3M (MMM) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the 3M first quarter 2005 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. (OPERATOR INSTRUCTIONS).

As a reminder this conference is being recorded Monday, April 18, 2005.

I would now like to turn the call back over to 3M.

Good morning.

I'm Mark Colin, Director of Investor Relations for 3M.

Welcome to our first quarter 2005 business review.

Before we begin I have a few brief announcements.

As in prior quarters, today's discussion will follow a series of PowerPoint slides which are currently available on our Investor Relations website.

Looking ahead, our second quarter 2005 earnings conference call will take place Monday, July 18th.

Please mark your calendars.

During today's 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 most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions.

Also, as we disclosed in our 2004 10-K, effective January 1, 2005, as part of our continuing efforts to drive growth by aligning businesses around markets and customers, the Electronics Markets Materials Division and certain high-temperature and display tapes within the Industrial Business, transferred to the Electro and Communications Business.

We also moved our Africa region reporting from Latin America Canada to Europe and Middle East.

Our comparisons and historical information included in our press release and also provided via Form 8-K this morning have been adjusted for these realignments.

And now, I would like to turn the program over to Pat Campbell, 3M's Chief Financial Officer.

Pat.

Thanks, Mark, and good morning everyone.

Let's begin with some key highlights for the first quarter.

Please turn to slide number two. 3M delivered solid results in the first quarter by driving our corporate initiatives across our businesses and generating significant growth in key areas like LCD films, Health Care, China, Eastern Europe, and Latin America.

We are executing our productivity and pricing plans in order to get ahead of rising raw material prices and slowing global economic growth while simultaneously investing in the future with increased R&D and growth for united (ph) capital investment.

This quarter, the team came together to post earnings per share of $1.03, an increase of 14.4% over last year's first quarter.

First quarter sales were 5.2 billion, up almost 5% on top of last year's extremely strong first quarter.

Local currency growth was 2.3% as strong results from our high-growth products and markets more than offset the very sluggish Western European and Japanese economies.

Results in Europe and Latin America were further impacted by the timing of the Easter holiday at the end of March this year as compared to April last year.

In addition, there is no doubt that our pricing actions, many of which took effect either late last year or the first of this year, had some effect on first quarter growth rates in a few of our businesses.

When you adjust for these impacts, our local currency growth would have been closer to the low-end of our 5 to 8% target.

We believe we're now seeing normal business patterns (technical difficulty).

Operating income was 1.2 billion, a 9.5% increase.

This growth was broad based as five of our seven businesses posted year-over-year operating income growth.

Operating income margin in the quarter was 23.7% which represents the 13th consecutive quarter of year-over-year margin expansion.

Strong free cash flow of 768 million included higher year-on-year capital investment in growth oriented facilities including our optical film plants (technical difficulty).

In February, our Board of Directors authorized a dividend increase of 16.7% for 2005.

This marks the 47th consecutive year of annual dividend increases for the Company.

Finally, we repurchased 671 million of our own stock in the quarter, up over 53% versus the same quarter last year.

On slide number three, we recap our first quarter sales performance on a geographic basis.

You may recall that last year's first quarter local currency growth rate which is defined as volume, growth plus selling price changes, was 8.3% which was our highest quarterly local growth rate in nearly five years.

Building on last year's strong first quarter, our 2005 first quarter worldwide local currency growth was 2.3%.

Volumes increased 1.8% and selling prices were up 50 basis points year-over-year.

Year-on-year currency translation boosted sales by 2.3 percentage points.

In the United States, sales improved 3.2% versus last year's first quarter.

We drove price increases in most of our businesses in the U.S., with pricing up 1.7%, while year-on-year volumes improved 1.5%.

As I mentioned, we believe that first quarter volumes were negatively impacted somewhat by the timing of some of our pricing actions.

U.S. sales growth was led by Health Care;

Safety, Security and Protection; and Industrial Business.

Sales in our international operations were up 5.5% in U.S. dollar terms.

Local currency sales were up 1.8%, with volumes increasing 2%, and selling prices declining 20 basis points.

We also worked very hard during the quarter to drive price increases in many areas of our international business.

If we adjusted for the price-down activity for LCD films and flex circuits, our international price increase would have been a positive 40 basis points.

Currency translation added 3.7% to sales.

Local currency growth was 6.9% in Asia-Pacific, with Japan down 1.6% and the rest of the region up 13%.

All seven of our businesses posted positive local currency growth in Asia-Pacific during the quarter.

