3M (MMM) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the 3M first quarter 2008 earnings conference call.

During the presentation all participants will be in a listen-only mode.

Afterwards you'll be invited to participate in the Question and Answer Session.

(OPERATOR INSTRUCTIONS).

As a reminder this conference is being recorded Thursday, April 24, 2008.

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

Good morning, this is Matt Ginter, Investor Relations for 3M.

I would like to welcome all investors and analysts to our first quarter 2008 business review.

You'll find this morning's presentation on our Investor Relations website at 3M.com.

The slides will remain on the slight along with an audio replay of today's call for an extended period of time.

Please take a moment to read the forward-looking statements on slide two.

During today's conference call we will make certain predictive statement that is 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 form 10-K lists some of the most important risk factors that could cause actual results to differ from our pre predictions.

I also wanted to mention that our annual investor day meeting, which will be here in St.

Paul, will takes place on September 9th.

Please hold the date, and more details will follow.

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

Today is a very busy day as many companies are reporting earnings, and I know you're all very busy, so we'll do our best to keep the call to about an hour.

You can help during the Q&A by limiting yourself to one question and one follow-up.

We appreciate it.

This way all questions can be fully addressed.

So, now go to slide three and I will turn it over to George.

Thank you very much, Matt, and good morning, everybody.

Today I will give you my views on the quarter, and along with some comments on the rest of the year.

In an uncertain economic environment, like the one that we're experiencing today, we are particularly blessed by the global presence and strong diverse portfolio that 3M has developed over the years.

Investments we've been making in new products, acquisitions, and particularly in strengthening the core of 3M is paying off handsomely, and it is these factors which have allowed us to do so well even as we deal with a weak U.S.

economy and face the challenges of our LCD based optical films business.

So first and right up front I'd like to affirm our 2008 goal of EPS growth of 10% or more.

The quarter was a tale of four principle factors.

First, excellent performance in four of our six reporting segments; second, slowing U.S.

growth as evidenced by slower performance in our Consumer and Office business; third, superb international performance; and fourth, continued slowing of and enlarging compression in the optical films business.

Overall we had good results with sales up 9% bolstered somewhat by foreign exchange and EPS of 8%.

We maintained margins at or about 20% or better in all of our businesses even as we continued to invest in R&D, additional sales presence, and more efficient supply chain and in acquisitions.

It will surprise nobody we saw consumer office segment slow in the first quarter and it finally mirrored the experiences seen by U.S.

retailers and other supplies into that market.

But we clearly have been taking market share in many important product categories.

As companies in the U.S.

cut back in banking, airlines, brokerages, and with the contraction in residential construction, people are naturally buying less of these types of products.

The U.S.

economy as we see it from our Consumer and Office perspective continues to be slow in the end markets.

Net sales in the Consumer and Office business were up 2.6%.

While local currency sales were down 2.5%.

Margins held in at about 20%, but we must expect that the Consumer and Office market will continue to be weak in the second quarter and likely it will persist throughout the balance of 2008.

Performance was helped by continuing improvements internationally, and I think that given the tough U.S.

market challenges, that this was still a great performance by the Consumer and Office team.

We may see some improvement as the current inventory corrections in the United States finish, but we don't expect this to be transformational.

Our Industrial and Transportation business saw nothing less than stellar performance.

Sales were up 17%, and profits were up about 15% with the margins coming in at 22.6%.

This great performance went right across the entire Industrial and Transportation sector.

Like many other parts of our business, it is underscored the wisdom of our invest in and extend the core strategy.

Along with international growth and our localization initiatives there, this focus on the core has been the primary reason we've been able to do so well in these tough market conditions.

Pat will give you more details in a few minutes.

Healthcare performance was also strong.

Sales were up 12%, operating income was up nearly 20%, and margins approached 30%.

New products continue to reinvigorate the product portfolio of Healthcare.

For example, we plan to release our digital dentistry system in higher volumes as the year progresses.

Healthcare will continue to be one of those segments that receives targeted investments.

In Safety, Security and Protection Services the focus on the core business is also paying off there.

For the quarter we saw broad based growth in respiratory products, window films, corrosion protection, and track and trace solutions.

Sales were up over 13% in the first quarter, and profits were up 12%.

We've been building this business steadily over the past two or three years, and even with the contraction in the industrial minerals business and no x-factors to drive sales, we've still done remarkably well.

The future looks very bright in the safety and security business, and the acquisition of Aearo which will significantly expand our occupational health and personal safety lines received final European regulatory clearance and closed on April 1st.

Our support of security agencies around the world also gathers good strength.

Our electro and communications business continues to do well also.

Sales were up more than 9%, and profits were up over 13%.

Overall, E&C showed great growth all around the world.

New products, both those developed inhouse and acquisitions, are driving that growth.

We're seeing increasingly strong demand now for other ceramic core, reinforced high voltage wire product and it is swinging into profit now all be it small for the time being.

We achieved this performance despite significant end of life contraction in flex circuits for ink jet printers.

Display and graphics was clearly our biggest challenge in the quarter.

Sales fell by 6%, and earnings fell by 37%, largely because of significant weaker dollar volume in the optical films business which over shadowed solid performance by commercial graphics and traffic safety.

As we outlined for you in December last year, our mission in optical films is very straight forward.

First, we are establishing stronger working relationships with our customers, much as we did when we first built this business over a decade ago.

By reconnecting with them, we will more clearly understand their needs as we provide them the solutions they need in a fast-changing, technologically driven marketplace.

Second, we're vigorously driving out costs and introducing flew cost competitive film to deliver better value to our customers.

And third, we continue to strive towards a profitable and sustainable business in a market with explosive growth potential.

