3M (MMM) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the 3M second quarter 2002 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, simply press star, then the number 1 on your telephone key pad and questions will be taken in the order they are received.

If you would like to withdraw your question, press star and the number 2 on your telephone key pad.

As a reminder this conference is being recorded, Monday July 22, 2002.

Your 2002 speaker is Pat Campbell, the Chief Financial Officer of 3M.

We would now like to turn the call over to 3m.

Thank you and good morning.

I'm Matt Ginter, Director of Investor Relations for 3m.

I have a few brief announcements before we begin this morning.

Today's discussion will follow a series of power point slides.

If you received our press release via email this morning, you also received a power point attachment containing these schedules.

You can also access them online on our investor relations website.

As a reminder, our third quarter earnings conference is scheduled for October 21st.

We will send you a reminder notice, via email, a few weeks beforehand as always.

During today's conference call, we will make certain predictive statements that reflect our current views and estimates about our future performance and results.

These statements are based on certain assumptions and expectations of future convenients that are subject to risks and uncertainties.

The MD&A section of our most recent form 10Q 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 Pat Campbell, Chief Financial Officer.

Pat?

Thanks, Matt.

And good morning.

Welcome our second quarter business review.

Joining me this morning are Ron Nelson, our Controller, and Jan Yeomans, our Treasurer.

Let's begin with a few highlights from our results.

Let's please go to slide number two. 3M delivered another solid earnings performance in the second quarter.

Reported earnings were $1.18 per share, versus 50 cents per share in last year's second quarter.

Earnings were impacted by nonrecurring charges related to our current restructuring program, the details of which I will explain in a moment.

Excluding nonrecurring items, we posted earnings of $1.36 per share, up 21.4% for the second quarter of last year.

Sales totaled 4.2 billion, up 2.1% in U.S. dollars.

Asia pacific posted the strongest second quarter sales growth, driven primarily by higher sales of optical films for flat-panel displays along with solid growth in microflex circuits, electronics and other devices.

Second quarter operating margins improved to 20%, representing a recent high.

All business segments posted operating earnings growth in excess of sales growth.

We are five corporate inniatives global sourcing effectiveness, indirect cost reduction, e-productivity and 3M acceleration, 3M employees have committed themselves to improving business process everywhere within the Company.

Savings from these initiatives will gives the plexbility to invest in future growth opportunities.

The Six Sigma rollout continues to accelerate as planned.

At quarter end, over 8,000 employees had participated in some form of Six Sigma training.

We have over 2 500 active Six Sigma projects at present and closed about 400 projects.

All of these metrics, employees trained active project and projects closed are up substantially from first quarter levels.

Our balance sheet remains solid, free cash flow of 723 million during the quarter.

Debt-to-capital was just over 29%.

A few points lower than recent quarters, leaving ample room to fund future growth or other business needs.

Let's move to slide three, a recap of our second quarter performance.

As I mentioned, world wide sale, world wide sales and dollar terms increased 2.1% versus last year second quarter.

Sales improved by 7% on a sequential basis, being above 4% the remaining translation.

Second quarter sales volumes increased .6%, selling price increased .7%.

Recent U.S. dollar declines boosted our sales growth by .8%.

There was no impact in the quarter from acquisitions and/or divestitures.

Second quarter earnings per share, excluding nonrecurring item it is, increased 21.4%, year on year and 10.6%, sequentially.

Required chances in good will accounting, enacted in January of this year, boosted earnings by 4 cents per share.

Changes in foreign exchange rates had no discernible impact on second quarter results.

Please turn to slide number four, where we will examine sales on a geographic basis.

Second quarter international core volumes increased 2.9%, led by a 15% increase in Asia pacific.

Volumes improved 9.5% in Japan and 24.6% in Asia, excluding Japan.

Businesses with the strongest growth in Asia pacific included our optical film business, where we supplied film answers this enhanced the performance flat panel displays.

In addition, we saw good growth in sales of microplex circuits.

Excluding these two businesses, Asia pacific local currency growth was about 6%.

Volumes declined 4.3% in Europe, primarily due to the weak inspects telecom industry, along with lower volumes in consumer and office and Industrial markets.

