3M (MMM) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by and welcome to the 3M first quarter 2003 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 keypad and questions will be taken in the order they are received.

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

As a reminder, this conference is being recorded Monday, April 21st, 2003.

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

Thank you and good morning, everyone, I'm Matt Ginter, Directer of Investors Relations for 3M.

Welcome to our first quarter 2003 business review.

I'd like to begin with a few brief announcements today.

Our second quarter 2003 earnings conference call will take place on Monday, July 21st.

Please mark your calendars accordingly.

Today's discussion will follow a series of powerpoint slides, which you can access on our Investor Relations website.

During today's presentation we will make certain predictive statements reflecting our current views and estimates on 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 most recent form 10K lists some of the most important risk factors that could cause actual results to differ from our predictions.

At this point I'd like to turn the program over to Pat Campbell, 3M's Chief Financial Officer.

Thanks, Matt.

Good morning, everyone.

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

Please go to slide number 2. 3M reported another solid earnings performance in the first quarter and we are on track to deliver our current year plan.

Reported earnings were $1.27 per share versus $1.14 per share in the first quarter of last year.

Excluding special items, earnings were $1.42 per share, up 15.4% from last year's first quarter result of $1.23 per share.

Aided by a weaker U.S. dollar, sales in the first quarter were a record $4.3 billion, up 11% compared to a year ago.

With six of our seven business segments reporting positive worldwide volume growth.

Geographically, Asia Pacific continued to lead the way with volume growth of 19% and Latin America volumes improved by 17 1/2%.

First quarter operating margins were 20.2%, an increase of 50 basis points over last year.

Our five corporate initiatives aimed at improving our organic growth, productivity and cash flow continued to contribute significantly to our improved results and we are on track to achieve our objective of $300 million for the year.

With higher volumes and improved earnings, free cash flow remains strong with a 19.2% increase from a year ago.

On slide 3 we recap our first quarter sales performance on a geographic basis.

As I mentioned, worldwide sales in dollar terms increased 11% versus last year's first quarter.

Volumes increased 5.4%, which included 2 points from acquisitions.

Year on year currency translation boosted sales by 5.6% while selling prices were flat.

In the United States, volumes improved 1.4%, benefiting from 1.8 points of growth from acquisitions.

Displaying graphics, consumer and office and healthcare all posted positive volume growth.

Selling prices were down 40 basis points compared to a year ago.

Sales outside the United States increased 19.5% in U.S. dollar terms compared to the previous year.

Volumes increased 8.7%, lead by a 19% increase in Asia Pacific.

Volumes improved 8%in Japan and almost 30% in the rest of the region.

All business segments experienced positive growth in Asia Pacific with six of our seven segments posting double-digit sales growth.

Volumes increased in Latin America by 17 1/2%, benefiting from the recent Percision Optics acquisition, which added 10 1/2 points of growth.

Volumes were down 1.1% in Europe, primarily reflecting the continued weakness in Germany around telecommunications and in France.

Acquisitions added 2.2 points of growth in international and selling prices added 40 basis points.

Currency effects boosted international sales by 10.4%, driven by positive translation of 19% in Europe, 9% in Asia Pacific, translation natively impacted Latin American sales by 22%.

On slide 4 we reconcile the PNL, excluding special items to our reported profit results.

In the quarter we had a $93 million pre-tax charge, or approximately 15 cents per share related to the recent appeals court ruling which we detailed in a press release on March 26th.

The U.S.

Court of Appeals for the Third Circuit ruled against 3M in a federal anti-trust claim brought in 1997 by La Pages incorporated, a transparent tape competitor of 3M.

We are planning to appeal this ruling to the U.S.

Supreme Court, although the court will likely not decide whether to hear 3M's appeal until the fall, we thought it was prudent to book a reserve in the first quarter.

This expense was recorded in our corporate and unallocated on the other expense line of the PNL.

On slide 5, we detailed the PNL, starting with a comparison versus the first quarter of last year.

The numbers I will discuss exclude special items in both periods.

Gross margins were 48.8%, up 40 basis points from last year's first quarter.

Corporate initiatives, such as Six Sigma, indirect cost reduction, global sourcing effectiveness and E-productivity continued to improve our cost structure.

Raw material costs were flat, despite significant cost pressures in certain commodities.

Again, our global sourcing initiative has off-set much of this pressure, however we continue to face a much more difficult sourcing environment.

SG&A expense was 22.3% of sales, an increase of 30 basis points versus the first quarter of 2002.

Much of this increase is due to higher targeted advertising spending to drive higher sales, along with some additional employment reduction actions taken in our electro and communications business in Europe.

Overall, operating income was up 14% compared to a year ago and margins were 20.2%, up 50 basis points year-on-year.

