3M (MMM) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the 3M first quarter 2007 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, Thursday April 26, 2007.

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

Good morning.

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

And welcome to our first quarter 2007 business review.

Allow me to make a few brief comments before we begin today.

As usual, today's discussion will follow a series of PowerPoint slides, which are currently available on our investor relations website, at www.3m.com.

These slides will remain on our website along with an audio replay of today's call for an extended period of time.

During today's conference call, we'll 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.

Item 1-A 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.

George Buckley, our CEO, and Pat Campbell, our CFO, will both make some formal comments today, and then we'll get to your questions.

We know how busy you all are during the earnings season, so we'll do everything in our power to keep today's call at about one hour.

You can help us during the Q&A by limiting yourself to one question and one follow-up so that all questions can be properly addressed.

And remember, Bruce and I are available all day to answer your specific follow-up questions.

I'd also like to remind you that we'll host our next investor meeting in St.

Paul on the evening of October 9th and on the following day, October 10th.

The meeting will include a combination of business presentations, several opportunities for informal conversation with management, and a plant tour at one of our nearby manufacturing sites.

A formal invitation will be out very soon, but please mark your calendars accordingly.

So now I'd like to turn the program over to George Buckley.

Good morning, everyone.

As you can see from our press release, it's a very good morning indeed.

It goes without saying that we had a fabulous quarter.

Sales reached an all time high of $5.9 billion, up almost 10% on last year, with the operating potion of EPS at $1.28 up 14.3%, if I correct for the 2006 lost sales from pharma.

We achieved this despite challenging year-over-year comparisons.

You'll recall that we had over 8% organic growth in Q1 of last year, and here we have achieved another 5.6% of purely organic growth in the quarter.

I think this is absolutely stupendous.

I'm especially pleased with the breadth of our strength, all of our businesses posted positive sales growth, there was a near endless procession of good results from such important 3M units as OH&ES, dental, medical, and industrial [tips] and adhesives.

When they do well, the Company does well.

This performance is especially pleasing, given what we have seen -- a much slower growth in the United States and some parts of Asia in December.

Earnings not only exceeded our own expectations, but we more than overcame the loss of pharmaceutical sales and earnings in our numbers.

You'll recall that, because we retained a small activity to supply key pharmaceutical ingredients to the new owners, accounting rules prohibited giving discontinued operation status to this old business.

I'd like to tell you first about the general business conditions with the intention of demystifying the complex set of moving parts in a company like 3M.

In general terms, the U.S.

still remains a tale of two economies.

Sales into aerospace and energy markets were very positive and robust and from last week's [Durable Goods Order] Report, it looks likely to continue.

Sales into the U.S.

housing market were mixed, with some positive and some negative signals.

Beyond these factors, though, growth of 3M was pretty strong everywhere.

Currency was our friend in many places, but its positive contributory effects were often completely offset by a combination of negative price and cost inflation.

After the world economy, international sales growth was overall very strong, though with a few pockets of weakness, as you'd expect.

For example, sales in China rose by 30%, in Russia by 44%, India, 25%, and the Gulf region, by 31%.

In big countries like Germany we're up 11%, the U.K.

by almost 20%, and Italy by 9%.

Latin America also did very well, with sales up a hefty 12.1%.

Before you think this Latin American growth was off a small base, Columbia sales in 2006 were about $1.3 billion.

This is the power of 3M's international distribution at work and testimony to the entrepreneurship and creativity of the people working there and driving growth.

We did see pockets of slow growth in Japan and Taiwan, with these countries being more or less flat in sales as a whole.

Some of this is caused by movement of products traditionally manufactured in those markets to new manufacturing bases in China.

Taiwan appears to be the most affected by softer sales in consumer-oriented electronics.

LCD TV markets remain very strong for us and are gradually showing more stability as this market continues down its long pathway to eventual maturity.

I'm pleased to say that there's a lot more discipline in the market now.

As one might expect, we are seeing a little more seasonality in optical systems division as LCD TVs become a bigger part of their sales and monitors less so.

This is all very normal.

Outside the LCD TV markets, component sales into the electronics-related markets were a little softer.

Though some of that challenge was driven by end of life products in phones and printers.

Gross margin for 3M declined in the quarter by 200 basis points, but some of this is just an arithmetic peculiarity.

Pharma was responsible for just over 100 basis points of this decline and was wholly expected.

So gross margin is a marked sequential improvement over what we saw in Q4, commodity inflation and currency responsible for most of the balance.

Pressure on commodities will be a fact of life going forward, and in many cases, we are reformulating product to use far less of these key raw materials.

We remained cautious in our spending patterns, given a potentially wobbly U.S.

economic outlook and tough year-over-year comparisons.

It's been our deliberate and determined strategy to leverage corporate overhead spend and avoid adding head count in that area.

I don't expect to see any change in our approach there.

In fact, I expect it will gather momentum as the year goes forward, as sales increase, and we hold corporate costs as close to constant as we can.

At the same time, we continue to invest heavily in R&D and are working very hard on several breakthroughs in industrial, optical and electronic technologies that we hope to show investors at our meeting with you in October that Matt mentioned earlier.

Please be aware that previous pharma spending distorts our R&D spending numbers, somewhat.

We're also investigating the purchase of a couple of new technologies from outside our Company for use in our core business, as we push up the already high rate of technological development at 3M.

While the areas we are looking at are not expensive in our terms, the potential purchases are just great ideas that will help build and protect the enduring core franchises of 3M.

I'm extraordinarily pleased at the way our scientists are helping us push the competitive envelope these days.

Good for them.

I am very proud of them.

This aspect of the old 3M is coming alive again faster and faster as every day goes by.

We've completed six small acquisitions since the beginning of the year, as we continue our steady diet of small, low risk bolt-ons.

Some of them, like the pipeline-coating business of E Woods in the U.K., are very important to markets in oil, gas, and water.

3M's portfolio breadth allows an almost endless stream of these kinds of acquisitions, and we expect to remain in this mode for the balance of the year.

This approach will add 150 to 200 basis points to our annual sales growth rate.