To drive this mission we've installed new leadership in the optical systems division.

The division is now managed by Jim Bowman who formally led the improved performance in our automotive OEM business.

In addition, we have in place new technical and manufacturing leadership.

Importantly, we moved the division headquarters to Asia to be closer to our customers and closer to the rapid innovation and change that is taking place in the set and panel manufacturers in this incredibly fast-moving industry.

Over the last year or two we talked a great deal about the rapid rate of change in this market.

The first quarter was no exception.

If anything, it was surprising how quickly the market moved towards commodization in the quarter.

These challenges will likely extend throughout 2008 as the flat panel TV market continues to transition to commodity products.

We enjoyed the growth in this business, and now we are managing it as a transition to a business much more like the rest of 3M.

Please keep in mind that this is still an enormous market with enormous potential for those who can get the costs and product structure right, just as we are doing.

We are in the field sampling many new lower cost products that should win new converts.

So despite being in transition, optical films remains good business for 3M, a business with both good growth potential and operating margins comparable to those of the rest of the company.

A piece of good news in this general optical area is the strong interest we are getting for our new mini projector with applications in many new areas.

Because of the rapid movement of these marks in a break from tradition is our intention to license this technology openly, widely, and quickly.

It is in its very early days of this product, but we hope it will quickly become a fine contributor to 3M's overall product portfolio.

So to keep things in proper perspective, we have very positive performance across our portfolio.

Four of our six businesses are achieving double-digit profit growth and one is a little softer as expected, a true testament to the power of 3M's diversity and its recent investments.

As I mentioned earlier, we're especially grateful for the 3M business model in times like these.

Like all manufacturers we are combating significant upward pressure on commodity prices, transportation charges, and energy costs.

This has put pressure on gross margins which we are fighting hard to resist.

However, as you'll see from past jobs later the reduction in gross margins this quarter is all attributable to optical.

As you can well imagine, we're designing products to substitute lower cost alternatives which takes time to do, and we're taking price increases wherever we can.

So continued operational excellence is vital in these environments, and our focus on lean manufacturing, faster web speeds, better sourcing and yield improvements are keys to success.

Our balance sheet remains very strong, and we just posted our 50th consecutive annual dividend increase, and our pension plans remain well funded at around 100%.

This gives us enormous flexibility on where to deploy resources.

The supply chain initiatives continue at a steady pace with no hiccups in the transition.

Just as our diverse portfolio contributed to our success this quarter, so too did our international strength.

In the first quarter two-thirds of our sales were from international and grew by 13%.

China, Russia, India, Middle East, and eastern Europe are all growing between 15 and 30% annually, and we're very encouraged by the acceleration of growth in Latin America over the past year.

We see this Latin American region as a major opportunity for growth.

It is politically and economically stable, friendly to the U.S., and right in our figurative backyard.

In 2007 sales of $1.7 billion which is larger than China for now and growing in the teens of percent with margins well over 20%.

Absent the impact of declines in optical, the base business in all international markets remains surprisingly stronger across the world.

We have an unequaled global team, and the presence and they're hitting it on all cylinders.

In summary, challenges in optical and in the United States will be offset by other areas which are performing even better than expected.

We're staying on the course of growth prudently investing in our core and near adjacencies, and in acquisitions.

International will continue to be a positive factor overall for us, and as always, should the need arise, we will cut our cloth according to the size required.

So now I will end where I began.

Our geographic and market diversity enables us to reaffirm the 2008 EPS target of 10% or more despite the challenges we face.

Now I will hand the all call over to Pat for more first quarter detail.

Thanks, George, and good morning, everyone.

Please turn to slide five.

All information in today's presentation will exclude special items.

Recall that last year's first quarter earnings per share of $1.85 included net gains of $422 million or $0.57 per share from the sale of the company's branded pharmaceutical business in Europe net of various other special items.

Excluding special items in Q1 of 2007 earnings per share was $1.28.

There were no special items in the first quarter of 2008.

As George point out, we continued our trend of quarterly records for sales, operating income, and earnings per share in the first quarter.

Sales were up 8.9% to $6.5 billion, led by industrial and Transportation, Safety, Security and Protection Services, healthcare, and electro communications.

Local currency sales were up 3% in the quarter.

Looking at the company geographically, internationally we drove broad based growth with double-digit sales growth in Europe, Latin America, Canada, and Asia Pacific excluding optical.

Operating income was $1.5 billion, an increase of 3.6% over the same quarter last year, with four of the six business segments achieving double-digit operating income increases.

Operating income margin was 23.2%, as all six businesses delivered 20% or so plus margins in the quarter.

First quarter earnings were $1.38 per share for an increase of 8%.

Currency has gone in our favor for some time now.

In the first quarter was no exception.

We benefit perhaps more than your typical multinational because of our significant international footprint.

Two-thirds of our first quarter sales occurred outside the U.S.

with an even larger percent of our profits.

Currency added about six points to sales growth in the quarter, and an estimated $0.07 to earnings per share.

Earnings impact is indeed an estimate as it picks up the positive elements of the weak dollar but does not comprehend the higher commodity prices we're feeling related to dollar denominated commodities.

The true net earnings impact would be muted somewhat.

In addition, as we have previously explained, we proactively managed currency gains to the extent we can.

We have committed to deliver 10% plus EPS growth in good and bad times.

When currency is a tail wind, we work to invest the excess to ensure a predictable stream of future earnings thus improving long-term shareholder value.

Overall, I am pleased that we're able to deliver these results despite a very difficult U.S.

consumer, housing, and auto marketplace, the softening optical business and record level commodity prices.

As we point out to you previously, we expect in Q1 to be our toughest comparison for the year due to our outstanding performance in last year's first quarter.

