3M (MMM) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the 3M second 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, July 26th, 2007.

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

Good morning, I am Matt Ginter, Head of Investor Relations for 3M.

Welcome once again, all investors and analysts to our second quarter 2007 business review.

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

Today's discussion will follow a series of PowerPoint slides which are currently available on our Investor Relations website at MMM.com.

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

During the call today, we will make certain predictive statements that reflect our current views and estimates about 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 1A of our most recent Forms 10-K and 10-Q list 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 formal comments today, then we will get to your questions.

Again, we know how busy you all are during the earnings season, so we will 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.

Also remind you again, that we will host our next Investor Meeting in St.

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

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

Look for an e-mail in the next few weeks with specific details on this event.

So now, please go to slide number 3, and I would like to turn the program over to George.

Thank you, Matt.

Good morning everybody, and thank you very much for joining us here this morning.

I am pleased to report another very strong quarter for 3M.

And more importantly, for the longer term, our growth agenda continues to gain momentum, and deliver results that we have planned and hoped for.

Let me start the call by thanking the people of 3M for their outstanding work again this quarter, without their help, none of this good stuff can happen.

So we are very grateful for that.

Obviously we are very pleased with the quarter.

Sales topped $6 billion for the first time in our history, and that is up 8% over last year, and up almost 12% if you adjust for the pharma disposal.

In a company of our size, that is fabulous growth.

Excluding special items, earnings were $1.23 a share, up more than 17% year-on-year, achieved by the combination of great growth, and continued operating discipline.

Again, the breadth of 3M's strength was evident.

Excluding Pharma, all of our 6 businesses posted positive sales growth, but it was a little tougher to do in our Electro and Communications area.

A list of successes from our important large business units continued.

In fact, sales grew at double-digit rates in each of the largest global divisions of 3M, namely Automotive after market, Industrial Adhesives and Tapes, Medical Products, Occupational Health and Safety, and Optical Systems.

We haven't seen this in a long time.

Along with that, we drove explosive sales growth in several developing countries around the world.

For example, sales grew 40% plus in Russia and India, 30% plus in Poland and Turkey, and a hefty 27% in China, just to name a few, with organic unit growth being the primary driver.

We drove outstanding sales growth in some of our largest well-established subsidiaries such as Germany, who grew at 12%, and the United Kingdom who grew at a whopping 53%, driven by a combination of acquisitions, organic volume, and of course some positive currency.

Progress in the first half of the year gives us continued confidence in our strategic plan for growth, which as you know, calls for some investments above the rates that we have seen in recent years.

The investments include, increased funding for R&D, and that is earnings numbers you are seeing, plus acquisitions and more localized manufacturing capacity to serve customers better.

All of these are designed to advance the reputation of our brands, and build our enduring franchises.

We also continue to invest heavily, but we think prudently, in technology development, particularly that in our core.

So far this year, we are investing in R&D in a rate that will result in greater than an 11% increase over last year, when adjusted for the divested pharmaceutical business.

Similarly, our capacity investments are on-track, and will soon start generating positive results.

This is another one of the real keys to our success in the future.

A couple of weeks ago I participated in the opening of a new respirator plant in Korea.

This was the fastest built of any new plant in 3M's history, just 11 months from breaking ground to startup.

Just for your information, a new 3M plant will typically get past the breakeven point about three quarters after its opening.

But this performance in Korea was an absolutely fabulous achievement by our project manager, John [Bloom], and his team of people from Korea and from St.

Paul, who I want to recognize here publicly.

As you know, 3M has a number of other new plants or plant extensions under construction.

We have now successfully knocked off four of them.

All on time and on cost.

We had some small time slips in our plan in Russia and in China, where some frustrating permitting delays have pushed back the opening by a few months.

But none of this was down to 3M, only down to local government issues.

You have heard me talk before about the importance of streamlining our supply chain.

These new facilities will give us a good start on this multi-year undertaking.

In addition to the Korean plant I already mentioned this quarter, we have opened and optical fill plant in Poland, a mixed industrial plant in southern China, and a construction and home improvement type plant in Canada that we opened in June.

On the other side of the ledger, we have also exited several high cost underutilized manufacturing facilities in Japan, France, Italy, and the United States, and streamlined several of our U.S.

supply chains, by relocation of manufacturing equipment from one facility to another.

This is in addition to the streamlining activities achieved through plant construction.

On the acquisition front, we have now completed eight acquisitions since the beginning of the year, as we continue on our steady diet of relatively small, low risk bolt-ons.

These acquisitions are building strength on strength in many of our market leading businesses right in the core heartland of 3M.

I want to point out that while we are accelerating investments in growth for the future, we are maintaining strict discipline on spending in our administrative areas.

While these are important for the Company, they do not need to grow in-line with sales.

The bottom line is this, we are driving our growth agenda forward, investing as we said we would, and we are encouraged by the results so far.

No doubt we have a great deal still to accomplish, but there is every reason to be very pleased and encouraged by our progress to-date.

There was lots of good news this quarter for 3M, which is bound to be encouraging for all of us.

Before we get ahead of ourselves, and get accused of telling you only the happy news, I want to given you a balanced sense of perspective.

I think you probably know not everything goes right in a company like ours all the time, and this quarter was no different.

For example, we saw continued softness in our roofing granules business, with sales down 13% year-over-year, although it was up sequentially.

While we did very well in construction and home improvement, we did so based on commercial construction, and winning new SKUs presence and market share.

The underlying residential construction market is still fragile, and I expect it to continue so for the foreseeable future.

We also saw very weak markets in electronic interconnects with sales down 10% year-over-year.

But it is the diversity of our portfolio that overcomes this kind of issue.

3M's strength comes from it's technological prowess, yes.

But it also comes from its broad markets and wide geographical diversity.

As I mentioned, while commercial construction is robust, residential construction remains weak.

At the beginning of the year, I think most of us believed that we would see some betterment in the second half of '07, but this will probably prove to be too optimistic.

Growth was strongest internationally as I mentioned at 11.7%.

Growth in the U.S.

was more modest, with sales up 6.2% year-over-year.

If I take out last year's divested pharma sales, and this includes about 2.8% from acquisitions.

Healthcare, Safety, Aerospace, and Energy markets are the leaders, as Pat will show you in a moment.

There was a time not long ago when we would celebrate this kind of U.S.

growth rate, but not now.

So we will be doing our best to drive for better growth in the coming quarters.

Now I will turn you over to Pat for a more detailed discussion of our second quarter results.

Pat?

Thanks, George.

And good morning, everyone.

As George has already indicated, not only did we continue to execute on our growth plan, with greater than $6 billion of sales in the quarter for the first time in Company history, but we were able to maintain exceptional margins and returns, while we continued to invest in future growth opportunities.