We have, by the way, been making these small acquisitions at very moderate multiples since they are mostly below the radar screen levels of private equity.

Each them plants a seed of high growth in coming quarters and years.

We are very happy with the work we've done so far on [bull-walking] 3M's historical base.

As opportunities arise, we'll now bring additional focus and investment to our dental, medical and industrial safety segments to strengthen our enduring franchises in these areas.

These investments will continue to build on the strong core of 3M's technology and manufacturing base.

A big question mark going into the quarter was how the U.S.

consumer would do.

Our consumer and office business, which is roughly 60% U.S.

based, grew sales by a strong 10%, and that growth was very broad based.

We saw 7.1% growth in the U.S.

and slightly higher overseas.

A long train of positives in C&O was led by our consumer and home improvement division, whose sales in the quarter grew by 15%, all led by new products.

Earnings were also up 15%.

This has all been about the creativity of the C&O people, and many new products which mitigated and overcame the underlying weakness in paint and drywall areas.

We believe that there was some shelf restocking at major home improvement retailers in Q1 that complimented the destocking we saw in December.

This probably gave us some extra lift in the quarter.

But the primarily influence, right across this segment, was driven by new products.

Automotive markets were also a very pleasant surprise to us this quarter.

Sales in our automotive OEM unit rose 4.5% and earnings rose by 15% when we saw similarly good performance in the automotive after-market.

Not bad at times like these.

Sales in our two energy market businesses grew a combined 25%, all organic, and with great earnings leverage.

We worked tirelessly to drive growth and change all across 3M, and even in these more bumpy economic times, it seems to be working.

Understandably, you can't see inside 3M in the same way that we can, but I will tell you that 3M's people are almost universally inspired by the message of driving growth and the investments we're making in our Company.

Even though we have a great deal still to accomplish, we're nevertheless very pleased with our progress.

We're driving our growth agenda forward, and at the same time, reinvigorating all aspects of 3M; culturally, structurally, and financially.

Conceptually, our growth model is quite simple; growth can be thought of as a figurative pipeline delivering products to our customers.

Our job is to make sure the sending end of that pipe is more effective by using our legendary invention and innovation model to get the right new products and inventions ready quickly.

We also need to make the receiving end of the pipe better by delivering the right kind of customer service, products, and brands to inspire customers who penetrate local distribution.

And we need to make the pipeline itself flow freely by keeping it short, direct, speedy, leak free, and of large enough capacity to deliver the needed volume.

Acquisitions help all three elements of this simplified mental model.

A big piece of the heavy lifting here is restructuring of our supply chain.

It's not glamorous work, but it's a vital ingredient in the mix of our growth strategy, and it's also needed to get our effective tax rate down.

By doing it, we get what Americans would call a three-for; working capital, cost, and growth, all at one time.

Most of you know we had a pretty complex supply to the pipeline with back feeds and reentrant loops; jug handles, as they are sometimes called in navigation parlance.

You also know that we're vigorously investigating in capacity to address unmet demand and grow our traditional core, and that we're building these pipelines in the market -- to supply directly to the market.

We think growth can accelerate as this new capacity comes on stream and as we deliver that capacity to the market with much better customer service and efficiency, both in terms of costs and of working capital usage.

3M currently has under construction 19 new plants or plant extensions, and there will be more to do once we've digested this phase of our rebuilding.

We aren't doing this because we secretly want to be in the construction business.

We're doing it because we got behind and our customers are demanding it, and we can't afford to grow working capital wise with historical supply chains hundreds of days long.

You can see that in our numbers.

Nor, equally importantly, can we meet our customer requirements.

I've read some research that questions why some of this plant construction is in the United States, but I would only humbly point out that we still have growth in the U.S., albeit at slower rates than internationally.

We're not building new plants in the United States, just extending existing plants and doing it where the core manufacturing competency for that product lies.

It's no more sensible to send product to the United States through long, unconvoluted supply chains from the far east than it is the opposite way around.

We're putting capacity where the demand is, to try to keep the customer service levels up and the working capital demands low.

We need that to drive our ROIC, subject to getting the best cost and tax structures that we can.

Moreover, some businesses, like optical systems, do not scale well and live on a large technical ecosystem within a company like 3M.

To (inaudible) converting operations, the U.S.

is still the most logical place for much of the investment in jumbo manufacturing today.

Construction of the new OH&ES facility in Korea, on which we've invested about $140 million, is going very well.

About a month ago, I got my first trial samples of respirator masks from this new facility.

This will be the fastest build of any major new facility in 3M's history.

It's due to start up in July of this year.

We've also been dealing with the other side of this equation, too.

We announced the closure of a manufacturing facility in Eau Claire, Wisconsin, plus a small plant in Japan.

Their cost was included in the restructuring puts and takes that you saw in this quarter.

Because of growth, we do not expect to close very many plants in the United States.

But from time to time, you'll see us doing it where it makes economic good sense, and even then, it will be done slowly and over time.

We are renewing our focus on and our investment in R&D.

Our scientists and manufacturing process engineers are indisputedly world class in their fields.

And their creativity, combined with continued investment in technology, remains fundamental to our growth agenda.

We're working hard to create new technology and product platforms in such promising fields as electrical power transmission, renewable energy, minerals extraction, air and water quality, as well as strengthening our traditional core businesses.

We also seek considerable opportunity to localize, not only the manufacturing we've already discussed, but also our brand presence around the world through product customization and use of local brands.

As we gain distribution access, we are able to pull-through our mega-brands such as 3M, Scotch, Scotch-Brite, and Post-it, and drive preference in local customers for those brands.

For the rest of 2007, our main priorities are clear; firstly, to increase the horsepower of our growth engine and to leverage it to the bottomline.

Secondly, continue the drive for factory costs and gross margin improvement.

And thirdly, flawless start up of our new manufacturing lines and plants.

For the second quarter, we expect to see similar economic conditions and sales patterns to Q1, with perhaps the end to shelf restocking in the home improvement market.

We do not expect to see any large rebound in the U.S.

or Japanese economies for us until later in the year.

Nor, on the other hand, do we expect to see any recessions.