Please turn to slide six for an in-depth review of the first quarter performance versus the same quarter last year.

All information on this slide excludes special items.

The story around the P&L this quarter needs to be separated into two pieces, optical and the rest of the company.

As you can see at the far right of the chart, excluding the impact of optical, gross margins and operating income margins would have been better than last year, so our broad-based portfolio continues to perform as anticipated.

Sales would have been up 11%, and operating income would have been up 12.2%.

Optical on the other hand saw the operating income halved from last year and with the sales reductions of 16% which results in the decline of margins but still well within our guided margin range for the year.

As I previously mentioned, we delivered all time record sales, operating income, and earnings in the first quarter.

Now including optical first quarter sales increased 9% boosted by currency translation effects with operating income up 3.6% and earnings per share up nearly 8%.

Net interest expense was $25 million, up $15 million year-on-year primarily due to higher debt balances.

Finally, the first quarter tax rate was 31.8%, a decline of 1.4 percentage points versus the same quarter last year.

This decline in tax rate is consistent with our goal of reducing our tax rate by 1% per year.

The P&L on a sequential basis is found on slide seven and reflects solid performance in several categories.

Sales were up 4.1% versus the fourth quarter.

We kept SG&A relatively flat versus last quarter, and SG&A spending declined 1.7%.

With four of our six businesses delivering positive sequential growth, we leveraged this into a 16.3% operating income improvement.

Operating margins improved by 240 basis points sequentially driven by a combination of strong sales in our emerging markets and developed international markets and outstanding operational discipline.

On a sequential basis net income and earnings per share increased 14.5 and 16% respectively.

Now let's break down the components of sales growth for the quarter.

Please turn to slide number eight.

On a worldwide sales basis we grew 8.9% in U.S.

dollar terms with international up 13%, and the U.S.

up 1.6%.

First quarter organic volumes were up 1.6%, while selling prices declined by 30 basis points, and acquisitions added 1.7% of growth.

Selling prices were negatively impacted by 1.1% due to price reductions in our optical film business in the quarter.

Globally, we're aggressively pursuing price increases where we can to help offset record level commodity price inflation.

Global revenue growth was boosted by foreign exchange to the tune of 6% in the quarter.

Internationally, local currency sales were up 3.4% versus the same quarter last year.

Organic volumes increased 3.9% as five of six business segments posted positive local currency growth.

Selling prices declined 1.4% driven by a 14% decline in optical pricing.

Excluding the impact of optical, international selling prices increased 30 basis points.

Acquisitions added an additional 90 basis points of growth in the quarter.

Regionally local currency growth was led by Latin America at 15%, followed by Canada at 7%, and Europe at 3%.

The Asia Pacific region delivered .8% local currency growth in the first quarter which was negatively impacted by an 18% decline in the optical film business.

Excluding optical, local currency growth in Asia Pacific was 8% versus last year.

As many others have already reported, growth in the U.S.

is more difficult due to the slow economic conditions with local currency growth of 2%.

Organic volumes declined 2.8% while selling prices and acquisitions added 1.7 and 3.1% respectively.

First quarter business segment performance was a tale of two stories.

On the positive side we saw a strong growth of 13% in our Industrial and Transportation business, 7% growth in electrical communications, and 3% growth in healthcare.

This growth was offset by sales declines of 9% in Consumer and Office, 5% in display and graphics, and 4% in Safety, Security and Protection Services.

Please turn to slide nine for a review of our Industrial and Transportation business.

This is our largest segment, representing about a third of our sales, and in the last quarter as revenues grew faster than any other business, it was truly a remarkable quarter for this team.

First quarter sales in the segment grew 17.1% to $2.1 billion.

In local currency terms, sales increased 9.6% including a four-point boost from acquisitions.

Our efforts to reinvigorate 3M's core is paying off in spades here.

In fact, all of our largest core industrial businesses, including including abrasives, industrial adhesives and tapes, automotive after-market, and automotive OEM each drove double-digit sales growth in the quarter, along with personal care products, aerospace and our oil and gas market initiative.

Throughout 2007 we stepped up our investment in this business to strengthen our already unrivaled portfolio of core technologies.

Through increased R&D, and a number of bolt-on and complementary acquisitions, we have begun to transform our tapes, abrasives and adhesive businesses into a legitimate growth engine for the Company.

We're extending the core by extending in the fast growing adjacencies such as professional abrasive power tools and solar energy solutions.

In our market-leading automotive after-market division we're supplying technology based solutions to auto body shop repair around the world growth was driven largely abrasives, masks and re finishing products.

We also effectively reinvent our a abrasives division if in the past year driven by special application products including marine, Aerospace, wood and metal working and automotive OEMs.

Geographically, we saw a standing double-digit growth in every region worldwide including the United States with growth led by Europe.

We're driving added market penetration in emerging markets as our industrial business continues to make significant investments in China, India, Poland and Brazil.

First quarter operating income in the industrial and Transportation was $472 million, up 15.2% with operating margins of 22.6%.

Please turn to slide ten where you'll find the first quarter highlights for our Healthcare business, which is a leading provider of medical, dental, and orthodontic products along with drug delivery and health information systems.

Healthcare extended a stellar 2007 performance into the first quarter of 2008.

Local currency growth including acquisitions was 5.9% in the quarter, virtually all organic.

Three of our healthcare divisions drove double-digit sales growth, namely medical, dental, and orthodontics, with medical leading the way.

International sales growth was outstanding in Q1 as we drove double-digit growth in all regions outside the United States.

Our dental business was recently recognized as the most innovative company in the worldwide dental industry for the third consecutive year by the independent publication 2007 dental industry review.