Local currency sales in Europe declined 3.8% as the economies in Western Europe remain sluggish.

Year-over-year first quarter growth in Europe was impacted by the Easter holiday season by a couple of percent.

We posted a 3.3% local currency growth in the combined Latin America and Canada region lead by our Transportation, Consumer and Office, and Industrial Businesses.

On slide number four, we compare our first quarter P&L versus last year's comparable quarter.

Sales were up 4.6% year-over-year, driven by growth in Health Care;

Transportation;

Safety, Security and Protection Services; and Industrial Businesses, and as well as in developing markets like China, Eastern Europe, and Latin America.

We leveraged this sales growth into an operating income of over $1.2 billion, an all-time record.

We are up 9.5% year-over-year.

The combination of aggressively managing our portfolio mix to drive our higher growth businesses, solid productivity gains driven by corporate initiatives, and pricing actions more than offset the significant rise in raw materials prices.

Research and development and related expenditures increased 3.3% year-over-year, as we continue to aggressively invest in future growth for the Company, especially in our Health Care and Display and Graphics Businesses, and in our new technology platforms including nanotechnology and filtration which we discussed at our investor meeting in February.

First quarter net interest expense was $4 million versus 9 million last year, primarily due to lower net debt levels.

The tax rate as anticipated for the quarter was 32.5%, down 50 basis points year-on-year.

This reduction is due to the combination of the Medicare modernization act and the manufacturer's deduction which was part of the 2004 American Jobs Creation Act.

We expect to remain at this rate for the remainder of 2005.

Quarterly net income increased 12% year-on-year and earnings per share improved 14.4%.

The P&L on a sequential basis is found on slide number five.

Sales were up 1.5% versus the fourth quarter of last year, as five of our seven businesses drove positive growth in the first quarter.

We leveraged our sequential sales increase into a 12% operating income.

Operating margins improved by 220 basis points sequentially, driven by a combination of continued focus on productivity, and process improvements along with the improvement in global pricing.

Also, recall that our fourth quarter margins are typically the lowest of the year.

On a sequential basis, net income and earnings per share increased 12.4% and 13.2%, respectively.

Please now turn to slide number six where we will examine our results by business segment.

Our Health Care Business continued to gain momentum in the first quarter with sales exceeding $1.1 billion, up 5.2% in local currency year-over-year.

Sales were led by double-digit growth in Aldara which is gaining significant traction in the dermatology market for the treatment of actinic keratosis and basal cell carcinoma.

We also experienced solid growth in our medical supplies, dental, Orthodontics and health information software businesses.

Operating income increased 18% to $309 million.

Local currency sales in our Industrial Business grew 2.6% the first quarter of 2005, coming off a strong first quarter of last year.

Growth was led by our braces and industrial adhesives and tapes business.

Industrial continues to drive strong operational discipline as operating income grew over 20% to $184 million.

Display and Graphics is also coming off very high growth in the first quarter of 2004 with increased sales of 20.5% in local currency terms.

First quarter sales were 862 million, were up slightly year-on-year.

Film sales in our optical systems business reached an all-time high in the first quarter as demand for LCD flat-panel display films will be accelerated.

Operating margins in our film business were in line with prior quarters.

The phase-out of our commercial videotape business announced in the fourth quarter along with the continued decline in the CRT rear projection television market, impacted both sales and operating income by about 2%.

Our Consumer and Office Business which had a very strong 2004 delivered first quarter local currency sales of almost $700 million.

The business implemented price increases in late 2004 and early 2005, which we believe impacted sales in the first quarter of this year.

Consumer and Office continues to benefit from a strong flow of new product introductions including first quarter launches like the Scotch contour tape dispenser and Scotch stretchy tape.

We expect new products to drive significant growth throughout the rest of the year in Consumer and Office.

The continued decline in our digital systems business, negatively impacted sales by approximately 2% during the quarter.

Operating margins remain very healthy over 17% to sales.

Safety, Security and Protection Services' local currency growth was 3%, driven across our broad based business portfolio.

Geographically, sales growth was led by Latin America, Asia-Pacific, and the U.S.

The Hornell acquisition had the 1.9% of growth in the quarter.

Office improved by over 6% year-on-year to $133 million.

Strong operational focus, restructuring benefits and portfolio management in our Electro and Communications business, resulted in an operating income increase of over 34% to $103 million, the highest income level since the third quarter of 2000.

Local currency sales decreased 1.4% year-on-year due to the continued softness of the telecom industry in Europe and the U.S., and an increasing competition in our flex circuit business.