Home construction markets will likely remain weak here in the United States for the foreseeable future.

And the forecasts of automotive unit production in the United States to be at the lowest levels since 1992.

So a level of caution is in order for now in those markets.

For the end of the second quarter, I expect year-over-year comparisons to begin getting better on roofing granules, if for no other reason than the low levels of business we began to see at that time -- at this time last year.

But that will contribute positively to our performance.

LCD TV construction is likely to be quite a bit stronger than last year in the second quarter, though there will be continued and expected downward pressure on price until the market reaches maturity.

As a matter of interest to you, to offset this, we successfully experimented with a new manufacturing approach that will double the capacity of our newest optical full line indicator with essentially no capital investment to speak of.

This change will produce higher yields in large format TVs and add to the strength that 3M has in this segment of the market.

We've also successfully developed a way of recycling waste from optical films, to use as feedstock for some consumer and office products that will cut down on the cost of raw material, as well as being very environmentally responsible.

This will save us millions of dollars when we launch it fully.

So in conclusion, overall, we're not expecting large swings in the mix of sales in Q2, though there is reason to believe that the slower Asian sales will pick up somewhat as component part lines drain and as we move into the second half of the year.

Traditionally, the second quarter for 3M is stronger than the first.

The seasonality in LCD TVs will be a more normal feature going forward.

So undoubtedly, the second quarter will be stronger than last year, as we benefit from easier comps.

But we have a lot to do in rebuilding our Company, and we see no upside at this stage to increase our annual guidance without another firm data point.

So while we are cautiously optimistic and our plans are conservative, we remain committed to our current annual guidance.

Finely, I'd like to thank 3M employees around the world for their outstanding performance and results this quarter.

They did a simply wonderful job.

Now for a more complete picture of the first quarter, I'd like to turn the microphone over to Pat Campbell.

Pat?

Thank you, George, and good morning, everyone.

As George has already indicated, it was truly a great quarter fot 3M, from both a top and bottom line perspective.

As explained in our press release this morning, and as shown on slide number two; first quarter reported earnings per share are $1.85.

Included in this result are three special items.

First, in January of 2007, we completed the sale of our brand of pharmaceutical business in Europe, which resulted in an after-tax gain of $506 million or $0.68 per share.

Second, we undertook some business-specific restructuring actions that included head count reduction, asset write-downs and other costs pertaining to the sale of the pharma business in Europe.

In total, these items reduced net income by $9 million or $0.01 per share.

Finally, the various environmental regulatory developments occurred during the first quarter of this year, including increased regulatory activity in Minnesota and the receipt of a permit to begin work addressing perflourinated compounds in the soil and groundwater at a manufacturing facility in Decatur, Alabama.

During the quarter, we completed a comprehensive review with our environmental consultants regarding all of our environmental liabilities, which include the estimated costs of addressing trace compounds of perflourinated compounds in drinking water sources in the city of Oakdale and Lake Elmo here in Minnesota, as well as the presence in the soil and groundwater in our manufacturing facilities in Decatur, Alabama, and Cottage Grove, Minnesota, and several former disposal sites in the state of Minnesota.

As a result of these regulatory developments and our comprehensive review, we increased our accrued liabilities by $121 million in the first quarter of 2007 to address these plan remediation activities.

We expect that most of the spending will occur over the next three to seven years.

After adjusting for these items, earnings for the first quarter are at $1.28 per share.

Please refer to today's press release for a more detailed discussion of these special items.

As we discussed in last quarter's earnings call, Generally Accepted Accounting Principles prevent us from classifying the pharmaceuticals business as a discontinued operation.

Therefore, it creates a year-on-year comparability issue.

Q1 2006 revenues for the pharma business were $193 million, and operating income was $60 million or $0.05 per share.

Adjusting for pharma in the 2006 base, earnings per share increased 14.3% year-on-year.

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

The 3M team rose to the challenge in the first quarter and delivered truly outstanding results.

Our objective of accelerating top line growth, while maintaining superior financial performance played out in the first quarter, as we posted record sales, operating income, and earnings per share for any quarter in 3M's history.

Excluding the impact of pharma shown in the far right column and special items, earnings per share increased $0.16 or 14.3%, on sales growth of almost 10%.

Operating income was up 10.6% to $1.4 billion, with operating margins at 24.4%, up 20 basis points year-on-year on an excluding basis.

Gross margins were 49.3%, down 2.1 percentage points from last year's first quarter.

Approximately half of this -- half of the decline is the impact of the sale of the pharma business, which was a very high gross margin business.

The remaining decline was largely due to the weaker U.S.

dollar and higher raw material costs and somewhat on selling prices.

SG&A expense remained at $1.2 billion down 2.6% versus last year.

Excluding pharma, sales and marketing expenses were up in line with local currency growth year-on-year, as we invested in sales and marketing resources to drive accelerated growth, while our aggressive focus on managing our administrative expenses continues to pay off.

R&D and related expenditures were 5.5% to sales in the first quarter, versus 5.8% last year.

But please keep in mind that pharma required very heavy investment in R&D, in the range of 15 to 20% of sales.

Therefore, we expected our percent of sales to decline.

Excluding the divestiture, R&D and related costs were up 12% year-on-year, as we continue to aggressively invest in growth opportunities.

Consistent with our expectations, the tax rate increased in the first quarter to 33.2% or up 50 basis points.

Please turn to slide four for a recap of our first quarter top line performance.

As mentioned, first quarter worldwide sales increased almost 10%, prior to the negative impact of 3.8%, due to the divestiture of the global branded pharmaceutical business.

Worldwide local currency sales increased 7.4% versus last year's first quarter, including 2.6% from acquisitions and global selling price declines of 80 basis points.

Translation increased reported sales by 2.5% -- percentage points in the quarter.

In the United States, local currency sales improved 6.2%, equally split between organic and acquired growth.

Selling prices were up 80 basis points for the quarter.

The divestiture of the pharma business reduced U.S.

sales growth by 4.2%.

Therefore, reported sales growth was closer to 2%.