The award commended 3M's track record on innovation and is based on achievement in three categories, the number of new product clearances in the U.S.

market, the number of approved U.S.

patents, and the number of European and worldwide international patents.

We also drove strong double-digit sales and profit growth for the quarter in our medical division, another of 3M's critical core businesses.

Recently we extended our core offering in this business by introducing a transparent antimicrobial dressing to cover and product patient's catheter sites.

Of course we're leveraging the 3M Tegaderm brand in order to highlight its value in the eyes of healthcare practitioners around the world.

We continue to invest in our core Healthcare businesses while pursuing strategic synergistic acquisitions.

In fact, we have added more than ten acquisitions in the past two years.

The team is working hard to where bring new products and solutions that will enhance the patient experience and drive productivity for the healthcare professional.

First quarter operating income in Healthcare increased 19.6% to $321 million margins of 29.8%.

Please turn to slide 11 for a recap of first quarter performance for the Display and Graphics business.

Since George covered optical systems in a fair amount of detail, I will try to be brief here.

Sales for display and graphics were down 5.9% in the first quarter, and operating profits were down 37%.

Operating margins came in at 21.5%.

Positive sales growth and traffic and safety systems and commercial graphics were more than offset by lower than expected sales in optical systems.

Display and Graphics faced a traditional seasonal slowdown in our traffic safety systems business as the highway construction season obviously slows during the first quarter during colder climates.

We also experienced some softness in the rebranding aspects of the commercial graphics business which is not unusual to see when the economy slows.

We continue to see strong demand for our on premise graphics, services and fleet graphics in commercial graphics.

In projection systems, we introduced super close projection products and are scaling up production of 3M's mobile projection technology, and ultra compact LED illuminated projection engine designed for personal electronic devices.

George mention this had briefly in his comments.

Traffic safety and commercial graphics are highly stable long-term winning businesses for 3M, so although slow growth in the first quarter, these will rebound, and we have some exciting new technologies in micro projection as well.

We obviously have challenges in optical in 2008, and rest assured we're are addressing them aggressively, and we feel very good about the D&G business longer term.

Safety, Security and Protection Services also had an outstanding quarter, as shown on slide 12.

Sales rose 13.4% to $859 million.

Local currency sales growth was 6.4% with 1.9% from acquisitions.

We posted strong growth in three of our four businesses, respiratory protection, protective window films, and cleaning solutions for commercial buildings, and corrosion protection.

As a leading manufacturer of occupational safety products, asset tracking solutions, security systems, and building safety solutions, we continue to see exceptional growth in both developed and emerging economies outside the U.S.

International sales expanded at a double-digit clip in the quarter with equally strong contributions from Europe, Asia Pacific, and Latin America.

On April 1st as George mentioned we completed the acquisition of Aearo Technologies, a global leader in the personal protection industry.

Through significant acquisitions such as this, we have expanded our safety portfolio to offer customers a more complete personal protection solution, and we continue to see strong demand in this area.

We also have seen continued growth in our core protection and security businesses which are both supplemented with strategic acquisitions, namely E-Wood, and Security Printing Systems Limited.

Based upon our advanced heat blocking technology, five 3M window films were selected to be part of an initiative to lower energy costs across the globe.

The roofing granules business posted sequential improvement versus the fourth quarter.

However, the business was still down slightly year-on-year.

Being sales in this business are predominantly U.S.

based, we continue to expect the sales roll will remain soft through the year due to the weak U.S.

housing market.

Operating income was $204 million, up 12.4% versus last year's comparable quarter, and margins were a solid 23.7%.

Please turn to slide 13 for a recap of our Consumer and Office business.

Year-on-year growth in this business was 2.6% with sales in local currency down 2.5% for the quarter.

Consumer and Office feels the pain of the U.S.

economic slowdown more quickly and directly than many of our other 3M businesses.

Recall we began feeling it in the second quarter of last year.

In the first quarter of 2008 business conditions were even more challenging driven by slower U.S.

same-store sales and further inventory drawdowns from our large U.S.

retail customers.

One bright spot in Consumer and Office was our home cares product division home to leading brands such as Scotch bright sponges and scrubbers where sales increased 10% in the quarter due to equal volume and currency.

In geographic terms, international sales were up almost 20% following our focused investment strategy to grow this business.

We saw a strong double-digit growth in Asia Pacific, Europe, and Latin America.

While in the U.S.

where we derive over 50% of our revenues, sales declined year-on-year by 9%.

Going forward, we expect growth in the consumer office business to continue to be led by international operations.

As U.S.

growth will remain uncertain over the near term due to challenging economic conditions.

So in the strength of our relationships with key customers, we did earn some accolades from a couple of our largest customers.

Target recently awarded us the partner of the year award.

And Staples recognized our post-it team as the best category manager in the U.S., Canada, and Europe, the first time that a supplier has won the award in all three regions in the same year.

Internationally our team in Brazil won the vendor of the year award from Sam's Club, and 3M Mexico won the vendor of the year from Wal-Mart.

Operating income was 166 million, down 7% year-on-year, for profit margins remained at near 20% levels.

Please turn to slide 14 for an overview of our first quarter performance in the electrical and communications.

Our solutions in this business, connect the world's power grid enabled global telecommunications and helped to connect scores of high tech electronic devices.

Electro communications marked another solid performance with first quarter sales of $725 million, up 9.2% and profits up $146 million or 13.6%.

Sales growth was led by our electrical markets division, another critical core 3M platform that serves the electrical utility, construction, and maintenance OEM markets along with our electronics markets materials business where we provide adhesives, floor chemicals and abrasives to a number of industries, most notably semiconductor and electronic assembly.