So clearly, our growth plan is on-track, and I feel very good about our performance this year.

As explained in our press release this morning, and shown on slide number 5, second quarter reported earnings per share were $1.25.

Included in this result are three special items, which I would like to explain in some detail for you.

First, we announced that we would phase out operations at our Belle Meade, New Jersey facility, which produces roofing granules for the asphalt roofing shingle industry, and a number of auxiliary products.

The closing was driven by a significant reduction in demand from shingle manufacturers in the northeastern part of the United States.

Remaining production from Belle Meade will be consolidated with other 3M facilities.

Second, we signed a consent agreement with the state of Minnesota, to address potential sources of perfluoro chemicals near legacy waste disposal sites.

Lastly, we recognized a gain from the sale of our OPTICON Priority Control Systems, and Canoga traffic detection business to TorQuest Partners, Incorporated.

This business was in our Display and Graphics segment.

After adjusting for these three items, earnings for the second quarter were $1.23 per share.

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

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

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

Q2 2006 revenues for the pharmaceutical business were 196 million, and operating income excluding special items was 60 million, impacting earnings per share by $0.05 per share.

Adjusting for pharma and special items, earnings per share increased 23% year-on-year.

On slide number 6, we compare our second quarter P&L versus last year's second quarter.

Excluding special items, earnings per share were $1.23, a year-on-year increase of 17.1% on sales growth of 8%.

However, adjusting for pharma, earnings increased 23% on sales growth of nearly 12%.

Operating income was up 12.3% to $1.4 billion, or up 18.1% excluding pharma.

Operating margins were 22.4%, up 90 basis points.

Gross margins were 48.8%, down 130 basis points from last year's second quarter, but in-line with the impact related to the pharma divestiture.

As George already noted, our expenditure on research and development was up 11% year-over-year ex pharma, to support our overall strategy to reinvigorate our core business.

SG&A expense was flat year-on-year at 1.3 billion, or up 5% adjusted for pharma, reflecting our continued investment in sales and marketing, to support our growth markets while constraining administrative costs.

Please turn to slide 7 for a recap of our second quarter top line performance.

Sales and local currency increased toward the upper end of our targeted range at 9.3% worldwide, with 6.2% from the U.S., and 11.3% from our international operations.

The biggest driver of this sales growth was organic, with a worldwide organic volume up 6.9%, led by a 9.9% increase in international.

Acquisitions contributed 2.8% across the board, and prices were down slightly.

The pharmaceutical divestiture decreased sales by 3.8%, and currency translation added 2.5%.

We are particularly pleased with the growth performance of our international operations this quarter.

Within international, Europe turned in the highest local currency growth at 15.8%, 9.5% of that was organic.

Rounding out international, Latin America and Canada grew at 10%, while Asia-Pacific grew at 8.1%.

Before we move to the business segment highlights, please refer to slide 8, where I would like to comment on our year-to-date progress against our key strategic financial goals.

We have described our multi-dimensional strategy, that is to accelerate our sales growth without degradation of our operating margins, drive double digits earnings per share growth, and continue to deliver premium returns on capital.

Excluding pharma, sales were up almost 11%.

We drove outstanding leverage with operating income up more than 14%, and earnings per share up nearly 18%.

We continue to create value for our shareholders by investing in growth programs, evidenced by our year-to-date return on capital of 22.7%, up 80 basis points from last year's comparable period when you adjust for pharma.

As can you see, through six months our plan is working extremely well.

Now please turn to slide 9, where I will review our quarterly and year-to-date results by business segment, starting with the Display and Graphics segment.

For the second quarter, Display and Graphics sales were up 10.2%, to more than $1 billion, the first time in this segment's history.

Local currency growth was up nearly 9%, and was largely organic.

Margins were an impressive 28.7% for the quarter, and 30.3% on a year-to-date basis.

Year-to-date, Display and Graphics sales have increased more than 5%, with profits up more than 10%.

Optical Systems continues to focus on market segmentation, with strong penetration in handhelds, computer displays, and LCD televisions.

Both sales and profits for Optical Systems were up double digits over the second quarter of last year.

Our new optical film converting facility in Poland is on-line, supporting LCD panel manufacturers, as they start up their operations in eastern Europe.

We also were on-schedule in scaling up the productivity and capacity of our DBEF manufacturing facilities here in the United States.

We expect to see continued accelerated growth over the second half of the year, as seasonal LCD TV demand gears up for the holidays.

Commercial graphics posted another solid quarter with strong sales growth.

We saw an uplift in the vehicle wrapping market, where we provide films, inks, and other products for this rolling billboard industry.

Likewise, Traffic Safety Systems posted noteworthy seasonal growth, driven largely by the road construction season, with particularly strong showings in Europe and Latin America.

Please turn to slide 10 for a summary of our results for our largest segment, the Industrial and Transportation business.

Industrial and Transportation had another excellent quarter with sales up 8.5% to $1.8 billion.

Local currency sales increased 5.6%, including 1% from acquisitions.

Margins improved 70 basis points year-on-year, coming in at 20% for the quarter.

Year-to-date sales were up 7.6% over the first half of last year, while profits increased 10.4%.

Through the first six months this year, Industrial and Transportation margins were 21.5%, were up 50 basis points versus the same period last year.

Strong operational discipline and cost control made this margin improvement possible.

Our worldwide basis, the Industrial and Transportation business continues to grow faster than their end markets, and not surprisingly our international growth continues to outpace the U.S.

The largest divisions within Industrial and Transportation posted solid sales growth, including notable performance from our Automotive after market, Energy markets, Automotive, Industrial Adhesives and Tapes, and our Abrasive Systems divisions.

Growth within our Automotive after market division was driven largely by abrasives, maskings, and refinishing products, where our branded line of products is the preferred choice of body shops around the world.

With a car care market, our NASCAR sponsorship continues to strike accord with a growing number of do-it-yourself car care enthusiasts.

Finally, our Automotive division delivered good results in the second quarter, led by Attachment Systems and Structural Adhesives for mirrors, body molding, and panels, that are used by Automotive OEMs.

On the investment front, we have recently increased R&D spending to strengthen our core adhesives and pressure sensitive tapes technologies.

In addition, we have added five relatively small but highly strategic gap-fill acquisitions in the last two quarters, to continue to strengthen our core Tapes and Adhesives platforms.

Please turn to slide 11 for details of our Consumer and Office business, where we have seen outstanding results for both the second quarter, as well as year-to-date.

Consumer and Office sales increased 8.2% to 832 million in the second quarter.