First quarter net interest expense was $17 million, $7 million higher than a year ago, due primarily to higher year on year debt levels and lower interest income.

The tax rate was 33.1%, up 60 basis points versus the first quarter of 2002.

For the rest of the year we expect a 32 1/2% rate.

As anticipated, minority interests decreased $10 million compared to a year ago, reflecting our recent acquisition of a minority partner in our Japanese joint venture.

Quarterly net income of $560 million and earnings per share of $1.42 were both up about 15% year on year.

Average diluted shares outstanding remained at $395 million.

Slide number 6 details our quarterly results on a sequential basis.

Again, these numbers exclude special items.

Sales improved 4.3% sequentially.

With a broad-based improvement across much of the portfolio.

Displaying graphics, transportation and safety, security, and protection services lead the sequential sales increase.

Seasonality is a factor in the first quarter, as growth tends to pick up in these three segments.

Also, acquisitions added 120 basis points sequentially.

The gross margin of 48.8% was down slightly sequentially, more than accounted for by acquisition costs in the first quarter.

We leveraged the sales increase into a 9.8% sequential improvement in operating income, lead again by a display in graphics, transportation, and safety security and protections services.

Operating margins improved by 100 basis points versus the fourth quarter.

Primarily driven by higher volumes, coupled with continuing process improvements.

Both net income and earnings per share increased about 10% on a sequential basis.

Slide number 7 details our performance by business segment.

Overall, this was a very solid quarter, as six of our seven business segments posted higher sales volumes versus a year ago.

Our corporate initiatives continue to enable broad-based improvements in sales growth, productivity, and cash flow.

In our new organization structure, built around seven key business segments, it will drive better focus on customers and end markets, which we believe will translate into higher growth.

Worldwide volumes in healthcare increased 4.7% versus last year, as most product categories posted strong performance.

As we mentioned before, one of our branded pharmaceutical products has been impacted by generic competition, excluding this event, healthcare volumes would have increased over 7%.

Operating income improved 8.4% to $238 million.

As most of you probably saw in January, Eli Lilly and 3M announced the suspension of phase-3 studies for resiquimod, a potential treatment for gentital herpes.

Lilly continued to evaluate the strategic options with respect to these trials, but at this time we have nothing new to report.

On the positive side, we are very encouraged by the phase 3 results for Aldara in treating superficial basal cell carcinoma actinic keratoses.

We anticipate submitting new supplemental drug applications for these two indications around mid-year.

In our industrial segment, 3M's improved 3.9% versus a year ago.

Our industrial tapes business lead the overall growth.

Operating income increased 19.3% versus last year to $132 million, driven by the accommodation of higher sales, process efficiency improvements and the benefit of restructuring actions.

Displaying graphics volumes increased 24.4%, versus the first quarter of 2002.

Organic growth rose 12% led by optical systems.

We also added 12 points of growth via a recent acquisition of Precision Optics.

Operating leverage remains strong as profits improved over 50% to $182 million.

Consumer and offices volumes improved 3.3% compared to last year.

Strong growth in our construction and home improvement, stationary products, and home care businesses helped offset weakness in other product categories.

Operating income increased 5% to $110 million.

Safety, security, and protection services volumes increased 5% versus the first quarter of 2002.

Growth in this segment is being fueled by increased global demand for better safety products and solutions.

Compared to the same quarter last year, operating income grew 22% to $105 million.

Electro and communications volumes declined by 5.1%, versus last year.

Due primarily to the continued weakness in the global telecommunications industry.

Our overall Telecom business was down about 15% this quarter.

Operating income declined from 9.4% to $47 million.

In our transportation segment, volumes increased 1.7% year-on-year, driven by positive volume contributions from our automotive OEM business.

Operating profits improved 17% to $100 million.

In slide number 8, you'll see that we continued to improve our balance sheet in cash flow metrics.

Now working capital turns were 4.7, up .6 turns from one year ago and flat sequentially.

Our goal remains a minimum of six turns by year-end 2004.

Inventories declined by $43 million versus the first quarter of 2002, a decrease of 2.2%.

Inventories were up $26 million sequentially.

Pharmacy impacts added $16 million to inventory sequentially and $113 million on a year-over-year basis.

Accounts receivable was up $33 million or 1.3% versus the first quarter of 2002.

On a sequential basis, receivables increased $116 million, or about 4.5%, which is in line with our sales growth.

Currency impacts also increased accounts receivable by $16 million sequentially and $174 million on a year-over-year basis.

Capital expenditures were $120 million in the first quarter.

Our forecast for the year remains at $900 million, as we anticipate Cap Ex to ramp up later in the year.

First quarter free cash flow was $608 million, which is a 19.2% increase versus one year ago.

