this year. As for the second quarter, where we have somewhat better visibility, we expect earnings to be similar or up slightly from the same quarter of last year. January of this year, as you may recall, our earnings guidance was based on assumption 6% organic volume growth and stable currencies. 6% volume growth does not seem attainable in the current economic environment. The dollar has gotten even stronger. Nevertheless, we expect to offset a good deal of these effects with the initial restructure in saving,

continued aggressive cost reduction efforts, more favorable raw material impact. While it is difficult to predict when the economic environment will turn upward again, we're making fundamental improvements in our cost structure. We're aggressively driving our other performance initiatives. These actions will position us for strong earnings growth, once the economic environment. We've enjoyed speaking with you today, and now we'd be happy to take your questions.

Thank-you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you'll need to press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt acknowledging your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the 1 followed by the 3 on your pushbutton phone. If you are using a speakerphone, please pick up your handset before entering your request. One moment please for the first question. Jack Kelly with Goldman Sachs. Please go ahead with your question.

Good morning. Bob, could you just maybe give us a little help on Electro which you mentioned was up 7% in the quarter, and when she was real soft as related to certain lines. How did that progress through the quarter? Was that fairly even, or did Electro kind of decelerate year-over-year as the quarter progressed? Secondly, with regard to currency, if it does remain unchanged for the year from here, what kind of hit would it have? And, just finally, when you gave the guidance back in January, aside from the global number of 6%, which is now 3, you also had given some indications for the US, international, etc, and also what acquisitions would contribute. I was just wondering if you could give us a couple of those metrics. Thanks.

Yes, good morning Jack. Thanks. I think I have got those on mind. On the Electro communications, certainly the business did decelerate during the latter half of the quarter. What we have there is some pretty strong performances throughout the quarter in our telecommunications business globally, but certainly those businesses aimed at the electronics manufacturing and semiconductor industry did drop, beginning in the middle of the first quarter. Overall, you asked about the currencies, if they stayed at today's rates, I think currency overall would be about 3 percentage points hit for the year, which is about the same impact that acquisitions will have on us. And so, if you look throughout the year, basically currency and acquisitions, if we don't make any more acquisitions, we'll offset and price being about neutral. I think that covers, Ron do you have anything else.

The other question Jack was relative to the guidance in the sales growth and the expectation on the US sales growth, would be, that would be a flat-to-potentially a slight decline, international being a little bit weaker than we saw in the first quarter. As we had a slight increase in the second half of the ..

And just on pricing, how would you see last year versus, I guess the, 0.5% increase in the first quarter, at least in the US?

Yeah, we expect pricing to stay basically flat for the year.

Thank-you.

Jack, the only thing I would add to Bob's comment there is that in our Electro business both the hi-tech oriented piece and the piece that stands at industrial side, sort of, took a hit in February, and kept sliding a bit, so both industrial and hi-tech, whereas [CalComp] held up.

Our next question comes from John Roberts with Merrill Lynch. Please go ahead with your question.

Thanks. Jim, do you have any plans at this point, to come out and have more extensive meetings with analysts and investors about the strategy?

Yes. We're putting together a schedule now, and I recognize I need to spend more time with many of you, and I think Matt is going to be organizing some meetings over the next week or so, as a matter of fact.

And second, at least qualitatively, as you get out 12 months from now and finish up on the restructuring program, do you see that is offsetting any changed economic expectations, over the next year. Or do you see that as sort of additive to what your earlier plans might have been?

Well, in our minds, the economic environment is, while its difficult now, and tough to predict, its hard to assume that it will quickly snap back over the next year or so to some of the go-go growth rates we've experienced over the last few years. So our plans assume, a bit of a hit going forward in the markets at the restructuring, in part, offsets that.

And then lastly, the $60 million of reduction that was achieved during the first quarter. You didn't reserve for that, like you reserved for the going forward. Was there a meaningful cost associated with getting that 60 million?

Well, that 60 million was largely related to these indirect costs that we talked about, so this is just cutting back on what we're paying to suppliers, cutting out all the discretionary spending that we thought, we could do without in this environment. So that there was not a cost associated with most of that.