In our international operations, local currency sales were up 8.2%, including 5.8% organic and 2.4% from acquisitions.

Selling prices declined 1.8% versus last year, largely due to our businesses that serve the consumer electronics industry where price down is a way of life, but where there are high-volume growth and profit opportunities.

The sale of our brand of pharmaceutical business decreased our reported growth in international by 3.5%.

The impact of an overall weaker U.S.

dollar boosted sales by 4% in the quarter.

Europe delivered local currency growth of 13.3%.

Safety & Security Protection, Healthcare, and the Industrial & Transportation businesses were the strongest contributors to this growth.

U.S.

local currency results includes 5.4% of growth from recent acquisitions, primarily Security Printing Systems Ltd., and BioChoice International.

The pharma divestiture negatively impacted local currency growth in Europe by 7%, while currency translation increased sales by 8.7%.

Latin America and Canada combined to post local currency growth of 9.1%, including a point from acquisitions, led by our Industrial & Transportation, Healthcare, and Safety, Security & Protection businesses.

The pharma divestiture reduced growth in this region by 2.5%, and currency impacts were negligible.

Local currency growth in Asia Pacific was 3.9%, with Japan flat and the rest of the region up 6%.

Solid sales growth in Industrial & Transportation and Consumer & Office businesses were offset by declines in flexible circuits and optical films.

Again, the pharma divestiture had a 1.2 percentage point drag on sales growth, and currency translation added about 1 point.

Please turn to slide five for a discussion of our first quarter -- sorry -- so now let's dig into our business segment results.

Please turn to slide number five.

Leading off with our Consumer & Office business; they delivered outstanding results in the first quarter, with sales up almost 10%, to $814 million.

Local currency sales increased 8.2%, including 1.2% of growth from the Nylonge acquisition, a global provider of household cleaning products, including cellulose sponges, scrub sponges, and household wipes.

The acquisition has two primary benefits.

One, it expands our leading line of home scrubbing and cleaning products.

And two, it quickly adds manufacturing capacity in a growing core 3M business.

Year-on-year growth was led by the construction and home improvement business, serving the do-it-yourself retail channel, with products such as Scotch Blue Masking Tape for the professional paint trade, along with expansion of distribution of our Filtrete furnace filters, where we have recently added capacity to drive added growth.

Also leading growth in the quarter was our business supply -- our business' supply in the Consumer & Office mass retail segment.

In fact, our office supplies business was recently recognized by Staples as their global supplier of the year.

In geographic terms, we generated substantial sales growth in every major region of the world.

We leveraged the top line performance to drive year-on-year operating income growth of 18.1%, to $177 million.

Profit margins increased 150 basis points year-on-year, to 21.7%.

Safety, Security, & Protection Services also had an outstanding quarter, as shown on slide six.

Sales rose 19% to $758 million.

Local currency sales growth was 15%, with two-thirds of that growth coming via our August 2006 acquisition of Security Printing Systems, Ltd., a leading provider of finished, personalized passports and secure cards based in the U.K..

For many years, 3M has had a niche position in the passport market with securities laminates that prevent counterfeiting.

This acquisition allows 3M to deliver a full range of border and civil security solution products.

Organic revenue growth continues to be driven by the strong global demand for personal safety products, especially in respiratory protection.

I have mentioned before our plans for a new respiratory plant in Korea to supply disposable respirators for the -- in the Asia Pacific market.

The new plan is a testament of our overall strategy of simplifying and shortening supply chains by placing manufacturing closer to the customer.

Things are progressing very well, as George mentioned, and in fact, where we are doing some converting and packaging.

We are on track for a complete plant launch mid-year.

We also posted outstanding growth in two other businesses.

First, sales were up more than 50% in our corrosion protection, where we are aggressively penetrating the oil and gas market with unique pipe coating solutions for our customers.

As you may recall during the quarter, we announced the acquisition of E Wood Holding PLC, a U.K.

based manufacturer of high performance protective coatings.

E Woods' expertise in liquid technologies for new pipes and rehabilitation coatings for existing pipes in the oil, gas, and water market compliments 3M's core corrosion protection product offering of external powder coatings for new oil and gas pipelines.

Finally, we drove double digit growth in our Building & Commercial Services business, as well.

Operating income was $181 million, up almost 15% versus last year's comparable quarter, and margins were a solid 23.9%.

Our market leading quarter, and margins were a solid 23.9%.

Our market-leading roofing granules business posted strong sequential improvements, as industrywide inventories are now in better balance with demand.

However, our business was still down year-on-year, which negatively impacted first quarter sales and operating income growth by almost 3% and 6%, respectively.

Please turn to slide number seven.

Industrial & Transportation continued their strong performance in the first quarter.

Sales grew 6.7% to $1.8 billion.

In local currency terms, sales increased 4%, including a point from complimentary acquisitions that have helped to fill gaps in our product lines.

Most of our traditional Industrial businesses, such as abrasives, industrial adhesives and tapes, automotive after-market, and liquid filtration grew sales at a mid single digit rate in local currency.

While our automotive OEM-related businesses grew at a low single digit clip.

Our single products -- I'm sorry, our industrial products for the oil and gas and aerospace industry shows strong double-digit growth and are expected to continue at that rate.

We believe there is a clear line of sight to more growth in this business, and we're investing accordingly.

We're strengthening our core businesses like tapes, abrasives, and adhesives by increasing R&D expenditures and making complimentary acquisitions.

This business now is a strong pipeline of new products, such as the next generation acrylic foam tapes for automotive OEM application.

In this quarter, the business made three bolt-on acquisitions in the adhesives, tape and abrasives area.

Geographically, our Industrial business is making significant investments in China, India, Poland, and Brazil to better serve customers in areas of the world where growth is exploding.

Our automotive after-market business, where the collective family of 3M brands is the number one choice for body shops around the world, has launched a new line of consumer care products for the do it yourselfer.

Finally in the second quarter, we'll open a new laboratory and customer center in Houston, Texas, to bring 3M's wide array of technologies and research capabilities to customers in the energy extraction industry.

Throughout 3M's history, this level of customer intimacy has sparked both innovation and growth.