Strong earnings, coupled with tax timing benefits and slightly lower severance payments drove the higher cash flow.

This strong cash flow enabled us to pay $257 million in dividends to our shareholders during the quarter.

In February we boosted our quarterly dividend by 6 1/2% to 66 cents per share, the 45th consecutive annual dividend increase for 3M.

We have now paid a dividend to our shareholders for 86 straight years.

It's also bought back $173 million of our own stock.

Overall, debt levels decreased by $58 million sequentially and our total debt to cap ratio was back under 35% at quarter end.

Chart 9 describes our recent experience in the area of respiratory protection litigation.

As described in our most recent 10K, we saw an increase in the number of claims and an increase in the proportion of SILICA-related claims in the fourth quarter.

We saw a similar phenomena in the first quarter.

We believe much of this activity is related to recent tort reform initiatives.

As a result, outstanding claimants increased to 54,000 at the end of the first quarter.

We plan to continue to aggressively defend the company against these lawsuits, which will result in a heavier legal investment in the future than we previously had planned.

Our average settlement cost per claimant has increased, but the cumulative average remains less than $1,000 per claimant.

In light of these events, we believe it was prudent to increase the reserve by $100 million in the first quarter, along with a corresponding increase in related insurance receivable of $94 million.

As we reflected in the receivable, we expect a substantial portion of our liability to be covered by our product liability insurance.

We remain vigilant in our defense efforts and will continue to assess the situation very carefully.

Please turn to our final slide, which is number 10, where we discuss our outlook.

3M has many positive things going for it, such as our broad-based business operations and our initiatives aimed at accelerating top-line growth and driving higher productivity in cash flow.

And of course, we also face many challenges, such as higher raw material costs, the potential impacts from the SARS outbreak, and continued Geopolitical concerns.

Taking all this into consideration, our operating plans for the remainder of 2003 will continue to reflect uncertainty.

Although we are facing an even tougher environment than we did a quarter ago, we are reaffirming our expectations for 2003 in total, that earnings, excluding special items, will be within our range of $5.80 to $6 per share.

On a reported basis, we anticipate 2003 earnings to be between $5.65 and $5.85 per share.

Both ranges assume volume growth of 3% to 7% for the year.

For the second quarter we expect earnings to be in the range from $1.47 to $1.53 per share.

Volumes are expected to increase in the range of 3% to 6%.

While these are challenging goals during uncertain times, 3M is a company focused on delivering high-quality results over the long-term, via accelerated top-line growth, improved productivity, and significant cash flow generation.

This concludes the formal part of my presentation this morning.

Joining me for the question/answer portion are Ron Nelson, our controller and Mark Borseth, our treasurer.

Let's begin the Q & A.

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

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

If you are on a speaker phone, please pick up your handset before entering your request.

Please limit your participation to one question and one follow-up.

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

Your first question is from Michael Reagan with CSFB.

Pat, I was wondering, if you could just give us a sense how volumes decelerated from the fourth quarter, yet you've reaffirmed your outlook on both top line and for earnings.

What have been the positives to offset even your admission that the world's tougher than you thought a quarter ago?

Well, you know, if you look at the guidance again for the year, we're still in the same ballpark from a volume range perspective.

The initiatives continue to give us you know, significant benefits.

Currencies been a little more favorable to us, and it seems to be holding in there, so accommodations of those factors.

So it sounds like currencies, the offsets to the weaker overall environment than you expected?

I mean, you're sticking at $300 million of benefit from the restructuring, so if the internal initiatives are driving more profitability than you thought, where's that coming from?

I'm sorry, Mike, I didn't catch the last part of it?

You've stuck with $300 million of benefits from restructuring, and yet you talked about better profitability than you thought.

What are the internal initiatives driving that?

I guess we're not saying better profitability than we thought, we're staying with where we were.

The initiatives are on track, you know, our volume -- we've said it's in the 3% to 7% range, and we really haven't changed our view on that.

If you look at the pieces, you know, material seems to be a little bit more difficult than we had thought and effectively, you kinda' look at maybe currency's helping us a bit there, but the net on the initiatives, we still are at the $300 million range, so even though we get more raw material pressure, we're still going to generate $300 million of incremental gains.

So we don't see on the bottom line that we're going to you know, be any worse off.

Okay, thanks.

Your next question is from Jeff Sprague with Salomon Smith Barney.

Thanks, good morning.

The follow-up on the sequential decline, then one or two other items.

With the U.S. going negative, I'm just wondering, was it positive in January and February and split negative in March and can you give us some color what you see here in the early part of April?

All right, I wouldn't necessarily say there was a good January, February, then a falloff in March.

It's kinda' been the overall level of business hasn't been you know, that significantly different.

Looking at January, February, you know, and March of business --

Has any kind of flash reports from the front lines on April?