Our Transportation Business which is participating in an increasingly difficult industry, drove local currency growth of 4.5% with operating income up 5.8% to an all-time high of $126 million.

Topline growth continues to benefit from new products and solutions for our customers along with our strategy of replicating successful 3M solutions across several distinct segments of the transportation industry.

Now if you will turn to slide number 7, I will review a few balance sheet and cash flow metrics.

Networking capital turns were 5.6 at the end of March, up 1.3 turns versus one year-ago.

Turns were down 0.2 versus year end which is down similar to last year's fourth quarter to first quarter sequential trend.

Inventories increased by $100 million versus last year or 5.3%.

Inventories were also up 83 million sequentially.

Currency translation effects added 47 million to inventory year-on-year but reduced inventory 31 million sequentially.

Accounts receivable were flat versus the fourth quarter of 2004, but up 107 million sequentially.

Currency translation effects added 68 million to accounts receivable year-on-year but decreased accounts receivable 60 million sequentially.

Capital expenditures were 235 million in the first quarter, an increase of 77 million year-over-year.

We expect our capital expenditures for 2005 to be approximately $950 million.

As I mentioned earlier, first quarter free cash flow was a very strong $768 million.

We paid $324 million in dividends to our shareholders during the quarter.

We also accelerated share repurchases for the first quarter.

In total, we acquired 671 million of our own stock resulting in a net repurchase of 476 million.

For the remainder of 2005, we have 1.4 billion available in our repurchased authorization.

Weighted average diluted shares outstanding were 787 million, down about 1.6% last year.

Our debt-to-capital ratio is 22% at the end of the quarter.

Please turn to slide eight where I will discuss our guidance.

While we face an environment of rising raw materials prices and a slowing rate of growth in mature economies, we remain confident that we will deliver outstanding financial performance.

For the second quarter, we expect earnings to be between $1.08 and $1.10 per share.

Local currency growth is expected to increase in the range of 4 to 7%.

For 2005 in total, we're reaffirming our expectations that earnings will be in the range of 4.15 to 4.25 per share.

Expect local currency growth of 5 to 8% for the year.

While these are challenging goals during uncertain times, we're very confident that our balanced business model will drive higher growth particularly in optical films, health care, and developing markets.

We continue to invest in world-class technology platforms and leverage to drive growth throughout our global business portfolio.

As demonstrated in the first quarter, we're gaining pricing traction and continue to drive productivity gains through the utilization of our corporate initiatives with much more to go.

We believe that our balanced growth and productivity model will enable us to drive outstanding cash flow and shareholder value over the long-term.

This concludes the formal part of today's call.

Joining Mark and me this morning are (indiscernible) Ginter (ph), our Director of Financial Planning and Analysis; and Bill Schmoll, our Head of Tax and Treasury; as well as Peggy Smyth, who is our recently appointed Chief Accounting Officer, who only joined us on Tuesday, but she is here participating with us.

We would be happy to address your questions.

So let's now begin the Q&A.

Steven Weber of SG Cowen.

A couple of things.

Number one, in your comments Pat, you mentioned that in Display and Graphics, videotape and the rear view -- rear projection TV costs 2 percentage points.

Was that 2 percentage each or combined?

That was on a combined basis, Steve.

Can you tell me, your inventories were up, if you adjust for the currency a fair amount.

What happened to the sales value of production and how does that look going forward?

Sales values of production, if you take currency out, was up about 2 to 3%.

We continue to work at inventories, Steve, to balance both satisfying customers and delivery needs, as well as building for the anticipated -- some of our anticipated businesses going into the last half of the year.

In Q1, we start to build inventory for tape, as an example, for the rest of the year as we get -- for back-to-school, as well as we do build ahead a little bit for some of the construction businesses, particularly in the traffic safety systems business.

When you look at that, does that include all of the materials costs, etc.?

Is there some sort of standard costs or does that reflect the going rate of materials and things like that?

It pretty much reflects what we're experiencing in the first quarter on the material front, which was a higher level.

Last question.

Can you size what currency did for you at the EPS line?

Somebody asks this question every quarter, so maybe I should just put it in the pitch because I think you know that we can calculate a number, and it is 4 cents if you look at the literal mathematics.

But again it gets into the impact of course on exchange rates, flow of goods, global economy and so forth.

So it's a little more difficult to actually be precise as to the exact impact, but if you just did the math it would be about 4 cents for the quarter.

Right.