First quarter growth operating income was $411 million in Industrial and Transportation.

Please turn to slide eight for an overview of first quarter performance in the Electro & Communications.

First quarter sales in this business were $668 million, up 3.6%, and profits increased 8.4% to a record $130 million.

There are three primarily takeaways from Electro & Communications performance this quarter.

First, on the revenue front, we drove outstanding growth in both Electrical and Communications businesses.

Electrical markets division continues to deliver outstanding growth in a number of products and solutions for insulating, testing, sensing, and connecting to both power utilities and manufacturing OEM's.

In the Communications business, growth has been driven by the global development -- I'm sorry, global deployment of enhanced broadband services, which requires significant upgrades to existing communication networks to improve performance and expand the bandwidth needed to deliver enhanced services.

Second, we had a tough sales quarter in our Electrical Solutions business, primarily due to year-on-year decline in flexible connectors for inkjet printers, and to a lesser extent, semi-conductor and interconnect customers reducing inventory in the channel.

Finally, despite some sales challenges in the quarter, the business did a phenomenal job of managing its costs in the quarter, as profit margins were a record 19.5%.

Please turn to slide nine for a recap of first quarter performance for the Display & Graphics business.

Facing a tough year-on-year comparison, sales were up slightly versus the first quarter of 2006, and were a record for any first quarter in our history.

Commercial graphics posted an outstanding first quarter, with double-digit increases in both sales and profits.

Growth was broad-based, driven by the combination of new products, food and retail advertising, rebranding efforts related to merger and acquisition activity, along with international penetration.

In optical films, we're very encouraged to see the LCD industry taking a more rational approach to better balancing supply within market demand.

In the quarter, this resulted in our optical film sales being down a few points year-on-year.

Recall that last year's first quarter reflected a sizable inventory build that subsequently was corrected during the second and third quarter of 2006.

We have also consciously made the decision to focus on markets where we add the most value.

As a result, we have lost some penetration of optical films for low-end desktop monitors, but continue to have strong penetration in handhelds and notebooks, along with the fastest growing segment of LCD industry TVs.

Selling prices were down in line with our recent experience.

Our strategy here remains the same; that is, to carefully manage the price-down requirements of the LCD industry, while at the same time, growing total sales and profitability.

There is additional growth to come in this industry, and we are investing thoughtfully to support it.

We hope that this quarter's margin performance of 32% in Display & Graphics puts many of your concerns to rest.

Our business teams have proven successful over many years at relentlessly driving productivity via Six Sigma and Lean, and this quarter was no exception.

Looking ahead, we expect strong seasonal demand in the LCD industry in the second half of the year, as LCD penetration starts approaching 40% of the overall global TV industry.

It is very apparent that LCD technology will be the leading technology in the global TV market.

We'll be starting up our new optical film converting facility in Poland in the second quarter, supporting panel manufacturers and OEM's as they move operations to Eastern Europe.

We're also seeing continued improvement of our new DEBF manufacturing line here in the United States.

Both projects are tracking to their plans.

And lastly, please turn to slide 10, where you'll find the first quarter highlights for our Healthcare business.

Healthcare had an absolutely outstanding quarter.

Local currency growth included -- including acquisitions was 20% in the quarter, 15% of which was organic, and 5% which was acquired.

Of the organic growth, 4% was a result of the new supply agreements related to the sale of our branded pharmaceutical business, in which our drug delivery systems division became a source of supply to the acquiring companies.

And the balance of the portfolio grew at double-digit rates.

We spoke quite a bit during last year about accelerating investments in our core Healthcare portfolio.

And as you can see, these investments are delivering.

Sales growth was broad-based across Healthcare, with our drug delivery business leading the way.

For those of you less familiar with this business, we're a leading technology provider of drug delivery solutions, partnering in many cases with drug companies, by providing highly innovative components for both inhalation and transdermal delivery of medicine to patients.

During the quarter, we also saw solid sales in the clinical and hospital markets, both in terms of traditional stalwarts, such as consumables for invection prevention and wound care, as well as innovative software solutions to enhance productivity and data accuracy in the hospital.

Sales grew at double-digit rates in our dental business, which was recently recognized as the 'Most Innovative Company' in the worldwide dental industry for the second consecutive year, by the independent publication 2006 Dental Industry Review.

This award commended 3M's track of record of innovation, noting that the business led the industry with an average of 45 innovations per year over the past five years.

And finally, through acquisitions, we have added some key businesses and technologies that will bolster our leadership position in infection prevention and detection, as well as digital dentistry.

First quarter operating income was $269 million.

Excluding the divested pharmaceutical business from the first quarter last year, operating income increased by 12.7%.

Please turn to slide 11, where I will review a few balance sheet and cash flow metrics.

Working capital grew slightly faster than sales during the quarter.

As George discussed earlier, many of you are well aware of our efforts to streamline our supply chain to improve customer service and reduce working capital.

But this will take some time to fix.

Capital expenditures totaled $304 million, an increase of $114 million year-on-year and a decline of $100 million sequentially.

Total capital expenditures for 2007continue to be expected to be in the $1.4 to $1.5 billion, as we invest in a number of growing and highly profitable businesses.

Free cash flow, excluding special items in the quarter, was $670 million.

Dividend payments to our shareholders were $350 million, and we aggressively bought back stock during the quarter, with gross share repurchases of $1.2 billion, over 4.5 times the amount purchased in last year's first quarter.

In February, our board authorized a two year, $7 billion share repurchase program for the period of February of '07 to February of 2009.

As of the end of the first quarter, we had $6.1 billion remaining of the total authorization.

Weighted average shares outstanding were down 3.6% year-on-year and 1%, sequentially.

Our debt-to-capital ratio was 31% at the end of the first quarter.

This concludes the formal part of today's program, but before we open up for questions, let me summarize the quarter.

In the face of a tough year-on-year comparison, we delivered an all time quarterly sales record of $5.9 billion, up almost 10%, with earnings per share growth of over 14% after adjusting for the pharma divestiture.

These outstanding results were broad-based, as every business posted positive sales growth.