We get flash reports all the time from the front lines, but at this point in time, there's nothing unusual to report.

We continue to look at you know, the SARS situation to see how that may affect psychology and certain markets and so forth, but thus far, I haven't really seen anything that would trip us up, but you know, we keep our eye on this on a day-to-day, week-by-week basis, but haven't seen any significant change in trend.

Also, just on the settlements.

Can you give us a little bit more color?

I think you state the cumulative average has remained below $1,000, but you've settled a lot of cases, so it might be hard to move that average initially.

Is the current trend markedly above $1,000 per settlement?

I would say the current trend is not significantly above -- you do get a little bit of a mix effect now and then, but haven't really seen a significant change really in our averages from historical levels.

Just one final piece on electronics, can you give us a sense of what the change was in the business X-Telecom?

I have to kinda' look that up a little bit.

I would say -- if I recall right -- if you take Telecom out, it's about flat.

Jeff, this is Matt.

Within ENC ex-Telecom sales were relatively flat.

All right, thank you.

Your next question is from David Begleiter with Deutsche Bank.

Thank you.

Pat, for Asia, can you break out the Asian growth a little bit more, extra pan by region and segment, where the strength is?

If you could elaborate on SARS -- where would the impact first be felt in terms of particular segments in your business that were slow due to the SARS outbreak?

I don't know where it's gonna hit.

You look at where the impact relative to population is, of course Hong Kong is hardest hit.

China's had an increased reporting of the number of cases just recently.

So, you have to believe that the first impact the marketplace in those areas, originally in China it was more in the southern part, but Beijing's had a few cases here as well.

So you have to believe that those probably would be the first impacted, but it's an evolving issue that -- evolving issue that we're all obviously concerned about obviously, and we have to keep a close eye on it.

You know, if you look at the Asian growth, you take Japan out and it's very broad-based growth across all of our segments.

Korea's doing well, China's doing well, Taiwan's growing very well.

Even if you were to back out Telecom, industrial businesses are running very strong, healthcare is running strong, safety, security is running strong as well.

Transportation, you get outside Japan and the business isn't quite as big, but it's really you know, good growth across the region.

Pat, last thing on the U.S. volume growth, ex-Tambitcor, what were U.S. volumes up in the quarter?

And what are you seeing on the industrial U.S. landscaping, just quite weak right now?

Well, industrial was weak -- I mean, it's not getting a lot worse, it just hasn't improved a heck of a lot more.

I guess on Tambitcor -- Jeff, Dave, we'll get back it you with specifics there.

Jeff, Dave, we'll get back it you with specifics there.

Okay, thanks, Matt.

Thanks, Pat.

Thanks.

Your next question is from Stephen Weber with SG Cowen.

Yes, a couple of things.

If you go through the segments, there's the -- unallocated portion on operating income showed a negative $40 million.

What would account for that?

Is that where this restructuring you alluded to in ENC was?

Or is there other things in there?

That's the first question.

As you know, the unallocated from quarter to quarter will move around a little bit, somewhere between the range of $10 to $20 million.

The entire $40 million in this quarter reflects primarily some of the acquisition-related costs that Pat described and also that differential on the respirator liability receivable that Pat mentioned in his comments.

Those two factors are the primary reasons for the higher than normal cost in the unallocated segment.

So it should go back to some sort of normal range in the second quarter, barring another acquisition.

That's correct, Steve.

Okay, so the re-structuring charge, the restructuring hit you took in ENC is in that segment line?

Correct.

Okay, while I've got you, what is happening with the volumes -- what happened to the sales value of production in this quarter on I guess on an organic constant currency basis, however you can give it to us clean, and what's the outlook for the rest of the year?

If we look at it on a constant dollar basis, our production output in the first quarter was about 3% higher than the first quarter of last year and about 2% higher than the level that we saw in the fourth quarter.

And looking forward, we would anticipate that those production outputs would attract pretty steady state with our volume growth as the year unfolds.

Okay, and now just on the acquisitions -- one last question.

Where is corning precision, is that split between Asia -- and largely I assume Asia, and the U.S. or all in the U.S.?

That's actually U.S. and Mexico.

Okay.

Is where most of that shows up in the results.

So it would actually would be in Latin America and the U.S.

So there is a little piece in Asia, but not probably as much as you would have thought.

Pat, those numbers you gave us on volume growth, were those cores for Latin America and Asia, etcetera, were those core volume growths?

Well, you know Latin America as an example is 17 1/2, but I mentioned 10 1/2 of that was due to the Precision Optics acquisition.

Okay.

Thank you.

Your next question is from Jack Kelly with Goldman Sachs and Company.

Good morning.

Hi, Jack.

Pat, you commented on the Tamicor's impact on revenues.