Lastly, you didn't mention your plans for repatriating cash.

Has that changed in any way?

It has not changed at all from what we discussed at the investor conference in February or on prior calls.

It is the same.

We also continue to work on the repatriation of overseas dividends back into the U.S.

But until some of the nuances of the current tax legislation gets squared around, we're not ready to declare or disclose what that is going to be.

Okay, thank you very much.

John Inch of Merrill Lynch.

Thank you.

Good morning.

Pat, the definition of your organic growth appears to have shifted from volume to local currency, and given the pricing that would prospectively suggest that maybe the targets are about a percent lower.

I was just curious, is there anywhere specifically as this quarter has unfolded, that perhaps look a little bit softer today than what you were thinking when you gave the analyst update in February?

The update I gave in February was intended to be kind of a little bit of a multiyear view, a couple year view of the world.

As we have gotten into the first quarter here, there is no doubt that some of the economic trends have become a little more worrisome for us.

So oil price continues to be -- was at, of course, at an all-time high -- has come back here a little bit.

So there has been a few factors that has made it a little more questionable for us.

Western Europe, we thought was going to be slow.

It is actually running slower than we had thought.

I think the second quarter will determine a lot as to what the rest of the year develops into.

But again, our focus is -- we need to be able to balance where the economy goes, what our topline does and our cost structure so we deliver the kind of earnings that we promise you.

And we think that is one of the great things about our business model, is we have got some flexibility between topline and costs to bring home the earnings.

Pat, how about your Industrial Businesses in the U.S., not specifically just industrial, but industrial-type businesses in the U.S.?

Did the U.S., generally speaking throughout the quarter, did it -- kind of pulled in.

Are you seeing signs that things may be softening a little bit?

How should we be thinking about it?

The first quarter is going to be a little difficult to read, John, because we did institute a number of pricing actions in the first quarter, and I know a number of competitors also did.

This is a little bit unusual in the industrial space right now as compared to the past couple of years where it has been more of bold (ph) price to price down type market.

I think it is going to take a while to sort out exactly what is going to materialize here.

But when you look at things like auto production in the U.S. and so forth, it surely was very difficult in the first quarter for the domestic industry.

So, we remain cautious, but at the same time ready to supply as the economy determines.

Just lastly, Pat, you mentioned I think in your comments that pricing may have put a little bit of pressure in a couple of areas.

Is there anywhere specifically that some price action you decided to give up some topline and go more for profits?

I don't know if we have consciously went -- I view pricing actions as really been kind of a long-term issue.

We have got to get on with getting out some of the raw materials headwinds that we are facing.

Obviously, you have to look at what the short-term impact is because you surely don't want to destroy your volume position.

It is a day-to-day, week-to-week monitoring as to our competitive position and how well the pricing fix sticks in the market.

So we continue to work our way through that, but our price increases were very, very broad based.

Okay, thanks Pat.

Robert Ottenstein of Morgan Stanley.

I am going to try to maybe we ask some of the questions that have been asked so far, because I am not sure I'm getting a really good answer yet.

End of January or so, you talked about 5 to 7% volume growth in the quarter, and it is obviously considerably less than that at 1.8, and yes, Europe is a little weaker than expected, but -- I was wondering if you could give us a little more sense of what is going on.

We knew about Easter, right?

You knew about the price increases that you were getting.

Do you think there was just maybe more prebuying in the fourth quarter against price increases, number one?

Do you think you lost marketshare?

Or do you think that as you were raising prices, customers kind of held off buying to see if those price increases would come into effect or try to get better prices from somebody else, or just see how serious you were?

I'm just trying to get again a little more feel for one, the impact of the price increases on the volume; and second, what you're really seeing out in the world because the actual results here are very different than the guidance on the volume side.

Robert, I think that is a very good question.

To deal with your -- you got two parts.

You had a prebuying question and you had kind of hold off.

The reality is I think it was a combination of both that took place in the markets.

In many cases, we have to preannounce our price increases as part of our contractual obligations with customers so that gives them a heads up when it's going to come.

So there is no doubt that our very strong fourth quarter in retrospect had probably some prebuying activity in it.

At the same time, as I think there is probably a few that are of course trying to hold off, but with buying see if they can shop for a better solution elsewhere.

But we have not seen any kind of penetration erosion in our major businesses thus far, to at least my knowledge.

So we keep a very close very, very close eye on that because we're not in the game of just raising prices to say we raised prices.

We have to constantly look at the price value equation that we have in the marketplace, and essentially our competitive position.