In short, we're successfully executing our strategy, which is to accelerate top line growth, while maintaining superior financial returns.

Now we'd be happy to take your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Mike Judd with Greenwich Consultants.

Please go ahead, sir.

Good morning and congratulations on a great quarter.

Thanks, Mike.

My only question is; it looks like the low end of the range that you gave, in terms of your earnings outlook for the year looks -- certainly looks very easily achievable.

And I'm just curious as to why you didn't increase, at least, the lower end of the range?

Mike, of course, that's a very legitimate question based upon our first quarter performance.

As we assessed the situation, we didn't really want to attack -- adjust our total year outlook.

We gave full year guidance last quarter.

Give us another quarter, and we'll take another look at it.

But surely don't read anything into not adjusting it relative to future performance.

We just want to get another piece of data before we look at it.

We're being conservative.

Congratulations again on a great quarter.

Thank you, Mike.

Our next question comes from Shannon O'Callaghan with Lehman Brothers.

Good morning, guys.

Good morning, Shannon.

Just on the organic growth, I mean, in the quarter, you're saying 4.8%, a little better than last quarter.

You guys are -- ex the acquisition impact you're looking for, you're still looking for roughly 4 to 8.

George, what do you think needs to improve from here?

What visibility do you have into it to maybe get closer to the high end of the range?

I think it's a little higher than what you said.

The -- there's a lot of momentum building in the Company with new products.

We're focusing a lot of -- trying to do -- have a lot more people, I suppose, working on fewer set of widely-spread programs.

I think as that kind of gets traction, you'll see this accelerating.

I also think that what we've done is we've reengaged our technical community.

And I don't know -- people tell me for the first time in a long time, the folks over in the labs now really are fighting with us.

They understand we've got to focus on things, we've got to stuff coming out of the pipeline.

And so I think as that gathers momentum, we'll see it.

I think another factor is, as we've been doing some of these acquisitions that you've seen, they broaden the product base, they make us more important to our customers, they get us into markets, candidly speaking, that we weren't in.

And so I think overall, when you put all of that in the pot and stir it, you'll see a gradual lifting of that organic growth rate.

So we're pretty happy with where things are, and expect to see them growing progressively over the coming quarters.

Okay.

Thanks.

Thanks, Shannon.

Yes -- I had just one more.

You guys broke out a number of different items in the quarter.

You talked a little bit about currency.

Can you give us the currency and the pension earnings impact in the quarter, in terms of Delta?

Well, the -- as the currency works out from an earnings standpoint, it was about neutral for the quarter.

I think you're aware we've got an active hedging program in place that covers about 50% of our exposure.

For the quarter, the earnings impact was relatively minimal.

As a matter of fact, it was neutral when we actually do the math.

The pension number off the top of my head, I do not -- I do not recall.

We'll get back to you.

Okay.

Thanks.

Thanks, Shannon.

Our next question comes from Jack Kelly with Goldman Sachs.

Good morning, George.

Good morning, Jack.

Just on Display & Graphics; it's unusual to see D&G profits rise when LCD film sales decline.

So that's a real positive.

Could you just comment on two items to give us some color there?

Number one, the sustainability of the pick-up of the graphics and traffic safety systems, which had a strong first quarter.

And then, secondly, George, if you could maybe elaborate on your comments about LCD.

Can we expect in the balance of the year unit volume to get back to the 20% plus kind of growth rate?

Sure.

Thanks, Jack.

On the two big units in D&G, other than optical systems, this is traffic safety and commercial graphics, we've seen, Jack, an -- actually multi-quarter trend of increased penetration.

For example, in traffic safety, Jack, we flipped some of the ways that we manage the contract -- the kind of municipality end of the pipeline.

We're now taking charge of some of those projects.

And we're able to drive growth as a consequence of that kind of change in our philosophy.

In the old days, we would supply to contractors, they would bid out to the (inaudible).

We've flipped that, we're doing the bidding and taking the contractors under our wing.

So it seems to be working for us there, Jack.

Also, there has been a lot of new products released.

The reflected paint markers, some upgraded diamond sheeting.

Generally speaking, we are just driving this growth, Jack, to new products.

It's the same in commercial graphics.

And the viability and the use of our graphics in retail, in automotive, in aerospace, in retail spaces, it just is -- it just is doing very, very well.

And, again, the underlying reason why we're being successful, Jack, is the ease of application, our relationships with distributors, the kind of money they can make on our products versus those of our competitors, and the quality, overall, of the service that we bring to those guys.

So it seems that is a sustainable model, Jack.

Now going to optical.

Optical last year went through some real sort of bouncy changes, as you well know.

What appears to be happening is much more stability in that marketplace.

I think that we -- as it becomes a bigger place of the OSD sales, Jack, in fact, as LCD TV become a bigger piece of these sales, I think we're going to see this classic sort of peaking in the late third, fourth, early first quarter, and then some softening in the summer quarters, when people are out buying other things than LCD TV's.

So I think we'll see that kind of pattern coming.

We -- I also expect, Jack, and do forgive me for a long answer -- we also expect that as this market matures and fewer and fewer big players come into it, as some of the smaller players consolidate, it's kind of really getting into a big boy's game here.

That will see increasing stability in the marketplace.

We also fully expect over time, the pricing pressure will decline.

And so all in all, Jack, this is a fabulous business.

It's in the top three or four, marginwise, of any of the businesses that 3M has, and it remains very, very strong.

And so we are pretty pleased with it.

We recognize that we've got to continue to invent, we've got to continue to deliver great service to our customers.

And that's all the kind of things that the folks over in OSD are very, very used to.

I'm very positive about it, Jack.

So we probably could get back on track to that 20% this year?

I want to say yes, but I think I've got to hold my opinion on that in reserve.

But I'm still very positive about it, Jack.

Okay.

I just want to follow-up on a separate subject -- and, Pat, you referred to this.

The billion dollar -- $2 billion buy back, significantly up from last year.

I know we can't annualize it.

But I think the most you've ever spent is somewhere shy of $3 billion.

But do you think this year could be a record year for buybacks if you use $3 as kind of a benchmark?