Electro and Communications in total of over 3.3% local currency growth in the quarter, despite another tough sales quarter in our flexible connectors business where a number of products solutions are going end of life.

In geographic terms, we saw solid double-digit growth in Asia Pacific and Latin America, and single-digit growth in the United States and Europe.

We have invested in a number of customer technology centers and manufacturing facilities in key regions around the world to serve our customers in this business.

It is this kind of bench to bench intimacy that enables 3M to grow our competitors and become true partners with our customers.

The first quarter balance sheet and cash flow metrics are found on slide 15.

Free cash flow for the quarter was $699 million versus $670 million in last year's first quarter.

Income tax timing differences negatively impacted free cash flow in the first quarter versus last year to the tune of $200 million.

Traditionally, our free cash flow conversion in the first quarter is the lowest of each year due to historically strong sales in March and softer sales in December which negatively impacts our working capital.

Working capital turns were in line with the same quarter last year and down .4 turns sequentially.

Foreign currency translation increased the accounts receivable year-on-year by $289 million sequentially by $150 million, and inventories by $200 million versus last year and $82 million sequentially.

Capital expenditures were similar to last year's first quarter at $298 million but down $93 million sequentially.

Looking ahead for the entire year, we're now expecting capital expenditures to be in the range of 1.3 to $1.4 billion from our previous range of 1.4 to $1.5.

Dividend payments for the quarter were $353 million share repurchases were $510 million both consistent with the recent quarters.

Weighted average shares outstanding were 717.2, down 3% year-on-year and 1% sequentially.

Our debt-to-cap ratio was 33% at the end of the quarter.

Due to the closing of the Aearo acquisition on April 1st, we did carry excess cash on the balance sheet at quarter end.

Now let me cover our full year guidance so please turn to slide 16.

As George mentioned, we continue to expect 10% plus growth in earnings per share for 2008.

While some elements of our portfolio have gotten more challenging since our last earnings call, namely the U.S.

retail, housing, and automotive markets along with optical, others are performing as good or even better than expected.

Of course the dollars remain weak which is helping our results as well.

As previously expected, operating margins for the year should be in the 22.5 to 23.5% range, and our tax rate is expected to be in the range of 31.5 to 32.5%.

We expect capital expenditures as I previously mentioned to be in the 1.3 to 1.4 range.

Let me take a quick moment to remind you of a couple items that will impact our per share earnings in the second quarter.

As in past years, we will have higher sequential stock option expense in Q2, than we did in Q1, as we grant our options in the second quarter of each year and must recognize the expense on the date of the grant related to those employees that are retirement eligible.

Second quarter options expense will be $0.03 to $0.04 higher than in Q1.

Second, with the closing of Aearo on April 1st, we estimate we'll have $0.02 of acquisition related costs in the second quarter.

That concludes our formal comments this morning.

Now we would be happy to take your questions.

(OPERATOR INSTRUCTIONS).

Your first question will come from the line of John Inch with Merrill Lynch.

Question around organic growth.

The U.S.

down 2.8%, George or Pat, what do you think the growth would have been if you folks had not been over the past few quarters putting in place your growth spending initiatives?

I am just curious how much you think your initiatives have driven this number?

Is this still going to be something that's to come in later '08 or '09?

John, it is difficult to give you a precise answer to that question, but the new product vitality index that we mentioned is moving upwards about 2 points each year.

So I think it is fair to say that with the impact, I don't know that I can give you a number.

Matt, do you have anything recorded there?

Estimate, George.

So it has been positive, John, obviously, but very difficult to give you a precise number.

Can we make an estimate and get back to you.

For sure.

Just as a follow-up, I know that at the December 12th meeting we had thrown out currency contribution for '08 of $.05 to $0.15, and I think if I parse Pat's comments, the $0.07 times 4 is $.28, but there is higher raw material costs and so forth, so maybe it is $0.25.

I guess my question is that's 5% of the EPS contribution.

Looks pretty good, but how are we thinking about or how are you guys thinking about currency potentially moving the other way?

Is that between that and pension, are those headwinds something that we need to factor in here as with you begin to look to '09 or for instance you feel like you have enough in the flex spending or other things to potentially offset what would invariably turn into headwinds next year?

John, Pat here.

First of all, we never bank on either foreign exchange or pension returns, kind of from a long-term planning perspective, we view those as being a little more short-term in nature, so we plan the business more around kind of a steady state operational basis.

So, what we try to do is when we have the benefit of foreign exchange and just to be clear with everybody, it is a difficult number to get your hands on.

I can give you a technical foreign exchange number, but I think you're all well aware, there is other more macroeconomic impacts that affect business results, volume and so forth, that make it a little harder to come up with a good net number.

But we're definitely seeing on the commodity side some significant increases that we're trying to of course address through price increases and the like.

So, what we're trying to do is while the currency is favorable for us is to continue to invest in our businesses, so as currency does move which eventually it will at some point in time, that what we've done is we've got a better growth space in the rest of our businesses.

So, that's been our strategy.

Great.

Thank you.

Hey, John, are you still there?

I am here, Matt.

This is Matt.

I wanted to clarify one thing.

We live in this world of instant information, so I have seen your initial report.

For the benefit of everybody, we had a benefit of miscellaneous versus the same quarter of last year, and I want to make it clear what that is.

This year our pension expense is lower as we told you to the tune of about $0.02 to $0.03 in the first quarter of this year.

And what we did is the whole $0.02 to $0.03 essentially is affecting corporate miscellaneous, the amount of pension expense we're charging out to our businesses is essentially the same, so that really counts for that difference.

So, Matt, what should we model as then the corporate number for the rest of the year, do you think, or for the other quarters.

Something pretty similar.

Okay.

A positive number, then, or flattish?