So I am not at all concerned with our first quarter performance from a competitive perspective, from a penetration level.

If anything, I probably underestimated the impact of maybe the ramifications of some of the price increases.

And you're very fair to say that Easter has not changed since last, so that is not a reason why it has moved.

It is just more of a year-over-year comparative issue than anything else.

In your comments, you said, "now seeing a more normal business pattern emerge".

Can you elaborate on that comment and what you're seeing in April?

April, if you look at our quarter, I would say that we had an upper first part of the quarter than we did the last part of the quarter.

March was good for us and we see that continuing on thus far in April.

So that gives us more of the emerging business comment that I have in here.

That is what we are seeing.

We are seeing more like we saw more towards the last half of the quarter than we did the first part.

So you are saying the first half of the quarter was very tough and then things picked up?

I would say the first half was a little more sluggish for us coming off of the real strong fourth quarter.

The first part was a little -- quite a bit below our expectations versus the last half of the quarter.

Thanks a lot, Pat.

Jack Kelly of Goldman Sachs.

Just as a follow-up, you kind of gave some reasons but maybe just want to get you to prioritize them.

If we are going to pick up to 5 to 8 for the full year in terms of local currency, or 4 to 7 in the second quarter versus the two-ish in the first quarter, you had mentioned Health Care I guess accelerating from 5%, optical film accelerating from where it was.

What else is going to happen -- the lack of the Easter comparison.

But what other things would you put in there because it seems like Western Europe and Japan, Pat, are going to stay weak, from your comments.

Yes, and of course we got to have flexibility in our planning.

I guess if I think of a couple specific businesses that come to mind, consumer as an example, we expect to be quite a bit stronger the rest of the year than it was here in the first quarter.

I think industrial probably will be stronger the rest of the year versus the first.

Health Care we expect to continue to accelerate its growth.

Display and Graphics will probably be an upper question.

I think they will still have an upper comparison here in the second quarter when they kind of reach their peak performance.

And then the question is, as long as the, which we expect, the LCD continues to take off the last half of the year, roll again at another increment, we expect them to grow more at the back half of the year.

And I think the other businesses will continue to improve, look at safety and security, probably upping their sales growth percent a little bit during the rest of the year as well.

Just why is consumer going to accelerate, you said quite a bit?

I think -- you always get into this comparable issue, Jack.

And back to Robert's question on prebuying activity and so forth, if I look at our consumer business it is very clear to me that we had some prebuying going on in the fourth quarter which did not happen in the first quarter.

I think that will be flushed this way through the system here by the second quarter and through the rest of the year.

Okay.

Finally on optical film, you had mentioned in the press release, it was a solid performance along with Health Care.

Are we back to double digit growth year-over-year in optical film?

And do you think we can get back to where we were some point this year to what we did for the full year last year, which I guess was in the 20 to 25% area?

The answer to the first part of your question on near double-digit, that is a pretty true statement.

What is going to happen the rest of the year is, we are gearing up a new facility to produce both quantity, improved quality and better costs to keep our leadership position in optical films.

So we're well-positioned to take on what the market needs in the last half of the year.

The forecast that we are currently seeing would be for an acceleration of growth in the last half of the year.

What the rate is going to be, our customers of course will determine for us.

But we are highly optimistic for the back half of the year for optical films.

So you're characterizing, you're going to have film that is available.

So you're saying you're going to have the supply but the issue has really been demand, hasn't it Pat?

No, we're not changing at all the view of what we think of the opportunities for optical films, LCD panels.

The real issue, of course, is what the customer is going to need.

We don't see anything right now that is in the way of a continuation of their increase in demand.

What the rate of growth is I can't really predict.

I think we showed you guys in February that if you look at the total LCD market, there is probably -- should draw at a long-term rate of about 45% a year.

If it grows that rate the last half year, I don't really know at this point in time, Jack.

But we feel very good about our position so when the volume is there we will be ready to supply our customers.

Thank you.

David Begleiter of Deutsche Bank.

Thank you.

Good morning Pat.

On LCDs, when you do bring up the new facilities, do you expect some initial onetime hits to the operating margin?

No, not really.

It is like building a new plant; it is a new building and so forth which has another generation of new process technology and so forth.

But we're not expecting any significant startup related inefficiencies that would have a material impact on our overall margins.

Longer term in that business, Pat, can you sustain -- how long can you sustain these operating margins in optical, given it is a technology business at heart and margins do erode pretty substantially and quickly in technology businesses?