Local currency sales were up 6.1%, including 1.3% from acquisitions, primarily due to the October 2006 acquisition of Nylonge, a global provider of household cleaning products, including cellular sponges.

For the first time in many quarters, international growth outpaced our outstanding U.S.

market performance.

Profits rose 21.3%, and margins jumped 2% compared to the second quarter of last year to almost 20%.

Year-to-date, sales were up 9%, and compared to the first half of 2006, profits were up almost 20%.

Leading the charge for consumer office were office supplies, construction and home improvement, and home care divisions.

At the same time, growth and penetration continued in our core businesses in Europe and Asia.

Scouring products, wipes, handles and cleaning products led the way for home care in mass retail outlets.

As many of you know, the third and fourth quarters in our Consumer and Office business are heavily dependent on having a successful sell-through, during the Back-to-School and Christmas periods.

This will require increased investment in advertising and promotion during the second half of the year.

Please now turn to slide 12.

Safety, Security and Protection services delivered an exceptional and broad based quarter of growth, with sales up nearly 21% over last year's second quarter.

Growth in local currency was up nearly 17%, including approximately two-thirds from acquisitions.

Acquired growth was primarily from Security Printing Systems Limited, a leading provider of finished personalized passport and secure cards, and E Wood PLC, a manufacturer of high performance protective coatings for the oil, gas, water, rail, and automotive industries, both of these are based in the U.K.

Operating income rose an impressive 21.9%, with margins at 21.2%, slightly higher than the second quarter of 2006.

Year-to-date sales have increased nearly 20%, with profits up 18%.

As I mentioned earlier, we saw across the board growth, led by corrosion protection, respiratory protection, and protective window films, and cleaning solutions for commercial buildings, where we have seen a strong increase in commercial construction in many parts of the world, which is driving increased demand for our fire protection and window films.

We continue to experience strong demand for Personal Safety products, and we are pleased that our new production plant in Korea celebrated its grand opening on July 11th which was right on schedule.

In addition to the growth in Personal Safety Products, we are seeing explosive growth in our corrosion protection business, where we provide our customers with pipe coating technology solutions, that extend the life of both underground and above ground pipelines.

With a recent acquisition of E Wood, we can now apply our technologies to both new and existing oil, gas, and water pipelines.

Both sales and profit growth for this division were strong double digits.

During the second quarter, we continued to see modest improvement in our Industrial Minerals business for residential asphalt shingles.

However, our business was still down year-on-year which negatively impacted Safety, Security, and Protection services second quarter sales and operating profit growth by approximately 2% versus last year.

As George mentioned, we continue to expect residential construction to remain weak, so an element of caution is required for the Industrial Minerals division.

Please turn to slide 13 to review second quarter results for Electro and Communications business.

The results in this business were very mixed.

While we continue to experience very strong growth in the electrical markets and communications markets, the consumer electronics market has faced significant lower sales, adversely affecting both our electrical solutions and our electronics markets materials divisions.

Overall, the Electro Communications business has taken the necessary corrective actions to respond to the slower consumer electronics market.

At the same time our electrical markets and communications business delivered strong double-digit bottom line growth, offsetting the weakness we saw in the Consumer Electronics markets.

Sales were up 3.4% over the second quarter last year, with local currency growth of 1.2% driven by acquisitions.

Outstanding discipline continues to generate profits that increased 16% over the same period last year, with margins up 2 percentage points to 19.1%.

Year-to-date, sales are tracking with the quarter, with an increase of 3.5%, and profits increasing 12% versus the first half of 2006.

Lastly, please turn to slide 14 where you will find the second quarter highlights for our Health Care business.

Health Care had another outstanding quarter.

Local currency growth including acquisitions was 19.5% on the quarter, largely organic with 4.4% from acquisitions.

Of the organic growth, 5.6% was a result of a new supply agreement related to the sale of the branded pharmaceutical business, in which our drug delivery systems became a source of supply to the acquiring companies.

A large part of the acquisition-driven local currency sales came from two recent acquisitions.

Biotrace International PLC, the U.K.-based manufacturer and supplier of microbiology products, and SoftMed, a Maryland-based provider of health information software.

We also acquired DMS Chile, a Santiago-based manufacturer of disposable surgical gowns, drapes, packs, and kits.

Excluding pharma, sales were up 23.1%, with profits increasing over second quarter 2006 by 32.3% to $277 million.

Margins improved 2% to 28%.

Year-to-date performance has been equally impressive, with sales up 23.7% overall in the first half of the year, and profits up 22%, all excluding the sale of pharma.

All businesses within Health Care delivered double-digit growth.

Leading the way was our drug delivery systems, where we are a leading provider of inhalation and transdermal drug delivery solutions.

We also saw strong growth in our Health Information Systems business, where we are a leading provider of advanced software and services, that help Health Care organizations capture, classify, and manage health care data.

We recently signed an agreement with the state of Maine, to build one of the nation's first health care information sharing networks.

In out Dental business, we launched a new product called Protemp, a preformed malleable crown material, that delivers a custom fit for patients in less than four minutes.

We also acquired the rights to the Peridex brand of periodontal rinse from Zila Incorporated.

We expect to continue to build the brand through extensive research and development in the preventative dentistry field.

And finally, we continue to make progress on our commercialization efforts of the digital dentistry technology we acquired with the Brontes acquisition.

The product is on-track from market tests in the fourth quarter, with commercialization planned for early 2008.

The team is working hard, we are very excited about bringing new products and solutions that will enhance the patient experience, and drive productivity to the dental profession.

Please turn to slide 15, where I will review a few Balance Sheet and cash flow metrics.

Excluding tax payments related to the gain on sale of the branded pharmaceutical business, free cash flow was 866 million, or approximately 95% of net income.

Year-on-year working capital turns were down 0.2 turns versus the second quarter last year, but flat sequentially.

As we have discussed with you, our supply chains, streamlining our supply chains to improve customer service and reduce working capital is a top priority.

Capital expenditures totaled 348 million, an increase of 87 million year-on-year, and an increase of 44 million sequentially.

We continue to expect total capital expenditures to be approximately 1.4 to 1.5 billion, as we invest in a number of growing and highly profitable businesses.

Dividend payments to our shareholders were 346 million, and we aggressively bought back stock during the quarter, with gross share repurchases of $1 billion.

As of the end of the second quarter, we had 5.2 billion remaining of the total 7 billion authorization that runs through the end of February 2009.

Weighted average diluted shares outstanding were down 5% year-on-year, and 1.3% sequentially.

Finally, our debt-to-cap ratio was 30.2% at the end of the second quarter.

This concludes my formal business review.

Now I would like to hand it back over to George, for a first half 2007 scorecard and his closing comments.