Healthcare margins were down about 100 basis points.

Was that also reflecting the general competition and if so, is that the extent of the impact or can we expect more in subsequent quarters on the margin side?

I would say that we are hitting almost full effect on generics right now.

We may get a little more sequentially -- we'll eventually kind of run out of -- it will still be a difficult comparison year-over-year for us, but looking sequentially, maybe a slight reduction, yet Q1 to Q2, but nothing significant.

Okay.

And it appears on the SARS issue, you're basically saying, at least in the first quarter, there was no impact.

Is that fair?

If you really look at it, this thing kinda' took off at the tail end of the quarter.

So, we did not see anything that was a discernible event that we could crack.

Obviously some of our businesses sold a few more masks at the end of the quarter, but we'll actually probably see more of that during the second quarter.

Didn't really see much of a business effect at the tail end of the quarter, but we are keeping a very close eye how things are progressing here in April.

Okay, just finally on the claims issue, if you were to characterize that increase in claims geographically and whether a particular state -- the reason I'm asking the question, sometimes it kinda' rolls from one state to another, Mississippi jumps, then Texas, New York, etcetera.

Can you give us any color?

I think the color would be very heavily in the south, okay?

Mississippi being the lead, Texas following, be the two states and those are the two obviously were the most discussion is around.

Of course towards state tort reform.

If we look at the whole claim number, what would you guess Mississippi and Texas might account for the total?

Roughly?

Out of the 54,000 claims that we have?

Yeah.

I'd have to look at that.

Off hand I don't know what that number is.

Okay, good, thanks.

Your next question is from John Roberts with Buckingham Research.

Good morning.

Pat, do you have any index of incoming raw materials?

You've got some lag effects because of inventory along manufacturing cycle, those things were declining through last year, now we see what's started up.

You've got current inbound versus the trough at the bottom, your raw materials type from last year?

Let me talk about it this way, as we've kind of gone through quarter by quarter, we're looking at say 1% reduction moving to probably flat year-over-year to something that may be more in the order of a 1% increase, you know, by the second, third quarter.

So we're seeing give or take on an overall basis, maybe a 2 to 3-point increase in raw material supplier increases, but of course we continue to work on the global structuring side to try to mitigate as much of that as possible.

Assuming nothing spikes up further from here, you wouldn't expect it to get more than a couple percentage points increase year-over-year?

Not even that much.

I don't expect anything more than that.

Thank you.

Your next question is from Robert Cornell with Lehman Brothers.

Good morning, everybody.

A couple questions.

You mentioned what was going on with Electro Communications ex-Telecom, but when do you see that business starting to show favorable comps and are there any signs of life so forth and so on?

I guess I wish I knew the answer to where the call the bottom for that, Robert.

If we look at -- if you split it somewhat between the U.S. and Europe as an example, Europe is still going through a more significant reduction right now.

They had a bigger take-down here in the first quarter than the U.S. did, but we are still seeing you know, seeing a weakness in that.

We're planning on the basis that there will be a continuing softness in the overall Telecom space.

Some of the recent rulings, even in the U.S., on how they want to try to handle some of the local --

Right.

Doesn't really help the situation, so we had hoped that may help to stimulate a little bit demand, but right now we're assuming that things are continuing to soften here a little bit and hope that it does come back.

You do get sporadic orders here and there, but it's not a continuous flow.

Another question is, what's going on with the whole Scotchgard phase out, the new product launch?

You mentioned a higher ad spending.

Is that in anticipation of some of the products coming on?

Where does that hold evolution?

Well, the whole evolution is that we've pretty well reached bottom from the old chemistry perspective, and we're currently in the marketplace, validating, certifying our new chemicals, so that is in process.

None of the advertising that I mentioned though was a specific campaign to bring that back.

It does take a while to get those materials back into our customers' hands as well as get them certified into their products, so we're in that process right now.

Is that gonna be an '03 event, seeing some of that sales recovery?

I would say that you'll start to see some '03 impact later in the year, but it will be a little bit later.

And that's a little bit slippage from what we previously thought.

It's taken us a little longer to try to get that product back in.

I think it's proven to be a little more difficult to you know, try to -- I'll call it take some other people out of the market -- but we are diligently working at it and we're looking at it on a order by order basis and we're making some progress.

Final question, on precision Corning lens, now that you've owned that for a while, how is that business growing?

How are you finding it integrates with the other technologies you got and how about the fit upside-down types of prizes.

I would say integrations been very, very -- you know, it curved very well.

Very pleased.

The organizations are integrating outstandingly.

I would say they have probably the more technical capability than we thought of during the due diligence process, and the integration of our technology between 3M and them is continuing.

We're moving some work between operations, but you know, they're a very, very good company, couldn't really have asked for a better acquisition.