The challenge to the business is to maintain the margins that we have been running at and that is a combination of, of course as we get more volume (technical difficulty) and the industry will demand some price down.

But the way to win at this game is to keep on -- as a leader in technology, keep our process capability up, get our quality -- continue to improve our quality as well as get our cost position where no one can touch us.

That is really the game plan there, and continue to add more value for our customers.

Just on the price down, is it double as you expected back in February, double this year versus last year?

No, I would not say it is double what it was last year.

I thought Jim said, price down would be 10 to 20 every six months, or is it 5 to 10 in the prior?

At this point in time, we have not -- it becomes, David, it becomes somewhat of a tough calculation because we are constantly reinventing the product for that space.

So it becomes a little bit commingled.

But we have not, thus far, seen a significant acceleration in the rate of reductions at this point in time.

Okay, thank you very much.

Jeffrey Sprague of Smith Barney.

Good morning everyone.

Just back to the guidance.

I wonder, Pat, since we do have a definitional change, at least here in the first quarter out of the gate, can you bridge us and just clarify how much price is actually in the 4 to 7 and the 5 to 8% growth target for '05?

Jeff, probably not precisely.

As we talked here about the quarter, looking at price volume is a -- you've got to try to find the optimal mix of those to drive both revenue and profitability for the business.

We have got 50 basis points of price here in the first quarter.

At this point in time, I would expect that number to actually improve a little bit for the latter half of the year.

Just looking at -- we don't get -- we got some balance sheet items so we don't really have all of the detail around the operating cash flow and the cash flow statement you give us.

Operating cash flow grew about half earnings, half of the rate of earnings.

Is there anything else going on with cash taxes or retention (ph) or anything else in the quarter that negatively impacted cash flow?

No, I would say the biggest item I drew attention to was, our CapEx was up $77 million.

No, but looking at operating cash flow before CapEx, you had about 6% growth year-over-year.

Offhand, I can't think of anything, okay, that is unusual there Jeff, but the guys can get back to you on that.

Just one final thing.

On Display and Graphics, I guess stripping out the CRT and the video, you still only have very modest single digit growth.

We establish that optical was actually fairly solid.

So could you give us a little color on what is going on in commercial films and maybe the other pieces there that sounded like they had a fairly rough quarter?

It was a little more flattish in the other businesses for the quarter -- traffic, safety and commercial graphics.

Traffic Safety, we continue to wait for -- not wait, but hoping that we get a new Highway Bill enacted.

Our penetration in that business continues to remain very, very strong on a global basis.

There is -- I can give you a whole litany of reasons, wet weather, okay, and so forth, which in the south and so forth, has delayed some of the construction projects which should imply that we will get some of that back in the later part of the year.

So nothing from a performance standpoint that is a concern at this point in time.

Thanks a lot.

Robert Cornell of Lehman Brothers.

Good morning, Pat.

Mark, how close to the 4 to 7 run rate for the second quarter were you actually achieving, as in the second half of this quarter?

I would say that we are right in that ballpark of the low-end of that range.

I think it would be fair to say that.

Just in terms of -- you mentioned some of the international growth slowing.

You didn't mention China at all.

What is happening in China -- anything?

A lot of people think China is slowing.

What do you see?

I have to tell you China remains very, very strong for us.

Of course the economy has slowed some degree there, but our China business remains still very, very good.

I think I mentioned on some previous calls, in previous conversations with many of you, that we still believe that we are underpenetrated in China.

So our ability should be to still grow faster than the overall economy in China, so our plans remain still in place to achieve what we have told you for China.

Can you give us a little more flavor on why Japan was soft and maybe go back and talk about Europe a little more too, in terms of why that is soft?

And how are those weak markets going to contribute here in the second quarter?

I wish I could give you more explanation on either one of them.

My take is Western Europe is -- it will be a sluggish economy.

There will be a little bit -- I brought up the issue of Easter which will be kind of more like Q1, Q2 flop, so we expect Q2 to be a little bit better.

But our planning for Western Europe is a very, very flat economy and so that is how we are dealing with it.

We are putting resources more in Eastern Europe to pick up where the volume growth will go to.

That is what our strategy is.

I think it is a relatively foregone conclusion, that is going to be what is going to happen here.

And let's face it, it was running strong first part of last year.

It fell off quite a bit at the back-end of last year.

We do hope it gets a little bit of a recovery here.

Our businesses, though, in Japan continue to perform very well vis-a-vis the local economy.