Sales of specialty material markets also declined, due to the Scotch Guard Product related phaseout we discussed with you in the past.

Latin America, volumes declined 4.5%, driven by ongoing difficult economic conditions across the region.

International selling price improved 1.3%, primarily due to currency related price increases in Latin America.

Currency impacts boosted international sales by 1.5 points in the second quarter driven by a 6.5% positive impact in Europe and 1.5% positive impact in Asia pacific.

Currency translation was negative by about 14% in Latin America.

In U.S. dollar terms, international sales increased by 5.7%.

In the United States, volumes declined by 1.8%, led by positive growth in health care and consumer and office.

Our electro and communications, specialty segments posted the biggest year on year volume declines.

Selling prices in the U.S. were flat for the quarter.

Now please turn to slide five, where we will examine the P & L in more detail, starting with a comparison versus the second quarter of last year.

The numbers I will discuss exclude nonrecurring items recorded during the quarter.

Gross margins were 48.5%, which is 70 basis points higher than last year's second quarter.

Using Six Sigma, we continue to drive costs out of our factories by optimizing manufacturing and other business processes.

Indirect cost reduction he have for the and lower employment levels also boosted factory performance.

Gross margins benefitted from positive sales mix, due to sales strength in the Asia pacific area.

Material costs declined by 4%, as our global sourcing initiative continues to drive procurement savings.

SG&A expense was 22.1% of sales, a 120-basis point improvement versus last year's second quarter.

Overhead count levels, along with our continued efforts to reduce overall indirect costs, helped curtail SG&A spending.

To achieve this despise spite sequential increase in advertising and merchandising expense.

By reducing costs in other areas, we maintain the flexibility to invest in future growth initiatives.

And we expect to further accelerate advertising investments into the second half of the year.

Overall, operating margins were up 20%, up 2.1 points, year on year.

Second quarter net interest in expense was 11 million, 13 million lower than the second quarter of 2001.

Overall borrowings along with declining rates on floating rate debt grows with the reduction.

We posted a 32.5% tax rate, as expected, which was one point lower than last year's second quarter.

We expect to maintain a 32.5% rate for the remainder of 2002.

Net income was 539 million or 19.3%, increase year on year.

Earnings per share increased 21.4% to $1.36 per share.

Average diluted shares outstanding declined from 402.2 million last year to 396.1 million this year, a reduction of 1.5%.

Slide number six details our quarterly results a sequential basis.

Again these numbers include nonrecurring items.

Sales improved 7% versus the first quart over this year, led by an 11% increase in transportation, rapids and safety.

Sales in this segment typically increase in the second quarter due to springtime increases in government highway spending.

In addition, continued acceleration in the sales of optical film for flat panel displays continued contributed to this increase.

Sales improved 9% in electrocommunication and specialty materials and over 6% in both health care and consumer and office.

In the industrial market segment, sales were flat sequentially.

Operating income improved by 8.8% versus the first quarter, led by strong sequential increases in transportation, graphics and safety, electrocommunication and specialty materials.

Overall, operating margins improved by 30 basis points from first quarter levels.

Both net income and earnings per share increase almost 11% on a sequential basis.

On slide seven, we show a reconciliation of the P & L, excluding nonrecurring items to a reported profit results.

Included in our second quarter reported results are our 148 million of pretax charges for approximately 18 cents per share, associate with the current restructuring plan.

The charges relate primarily to employee severance costs and accelerated depreciation charges.

Of the 148 million in pretax charges, 91 million impacted cost of sales, 56 million impacted SG&A and 1 million impacted R&D expense.

We anticipate no additional one-time charges associated with the this restructuring plan.

Since the plan was first announced in 2001, we have recorded 771 million in related nonrecurring charges.

In total, we now expect to eliminate approximately 6700 positions associated with this plan.

June 30th, we've eliminated about 5700 of these positions.

Total head count declined by approximately 1200 positions during the quarter.

Slide number eight details our performance by business segment.

Again, excluding nonrecurring items.

Transportation, graphic and safety volumes increased 9.3%.

Quarterly sales in this segment are now just under $1 billion per quarter.

Growth was broad based, led by strong growth in optical films, safety and security products and solutions, automotive OEM products and respiratory protection products.