Their first quarter sales were a little bit soft.

Part of that is a little rebound, probably coming out of the fourth quarter selling season, but all expectations are that their sales will ramp up later this year.

But you know, on track as far as integration goes and continuing to achieve the profitability objectives that we had as part of the program and from a technology standpoint, actually even as far -- we're more surprised as far as their capabilities.

Thanks, Pat.

Your next question is from John Inch with Merrill Lynch.

Good morning.

Just wondering if we could focus on Asia for a little bit.

Ruffly what were your operating profits in Asia and what was your year-over-year growth?

We're not going to disclose geographic profitability.

We do that at the end of the year, we'll give you the segment stuff, but the profitability in the region was again very solid.

And it's really broad-based, not just one product.

It's across the whole spectrum, be it in Japan or Korea.

Pat, I mean in '02, Asia accounted for 43% of 3M's operating profit growth.

As you reiterated your guidance for '03, have you assumed Asia is going to be slower as part of your 3% to 7% volume guidance?

I mean, there's a lot of variables that go into 3% to 7%.

If you look at kind of the upside scenario at 7%, you basically assume that Asia continues to run the way they have.

At the low end you would assume that you know, Asia probably falls off a little bit, so -- and there's a lot of accommodations between those two.

But as I think on the 3 to 7, Asia is one of the big factors that kinda' swings you from the top of the bottom part of that range.

Okay, then just lastly, and I apologize if you gave this number before -- if we could get the bottom-line impact from FX, roughly?

It was slightly favorable.

Bottom line, we've looked at it in a number of ways, but probably on the order of say 2 cents is the impact, and you have to keep in mind that Latin America is still going through a very unfavorable situation.

I think I mentioned that our translation, our sales were a negative 22% for the quarter.

So, as you may normally think about where the year in the end have gone, you expect them higher than that, but that's -- 2 cents is being somewhat offset by continued weakness in both the Brazil Rio as well as the phaseo.

Pat, in response to Michael Regan's question, you mentioned currency as one of the driving forces, yet it's only 2 cents on the bottom line.

Are you assuming Latin America Bates as part --

What happens -- let's take Latin America as an example.

Latin America started to go through their devaluation in I believe the third quarter last year.

So the comps, Latin America will become easier as we go through the year.

And the other thing -- I think we mentioned to you guys in the past that we've got a hedging program in place on 50%.

And over time, we were hedging rates last year for the Euro at the high 80s.

Those will wear off as you go through time here and you'll be replacing those with hedges that are at $1.08.

They will have a significant different impact over time.

Thank you.

Your next question is from Robert Ottenstein with Morgan Stanley.

Pat, I was wondering if you could update us on the acquisition outlook, kinda' going through what the pipeline looks like?

And also in terms of emphasis, any change in emphasis on areas, whether that change is geographic or by segment?

Then also in terms of pricing, what sellers are looking for.

First of all, no change in the strategic direction.

Pipeline continues to be full and very active across a number of different businesses.

So nothing's really changed there.

We're actually probably seeing -- we're circulating and processing a lot more deals from a flow standpoint.

Pricing again is very sporadic.

The certain segments of the economy still are holding up very well.

Others aren't.

One of the phenomenons you're running into now is you've got a lot of fun money sitting waiting to do deals right now, which is creating kind of a competition for deals.

So it's not only companies looking to acquire, you've got a number of private funds, private capital that is also looking to get in deals as they have to be invested.

So, that's kind of where we're at.

Okay, then you're talking about -- I just want to clarify this.

The volume growth, the 3% to 7%, that includes about 200 basis points from acquisitions?

That's correct.

Okay, so it's a wide range of the volume growth.

How much of that is gonna drive Cap Ex?

Because we're starting off here on a low rate on Cap Ex.

You've got it running up.

Is the 900 number kind of the number you would see with the higher volume growth?

And if the volume growth stays or goes to the lower end, then maybe Cap Ex comes down to 800 or are there certain maintenance items you can't avoid, so the Cap Ex needs to be at the 900 number?

I'd say they're not directly linked, Robert.

The 900 is kind of our plan of what we think we need to get done here, a piece of our investment going forward will be some capacity for optical that we'll probably have to make to keep up with the demand for that business, as rapidly as it's growing.

So maybe on the margin you could say there's a slight difference between Cap Ex at 3 versus 7 and we keep looking at that every quarter as we go through it, but I wouldn't necessarily directly link the two, you know, the two together.

Obviously if we're only at a 3% growth rate in two of FX acquisitions, meaning only 1% is organic, obviously we've got to take a harder look at how much Cap Ex we put in.

But on Cap Ex, we're not -- 120's not starving the business.