I guess the final question for me is, if you run into sort of like a four-ish in terms of growth rates now, what would it take either geographically or product-wise to get you into the middle of the high end of this 4 to 7% range you're talking about for this quarter?

I guess a couple of things.

One is, we have to continue to drive our price action.

We have to continue to get some of our businesses up here a little bit from -- consumer needs to have a strong second quarter.

We expect industrial to be the same thing.

We'll still have a relatively tough comp in D&G for the second quarter because their film sales were at a very high-level in the second quarter of last year.

So those will be a couple of businesses, and of course Health Care has to continue to accelerate its growth as well to be at the high end of the range.

I guess I just remembered, no one has asked about the inventory issues out there in the film business.

What do you see?

Has that been cleared up?

Are you still seeing anything?

What is going on?

It has eased, we think, to a large degree.

The bubble that we saw at the tail-end of last year sort of worked its way through the manufacturers' pipeline at this point in time, is what we are seeing.

Thanks very much, Pat.

Jeff Cianci of UBS.

Just curious about this Electro profit swing on the cost side.

Volume didn't change that much.

Is it a mix?

Have you discontinued some product lines?

I know Brad has been in there trying to clean it up.

Are we talking about mostly cost of Six Sigma here or is there a notable mix shift in the profit numbers?

There are a couple of things.

First of all, just so you know, Brad is not running Health Care.

I just want to make sure everybody knew that.

And Joe Harlan is the Business Leader down there now.

If you go through a couple of years here, we have spent a lot of time and effort resizing Austin so it can be a much improved, much more profitable business.

I think in the quarter they ran about 18% margins, which are really good results for them.

So it is heavily cost.

It is working on the portfolio.

Making sure we are in the higher profit businesses.

The other piece is, and it relates a little bit to the opening comments that Mark made, we had moved one of our businesses, which is a good high-growth business, our Electronic Markets Material Division, to Austin the first part of this year and they had a very good quarter.

That is a great marriage with the businesses down in Austin.

A combination of factors, but honestly with the topline shrinking, it really was a cost story.

Part of it is the investment that we have put in in Austin to restructure the business the last couple of years which has hurt them.

It's starting to gain some payback done there now.

So for the full year for E&C you see a similar pattern?

You have easier comps and sales in the latter half and perhaps moderating profit growth?

Without giving any number, are we talking about double-digit, strong double-digit, bottom-line and maybe a single digit topline for the year?

As you are aware, that business is a little more dicey to forecast.

We still see a continued strong trend in that business.

I don't see Q2 as being too dissimilar from Q1, but that is about as far out as I want to go right now.

Great, thanks a lot.

Michael Judd of Greenland Consultant.

Thanks for taking my question.

I guess my question is more across the board, sort of macro.

Your pricing was up only half a percentage and you have discussed the reasons why, but I am interested in getting a sense from you.

Obviously raw material costs have gone up a lot.

Can you talk a little bit about sort of the variable margins in some of the businesses?

Also, with the economy a little weaker than people would anticipate, when do you think that you might -- and in which businesses might you have some pricing power?

From a price standpoint, again it gets back to -- where you've got the best opportunity, of course, is where you've got the strongest leadership position.

We have that in a number of different markets.

But also we have to keep looking at where competition is going and so forth.

So we will continue to look at what the right trade-off is from a pricing standpoint in the marketplace.

Can you go back to your first part of the question again?

I was just wondering if you could kind of run through the businesses.

And I realize this is not perhaps the way you look at it, but from a variable margin perspective -- in other words, the price of the product minus the raw materials costs.

How are things trending in the various businesses?

That is kind of a limited view because from our standpoint, if you just take price minus raw materials, our challenge in the businesses, you may not trade those two off one for one; you do the best you can.

But it forces us into driving other productivity improvements within the Company as well.

If you look at the gross margins of the Company, the gross margins year-over-year did improve which gives you an indication of how well the enterprise manages, I will call it, more the variable side of the business which, as you know, is strong year-over-year improvement.

But it is not literally just price minus material.

It also gets into factory productivity and the like, which a lot of our corporate initiatives get right after.

If you were to look at it purely as price minus raw materials, in most of our businesses in the first quarter we probably did not offset raw material increases with enough price.

Philosophically, as you think about that, obviously you would like to push those higher raw material costs, right?

Are there price actions in particular that are being taken here?

There are price actions that have been taken during the first quarter which we probably have not seen the full effect yet, until we get probably another quarter in, that we will continue to push.