Well, Jack, it surely could be.

Of course, one variable will be what the stock price is.

But it's our intent, okay, to actually have a record buy back.

Okay.

Good.

Thank you.

Thanks, Jack.

Our next question comes from the line of David Begleiter with Deutsche Bank.

Thank you.

Good morning.

Good morning, David.

George, just on Industrial, these are the highest margins I believe you've ever achieved, 23%.

Is this sustainable, at this new level, going forward?

Yes, I think, yes.

A the number of businesses in that area, David, that were -- had some challenges beginning to improve.

We've got some great people managing them, and we brought some of our most talented people on some of those areas and they're beginning to show response to the treatment site.

I don't see any reason to believe, David, that there is going to be any sort of downward turn in those margins.

So I think -- yes, in answer to your question.

And just so from Consumer & Office; how much of this restocking do you think was in Q1?

Can you quantify that impact?

I don't know if I can -- I mean, anything I would tell you, David, would be an educated guess, because we don't have all of the detailed point-of-sale information that we probably would need to give you an exact answer to that question.

But when you look at the overall sales growth -- now, of course, we know we have a lot of new products, and we knew that we sold a lot of destocking in the fourth quarter, so that might be attributable.

I mean, if you want to make a rough guess, a couple of points, perhaps, in (inaudible) numbers.

So it's not significant, but, of course, it's all additive.

And when it goes the opposite direction, you suffer it.

So I don't think it was a -- I don't think it was -- the fact that it altered -- brought success instead of failure, it wasn't that.

But it certainly gave us a lift.

15% growth and 15% earnings -- 15% sales growth and 15% earnings growth in that business is pretty spiffy, when you consider the type of economic conditions that exist in that construction market.

David, this is Matt, I'd like to jump in.

Excuse me -- for the benefit of everybody, too, I want to respond to Shannon's question about pension.

Pension helped us to the tune of about $35 million pre-tax this quarter or about $0.03 a share.

And that will continue throughout this year.

Thank you very much.

Thanks, David.

Our next question comes from Jeffrey Sprague with Citigroup.

Thank you.

Good morning.

Good morning, Jeff.

Morning.

I guess just a little bit more on the Display & Graphics question.

Were you actually able to achieve equal or higher margins in optical films on the revenue decline in the quarter?

No, we weren't, Jeff.

We saw some declines, but you've got to put it in the context of this -- the blistering growth rates that existed in the first quarter of last year.

So we saw some volume declines.

And as you know, that market traditionally sees -- it could be 3, 4, sometimes even 5% down price during the year.

So the trick always in those markets, Jeff, and you know this very, very well is; how can you keep ahead of that particular curve with cost reductions, better yields, better products, lower raw material utilization?

And so we obviously did a lot of that.

I mean, we were well ahead of the game, in terms of percentages.

But I think the next area where you'll see -- or the next sort of movement, shall we say, where you see some potential betterment in the short run of those margins is with this -- and I mentioned it in my remarks, that we've -- soon to launch a -- I want to avoid saying exactly how we're doing it, because I don't wand to send messages to our competitors; but this essentially double volume change in Decatur on [D10] will give us a lot more leverage on that business.

And its other format -- and, again, I'm trying to be helpful, but avoid the direct thing that we've done.

Is what we've done will make yields very much higher on these high format -- large format screens.

So I think we're going to see some plateauing of the margins in that business.

And, of course, I know that of other things we've got up our sleeves that we're working on.

So I think we ought to see a little bit more stability in margins in optical systems.

I don't think either Pat or I or anybody else here would not tell you that we can hold back the tide of margin pressure in that business fully.

But I think that the rate of decline is likely to slow as we go forward.

I guess the second question -- I mean, it kind of goes to the guidance question -- but in a sense, I wonder as you work through the supply chain and other issues, could we see some reduction in the volatility of the quarterly earnings?

If you think about the last five quarters, we've got kind of beat miss, beat, miss, beat.

I know you guys are moving through a transition of your own, and we're all trying to forecast it from the outside looking in.

But as you get through some of these actions, do you, in fact, see a little bit smoother, more predictable earnings pattern?

Or is it just a function of the short cycle nature of a lot of your businesses?

It's an excellent question, Jeff.

Clearly, in our minds, eliminating that pattern that you speak about is uppermost in our minds.

It's absolutely vital.

Everybody knows what we're trying to do here.

We are spending a lot of plates at this moment in time, trying to move this Company forward, where, in many places, it slipped behind, for all sorts of reasons, and none of which we need to talk about today.

So you get that kind of -- you get some sort of patchiness in those sorts of investments.

But it's an absolutely clear strategy on mine and Pat's part to make sure that we can have the kind of consistency that you folks have been used to.

We know that's what will happen at the end.

And we know that that is your intention, your hope, and it's certainly our hope too.

So I think we -- we've got a better handle now, Jeff, on spending patterns, investment patterns, and as our visibility on those sorts of things improve, I think you'll see improvements in the pattern of earnings.

But you are right.

I mean, you hinted at it.

There are some short-cycle businesses that we're in.

We don't always have -- the headlights don't stretch out a long way.

And at some level, you're always going to see an element of volatility coming from those things in different segments at different times in different parts of the world.

But the flip side of that, Jeff, and you know it well, is the breadth of our portfolio, the international spread of our portfolio.

Margins overseas are accretive to our averages.

And where we're drawing is in places where there's decent margins.

So I think, overall, Jeff, you ought to see -- as we get through the investment that we're doing -- you'll see much more stability in these sorts of things.

And it clearly is a goal for Pat and myself to make sure that happens.

Thanks a lot, George.

Thanks a lot, Jeff.

Our next question comes from Scott Davis with Morgan Stanley.

Good morning, fellows.

Good morning, Scott.

First of all, congrats on the quarter, I think all of us were surprised here.

But particularly in Consumer & Office, I'm looking at your incrementals here, not as high, and I think the margin is about as high as we've ever seen.

I know you've explained some of this already, but can you talk about maybe the sustainability of this mix shift that you saw in the quarter of any items we should be aware of or thinking about when we think about modeling, going forward?