This is reflecting the reality of Europe and the U.S. economy's continuing to remain relatively weak.

We're getting a lot more through-put through our factories with Six Sigma efforts and so forth.

So, we're not cutting from a growth perspective.

If we've got good growth opportunities, given an item more than one to put the Cap Ex in and the R&D to grow the business, so I don't want anybody to kinda' misread, say $120 million of Cap Ex is being kinda' we're stifling growth here.

You know, that's kinda' what we needed in the first quarter based upon our capacity utilization of what we saw in the near-term.

For next year, Cap Ex?

You know, we've been saying that our long-term rate is about 900.

We'll continue to look at that.

As we do more and more work on through-put analysis and so forth with Six Sigma, you know, we may eventually adjust that number, but at this point in time, that number seems to be about right.

Okay, then just one final question, can you go through -- and I don't know if it was in relation or not, what the deferred taxes were in the quarter?

I think it was a pretty big number last year.

Can you go through a little bit what's driving that and when it may reverse?

I won't take you through the actual book-keeping from a cash flow perspective.

I think the difference between our book expense and our actual tax payments for the quarter is about $150 million, which favors our cash in-flow for the quarter.

That -- there's a timing difference, so that does unwind itself over time.

We'll have higher payments in the third, fourth quarter of the year.

And normally our first and second quarter are our lightest tax payment quarters.

Okay, great.

Thank you very much, Pat.

Your next question is from Mark Gulley with Banc of America.

Good morning, guys.

I had a couple questions on specific in-use markets.

First on automotive OEM, can you tell us in transportation, Pat, how much was automotive OEM up and what drove that?

Well, automotive OEM was the reason our transportation was up.

I'm not going to get into giving you the specific -- effectively we'll give you all the divisions if we're not careful here because we don't have that many businesses really in transportation.

So the impact really for the transportation was on the OEM side.

For the quarter.

And then electronics communications, I know you're not gonna give a specific number, but can you give us some idea of how much Microelectronics-related products were up?

Can you better define what you mean by that?

Anything to do with Microelectronics itself or connecting a device to a board.

I'm not sure I -- I'm not so sure I know exactly -- because we have some other -- if you're looking at Microflex by itself that, was about flat as far as year-over-year goes.

Why don't we do that offline.

I had a question regarding the respirator issue.

What is the significance of the small difference still between the increase in the reserve and increase in the receivable?

Are you indicating that insurance coverage cover all the increase going forward of claims?

Well, it's somewhat of a judgment call.

These things take a while to ever get settled.

We look at our total insurance coverage on an on-going basis and as we look at how much we have to put in on the liability, on estimated outflows, we have to kinda' make a judgment as to what the ability to recover that is.

In today's world you have insolvencies going on and so forth.

So it was our judgement when we looked at the combination of factors, that providing a receivable reserve of 94 was correct, or probably indicative of maybe where we'll be for this piece of it, but we still have a very solid insurance program in place.

So don't at all misread that we're starting to all run into troubles there.

It was a judgment call we made as to what would be a prudent factor to provide against the 100% liability.

Lastly, can you remind us of the time table for the applications for the brand new, that the skin cancer indications for Aldara?

We said it would be later this year is when we would make those filings.

Thank you.

Your next question is from Jeffery Cianci with UBS.

Hey, Pat.

Hey, Jeff.

Good performance on the leverage.

I wanted to get a little more color on a couple -- looks like display and safety in particular had tremendous operating income leverage over the sales growth.

Now, am I to think that number one, these are disproportionately in productivity gains, a related question is the acquisition of Corning, somehow a higher margin to that segment?

Can you maybe flush out a little in those two divisions in particular.

Let's put this -- displaying graphics, solid business, the CPL business was also an outstanding margin business, but that's not what kinda' drove the margin expansion in the first quarter.

It's primarily our existing businesses, even if you're to take CPL out, it would be a sizable leverage effect on the volume growth that display and graphics has.

The team there does a fabulous job from a product innovation perspective, driving value into the customers and also, obviously, it's a good profitability business for us as well.

And it is you know, it's a high-volume business that has, you know, good leverage to it, but productivity gains, the optical systems group has some of the best productivity programs that we have inside the company, so they're driving both innovation as well as cost reduction at the same time.

So it's a combination of all those giving them top-line growth as well as bottom-line expansion.

Safety, security, you know, good business -- a lot of other business expansion in the first quarter was around safety products and solutions, but good effort on the cost side of the business as well.

So, it's both top-line and bottom-line in both cases.

So, nothing you know, nothing unusual there, other than you'll good focus on both getting maximum value in the marketplace, but also getting cost out on the back end.

Okay, great.

Finally, just a quick one on Electro.

Do we see the second half perhaps an easier comp, as -- you look forward.