George.

Thank you very much, Pat.

Please turn to slide 16 where you will see a quick recap of our 2007 progress, against the outlook that we provided for you in January of this year.

I think you will see that this slide underlines the confidence that Pat and I share for the second half of 2007.

As I said during the first quarter call, our main 2007 priorities are clear.

Firstly, increase the horsepower of our growth engine and leverage it to the bottom line.

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

And thirdly, to have [smaller] start-ups of our new manufacturing lines and plants.

So far this year, we are doing rather better than our forecasts.

Therefore, we are raising both our sales and EPS forecast for the year.

Through six months we have delivered local currency growth of 8.4%.

So we now are expecting full year local currency sales growth of between 7 and 10%, up from our prior expectation of 6 to 10%.

Reported earnings per share are now expected to be in the range of $5.40 to $5.60, up from the previous range of $5.20 to $5.45, including a net benefit from special items of $0.60 and $0.70.

Year-to-date operating margins are currently running at 23.4%, quite a bit ahead of our full year expectations of 22 to 22.5%.

Our effective tax rate for the first six months is 32.9%, within the range of our expectations, but we may well see a slight uptick for the last half of the year.

Lastly, we expect capital expenditures of between 1.4 and 1.5 billion for the year, on-track with our estimates at the beginning of the year.

Capital expenditures for the Company through six months was $652 million, and we continue to expect full year CapEx to fall within our originally stated range.

As far as the third quarter goes, we have somewhat tougher year-over-year percentage comparables.

But in absolute sales dollars, we expect more of the same on growth.

We also have some planned increases in spending year-over-year, and we want to preserve flexibility on that, while fixing plant start-ups, passing higher advertising and merchandising, and some higher R&D investments.

Some folks will probably accuse us of being a bit conservative here with our outlook, but we think sufficient uncertainty remains in the Asian electronic markets, and the U.S.

residential construction market, that we are planning a roof of careful improvement, but nevertheless steady progress.

With that, I would like to turn the call over for questions.

Thank you so much for listening!

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

Our first question comes from the lined of Jeff Sprague with Citigroup.

Thank you.

Good morning.

Good morning, Jeff.

George or Pat, I wonder if you could just give us a little bit better sense of the revenue opportunity that you ultimately hope to kind of untap, as you get all these capacity additions online.

Well, I will take a crack at it Jeff, when we finish the current round of investments, and remember that the current round of investments are only a start, a rolling sort of investment, that will add somewhere around $3 billion or there, of sales value of goods produced sold.

We are probably increasing our total capacity, manufacturing capacity of the order of 10 to 15%.

So it is a few billion dollars of Optic.

But of course it depends on how the plants load, Jeff, as to what the sales growth rate expands.

But we are actually building these plants, because we have got a lot of demand which is unmet.

So we hope these plants will get orders and respond relatively quickly, and it will be a piece of the puzzle in accelerating our growth rate, especially since we are there, Jeff, and we don't have these long supply change,and order today and wait for 60 days to get something from the U.S.

They will be in that location and can get product in a few days.

We really do think this is going to help a great deal.

Just as a follow-on to that, the this normal three quarter breakeven, does that in fact get accelerated by the fact that some of this demand is in hand waiting for the plant to come on, or is there still should be the expectation of some growing pains along the way as you do this stuff?

No, I think in those plants where there is already demand, I think it will be a little better than what we said.

I think you are right to point that out.

But we are just trying to give you a middle of the road feel for how this kind of stuff works.

Obviously, if you have a plant which starts absolutely superbly with huge demand, it will be faster.

If you have one with teething trouble, it will be longer.

So we are trying to give you some idea.

This is not two years to get these things contributing, nor is it two months.

We are trying to give you some kind of feel for the middle of the ground, Jeff.

Just one final one and I will pass it.

On this benefit in Health Care from the supply agreement, should we expect that kind of 5% bump for the next few quarters until you lap that, or was that kind of a one-time channel fill thing in the quarter?

No, Jeff, you should expect that up through the one year, up through the one year period.

All right.

Thanks.

Thanks, Jeff.

Our next question will come from the line of Mike Judd with Greenwich.

Congratulations on a great quarter!

As you look at the third quarter, can you talk a little bit about some of the seasonality effects?

Obviously in the business in Europe, et cetera, and what sort of economic assumptions that you have for the second half of the year, and then just lastly, what raw material inventory accounting method do you guys use?

Is it weighted average?

LIFO?

FIFO?

Let me have a crack at the first part.

Pat can have a crack at the second.

In Europe, you typically have roughly a month's holiday, sometimes as long as five weeks in some of the countries there.

So things get a little bit quieter, people aren't around, and so there is some cooling there.

But to compensate for that, what happens back here in the United States, we have a couple of things that are big factors in the way we grow in the third quarter.

And that is we have Back-to-School and the consumer office, very, very heavy sales growth that takes place in Back-to-School, and of course even by this time, toward the back end of the third quarter, the mass merchants are stocking up on their shelves for the holiday season.

so there is a lot of activity in Consumer and Office.

And also in the Consumer Electronics and Optical Films areas, you also see fairly heavy sell-in, as soon as the sell-through you see fairly sell-in to the TV business in this kind of timeframe.

So there are some seasonal lifts because there is some kind of, maybe some cooling a little bit of construction.

So they are the kind of puts and takes that take place in a company like ours in that particular season.

And Mike, this is Pat.

On the raw material, we do use FIFO, and the reality is, our raw materials right now are pretty stable.

So it has obviously got pluses and minuses within that, so not a big impact.

So there wasn't much of a FIFO benefit, even though we had rising prices?

No, no.

Okay.

Thanks.

Our next question will come from the line of Scott Davis with Morgan Stanley.

Good morning, everybody.

Good morning, Scott.

The only thing it looks like kind of to pick on for the quarter is working capital, and I might have been zoning out when you went through some of this, Pat, so my apologies if you mentioned it, but given it looks like receivables up 14% year-over-year, can you just talk through maybe a couple things, I mean, one, kind of explain that a bit.

And then also talk about where you envision working capital turns going the rest of '07 and in to '08?

Yes, Scott, I guess you had to find something, huh?

In response to your question on working capital, as we have kind of discussed, as we try to grow, and with our supply chain situation, we have kind of hit a wall here a little bit on turns.

Specifically here in the quarter, our receivables are up a little bit, partially it reflects the nature of the shipment pattern of some of our businesses during the quarter.

Nothing unusual though, from that standpoint.

We are running about 5 turns, and I expect that number is going to remain stable here for a period of time, until we start to see some of the improvements in our supply chain work, and some of the capacity coming on, so I don't see that here in the near future.