Operating level was substantial, as profits improved 23.5% to 244 million, boosted by strong volume growth and favorable product mix.

Volumes in health care increased 6.4% in the second quarter, led by strong performances by the pharamacutical, medical products and dental and orthodontic businesses.

Operating income improved 14% to $217 million.

Industrial markets, volumes declined .5% year on year.

Our automotive aftermarket, industrial tape and engineered adhesive businesses all posted a positive growth, but overall growth was held back by declines in other product categories.

Operating profit increased 14.4% year on year to 140 million, primarily driven by ongoing process efficiencies, the savings associate with the restructuring plan.

Consumer and office volumes declined 2.4%, reflecting the ongoing weakness in the office supply chain.

Down sizing and belt tightening have significantly curtailed spending for office supplies. 3M sales to the home improvement channel increased significantly the second quarter.

Operating income improved 16% to $122 million, benefiting from the significant Six Sigma and Global Sourcing savings.

In electroand communication, volumes declined 14.9%, volumes remind weak in the telecom industry and in most portions of the electronics manufacturing industry.

On the positive side, unit sales of microflex circuits increased a a double digit rate in the second quarter.

For the segment total, sequential sales improved 9% in U.S. dollars.

Operating income increased over 8% year on year to 84 million.

Electro and communications team has done an outstanding job adjusting to a very difficult market environment.

Specialty materials segment, volumes declined 5.9% year on year, primarily impacted by the product phaseout I mentioned earlier.

We have plans to introduce several new Scotch Guarded branded products over the next several months to regain this business.

We are targeting a total of $500 million in new sales within a few years.

Operating profits and specialty materials improved 9.8% to 42 million, despite the volume reduction.

For 3M in total, sales volume increased .6% and operating profit improved 14.1% with four of our six segments growing at double digit rates and the remaining two segments growing at over 8%.

If you turn to slide nine, I will cover a few balance sheet and cash flow highlights.

As of quarter end, networking capital terms were 4.2, up .5 terms versus one year ago and .1 terms sequentially.

Our goal remains a minimum of six terms by the end of 2004.

Inventories declined by 301 million versus the second quarter of last year, a decrease of 13.1%.

Inventories were flat sequentially.

By thoroughly analyzing our entire supply chain and by employing Six Sigma entitlement thinking, we are permanently eliminating unneeded inventory across the company.

Accounts receivable declined 156 million or 5.3% versus last year's second quarter.

Combination of strong sales in Asia, where receivable turns are lower than other parts of the world, along with a stronger Asian and European currencies, ruled in a somewhat higher-than-and receivable balance at this second quarter end.

We have made good progress in improving receivable terms in the U.S. and now turning our attention outside the U.S.

Where our opportunity is much larger.

Six Sigma teams are engaged in bringing up cash in this area.

Capital expenditures were 202 million in the second quarter, putting us at 363 million through the first six months of 2002.

We are maintaining our 2002 full-year forecast for approximately 900 million.

Again, six sigma is driving us to challenge traditional thinking.

Test are definitions of yield potential, waste reduction and capital expenditures and ultimately deferring capital investment until business conditions necessitate to capacity.

Second quarter precash flow was 723 million versus 459 million in last year's second quarter and 510 in the first quarter of 2002.

Driven by strong earnings or capital expenditures and improved capital returns.

Achieved this result despite absorbing 135 million in severance payments compared to 53 million in last year's second quarter and 91 million in the first quarter of 2002.

We expect approximately 100 million of restructuring related payments in the remind over 2002.

Cash flow in the quarter did benefit from differences in the timing of certain tax payments.

We generated ample cash flow to pay 241 million in dividends to our shareholders during the quarter, but also repurchase 285 million of our own stock and reduced our debt by 231 million.

Please turn to our final slide, which is number ten, where we will discuss our future outlook.

While there are signs of sales improvement in the second quarter, remain cautious about business continues for the remind over 2002.

Our operating plans will continue to reflect an uncertain global economic landscape.

For 2002, in total, we now expect earnings, excluding nonrecurring items, to be within a range of $5.15 to $5.30 per share.

On a reported basis, we anticipate 2002 earnings to be between $4.88 a share to $5.03 per share.