I don't think you expect in your guidance for this to be down for the year, do you?

Well, I guess when you say Electro, I don't know if you're talking specifically telecommunications there?

The whole division, but the way it works, you know.

The comps do get easier over time.

The question is when does it really reach bottom and it starts to come back up.

We're planning the business on the basis that we have a continued you know, softness in this space and we have to manage it accordingly, so we're not fooled that say gees, the thing's gonna come back in the next quarter, so let's ramp everything back up.

When we see a clear sign of a continuous quarter of flow coming in in a more positive reaction by a lot of our customers, then we'll try to ramp things back up.

But in the meantime, we will keep the thing really on a low level of -- lower level of activity.

All right, very helpful.

Thanks, Pat.

Your next question is from Howard Glietcher with Metropolitan West.

Hi, thanks for taking my question.

A general question.

You're generally one of the most innovative companies in the world, in many different segments, coming out with a lot of new products all the time.

And yet your pricing, zero worldwide, negative in the U.S. -- this is an issue that doesn't just apply to you, but I guess it's an issue in a lot of industries and locals.

What, if anything, are you doing or can you do or are you focusing on to get some pricing power?

Well, I can tell you we work at it every day.

But it's a very difficult world out there, from a competitive standpoint.

I think you know, being able to hold price in today's world is actually a major achievement.

In many of our businesses, we are still able to garner some prices, but you've got businesses like, we talked earlier about displaying graphics, that you know, good topline, good margin expansion, but you're giving away significant price reduction every quarter, every six months.

That's just the nature of some of those businesses.

It's a very priced-down business in many cases, but the ultimate solution of course is to design and create value for our customers.

And you know, that's what we're all about and we think we still do that probably better than most anybody else in the marketplace.

And so, from a pricing standpoint, we're obviously we try to get as much price as possible and we keep pushing that, but you know, the U.S.-Europe economies are not performing very well from a overall growth perspective and it's a very tough and very price-intensive world out there, but the other day, it's satisfying our customers with the best product, the best solution is the name of the game.

Is it that -- let's say relative to five years ago, your products are not as differentiated, maybe as they were in the past so that you can't charge a premium when you're going to price of a particular piece of business in any one of your sectors, if you have a superior product and it is worth something to the customer, they're willing to pay the price.

If it's not that superior, then you have to be very price-competitive.

Howard, I've only been here a little over a year and a quarter now, so I can't go back five years.

My take is, I think the whole world's changed.

The whole world's become far more price-competitive.

You're looking at cases of -- fears of eflation in the economy, rather than inflationary pressures we had in the past.

So it's a whole different environment I think that businesses are performing in today than they have in the past.

I can't think of an industry that's not performing in kind of a cost-down, constant pressure.

But that doesn't take away, again, the need to create where we can create a unique opportunity to go capture value with customers.

So I don't think our competitive nature has changed at all, I think it's more of the dynamics of the marketplace and part of that is what the inflationary situation is in the markets, say it was five years ago.

Thank you very much.

Your last question is from Dimitri Silverstein with Longbow Research.

Good morning, gentlemen.

A couple questions to follow up, if I may.

You mentioned Germany was weak, particularly in Telecom and France was weak.

Can you clarify which businesses in France were weak as well as the rest of Europe or conversely, which are showing signs of life?

Well, Europe as a whole, specifically the northern part, is going through still a significant growth issue.

I'd say in Germany, just go back, Germany Telecom was the biggest issue, healthcare's running good in Germany.

The whole industrial output in Europe right now though is down.

That's affecting industrial usage, it's also affecting the psychology around buying some of our products in consumer and office as example, on the supply side of it.

Those are the businesses that are probably being the most hurt, outside of the Telecom base right now.

Okay, and anything in Europe that is doing well, either in Germany or elsewhere?

Well, we have pockets of, you know, healthcare is a good performer, it's probably the best performer we have of all the groups, safety security is running well.

And actually even our transportation business is running good in a very difficult environment within Europe right now.

Okay, very good.

U.S. volumes, excluding acquisitions, declined.

If I'm repeating a question, I apologize, but can you expand a bit on you know, which segments caused the majority of that decline?

Well, we said who was up.

Okay, so -- All right, I'll do it by subtraction, thanks.

That's it.

That concludes the question and answer portion of our conference.

At this time I would like to turn the call back over to 3M for closing remarks.

Okay, again, thanks for joining us this morning.

Our leadership team and our work force are energized and committed to delivering sustainable, long-term value to our shareholders. 2003 appears to be shaping up as another challenging year for all companies.

At 3 M we are proactively facing these challenges with multiple initiatives to improve both top-line growth, productivity, as well as cash flow.

Thank you and talk to you in July.

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

You may disconnect.

Thank you for your participation.