Flattish.

Okay.

Thanks very much.

Thanks, John.

Your next question will come from the line of Shannon O'Callghan with Lehman Brothers.

Good morning guys.

A couple of the targets we didn't get updates on.

The 5 to 8% organic growth for the year, are you still thinking that's achievable, and Display and Graphics given the tougher first quarter here, there we were looking for mid-single digit organic and 24.5 to 25.5% on the margin.

Do you have an updated view of those different targets?

Shannon, I think in the current economic situation getting to 5 to 8% is a nice aspiration, but probably unlikely.

We're not throwing that away from a kind of where we want to be, but I just think it is probably unrealistic in today's economic world and on top of that with the situation we're in with optical, just probably doesn't make that a realistic assessment.

You can be guaranteed that we're fighting for every piece of volume that we possibly can in today's economy.

But importantly, Shannon, I want to make sure that you don't connect -- we're saying we're going to give you a 10% plus earnings growth.

Don't tie that to necessarily a 5 to 8% volume growth.

We'll get there without having that 5 to 8%, but that is clearly in our sights as what our objective is on more of a steady state economic environment world.

And if you get outside the U.S., our international performance remains very, very strong, so that piece of the business ex optical for a second, I would say that we're still performing at the levels that are consistent with that 5 to 8% range.

It is really the U.S.

impact, and it is the optical piece that is dragging us down at this point in time.

Another thing that we talked about in the past, this is George, is a multiple of IPI growth and we seem to be well in the hunt for that.

So, we're not slowing faster than anybody else even with the kind of head winds that we talked about already this morning.

IPI, I mean, I don't know what the actual number will come in at I guess in the first quarter, but it is not going to be 0.5%, right, or I mean organic growth is like 1.3 with price and the volume is a little different, but you're not going to be at 2X IPI, right?

Probably 1.5, of that order.

Okay.

And the Display and Graphics margin target, what's the updated view on that?

I guess, Shannon, you kind of have a very good question there.

It is pretty hard to look at Q1 at being 21.5 and saying that our objective of 24.5 to 25.5 is a realistic one.

I think the best way to think about that business is to assume that Q1 will be probably indicative of where the year will run.

Then the last one, help me to sort of then flip to the no change to the annual guidance in terms of margin.

Healthcare looks like obviously it is coming in better.

Where are the other big offsets given you already had a decent drag from display and now it will look worse.

Where are the offset to say keep the overall year flat to up 100 basis points on margin?

Well, you look at it where industrial has gone, first of all, let's go back to what our margin expectation is, our margin expectation for the year is 22.5 to 23.5.

We ran 23 in the first quarter with optical or DMG really at 21.5, so I think they're very consistent that we can continue to perform at the company level where we say we are and then continue to bring D&G down because it is somewhat like we ran here in the first quarter.

Okay.

I will leave it at that.

Thanks, guys.

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

Good morning, guys.

Good morning, Scott.

I wanted to approach the opposite of Shannon's questions, and the outliers and the high side.

I don't think it was a huge surprise at least for us that the rate of change in Display and Graphics was negative.

But certainly a surprise that Healthcare and electro and communications came in as strong as they did.

Let's just address maybe one at a time.

It wasn't clear in the presentation if there is any timing issues that, mix, or timing issue that is may have benefited margins in the quarter, or if that is purely volume driven and you're getting volume leverage maybe above and beyond what you've had historically?

Scott, there is nothing in either segment that is unusual that you should take away that there was kind of an artificial impact on either one of those businesses.

ENC just continues to perform very, very well.

They've got a few business that is are just absolutely doing gang busters right now that are actually at higher margins than what the average is.

So, that continues to hold them up.

And then really Healthcare across the board, healthcare across the board is just performing very well, both geographically and across all business segments.

So there is really nothing I would say unusual in either one of those that Q1s would be an outlier of where -- what the future is going to look like for us.

It is George here.

We said very early in my tenure what we're going to do is take the old traditional core of 3M and invest and make sure it remained strong, became a base on which to build the rest of the growth platform.

What we've seen now, certainly at this moment in time has been progressively increasing and improving the past two years.

Pat actually mentioned two or three of these in his presentation.

We've seen wonderful performance, improved performance from abrasives, from the electrical markets division which is in the ENC segment that Pat just spoke about.

We're seeing it in industrial techs, an improvement and resurgence in medical and the automotive after-market, and one of the businesses we were struggling with terribly which was the personal care division which is the division that makes diaper tapes is another business which is turning around.

So, what I think it turning out to be true, Scott, is the wisdom of investing in those businesses and bull walking those to make sure we had a great platform to grow from.

There is no reason at this moment in time for us to believe unless end market conditions worsen dramatically that we can't see continued either improvements or at least steady performance from the businesses.

It is so broad base and in such a lot of the big businesses and big divisions of 3M, and that's why you end up with even dealing with this optical transition, why you end up with the good numbers that you do.

Got it.

I want to go back and talk about Aearo little bit.

On the surface the acquisition looked a little expensive to us.

It is tough to tell.

It is a bit of a unique asset to hard to value from our perspective, but can you talk now that you've had a chance to close the deal and have a few weeks and you've had a few months to do due diligence, are there cost synergies, any other kind of strategic benefits above and beyond what you talked about on the last conference call?

Yes.

I will try to take and see if George has anything to add to it, Scott.

Based upon the feedback that the business team has had with them, I think they feel even better about the business, the opportunities, the very solid organization they have at Aearo the products they've got, businesses continue to perform, actually even above our short-term expectations.

So, everything thus far has been very, very good.

The integration planning has been just outstanding with them, and so I can't say enough good about the relationship that we've had with the Aearo organization thus far, and by all signals thus far, I would actually rate it probably a little bit better than we kind of thought when we first look at it.