So I think we are going to go sideways here for a while on working capital performance.

Okay.

Fair enough.

And just following up a little bit on what Jeff was talking about, as far as your factories coming up, and I wanted to talk specifically about yields in your D&G segment, and Alabama versus Poland.

Years ago I used to cover Corning, and I understand how important it is to get those yields up fast.

How long does it really take, and what is the learning curve there to really get yields up to a point where you can start making kind of a normalized margin.

First of all, let me just clarify something.

The plants in the U.S.

are manufacturing facilities that are producing the jumbo material, or effectively the raw materials for the converting sites.

That is a different kind of facility than the facility in Poland, which is really a converting location where effectively they take jumbos of material, and effectually cut and size those for the OEMs.

So completely different kind of manufacturing processes.

Converting plants of course will start up a lot quicker, and will have relatively higher yield than the general production side of the operation.

But George and I are never satisfied with the yield that we get out of our manufacturing processes.

Your point is spot on.

There is a lot of opportunity to continue to drive productivity and cost through yield, yield enhancement.

And when you look at the value of the material flowing through specifically a DBEF plant, getting the yields up in that plant are absolutely crucial, as we continue to fight in that, in a very price intensive industry.

So that is something that we remain focused on.

The yields continue to get better.

But the nature of some of those operations, are you know, periodically, you will have a little bit of a stumble.

But the underlying yield improvements within that plant have improved significantly.

We continue to press for higher yields.

Scott, part of the culture of 3M is, we have this sort of obsessive cost down mentality, and yield is obviously a piece of that puzzle, and we understand when we're in, we are manufacturing this kind of stuff in hugely competitive priced markets, and where the capital is expensive, yield is one of the really big keys to the door.

The keys to a solution of a highly profitable business.

So you are trying always to keep the yield improvements ahead of the price reductions, essentially the battle you are fighting, and for the most part we do that fairly well, and I don't think this is ever going to be a time when this is not part of the way we think, the air we breathe.

When we wake up in the morning, we are thinking about how the heck do we drive yield.

Makes sense, guys, thanks.

Our next question will come from the line of Steve Tusa with JPMorgan.

Good morning.

Good morning.

I just had a quick question on the outlook for the second half.

You know, I am a little bit, it's kind of tough to parse the, you talk about 6 to 10% growth that includes some acquisitions.

You are still thinking about 1.5 points contribution from acquisitions for the full year, or is that a little bit higher?

Probably a little bit higher than that for the whole year.

Probably a little bit closer to 2.

Okay.

So you are looking for a deceleration in the second half of the year, as far as core growth is concerned, or how should we think about the core X acquisitions X divestitures X 4X type of number for the back half of the year?

Assume we will do something similar.

Within that range that we have given you of 7 to 10.

We will do something similar.

Obviously George and I are continuing to drive.

We have to continue to drive sequential growth in the business, but to kind of nail that down to any one quarter is obviously a little more difficult.

But we are not anticipating or trying to forecast any kind of slowdown.

So these concerns that you mentioned around housing and things like that, that is not enough to kind of make for a deceleration in the back half of the year?

No, Steve and as George mentioned is that what is great about this company is the breadth of our portfolio, geographically and product wise.

Very rarely will all pieces of the economy be hitting on all cylinders at all points in time.

So you have a lot of gives and takes within that.

The point we are making on the housing side is we don't necessarily see that coming back right away, but we also don't see it having a major impact on our growth rates.

Right.

I can't imagine it is that big of a percentage of your sales.

And then lastly, just on D&G, there was a little bit of chatter that maybe somebody in this kind of long chain of buyers and assemblers is loading up on a little bit of inventory.

You know, are you worried that there maybe some of this demand was pulled into the second quarter, and we are going to have a little bit of an earlier than expected season in the LCD industry, and then how does that kind of play into your forecast there for the rest of the year?

Well, there is no question, Steve, we have seen continued strong demand in that area.

And oddly enough we are getting back into some areas where we once lost some presence.

So that is clearly good news.

But there appears to be relative stability.

We expect double-digit sales growth, kind of following the pattern that we have seen.

We don't expect to see anything that is really going off the rails.

Now, whether they buy ahead, you can argue that if you buy ahead, it may even be positive.

Not necessarily negative.

So you know, we will always see some ebbs and flows in this market, Steve, but I think what the great news that we see really in the last two quarters, is this company has done well even without the Optical business doing well.

It was a remarkable turn for our Company.

So don't expect to see any major surprises at this juncture.

Thanks a lot.

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

Thank you.

Good morning.

George and Pat, can you quantify how much more spending you guys did in sales, marketing, advertising, promotion in Q2 than Q1?

It would be a single digit number, Dave, on a year-over-year basis.

When you take pharma out of the base, and then when you look at a new adjusted base, that would be about what it is.

We also gave you a little bit of a tip-off, here, though in the back half of the year, that we will probably spend some more money here in ad merch in Consumer and Office, and we last year when you look at what we spent in Consumer and Office, we spent a little more of that in the front half of the year.

This year, we kind of saved some of that for the back half of the year, for the Back-to-School and holiday season.

So there will be a little bit of a mix in timing, as to when we make some of those investments in the consumer business.

But it would be a single digit number, and as we mentioned on the flip side is what we are consciously doing, is constraining the costs in the administrative side, so we can continue to fund those growth activities in the sales and marketing side.

Fair enough.

And on the four new plants that came on-line in June and July, were they ahead of schedule, on-schedule, behind schedule?

Schedule is kind of an interesting conversation, Dave, because first of all, to answer your question, literally, they were all on-schedule.

You also have to understand what George and I are driving is tighter schedules, and get things done sooner.

So other than the two plants that George kind of talked about, China and Russia, where we had permitting problems, which are kind of more of a future start-up issue, everything else is really right on-track.

And lastly, is Optical film pricing tracking your expectations?

Yes, it is.

Thank you.

Your next question will come from the line of Dmitry Silversteyn with Longbow Research.

Good morning, gentlemen.

Congratulations on a very nice quarter once again.

Thanks, Dmitry.

Couple of questions if I may just to follow up on some of the things you said earlier.

Strong growth that Consumer and Office has seen in Europe, that is quite a turnaround from what has been the pattern in this business.

Do you see this as a sustainable development?

Is this something that happened in the geographies, or is there something that you have done to change your approach to the market?

To answer your question, we do see it as a sustainable position.

We have been, there is really kind of a little bit of, you have to segregate this between markets internationally.

Asia and Latin America have been running pretty good in the past.

We have accelerated the growth.

Some of those markets are of course as the prosperity of some of those markets starts to develop, it actually improves the ability for people to buy, and so forth.