Right. Thank-you.

Our next question comes from Donald Zwyer with Lehman Brothers. Please go ahead with your question.

Good morning. Of the 23 million of cost related to acquisition, what segment or segments was that in? And, do you expect related costs going forward? And what areas are you focusing your acquisition search in?

Well, as far as the costs, they were focused in the three areas that we made acquisitions in the first quarter. In other words, Health Care, our transportation and graphics, which is the optical area, and electronic communications. We do not expect charges going forward related to these acquisitions. So this will be the one-time charge related to inventory write-up and in-process R&D write-offs. I think we've said before the areas that we are focusing on are really those that we have made acquisitions in the first quarter, maybe, Jim if you have any color you want to add going forward.

No, I mean, I think the high-growth areas that we've targeted before will remain those areas where we look for opportunities.

Okay, thank you very much.

Our next question comes from David I. Begleiter with ABN Amro. Please go ahead with your question.

Thank you Jim. And looking at the portfolio, any divisions or areas that you would like to either strengthen or try to prune from the organization?

Listen, David, it's a key question. I would choose to answer that on the positive side now, I mean, I think the businesses that I highlighted in my remarks, are worthy of significant additional investment, both organically and potential acquisitions going forward. I think, when you see the texture of our restructuring plan, which, after we talked appropriately to our employees, we will talk to you about, I think will reflect some of the prioritization that you are asking about, and if I could just hold you off till then, I'd appreciate it.

Fair enough. On the balance sheet, in terms of your philosophy on how strong a rating you need to maintain going forward, and how much borrowing capacity 3M has to make acquisitions and or share buybacks. Could you expand on that thought process?

Well, we see no balance sheet or rating constraint as we go forward. We could have probably a wonderful discussion about the relative merits of double As and triple As, and I think that might not be productive at this stage. But based on the plan that we have going forward, which does include acquisitions, we see no constraints. Bob, do you have anything to add to that?

No. Only that since Jim has taken over he has lent support to our intensive focus on focusing on the balance sheet and we certainly will be looking to generate cash more aggressively from the business that we have, both through working capital and capital spending management which reinforces the opportunity that Jim talked about.

Thank you.

Our next question comes from Stephen R. Weber from SG Cowen. Please go ahead with your question.

Yes. A couple or three questions. Good morning. Just first, Bob, when you were giving us, when you went down your lines of business, I assumed those were worldwide comments, but it wasn't totally clear to me. Secondly, could you tell us what the impact on your margins were, leaving aside the non-recurring from acquisitions in currency, in the quarter? And then lastly, your inventory index does still stand about where it did one year ago at this time. What was the sales order value of production? And did you have to eat something going forward here to get yourself where you want to be, I assume, entering 2002?

Yes. Good Morning Stephen. Yes. Just to confirm the numbers that I was quoting as I ran through the markets we're worldwide, although I did single out a couple when I was talking about the United States. Acquisitions, in total, impacted our margins about one percentage point negatively in the first quarter. Our inventory obviously, with the low volumes we were chasing some declining volumes down in trying to improve our inventories, the margin and the index stayed the same, but I'll let, Ron, I'm sure is ready to respond to your question about throughput.

You mean to point out the inventory is pretty flat compared to the end of the year, which meant that our sales target production in the first quarter, was very similar to our fourth quarter throughput, and down about 5% from the levels that we averaged in the first three quarters of 2000. Going forward, we anticipate, depending upon the various scenarios, that you heard Bob describe, that factory throughput would be somewhat higher than the levels in the first quarter.

Okay. And then one final question if I could. Jim, when you are talking about taking out 5000 people for the restructuring, is that a net number including the attrition or is that the restructuring and then you would grow around that, in those areas, that you deemed most worthy I guess.

Yeah. No that's a net number. It excludes, however, any consideration for acquisition rationalization that we're doing, accounted for separately. But some of the attrition we've already experienced and this 5000 would be a net number from sort of a March one, on through for 12 months excluding the impact of acquisition rationalization.

Okay. Thank you very much.