Both range assume lack global sales volumes at the low end of the range and a positive 3% at the top end.

For the third quarter, we expect he were earnings on both the reported and a pro-forma basis to be in the range of $1.35 to $1.40 per share.

This is a very exciting time for 3M, as we continue our evolution into a higher performance company.

Our foundation is a solid one, due to our many core strengths that help to differentiate us from our competitors.

We maintain a strong and diverse portfolio with leading market positions in many serve markets, driven by a rich family of differentiated products.

We also hold some of the best known and most powerful brands in the world and we have unmatched distribution capability, selling thousands of products in over 200 countries across the globe.

Regardless of any near-term economic trends, we are on a clear path to make 3M an even better company, focus on accelerating long-term top-line growth, improving process efficiency and increasing our cash flow.

Thank you for participating this morning and now we will take your questions.

At this time, I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone key pad.

If would you like to withdraw your question, press star and then the number 2.

If you were on a speaker phone, please pick up your hand set before entering your request.

Please limit your participation to one question and one followup.

We will pause for just a moment to compile the Q & A roster.

Your first question comes from Walt Liptack of McKnoble.

Good morning.

Good morning.

In your comments this morning, you talked about that there is no further charges regarding this plan.

Is there another plan that you're working on as we look into 2003?

At this point in time, we don't have a specific plan, but, you know, we will constantly look at the business -- the business needs around, you know, what a cost structure is, where the industries are performing to see if we have any further needs to do, you know, any kind of activity, but we are closing off the current restructuring program and if we do contemplate another program, obviously, we will, you know, make everybody aware of that.

Okay and then also on the SG&A, what was the incremental advertising costs in the quarter and what do you expect going forward?

I would say the quarter on quarter was probably up about $10 million and towards the back end of the year, we usually spend more in the second half versus the first half, which is where our consumer office businesses is heavier in the second half of the year and that could be in the order of $40 to $50 million.

Okay.

Thank you.

Your next question from Jonathan Rosenwig of Solomon Smith Barney.

Hi, guys, congradulation on a good quarter in a tough environment a couple of quick questions for you, first of all, the currency outlook at the current rates for revenues in the second half, do you know what the impact would be on the top line?

And also you went into some pretty good detail about what the top line outlook would be for the full year in terms of revenue ranges, depending on your for the EPS range.

Can you do the same for the third quarter?

On the currency side, I guess you can kind of pick, I guess, the end of June.

Yeah, if you pick basically what it was at June 30th?

Yeah, so we will probably be up, you know, a little bit.

I guess on the top line is by a percent or two I guess, I guess what we would estimate the top line would be -- would be impacted by, Jonathan.

Okay so, 1 to 2%?

Yes.

That is full company impact, right?

That's correct.

Yes.

Okay.

And that's both Q3 and Q4?

Yes, I -- yes.

Okay.

And as far as, you the revenue range that would you attribute the $1.35 to the $1.40 for the volume range?

Generally, I think you have to be thinking about flat sequential volume, is the way I would think about it, Jonathan.

We are seeing results very similar to what we are seeing in the second quarter.

Usually, you guys see a seasonal pickup in the third quarter.

Basically is the idea that Asia will not necessarily be viewed as sustainable and so that is why you are looking for it to be flat?

Well, obviously there is a complete mix of business, you know, Jonathan that we have to look at.

Obviously, we hope that Asia will continue strong, but you look at, you know, balancing all of them, we think from a planning standpoint, planning the business at kind of a flat sequential basis, based on, you know, uncertain cities the right way to look at it.

Okay.

And the debt-to-cap, now down to 29%, if I recall correctly, I thought the objective was for it to be somewhere in the 30 to 35% range, is that correct?

That is correct.

So should we now look at -- as the free cash starts coming in that maybe we great little more aggressive on the buyback?

I would not necessarily assume -- assume that.

Um, we do have, you know, the authorized $2.5 billion buy back program.

We bought back I think it was 285 during, you know, during the quarter.

There are obviously additional business needs that we may have to consider.

Right.

As we go -- as we go forward.

So don't look for us to be necessarily below 30% on any future -- on a future basis.

Okay, thanks a lot, Pat.