Scott, I think the other thing is keep an eye on where others trade, okay, in that space.

There has been another company sold in that space.

Just do your own assessment, okay, as to Aearo versus them.

Expensive enough.

Yeah, we actually thought both acquisitions were confined kind of expensive, so we criticized the other company as well, so we're equal opportunity critics here.

That's good for you.

One last point that I heard is I have been traveling around internationally, Scott.

We tend to when we do the modeling of these businesses, Pat and myself tend to be the very serious critics of synergies both in the cost area but in particular in the sales area.

And in over many years of experience of these sorts of things it is a place where companies seem to consistently make mistakes.

What seems to be transpiring here in Aearo, because they're relatively simpler products and so familiar and close to the kind of OGS core we've had for many years, there is a very high level of comfort in being able to get out those Aearo products into the international markets, and drive sales synergies, so of course you can well imagine that Julie Bushman who runs that business, Pat and I have sent Julie some pretty tough targets.

So, I think that if this thing goes anywhere near as well as we expect, then we'll see betterment in the synergies.

I am not sure about betterment in the cost end yet, in sales synergies, I meant.

Okay.

Thanks, guys.

Your next question comes from the line of Jeff Sprague with Citigroup.

Thanks.

Good morning, everyone.

Good morning, Jeff.

Just a couple quick ones.

You covered a lot of ground already.

I didn't catch it.

Could you just give us your all-in organic read on Europe in the quarter ex currency, ex deals?

Why don't you go to the next question, and I will come back if that's okay, Jeff.

Sure.

I got it.

It is 1.7% would be the organic in Europe for the quarter.

Which is somewhat of a slower growth rate for them versus last year's first quarter and from a trend standpoint.

I didn't talk about Easter, okay?

It does affect them in more the Mediterranean part of Europe.

So, we do expect second quarter will be kind of a little bit better.

I didn't want to get into the excuse game, but I still feel very good about Europe.

I think we have our eyes wide open in Europe to make sure that we don't see a slowing trend there, but I know George has been there more recently than I have, and we still feel very, very good about the programs that we have in Europe, the central east Europe, Africa Middle East continue to grow at double-digit rates.

The story will be western Europe over time, so we did see a slowing, but I used to tell you guys that any growth in western Europe I always viewed as being a positive, and to some degree I still kind of view that from a plan perspective, and many of our countries have kind of proven me wrong there, and I am glad they have.

So, I feel that we got a solid plan in place there, but we are watchful as to how the economic conditions kind of play out in the west.

Then, George, just a little further elaboration on your declaration if you will that optical has gone commodity.

Was that kind of a best versus the best type comment or is that all-in kind of consumer preference comment?

Can you just give us a little more color on kind of attachment rates and what you're seeing with the mix and how the competition is shaking out?

Yeah.

I can do that, Jeff.

You will recall it is a four-segment business.

It is the LCD TVs, the handhelds, the notebooks and monitors, and essentially this particular story is really about LCD TVs.

The handheld attachment rate, monitor, and notebook monitor as well as they jump around a little bit have largely remained okay, at least I should say stable.

And there hasn't been the same intense pricing pressure in those markets simply because the value proposition of some of these high brightness film is very strong because it held battery life.

So, the whole game really is essentially down to the LCD TV market, Jeff, and you know the way that the bottom of that market is exploded, and of course the market in many respects is still trying to find bottom.

It is trying to find out where is the smallest bill of materials it can get to with acceptable performance for the from a set for a customer.

And if other consumer electronics commodizations are give you a lead, what might happen is once the bottom is found at the lower end of the market, if you think about sort of good, bed or best, once the bottom of the pricing is lower into the market Jeff has been found the bottom of the pricing at the top end of the market will be found, and I think that there is likely going to be some recontenting.

There is some positives in the energy area, for example, 3M's films in the small television, a third of the energy usage in the bigger television more, but in the end that may not be a place that you sell more televisions, but you might get customer to say make choices left and right on sort of a low energy versus a high energy set.

So, those things I think in the longer run help us.

What we are also doing, Jeff, is sampling a lot of in-expense but still relatively high performing diffuser films into the market so we can supply that bottom end of the market and get more leverage there.

And so, I think that still during the 2008 in summary, Jeff, we're going to see more turbulence in that market as the set manufacturers in particular scramble for share and prepare for digital switch over, and I don't know if it is fully commoditized yet, Jeff.

I suspect not, but I think this first bump is hopefully will have been the worst bump.

Quickly, could you tell us what your dental growth actually was in the quarter?

Just a sec, Jeff.

Dental growth, Jeff, was going to be in dollar terms, dollar terms it is north of 10%, on a local basis probably mid-single mid-single digits.

Thanks a lot, guys.

I don't know if your question was Oral Care or dental itself?

Dental, Matt's got greater than double-digit.

The orthodontic business is was quite a bit stronger, almost 25% growth in the orthodontic business, part of that due in acquisition we had.

Combined Oral Care on an ex currency basis probably around 7.

7?

Thank you very much.

Thanks, Jeff.

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

Good morning.

Good morning, Dave.

George and Pat, good performance in industrial, but no operating leverage.

Margins actually fell.

Can you comment or talk to that, please?

Thanks, Dave.

We actually thought they did reasonably well, very well.

Based upon having a low 20s margin in a main stream industrial business I think is a very good grade of performance.

Our objective in that business is not to grow margins, as much as let's get the top line going, so they can keep the top line growing the way they have, keep margins the way they are, I would be perfectly happy with that model.

Now, I think you have heard from HC Shin in the past that he has a lot of focus on operational excellence to continue to drive productivity, get costs out, reinvest back into the businesses.