Our next question comes from Jonathan Rosenzweig with Salomon Smith Barney. Please go ahead with your question.

Hi Guys. Just wondering if you could specifically comment on the Electro communications margin, which were quite a bit lower than I would have expected. And, also, the cash portion of the restructuring cost, I would imagine probably a pretty high percentage here. And, finally, you touched on efforts to improve working capital, I just wonder if you could touch on what some of your targets are over the next 12 months or if you want to choose a longer term horizon, particularly for DSOs and the inventory returns?

Yes. As far as the Electro Communications market Jonathan, a couple of things there. First, our mix, kind of, went against us and as I had mentioned, our telecommunications business was quite strong during the quarter, which is a somewhat lower margin than our other businesses. Our businesses aimed at the industrial, which is our electrical business and some of the electronic businesses, which are more profitable were hit a little harder, and so we got hurt somewhat by mix in the first quarter. The acquisition impact was quite a few points there, as it has been. And also, the first quarter is always a somewhat lower margin in that business because of some of the price adjustments that was masked a little bit last year because we did not have the Quante acquisition in the first quarter. But all these factors caused that margin to maybe be a little less than people would have expected.

Is the integration of Quante going as well as you guys had anticipated or you're finding it more difficult to achieve the profitability levels that you had anticipated?

Well the good thing about Quante is the sales side is going very strong. Overall, certainly, we were slowed down, somewhat by the regulatory process in Germany where we in the end did not finish the full acquisition of the minority shareholders and have so-called control of the company until late fall. But, we do have firm plans now, going forward, to achieve the cost efficiencies that we had in mind. And so we expect, certainly, an improving situation in the course of this year for Quante.

Jonathan, relative to your question on the restructuring, we will be refining the elements that I'd planned over the next three weeks. Our present estimate is that the cash component of that restructuring will be about three quarters of that amount.

Okay. And on the working capital?

Well the working capital is a little bit of a work in progress at the moment. Particularly with the onset of our six Sigma efforts, and we have lined up a number of six Sigma projects that address this. I think that they tee up very well. Cash improvement is one of the three legs of the six Sigma overall objectives. And, we're revisiting those targets right now, but they will be more aggressive than we had talked about probably last September. But I think we need a little more time to put a stake in the ground there.

Yeah. I mean I think we're coming off a bit of a first quarter scramble, as you would expect, and not a bad job by the way, in my opinion. But we now have cash targets by division and Six-Sigma effort focused on it, so you will see gradual, but significant improvement over time on our turns.

Is there a risk though that as we see [________________] talking about, production should be picking up, but is there a risk that we see you guys trying to take out inventory and does that have an adverse impact on gross margin?

Well that's why you do it with fundamental process improvement in mind, so that you don't take out the inventory you wish you had. So, I mean its, I guess, the only thing that I could say to you now would be that the look we're taking gets after a necessary cycle and buffered stocks, as opposed to things we wish we hadn't had and that's why we do it that way, but there's always the risk you cite, in this unpredictable volume environment.

Right, thanks a lot guys.

Our next question comes from Mark R. Gulley with Bank of America Securities. Please go ahead with your question.

I've got a couple of questions; I'll ask it in series. Can you talk a bit about more generally the same-store sales growth excluding acquisition and currency that you saw in your new economy products, which account for maybe somewhat 15% - 25% of sales?

Well if I understood it right what you're asking about is the fundamental organic growth rates in the new economy businesses?

You got it.

And, you know, as we define those, they include a large part of the Electro and communication, plus our optical businesses and the numbers, the organic growth rate for our Electro and communications was about 7%. Our optical growth rate has continued quite a bit higher than that and so the average would be still staying around a double-digit basis in the first quarter.

I think I can bore in a little bit on Microflex. It still continues, I think to be one of you most successful new economy products? Can you talk about what kind of growth you saw in Microflex?

Well, you know, I wouldn't spell out exactly the growth rate for that particular product, but certainly the growth there was somewhat softer than we have seen in the quarters leading up to this quarter, and we feel as you known that product is primarily used in inkjet printers, and we see fundamentally good characteristics for usage of those, but whether it is an inventory correction or it's a slowdown, there was some softening of that business with the very high growth rates we had last year.