Your next question comes from Michael Reagan of Credit Swiss First Boston.

Thanks.

Pat, I was wondering, it seemed a little odd that in the businesses where your revenue growth was the strongest incremental margins was the weakest, whereas where revenue growth was down, huge incremental margins, I'm wondering if you could talk through that at all, specifically health care, consumer and office?

Well, health care, we are putting some more R&D effort in the health care -- health care business, you know, around some of the pharmaceutical products, so forth.

Which has impacted probably a little bit on a quarter by quarter basis.

That is my read.

I think consumer office did a very good job, you know, based upon what their earnings -- their revenue growth was from bottom line performance.

A piece of that obviously was ad mer much was on a sequential basis that is where you will see the impact.

Sequentially, how big was the incremental investment in health quarter second quarter over first quarter, what should we expect the rest of the year?

I think you will see pretty well flattened out here for the back end, the back end of the year.

I don't recall the exact number, Mike.

So just to finish on this topic, when we think about your raised guidance especially for the third quarter and the second after the year, what's the primary driver?

Your expectations of better revenues or is the second quarter revenue gain an anomaly and it goes to become much stronger margins?

Well, I think it is a combination of factors.

Someone our underlying productivity improvements in the business are obviously reaping very significant benefits for us and we have got two quarters behind us now and then obviously, you know, can kind of pitch that here into the future and even with a -- basically flat volume scenario here that we, you know that we should be able to continue, you know, the performance we have had.

Okay.

Thank you.

Your next question from John Lynch of Merrill Lynch.

Thank you, good morning, Pat.

Good morning, John.

You mentioned direct material costs down 4%, due to global sourcing.

But my question is are you seeing the pricing pressures in your direct materials apart from your own initiatives, say in the market and do you believe this trend down 4% continue or just getting started?

May need a little more color around that.

Well, obviously, the procurement team has done a very good job thus far in getting us about 4% here in the first and second quarters.

Obviously are starting to see some, you know, raw material price -- price pressures in the market, so, our future projections would probably be something less than 4%, you know, on an ongoing basis, obviously continue to strive to get to those numbers but with some sort of a -- some pressure in the market, that number may, you know, be cut in about half, the back end, the back end of the year, but we keep trying to get as much as, you know, as we can in the marketplace.

But there is some growing pressure in the market relative to raw material prices.

But you think you can still see a pricing declines for the rest of the year?

Yes, yes, we do, if you may be somewhat less than what we have been able to achieve the first half of the year.

Okay, my followup, Pat, you went through a lot of businesses that are showing improvement and strength.

Are there areas, both on a product market or geographic area that weakened significantly in the quarter and, if so, maybe you could talk a little bit to that.

Not too many that necessarily weakened sequentially.

Obviously, our business was up, you know, quarter on quarter pretty much with -- across-the-board.

Obviously year over year, we have a few businesses that are probably down a little bit, within our 45 or so businesses, a little bit hard, but obviously there is some geographic pieces of latin America is, obviously, down, you know, significantly and the -- list job in the current economic environment, you know, keeping the business at, you know, relatively, you know, high-level, um, um, as well and then on top of that we have been, you know, raising price in Latin America to, you know, keep our revenue line and profitability intact but fundamentally there has been no significant, I will call it businesses that have been shown sequential dropoffs.

Is Germany sequentially dragged for you?

Germany sequentially was not too much of a drag, it continues to be a year over year performance, you know, difficulty germany, though.

Market remains down, I think about 7% if I recall the number right in germany year over year.

Right, thank you.

Your next question comes from Steven Webber from SG Cowan.

Yes, the -- I have a couple of questions sort of related.

Can you tell me what the currency effects were on the balance sheet sequentially?

Cause the dollar moved rather dramatically during the quarter and I'm just wondering.

And then how that affected -- what -- your unit volumes clearly improved.

What -- how did your sales value and production look in the second quarter and can you give me some feel for how that all the to behave in the second half, given your inventory drive?

I'm going to turn this over to Ron Nelson to answer.

Let's talk about the sales volume production in the second quarter, sales value production was up about a percent compared to the same quarter of last year and up about 5% sequentially.