But we have also made a much more conscious effort to grow our consumer business internationally.

And that is between the Head of the consumer business, Moe Nozari, and Inge Thulin, who runs international.

We are dedicated to growing that business.

We have seen good growth in Europe, which is the first good sign we have seen for some time.

So it is a conscious strategy that we have to grow that business internationally.

Okay.

We are also on the hunt for some other products, you know, help us fill out those offerings to retailers, so it has really been, yes, the economies over there have bettered.

But it has been a very conscious strategy on the part of Moe, Inge, and myself, in particularly Inge and myself, as we pushed it on Moe's behalf outside the country, and it is now responding.

We are very, very pleased with the outcome.

Very good.

Then to follow up on what you said about the industrial and transportation segments, and the good growth you experienced, not just in the Automotive after market, but actually Automotive OEM business, again is this a sign of recovery?

Is it mostly U.S.?

Is it the international markets, perhaps China and India, that are driving this growth?

What is behind the recovery in the business, that gave you problems the last couple quarters?

Automotive has not been a problem for us.

First of all, we sell into all the major OEMs, so depending upon who is winning and losing impacts our business a little bit.

But we are very effective with all of the OEMs.

Actually, the U.S.

had decent performance this quarter as well.

So it was a very broad-based result within the Automotive group.

So it is more of a market growth than a share gain on your part?

Well, the auto production really has not moved that much.

On global basis, yes.

On a global basis.

Right.

So you can argue, and penetration becomes a little bit difficult because every one of these products is a designed end product, so some products will have the need for our products, others won't.

A lot of it has to do with design cycles of the auto manufacturers as well.

A final question on Consumer Electronics that has been impacting your revenues in the Electro and Communications segment.

Can you give us a little more granularity and detail on what is going on in that market, and why it has been weak in the second quarter, and what do you see for the second half of the year?

Well, I think the way that we understood what was going on here was it starts actually several quarters back.

There were no real blockbuster products in the marketplace in the fourth quarter.

You didn't see the big XBox launches, or whatever it would be, the snazzy consumer products, with the exception of LCD TVs, it was relatively slow.

You got the [iPhone].

And it seemed that the channel, the distribution channel had a lot of inventory in it, and it's been bleeding down, and now from our perspective, so we rolled that down with the channel as they were bleeding off inventory.

And that is what you have seen in the first couple of quarters here.

If there is to be a turn in that industry, I cannot imagine for example Consumer Electronics is going to leave that market alone, and not have two or three blockbuster products in the holiday season here.

And so we ought to see if it is going to happen, it is going to happen this quarter.

So I don't know that we can say that we are optimistic that it will pick up, but if it's going to pick up, this is the time it is going to.

All right.

Thank you very much.

Our next question will come from the line of Deane Dray with Goldman Sachs.

Thank you.

Good morning.

Good morning.

George, it was very interesting, you started off with your prepared remarks talking about reinvigorating R&D, and it's one thing to throw more dollars at it and increase the budget, but it is something else to start actually seeing innovation and new products.

So what are the specific goals that you are looking for, what is the timeframe, especially in terms of new product introductions?

Well, we look at this in a few different ways, Deane, and thank you for your question.

You are absolutely right.

It isn't only about just taking wheelbarrows of money over there, and saying please go try to spend it wisely.

In point of fact, what we have done, some of the things that have happened in the organization, is we have reconstituted our 15%, should we say free time, for our people.

Now you you might say why would you want to do that.

The point is is it about creating an environment, Deane, relatively few people use that.

But it is about creating an environment where people have a sense of controlling their own destiny, and allowing them to have those creative juices spill over into product creation.

So we did that.

We also got our senior guys engaged in a 'let's assess the big possible blockbuster products that we have got,' and can we better assemble ourselves, our skills, our technical skills to bring these along a little faster.

You always get those comments from people about, this is R&D, I can't rush around in a dark room that has got spikes stuck on the inside of the walls.

That is the classic thing you get told by the R&D people.

But the reality is what we are trying to do is organize ourselves.

We can identify some of the real big products, if it can make a technological breakthrough, and so that is what we are trying to do.

So we are being a bit more focused and [rifle-shot] on two or three of the big programs in the hope that we can advance this.

The other thing that we are sowing the seeds in the R&D community is look, innovation is who we were, it is a part of who we will be, it is nothing has changed here.

Let's get back to developing more and more new products and let's get back to developing them faster.

So we have begun to change the culture.

We took out a lot of the sort of non-relevant metrics out of the organization.

I think overall, Deane, what we have done is lubricated, shall we say, the means of getting the R&D done, and the innovations out, and reinstilled a sense of urgency into that organization.

Kind of all soft stuff, but they are all very effective.

But it also sounds like you don't want to set a specific goal, in terms of new product introduction or vitality?

We do.

In fact, we track a vitality index for all of these businesses, but they are widely varied.

A vitality index which is necessary for Automotive is very, very different than a vitality index which is necessary for Optical systems.

You know, we are moving up that curve, we have kind of slicked back a little bit on that measure.

Notionally as a company, we want to be well up into the 20s when it is blended across all the company.

But we will see those variabilities that I talked of earlier.

It is a move of probably a good 10 percentage points in the absolute measure is what we are looking for, Deane.

Great.

Last question, how does that product or the acquisition pipeline look for these bolt-ons, that you say you are focused on?

It is one of the reasons we did them.

Some of them were very, very good.

I was at one about two weeks ago, Deane, in fact it was the E Woods acquisition in the U.K., and we bought that for the coatings.

They do internal pipe coatings.

Our existing business did external pipe coatings.

When I got there, it felt like I had gone into Aladdin's cave.

They had coatings for water pipes, urban wear pipes, steam pipes, they had coatings for walls.

They had anti-microbial coatings for hospitals.

When I walked away from there Deane, it was okay, well let's go pack a great acquisition for the core, but my word, did anybody really realize we had all of these other wonderful products out there?

So we actually now are trying to figure out in our company how to take that and create it as a business, and make sure we get an extra top up or supercharge out of that particular acquisition, and that is kind of going in many of the one that we are buying.

And the pipeline, expect more of those?

Yes, expect more of those.

You know, you will see I think a similar number of acquisitions for the year, as you saw last year.

I hope at some stage we will be able to get one or two bigger ones, not blockbuster ones, but that is my hope.

As we have oiled the squeaky wheels at the bottom end of these, that we will see one or two slightly bigger ones too.

Thank you.

Thanks, Deane.

Our next question will come from the line of Shannon O'Callaghan with Lehman Brothers.

Good morning.

You guys have had this sort of trend of gross margins coming down, obviously the pharma divestiture is part of that, and restraining the administrative costs.