And then lastly, Jim I know you've focused on three of your five initiatives, didn't say as much on trend acceleration, but are you able, at this point, to talk about how Sixth Sigma will be used to speed up the rate of product development and commercialization.

Yeah, I am convinced Mark that it will make a big difference, I mean if you break down 3M acceleration it really has two components, one is a corporate view of the priorities as opposed to a bottom up divisional view, it is that piece which is an initial reprioritization that we're working on, and secondly cycle, which is your question, we will have ambitious and significant cycle prime reduction opportunities. I am convinced, and we are just getting the Master Black Belts and Black Belts in place now and based on my experience and a couple other Six Sigma leadership rules, its hard for me to tell you exactly what it is going to be and exactly how we will capitalize on the cycle time or exactly how long it will take, but I am committing to you that it will happen, and I will be in a better position to talk about it as we get some results for you.

Okay, thanks.

Our next question comes from Bill Fiala with Edward Jones. Please go ahead with the question.

Yes. With the uncertainty on the economy worldwide, have you seen the acquisition pipeline grow and what do you see with the pricing of those acquisitions? The second question has to do with the pharmaceutical pipeline, pretty much, how do you see maximizing the value there, are there any major decisions that have to be made or are you getting more excited of that business with time or are things are starting to moderate?

Oh! It is. Let me just jump in here Bob, the pharmaceutical pipeline, if anything is looking better than it did when I joined the company. I think many of you have had some in-depth discussions with our people. We are on progress as we march through the regulatory phases. The market sizes that represent the opportunities are not getting smaller, they are getting bigger and there are some teaming opportunities out there where we can leverage other peoples infrastructure more quickly to capitalize on the R&D investments so the pharmaceutical pipeline particularly the IRMs continues to feel very strong. Acquisitions - our focus continues there. The pricing is a little bit all over the map right now as it often is when you go through sea changes in an economic environment. Our argument is people aren't adjusting to the new reality. Their argument is they have got the most attractive thing that God ever made, so we are going through a little bit of that discussion so the pricing quite candidly is a little bit all over with the map. I have not seen kind of adjustments in some cases that I thought I would see but that is not going to slow us down.

Thanks.

Our next question comes from Robert E. Ottenstein with Morgan Stanley. Please go ahead with your question.

I know you cannot give us too many details on the restructuring. Can you give us any sense in terms of time, I think you might have mentioned something, but I did not quite catch it.

Yeah, I think I will jump in here again. We are looking at a quarter of the impact being this year, and the total was about 300 million.

And that would be all in the third and fourth quarter.

Yeah, and we are not going to see much in the second quarter.

Okay great. Can you talk to us a little bit in terms of on the cost cutting side, what you see in terms of advertising and R&D?

Well, R&D is, Bob will clean up after I make this answer here, but R&D is slightly up, okay. We are not cutting our life blood and those of you that know 3M know that in many cases is our life blood even though there is a opportunity to manage it even better than the world class levels we are today, but R&D is up, and we have held our advertising at strong levels, and we plan to do it in the second quarter as well. So we are not hacking away at those things that make this company what it is. I think what we have done, and you will see, when you will see the details is we have taken a fundamental look at structure and rationalization, and I think we have done selective and not homogenous and as a result it is our hope that the cost that will go after this restructuring will be those costs that we can afford to do without.

Yeah, and one just final question. Is there an opportunity to significantly lower the breakeven on the Electronics business and the Telecom in that area so that you do not get the kind of swings in terms of the operating margins here that we are seeing?

Well certainly, one of our objectives going forward, will be in terms of looking hard at the structure there to make sure that we have the flexibility that needs to be there in a market that it is again being realized as one that has cycles to it, so that we will be focusing on that, but as I mentioned, some of reasons or the somewhat lower margins this quarter were one off things for the first quarter.

Okay, thank you very much.

Our next question comes from Jeff Cianci with UBS Warburg. Please go ahead with your question

Hi! guys, maybe [_______________] is for Bob to followup on that last point, if you take out the one [_______________]I mean, do you think you can get back to at least the mid-teens margins for that division for the balance of the year?