Past view or comments relative to the second half volumes, we would expect that sales value production to hold fairly constant, hopeful lay slight increase with volume drive in the second half of the year.

Steve, your question on the foreign exchange on the balance sheets, obviously, it has different impacts on, you know, different pieces so I'm not sure -- you after a composite number or --

Just wondering whether -- whether we are getting a distorted view of the -- of inventories.

Yeah, obviously what you will have on the working capital side, the numbers are on the chart.

Receivables and inventories would be adversely affected by the impact of currency moves, you know, if you look at it either year over year or sequentially.

Sequentially, I think the number is probably over, you know, in excess of $100 million, okay, that those two are, you know have been impacted, impacted.

Or together?

Together.

If you looked at them collectively, yeah.

Those two items together that is why I think the important thing is to look at terms, okay, there is obviously both the numerator and denominator are expected.

Maybe some with a lag, but I think that is probably more indicative -- indicator there we can get back to you specifically, you know, on that if you want to get into that further.

Just if I can follow up.

It seems to me that -- um, if you got a 5% increase in the sales value and production versus the first quarter, I'm wondering why we didn't see a -- an even better improvement or a better improvement in the gross margin sequentially.

Was there any factors in there or was it distorted by mix?

I don't think there was anything unusual, I guess in it, from quarter to quarter, Steve.

We obviously, we think our margins were, you know, pretty good.

We keep working, you know, working at them.

Obviously, we are happy to see actually the production base improve a little bit here, but nothing -- nothing really, you know, abnormal in the quarter.

Okay.

Just lastly, is there anything I know you are not going to tell us what anything of any size on the acquisition front that is relatively near-hand?

Of course you know I couldn't answer that, Steve.

But at this point in time there is nothing to report.

Okay.

Nice try anyway, huh?

But --

Thanks.

Your next question from Jake Kelly of Goldman Sachs.

Morning, Pat.

Morning.

Just a couple of questions.

One in terms of the Industrial segment, your seams were essentially flat year over year -- you mentioned what areas were strong.

Could you just give us a sense of how industrial progressed through the quarter, obvious lay all right of questions about what is happening in the industrial economy, but can you characterize it as strengthening, else?

Number two, minority interest you had a non, I guess recurring gain there could you maybe just develop into that and a followup on raw materials.

Your costs were down 4% but what was your index down?

What was the spread between what your index was versus what you were able to negotiate through global sourcing?

Thanks.

I guess on the industrial, I think back to the quarter, there wasn't anything that was highly unusual through the, you know, through the quarter relative, to, you know, peaks and valleys or, you know, during the quarter, so I think it pretty well ran consistent during the -- during the quarter.

Um, on raw materials, um, I'm not exactly clear what you say from an index standpoint.

What we are talking about here is a true 4% price reduction on, you know, on materials.

So there is no inflationary element of that, if I understand your question at all.

This is a true price -- price reduction.

Yeah I guess I know the 4 was real, but I guess that was -- and maybe you can't distinguish it, but if you were to look at, you know, the broad indices, whatever materials you're buying, you know, was there a widening spread between what you bought at and what the indices were or don't you track it that way?

I -- I don't recall seeing it that way.

We don't track -- I will call it the commodity or industry prices are versus us.

We do obviously look at that as to trends but don't really pull together and call it a composite index per say.

We look at it commodity by commodity to make sure we are getting the best prices for, you know, given products.

And I think our team is doing, a you know, a very good job there.

Minority interest, I'm not exactly sure what you're looking at there, but we did have a slight adjustment from the first quart near the second quarter, primarily related as to -- we had found something in the first quarter that really related to an adjustment that we should have made as about penny, if I recall, the number right is that right, Ron?

That is correct.

And Jack, coming back to your question about industrial to Pat's point, as we move through the quarter, I don't think we saw any significant dramatic change, moving month to month, but nevertheless, the quarter as a whole had pretty much flat volume growth compared to the declines we have been seek the last quart earth.

So we feel we have hit some stabilizing point relative to our Industrial volumes and hopefully can move from there, going forward.

Thank you.

Your next question comes from Robert Oppenstein of Morgan Stanley.

Hi, a couple of bigger picture questions in a way.