Can you give us a sense of can SG&A continue to go down as a percentage of sales, and just sort of give us a sense of what you are looking for from that gross margin SG&A dynamic in the back half, and maybe into next year?

Yes, Shannon, I guess to answer your specific question is yes, we do see it can continue to come down.

There is no reason why SG&A has to grow at the rate of revenue.

But you have to be very, very disciplined about that.

You want to invest in the right areas that can heavily influence growth.

But then you also have to be very disciplined in the areas that don't drive growth.

So there is really no reason why that can't continue to be that way.

You look at where most of our higher percentage of growth is really in international markets, and our international markets actually have lower SG&A structures than we do here in the U.S.

So that is also favorable from just a percent perspective.

On the gross margin side, we have to work that day-to-day.

That is a combination of the yield improvements that we talked about previously, but also mix management within our business, and pricing, and so forth.

So the way we manage this is we have to manage growth, gross margin and SG&A and R&D expenditures in balance here, to give us the results.

So we continue to manage that, and we think we can get the top line growth, and continue to invest in the business, get more economic profit, and overall shareholder value as we do that.

So we see the model work very well, and there is no reason to believe that it can't work in the future.

Given what you said about Consumer and Office, and some of the other back half assumptions, you expect that as a percentage of sales, SG&A will be more in the second half than it was in the quarter?

We are talking about minor amounts here, and part of that is discretionary as we see how the quarter evolves from a revenue standpoint.

If I see a slight pick-up in spending, it is not going to bother me, because we will be doing it for the right reasons.

I am not going to give you a specific number, but that number will float a little bit depending on when we place some of our advert spending.

Okay.

And just one last one, on price it was a little less of a negative this quarter.

You made the comment about Optical pricing being sort of in-line with your expectations but did that get any better, or where did sort of price get a little better than where it has been?

You have to kind of look at it across the board.

We have some businesses that continue to get very, very good pricing.

Other industries are not favorable.

It ends up being more of a mix of business for us.

There really is no significant change in our overall trend.

Okay.

Thanks a lot.

Your next question will come from the line of Chris Kotowicz with A.G.

Edwards.

Good morning, guys.

Good morning, Chris.

I wanted to follow up on Jeff's question a little bit on the incremental investments, you'll start to see tailwinds on the top line.

Are we talking about a couple of points from your growth the second half of the year coming from these new plants, not to get too specific I guess, but should we think of it that way?

Maybe as a follow-up to that, is this all incremental, or is their any cannibalization of existing sales from these new plants?

I think the number, Chris is too high, the one that you just quoted.

Obviously there is a possibility as the plants load up, it is going to accelerate.

There is some cannibalization that goes on, because you may be working a plant, as we are in the U.K.

7 days, 24 hours a day, and some of that export volume that goes out to Asia, we lost volume we produced in the Korean plant, so there is some of that.

There is some of that cannibalization.

What it does help, though Chris, is the operating efficiency, and your ability to respond to the customers faster.

So you may not, you certainly wouldn't see any benefit in sales by offloading a plant in Britain, and loading up a plant in Korea.

But what you will see is faster response times, customers that will, more customers will buy from you, and you will see operating efficiency go up.

So you will see net betterment.

I think that the way that you might think about a plant like this, is a plant like this might fully load up over a year, perhaps, a year and-a-half.

You need to stretch it out just a little bit.

It doesn't all happen at once.

Okay.

And then on the, sort of related, but switching gears, you talked about I think fairly extensively how you got a lot of unmet demand, or you didn't have the ability to supply it, and we just talked about that.

I would think that that would actually help you on like receivables turns, right, because I would think your ability to go in and talk to a customer who wants more product than you can deliver, that you would actually see an improvement in your turns.

Is it just that you have got so much pressure in I guess the larger piece of the business, where you don't have that same dynamic, it overwhelms the other piece or not?

That is something I am struggling with.

I would think that you would actually see turns going up there.

Chris, actually I guess maybe two thoughts here.

One is, our receivable turns outside the U.S.

are not as favorable as they are inside the U.S.

So as the international markets grow faster than the U.S., that is going to be a drag, okay on our overall turn number, that is just the nature of the businesses.

And almost all of the segments that we compete in are very, very competitive.

And you compete on not only product, but you compete on price and terms, and so forth.

Actually our turns are not that bad from a competitive perspective, so that doesn't worry me.

We keep a very close eye on how competitive we are from an industry perspective.

Okay.

So you don't get the sense that you are making investments in new plants, and so the dynamic if all this comes through, is going to be that the supply demand imbalance is less out of whack.

That is not going to be favorable to your negotiating position.

That doesn't concern you?

No, it doesn't.

No.

Okay.

But Chris, what happens is, as you have capacity and you have capacity and you can respond quickly, it may not affect receivable turns, but it certainly affects whip turns, and the classic way you think about this is, if you plot sales versus fill rate, it is a kind of a Gaussian curve, a normal distribution, and as long as you can get, you make big gains in the early parts of the curve, of course the difference between sales at 97% fill rate, and 99% fill rate are not very large.

But those between 50% service rate and 80% service rate are.

So this is a strategy, Chris, that is not necessarily designed to attack the receivables issue.

It is something designed to attack the width and the sales growth issue service rates.

Thanks, guys.

Our next question will come from the line of John McNulty with Credit Suisse.

Good morning, guys.

Good morning.

Just a couple quick questions.

A lot of the companies that we deal with that are ramping up, facilities are really having a tough time with the overall ramp-up costs tied to materials, getting the labor, getting the engineers, that type of thing.

I notice you didn't raise your CapEx forecast.

I am wondering how you are actually dealing with these costs escalations?

First of all, I guess, John, there is cost escalation going on in the kind of building construction trade.

There is no doubt about that.

We continue to benchmark construction costs, and what it should take to complete these facilities, just like it is in the manufacturing process.

And there is some prioritization we need to make within our capital plan, but nothing that is that material to us at this point in time.

But something that we do keep a very close eye on.

I am sorry, go ahead.

I was going to say, this is George.

One of the things that we have been doing is trying to find a way to design fit for purpose plants, not necessarily Taj Mahals, and so I think we have been much, much more frugal with the way we have been spending money on these plants, and we are actually getting a, not to use a kind of phrase, a bigger bang for the buck now.

We are trying to be more efficient with the way that we are spending this stuff.

Another thing that happens in capital programs, John, is what tends to happen is time is money.

Pat mentioned earlier, kind of probably went under the radar scope, but Pat made the point earlier that we have been putting a lot of pressure on our people to try to find ways to get plants that were built formerly in two years, two and a quarter, to build them in a year.