Well the margins, if you adjust for the acquisitions they were in the mid-teens at the moment, normally we would expect a couple of points at least improvement in that market over the course of the year as you have some price balance at the beginning of the year and continued efficiencies again through the year. The combination of those, any cost adjustments will certainly put us in a good position to do that. The one wildcard again is that the volume, particularly outside United States, but if that does not drop precipitously, I think we have a good opportunity to get back to that kind of level.

I think going on the same lines, I am impressed with the Health Care margin, despite what I thought were higher clinical costs, are there any positives here that do not sustain perhaps with acquisitions improving the mix on the margin, do you indeed think you can keep Health Care in the low 20s going forward?

Well really, if you look at the fundamental cost improvements that we obtained in the first quarter, many other markets offset the decline that we otherwise would have had with the lower volumes. With Health Care and with consumer where we had some volume improvement that dropped to the bottom line and that caused pressures that are going to continue, it will be improved further by our restructuring in many businesses and so for Health Care and others, I see that it is sustainable certainly in Health Care because we feel much more confident about the volumes situation.

Okay, and finally if I could. Just a conceptual followup for Jim on his cost savings comment. Jim, on the 75 and then on the 300 million eventually. Certainly these are not the type of businesses that you have to pass those savings on the customers. Is there a rule of thumb in your short stay at 3M, that you come up with, do think may be three quarters of this can close the bottom line.

It is the same question I have been asking. Now listen, we have plenty of volume and price pressures out there and mixed pressures, and it is very hard for me to predict exactly how much of the 300 is going to fall through. I will say that we size this restructuring program to ensure that as we get back to any semblance of normalcy that we resume the growth rates that we have all been talking about over the last couple of years. Maybe that's the best way to answer it.

Okay, thanks.

Yeah!

Our next question comes from [_______________]. Please go ahead with your question.

Good morning. Just a clarification about the timing of the restructuring savings, I think, you indicated that you expected to complete the structuring process by the end of this year, and so I assume that the full 300 million of savings will be achieved in the 2002?

No, it was within one year from when we began and so I am sorry. Talking about the middle of the 2002 would be the end date and the 25% of the total would be the amount that was actually anticipated in this calendar year.

Could you characterize then, Bob, the savings that you would expect for 2002?

Well, on an incremental basis it would be another 3 quarter as or to say 225 million additional benefits in 2002.

Well so, then the presumption is you'd get the full 300 million in 2002?

Yeah, we would be at a running rate at that point so that the actual amount would be somewhat less than that.

Okay.

I think, Mike just to reiterate Bob's last comment. The 300 million run rate as savings won't be achieved until the 3rd quarter or so above next year.

Okay. I guess, I can just; I'll just straight line the assumption. Thanks very much. Okay.

The last question this morning comes from John Roberts, please go ahead sir.

Thanks, you've had a recent management change announcement in Electro and Telecom, I know we've asked some questions already about the outlook there, but maybe you can comment, does Chuck have any different management objectives than Harry had coming in or could you maybe comment on his style versus Harry's that we might expect some differences in the business?

Well, first of all Chuck is there because Harry retired, so I mean this wasn't a planned kind of move. I think Chuck is one of our best guys, I mean those of you who have had some exposure to him appreciate the leadership that he can bring to any business, and this business is not an easy one to manage and there is a lot of moving parts and yet there is a huge amount of opportunity, and I think he'll bring his normal, motivate the troupes, put solid plans in place and aggressively come after me for other resources. He needs to grow the business.

Thank-you.

Yeah.

Gentlemen, please continue with your presentation or any closing remarks you may have.

I'd just like to thank you all and assure you that as we said before we will continue to be intensely focused on those things that we can control. We delivered on our promise on that cost side in the first quarter, and we look forward to combining that at some point improving economics so that we obtain the growth and earnings and sales that we all expect from this great company. So thank you very much.

Thank-you.

Ladies and gentlemen that does conclude your conference for today. You may all disconnect.