Number one, can you give us a sense of what you're hearing from your customers and particularly where your read of the major customer inventories are from major segments, if you have got a sense of that as well?

When we have asked that in the past, it was obviously very low.

And second question, Jim had been a real big bull on the dollar.

Obviously that has done the other way quite dramatically.

The question whether that is -- whether you have changed your outlook in terms of the dollar, longer term and whether there is any strategic implications on that

Well it -- let me start, I guess, with the dollar, the dollar question.

Obviously, anybody's guess, okay, as to where currencies were going to go.

I think it was our job to make sure we are managing the risk and competitiveness on various levels of exchange rates.

No doubt that in isolation, a weaker dollar helps our results unless it obviously has a detrimental impact on the overall, you know, economic road.

So in isolation it will help us -- help us there.

But that doesn't really really change our planning.

Um, obviously, any results we get, expect that this, be that much better from a purely an exchange standpoint.

Um, the input from the customers, a number of customers that we have, kind of a difficult answer to give you.

My sense is that businesses are operating with leaner inventories coming out of this softness than they have previously that would be my -- my sense obviously if the economy does uptick, hopefully we will have a direct sellthrough capability, but obviously with the diverse businesses we have it will be hard to characterize in any certain way, but I'm not aware of any specific areas where we have got an inventory build situation that could be detrimental to us.

Just back on the currency, you know there have been some talk, maybe it was more like a year ago, that you, you know there would be an assumption, planning assumption of a permanently strong dollar and therefore, 3M would push more manufacturing overseas.

And so I'm kind of directing more in terms of that, whether that is still the assumption, still planning to do more manufacturing overseas or not.

Thanks for clarifying that, Robert.

That's obviously an operational strategy as compared to necessarily an exchange strategy.

Obviously, if we can balance our revenue cost footprint on a long-term basis better than we do since the volatility naturally reduces the amount of hedging activity and so forth in place, built focus there really is how do we satisfy our customers better?

By having facilities closer to our customers, being able to respond to their needs, obviously it could help our, you know, overall working capital situation if we were closer to some of our customers.

We are methodically looking at, you know, opportunities on, you know, improving, you know, where we manufacture or provide certain technical support for certain businesses.

So that strategy has not at all changed, okay, in a, you know, shifting environment.

We will be looking at that as much in a weaker dollar as we were in a stronger dollar, primarily on how do we satisfy, you know, our customer better?

Thank you very much.

Your next question from Mark Gully from Bank of America Securities.

Hi, guys this is actually Brandon on behalf of Mark who is traveling.

How are you doing?

Good.

How are you?

Good.

Good.

Two questions.

One on pension expense, you guys have given for 2002 full year what sort of assumptions do you have for your pension expense?

And second question is, just a housekeeping item, your net interest expense number, what is the breakout between interest expense and interest income?

Okay, I will let Jan answer the question on interest income and expense, just so I don't up the number, but on the pension issue, we don't see a change in our '02 expense assumption at this point in time.

Okay.

So we don't see any change there.

Okay.

Have you given any thought to '03?

'03, obviously, '03 will be a challenge, in the changing market conditions, all companies are going to have to look at, you know, what they are going to do relative to you know, their pension plans here.

If you had asked me this question two months ago, I would have felt probably a little better than I am today, you with the last two months of US equity returns doing being down over 20%.

So obviously with gearing to have have to think through here.

Our measurement date is September 30th.

Okay.

So during the third quarter here, we are going to have to -- have to kind of look at what our assumptions are and our funding needs, you know, for the '03.

Okay, thanks.

For the interest expense for q2, Brendan, was $20 million, interest income was 9, so interest expense was 11 million.

Thank you very much.

Welcome.

Your next question comes from John Roberts of Buckingham Research.

Good morning, Pat.

Good morning.

Last year the electrocommunication and specialty material businesses were coming down sharply, do you think in the third quarter we will finally turn positive comps because of the easier comparison there is?

Electrocommunication, we saw a sequential improvement in the business here in the second -- second quarter.

Starting in the third quarter, there will be -- start see some, you know, easier comparisons and actually better comparisons even into the fourth -- fourth quarter.