That really helps a lot a great deal in keeping control of the capital.

You may have here and there money you spend extra to expediting stuff.

But generally speaking on a project, time is money.

If you can cut time, you can cut money.

That is helpful.

One quick follow-up.

Seasonally, your second quarter margins tend to be better than the first quarter.

That definitely wasn't the case this time around.

Can you give us some color as to why that actually may be?

Is it some of the costs of ramping up and revitalizing this growth?

Or is there maybe something else maybe at work here?

One issue that has changed versus history is our stock option expensing.

Since we have adopted expensing of stock options, we have a much bigger hit here in the second quarter versus the first quarter.

That probably has an impact of about a point or so in our margins in the second quarter.

So depending upon how far back you are looking, that has kind of changed the kind of the Q1, Q2 comparison.

Great.

Thanks a lot.

Our next question will come from the line of John Inch with Merrill Lynch.

Thank you, good morning.

Good morning, John.

Just to follow up on that point you made on stock options, I had thought maybe we were looking for about $0.09 in EPS impact from stock options, versus the $0.07 you reported.

The question is is that $0.02 sort of still there and comes back sometime in the second half, or was there something slightly different about the dynamic this quarter, than what you maybe expected?

John, you have a good memory.

Actually, it is made up of two pieces.

The $0.09 actually was probably $0.085 of that was rounded up to $0.09.

There is two elements.

The actual stock option expense was a little bit below what we anticipated, but we also with the increase in the stock price, we had a number of reissuances, so people effectively executing stock options in the quarter, which actually provides a much more favorable tax deduction as well.

So it is really kind of a big piece of this is kind of the after tax calculation of the EPS.

That doesn't come back to hit you?

No, no, no.

I want to go back to the Electro business.

I think George you mentioned the interconnect business down 10%.

What would that business have been ex the interconnect business?

Kind of mid-single digit?

Yes.

Well, let me kind of go back.

As I said, that kind of tail, okay, of a couple different markets there.

The Electrical markets and the Communications markets were up double digits.

Okay.

The Electronics market, and then also the electronics materials obviously, really the Electronics solutions were down in the quarter.

So it was really kind of a very mixed bag within that segment this quarter, John.

Just trying to understand, sort of how you were calling this out for the rest of the year.

Looks like you have got some significantly easier comps coming up in the second half.

Would you expect the growth rate in the electrode business to pick up kind of sequentially, or should we model it sort of around that type of threshold?

I think we don't have those forecasts yet, John, but I think situationally, we would expect some improvement in that business in the third and fourth quarter.

It remains now to see whether that comes.

There is another piece of this business which is end of life flex circuits, so you have got, as Pat tried to say to you, there are several moving parts here.

You have got the flex business, which is kind of going end of life.

You have got a soft sort of market in Electronics, where they are working off inventory that is a factor, and then obviously a somewhat unknown factor, as to how much new product might get launched in the third and fourth quarter, but we will pull-through product now.

The pipeline itself is in good shape, John, so if the demand side of the equation gets going, and the consumer side of this business gets going, we will see some improvement in demand.

That is obviously what we hope for.

Just the question I was, if you look at the CapEx investments for these plants, the 19 that are ongoing, George or Pat, do you have a sense of what the potential P&L impact is from these growth initiatives?

I understand you have articulated well what the CapEx impact is.

Do you think there is a few pennies of impact on the P&L side that is being absorbed today?

Well, John, whenever you go through a phase of construction, obviously the construction phase doesn't really hurt your P&L.

When you do go through the start-up phase, you do absorb some P&L hit.

As George was saying, it takes about thee quarters of operation, before you get to a breakeven point on these plants.

So as you do launch them, you do absorb some penalties.

But within the scale of the business we have, we think this is a very manageable, very manageable expense.

So nothing that you would call out, $0.05 each year, or something?

No, no.

There is a number, and it is finite, but we don't think it is large.

One final one for me.

George, I know you have somewhat personally sort of undertaken some initiatives to try and squeeze some more profit out of the Optical films line, whether it be sort of production or perhaps raw material inputs.

Maybe could you give us a little bit of a sense of sort of where that stands, some of those initiatives, and as we kind of model out profitability in the D&G segment, do you think there is actually upside from this 28 to 30% range, that we seem to be trending in today?

On was sort of some psychological pressure that I put on my colleagues about yield, and about the need to get that up.

And to their great credit, they have now taken that bet, and run with it.

But there was another aspect of this, is all of the waste that was coming out of those plants, John, because when you are in those, especially in the jumbo manufacturing, the yields are in the 50% range, depends on exactly what the process is, so you have got a lot of material you can reuse.

And we successfully to the great credit of the chemists here in the Company, we used to just dump all that scrap in landfills, and what we are doing now is we are taking a lot of that scrap, reprocessing it, extracting the NDC, one of the key chemicals that is expensive, and has gone up a lot in price in recent times, and reusing those, we do some blending and then reusing that material to produce some of the plastic parts for Consumer and Office.

That is just starting.

There is a few products now that are getting their resin materials from waste, Optical film reprocess.

It seems to have worked, and obviously we try to expand that as much as we can.

Over time, it will make a small incremental list to the Consumer and Office business and to D&G.

Not big numbers but it is the right thing to do.

It is going pretty well, John.

I agree.

The question is people I think are wondering can you hold the profit at these levels, based on pricing pressures and industry dynamics?

That is kind of the $64,000 question.

What are you thinking?

Is there any reason to think that D&G takes a step down, or can we hold at these kind of profit ranges?

I think blended, we don't see D&G's overall margins going down in any dramatic way.

But there are many sort of battles, many dog-eat-dog battles to be had yet, John.

As the market matures, it is my my belief that the pricing pressure will actually ease, and so some of this will begin to go away quite naturally, and actually might even we have seen this in one markets, John, as markets mature, they stabilize for a little while and then you get a little bit of recontenting.

They kind of come out of the other side of the belly, so-to-speak.

It is going to be a constant battle for us to drive yield, drive recycling, drive productivity by doing, recreating line rate speeds, doing double width materials, all sorts of things like that, that come together to help you mitigate some of the pressures on price.

I think net/net in OSD, there will always be some incremental downward pressure on margins.

I don't think there is any doubt about that.

Thank you.

Thank a lots, John.

Have fun!

That concludes our question and answer portion of our conference.

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

Thank you very much everyone for joining us this morning.

I would just like to reiterate while there is still much to do, we are very pleased with our first half performance, and we are very confident in our ability to execute in the second half of '07, and more importantly, beyond.

Thanks a lot, everybody.

Ciao!

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

You may all disconnect, and thank you for participating.