Well, Scott, the -- where we saw the big growth -- I mean, obviously, we did well.

In fact, if you saw the details of the individual businesses that contribute to that, you'd see very encouraging growth pretty much everywhere, pretty consistently.

However, where we pull that off, we have had some real success in our Command and Filtrete products, they gave us great growth.

We were also successful, again, because of the -- not just the power of our brand, but what a retailer often looks for is, can I make more money out of your product?

First of all, is your product a well-branded product, do customers recognize it, and can I make more money out of your product on my shelves than somebody else's?

And the answer, generally speaking, for 3M is yes.

Because customers like the -- the consumers like the brand, they get that strong reassurance from what we do.

And so what we've also been doing, Scott, is we've been winning some business that other people had.

So now that's been counterbalanced by obviously some slower sales of things like sandpaper and other conditioning materials that are associated with paint and drywall.

But overall, it looks like that model is sustainable.

Okay.

Good.

Scott, can I just jump on there?

Sure can, Pat.

I guess -- really I want to address two things for people.

One is, across all of our segments, especially if you're trying to, I'll call it, model Q2; remember that we've got a stock option issue, okay, in Q2 versus Q1, that's about $0.06 a share, because of our retirement eligible.

So I just want to make sure everybody kind of keeps in mind, as we talk here about sequential margins and so forth, we're really talking about excluding unusual accounting-type events.

On the consumer side, I'd also -- I think it would be fair to say that we constantly look at when we want to spend our [add merch] money and so forth in that business.

And if we decide, for example, to ramp that up, you may not exactly hold the margin in any given quarter.

So consumer had a great, great first quarter.

and I don't want to dampen that at all.

We just have to keep in mind that it will probably have some variation in its margin, depending upon what level of add merch we spend, and then what period it happens (inaudible - overlapping speakers) when it hits.

I understand the timing issue there.

When I talk to investors, I think I've covered your stock all of seven weeks here -- but when I talk to investors, there's an awful lot of concern about these 17 or so plants that you're building.

Some of them, I know, are factory extensions, not new plants.

It sounds like, so far at least, execution has been fairly good.

Can you talk to us about your confidence level going out for the rest of the year and being able to ramp up capacity without any major glitches?

Yes.

We have been very up front with investors.

Its -- obviously, we took on a large test for our Company.

In our own defense, it's because we didn't do it before and we got behind.

So we had that issue to wrestle with.

The number one piece of reassurance I'll give you is that this is relatively broad based.

So you've got one plant being started up in India, one plant being started up in Russia.

You've got four plants being started up in China.

There's a couple in Poland.

There are some in the United States.

And they're in different businesses, by the way.

So you've got this thing relatively broadly spread.

So that gives you one set of reassurance.

The other reassurance that I'd give you is; the higher the degree of manufacturing complexity, the more likely you are to have troubles with an investment to start up.

I mean, you obviously know the struggles that we had with D10 in the second quarter of last year.

It followed a catastrophic failure.

The plant itself opened in the previous July, and it was a real challenge to get the thing running smoothly again.

But if I mark on a scale of 0 to 100 in manufacturing complexity of multi-layer optical films, the start of multi-layer optical film plant is at 95.

It is one of the most extraordinarily difficult and challenging manufacturing processes that you could imagine.

It's probably the most tough I've ever seen in my life.

However, not -- what we're not doing is not starting up a bunch of multi-optical film plants.

We've got things like this one in Korea, the respirator plant.

On that same scale of 1 to 100, this is 8.

A converting operation, even for optical films, is probably 5.

So it doesn't mean that we don't have challenges, but at the same time, we think those challenges are much, much more manageable than perhaps the scale of that major plant start-up that we had last year.

So we are reasonably comfortable.

We know we'll have the odd ups and downs in that start-up, but we're reasonably comfortable we've got the mastery of this.

And you can well imagine that Pat and I put tremendous pressure on these folks that said, 'you know what, we're taking on a lot.' We're trying to run very fast here to get this kind of stuff behind us quickly.

And we have pressed these issues of plant start-up, project management, fairly (inaudible) analyses of these products very, very hard.

And, of course, as you expect, people reassure us, and we have every reason to believe that these things are being managed well and running pretty well on track.

Okay.

Super, thanks, guys.

Our next question comes from the line of Dmitry Silversteyn with Longbow Research.

Good morning.

This is [Eugene Fetit] with (inaudible).

I just have a question on corporate expense.

If I subtract $121 million from environmental liabilities, corporate expense is $15 million.

Is that in your run rate, or why is it so low this quarter?

No, it's not necessarily a new run rate.

I think if you look at our history in corporate miscellaneous, it runs in about the 30 range.

It does bounce around a little bit.

But don't necessarily model that going forward.

Our history has been about a 30 loss or so in that segment.

Okay.

Thank you.

And then second question; on medical, you saw 20 to 25% gaining growth this quarter.

I'm just wondering if that's sustainable -- if you expect to see that going forward?

No, I don't think we said organic in medical was 20%.

We're talking about the Healthcare business in total.

I'm sorry -- I meant Healthcare in total.

Again, you have to split that apart.

There was, like, 15% organic.

You have to understand about 4% of that is related to the ongoing supply agreement we got for the pharmaceutical piece.

So the ongoing growth rate is about 11% or so.

Which is a very good quarter for the business.

And we've been targeting at the high single digits, low double digit growth for that business.

So that's in line with our expectations.

On top of that, we actually have one or two areas there that have not been performing to our expectations, which also have been -- they've received sort of remedial work.

We put new management in a couple of those operations, and the guys are getting the job done.

The patient is responding to treatment, not to use a pun for Healthcare.

Okay.

Great.

Thank you.

Thanks.

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

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

Well anyway, thank you very much for listening, everyone.

We really do appreciate your time and attention.

So thanks for joining us this morning.

We look forward to building on the momentum of the first quarter to deliver a strong 2007.

Thank you very much, everybody.

Bye-bye.

Ladies and gentlemen, that concludes our conference for today.

You may all disconnect, and thank you for participating.