Specialty materials, obviously, they are still going through the phaseout of the former Scotch Guard products and we will see more of a rebound probably -- I would guess starting later -- later in the year rather than the third quarter.

So you're not sure at this point?

Doesn't sound like you expect positive constant in the third quarter in those two segments?

I think they will be very close.

If you look at for example electrocommunication, we had sales third quarter last year 514 we did 504 in the second quarter this year, I think is very possible --

Right.

A flat to a bit of an increase in electrocommunication.

And pretty much the same story in specialty materials, where third quarter last year we did 251 and second quarter of -- just complete was 253 so I think in both case, flat hopefully some increase in both those markets.

That was my point.

You are come together crossover in both of those the one that looks like it will still be down then will be consumer and office.

It doesn't sound like you're expecting any -- the comps are still difficult, one and two sequentially it doesn't seem like you're -- you're like most corporation, you're keeping the screws on the spending, so doesn't sound like you would expect much to of a turn there?

To your point, the office channel is the one that has the most uncertainty and -- but very well have that same difficult challenge in the third quarter.

Okay.

Thank you.

Your next question from Jeff seeianty of UBS Warburg.

Thanks.

Hey, Pat, good control on the margin, the 20% in the second quarter and given that you know, looking for a similar range in the third, just wondering, is it 20% margin in your view now a floor going forward?

Is it something you expect to achieve and exceed then in subsequent quarters in '03?

Guess we want to try to keep growing the business, guys, so 20% is, I think, a doable plan for us on a going forward basis.

I don't see anything that is going to fall off from that assuming that, obviously, volume remains were it is at.

We all expect that hopefully volume will continue at the current level, or actually improve somewhat.

So you know, under those conditions, I would say that you know, be able to keep that kind of low.

Okay, thanks.

And comparison question, your range, your cautious range, I might add 515 to 530, 0% volume the low end and clearly you have some easier comps into the second half on volume.

So to do the low end of that range, wouldn't that imply almost a double dip in terms of volumes, just based on the math of comparing what September a year ago and then the 4Q?

Well, we are down -- we are down a negative two volume for the first half of the year.

So at the low end says we would have to you know, be plus two, last half, last half of the year.

It does imply, you know, maybe a little bit of a reduction from, you know, how we actually ran in the, you know, the second quarter, you know, the low end, and that is obviously, just, you know, the cautious of whether is the business, you know, how we are going to be, you know, for the last half of the year.

You mentioned a couple of div skreugss that were particularly easy comp notice second half.

Does consumer and transportation both have easier comps in the second half?

Comps we were -- electrocommunication and specialty materials.

Particularly, we expect the -- in consumer and office that the office chanlogical still have a difficult comp to be -- the point relative TGNFs, assuming that our Asian markets still hopped up, we should have a good drill of continuing in TGNFs, uncertainty we have, looking at the second half, whether or not the Asia growth will continue as we saw in the first two quarters.

That is great, thanks, guys.

Your next question comes from Don Saweer of Lehman Brothers.

Good morning, guys.

This it is Don Saweer.

Could you put the segments in order of POS I have to negative pricing, with best pricing in the second quarter?

We will answer you in just a second here, okay?

If you look at, again, U.S., we were effectively flat, you know, not in -- not a lot of price in.

Most of the international price was, you know, currency, currency related pricing but we will kind of give that you to.

Let me just, okay.

Saying we are at 7/10ths for the quarter.

Basically what we see this is world wide, we have positive in industrial of about 1.8.

Electrocommunications was slightly whosetive, about 8-10ths, consumer and offices positive 9/10ths, health care up 1-6.

Down in transportation graphic and safety of a negative 6/10ths and specialty materials was down 1-8, in that 1-7.

How many shares did you buy back in the quarter?

2.3 million.

Great.

Thanks a lot.

Welcome.

At this time there are no further questions, we will now go back to Mr. Campbell for any closing remarks.

Okay, thanks for joining us this morning, hopefully the market kind of rallies a little bit after the last week.

I look forward to talking you to again at the end of our third quarter and hopefully we will have, you know, continuing good results for you and hopefully we get the market turn around here as well.

Thank you.

Ladies and gentlemen, that does conclude our conference for today.

You may all disconnect and thank you for participating.