Enough to make up, though, for those higher costs or will we be kind of --?

I guess the way I would -- if I was in your shoes, what I would have a tendency to look at is what are we doing in gross margins.

That is where you get price minus material, minus our factory performance.

And I think you will see that we are one of, I think, a few companies who have been able to continue to expand gross margins while you have a raw material game that has gone up pretty significantly.

Okay.

Secondly, you have been generating a lot of free cash.

You have been paying more dividends which is great, and you have been buying back stock.

And you mentioned that you still have quite a bit of money on the table allocated for share repurchases.

Should we just expect that this is what you are going to be doing with your cash vis-a-vis acquisitions?

That is a fair read of what we have on the table, as we've announced the dividend increase.

We have a share repurchase program out there.

We continue to look at the acquisitions, the pipeline, where the market is.

See if there is something that fit in our portfolio that would very well with our technology or give us another growth opportunity, continue to look at those.

But the core program that we have got out there on funding organic growth, keeping our lead businesses growing, getting our developing markets the right kind of investment they need, paying back for shareholders on dividends, repurchase activity.

That is our game plan right now.

Perfect and congratulations on a good quarter.

Steve Tusa of J.P. Morgan.

Good morning.

Just a question.

Corporate unallocated was a little but higher.

It is kind of a lumpy number.

It jumps around a little bit.

Anything particularly in there or should we think about that kind of number going forward?

Well, it is a little lumpy as you are well aware of.

We don't have any of the specifics as far as numbers go to talk about.

But you will be seeing in our 10-Q that we have included in there a proposed settlement for some indirect purchasers which is a class action group that is a follow-on to the LePage (ph) settlement.

There is some money in there.

It is not a material amount for us.

So that is the one item that happens to be in there this quarter.

Okay.

As far as Health Care is concerned, pretty solid quarter.

On Aldara, what is the -- how, so far, is the success in the new AK indication?

There has been some news that some of your competitors in the topical cream side, have increased their marketing muscle behind their product.

Are you seeing any kind of competitive impact that would make you a little bit more incrementally cautious on the target for that indication of, I think it's like 400 million plus?

Our view of the potential of that product continues to be the way it has been.

I think we're seeing, of course, people realize the strength of the product in the market.

So that reinforces I think the strength of the product offering that we do have.

So we continue to drive-through our plans for Aldara.

We feel good about where we're at.

Lastly, reissuances of treasury stock.

Where does that number end up?

It was around 200 million for this quarter.

What do you expect for the rest of the year?

Maybe, Bill --?

As far as the number of shares or the?

Well the cash flow impact of that.

We still have an authorization outstanding of 1.4 billion.

Okay.

I will get that off-line.

Thanks.

That is the amount we still have left within our authorized program.

Okay, thanks.

That is a net of buybacks as well as reissues.

That is a net number, thank you.

John McNulty of Credit Suisse First Boston.

Good morning Pat.

Two quick questions.

On the industrial margin, we saw it hit a pretty high-level, basically the highest we have ever seen, over 20%.

Is that something -- is that a function of our electronic tape business not being in that any more and having it being shifted over to Electro and Communications?

Or is this a division where you saw much stronger pricing relative to maybe some of your other divisions?

Can you give us an idea if this is a decent run rate going forward there or if there were some onetime blips in it?

I am glad you brought up the industrial margin because I inadvertently didn't bring it up because they did have over 20% margin.

This is not an issue of moving out the other business.

It did not have that material to the impact.

This is the result of good operating performance of the Industrial Business continuing to focus on driving price actions through the marketplace, continuing to drive operational efficiency throughout the business, getting at some emerging market growth opportunities, getting those funded and resourced.

So this is about good operational performance in the industrial business.

So we should not be expecting this to slip back?

No.

On the acquisition front, we have seen acquisition activity just in the broader market really pick up a lot.

In the areas that you're specifically kind of targeting or looking at this point, is the acquisition environment would you say more favorable than what you saw even a few months ago, or are we basically in the same boat that we have been in for a while?

I think it is fair to say that it is probably more of the same.

A lot of money out there chasing deals.

We continue to try to find the right combination for us.

But the market is still generally, I would say, on the pricey side.

Okay, great.

Thanks a lot.

That concludes the question-and-answer portion of our conference.

At this time, we will turn the call back over to 3M for some closing comments.

Again, thanks for joining us this morning.

We're looking forward to reviewing another great quarter with you on July 18th.

Thank you.

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

You may all disconnect and thank you for participating.