One of the things that does hurt industrial a little from a margin standpoint is we have made some acquisitions in that space that haven't been necessarily at the same margin level that some of our core businesses has, so it takes awhile to kind of build those profit rates up, so I am not at all concerned with the level of margins within Industrial.

By the way, also, Dave, they're one of the units that suffers from commodity price increases more than anybody else, and Consumer office also.

Everybody does.

But if you wanted to sort of pick on a couple that suffer most, they are they.

Understood and thanks for the answer.

One other thing, George, mentioned about optical films still being a good growth business.

Referring to a new revised space not from last year's base, correct?

Correct.

And what would that new revised base be, do you think?

Well, as I jokingly say sometimes, Dave, predictions made difficult especially when it concerns the future.

The business is obviously shrinking, Dave.

It is mainly shrinking due to two things, some loss of attachment, primarily TVs, and obviously price compression.

So, I think we're not fully through with transition yet, Dave, and if you let me make that observation I made about a good growth business in the future, let me make it from a new base that comes up in 2009.

Sounds good.

Thank you very much.

Thanks, Dave.

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

Dean, your line is open.

Please go ahead.

Yes.

Can you hear me?

Yes.

I just want to go back to pension and effects for the quarter and make sure I have my math right.

Pat, you said $0.07 from FX this quarter and that was $0.02 to $0.03 from pension.

Yes, Deane, but I do want to clarify if I could.

FX the way we calculate it, is if you just literally take rate differences on both transactions and translation, and that's where you get the number.

It does not pick up any of the other input related impacts of say a weaker dollar on commodity prices and the like.

So it is probably an exaggerated example of what the real impact is on the bottom line.

How about your assumptions for the year?

When we look at the 10% plus, where would FX and pension combined represented of that 10%?

Based on what you know today.

Pension will be give or take $0.10.

FX is probably in the 25, 30 range.

But who knows depending on where rates end up.

So, that's purely just taking quarter end rates and then assuming they stay that way for the rest of the year which I guess your crystal ball is probably as good as mine on that one.

What are you using for your Euro exchange?

I think 1.58 at quarter end, so that's what we would have extrapolated in our last forecast.

Okay.

And then just a recheck on optical.

I know we have kind of beaten this one, but the assumption for the absolute EBITDA decline for the year as of last quarter would be down 50 to $150 million, and you were down 110 this more.

Are you going to set a new range for that or, George, I think you're saying you really won't have a sense for this until 2009?

Correct.

Dean, I guess let me try to get at where you're coming from which is December we kind of gave you a range for optical.

I think that's where you're coming from, and in the quarter here profits kind of halved, in that business.

So, we would expect that that trend from the year-over-year basis will probably continue to play out for the rest of the year here.

The same trend from the first quarter?

Yes.

Yes.

You can expect similar down trends, second quarter year-over-year is what that means Deane.

And if I was able to draw it for you, Deane, is that business has been of course the profitability has been reduced over time.

So, even during '07 if you looked at Q1 to Q4, it kind of went down.

What we're saying is that what we're down here in the first quarter, that delta will probably carry through for most of the rest of the year.

Most of it.

It could be by the end of the year starts to tail off a little bit, but that's anybody's forecast.

Okay.

And then on the capacity expansion this year, just a quick update on the 19 new plants, where does that stand?

And I see you're also cutting CapEx.

Is that related at all?

Not specifically.

I kind of view that $100 million reduction kind of almost a little bit in the round.

It does reflect kind of the economic situation we're in and so forth.

Because if your growth rates do slow a little bit because of economic conditions, there is some things that we possibly were looking at relative to capacity needs and so forth that you can maybe just kind of push them off a little bit.

So, that's more tinkering at this point in time.

But on the plants if I recall the statistics right, Deane, on the 19, we're schedule to do have about 13 of those up and running here by the end of the first quarter.

The one that I think we talked to you about in the past is Russia.

Russia is the plant that we thought we would have up and running right now.

We still are struggling a little bit getting final occupancy permit for that facility.

That's just the environment, Deane.

That's just the environment of Russia.

There is nothing I would say from an operational execution standpoint that we're at all concerned on.

Everything appears to be on track.

What's actually been happening, Dean, is these plants have been coming in generally faster and generally lower cost than we thought.

Great.

Thank you.

Thanks, Dean.

Your next question will come from the line of Steven Tusa with J.P.

Morgan.

Hi.

Good morning.

Good morning, Steve.

Just a quick one on the dental side.

Are you guys telling you anything about worries about the economy and the impact on growth there?

I think it would be fair to say that there are some discretionary decisions that customers make about when they have dental work done.

And as people get more and more concerned about discretionary income, it could affect people's buying behavior.

So, I think it would be fair to say there has been some feedback that maybe dentists have started to see some slowing in discretionary treatments and so forth.

My counter a little bit is it is hard to get into dentists at times as well, specially orthodontists.

So, the net doesn't impact you that much, but I think it would be fair to say that in a slowing economy you will see some impact on discretionary dental care.

Right.

Just on the optical side, I hate to beat this one, wish we could talk about something else.

So do we.

But it was really bad in the quarter, and when you think about you brought us out to the meeting in Minnesota and also in New York, and you kind of walk through and I think made people feel comfortable you had at least your hands around a fence around the situations to some degree.

And you basically hit your decline target in the first quarter only a few months after you did that kind of bottom's up review.

What's getting missed here between -- I know it is a totally dynamic market and in free fall, but what's bet getting missed here from the ground level up to the exact date of office where you guys are just having such a hard time on visibility, totally acknowledging that this is a very unusual circumstance?

What's happening in the end market, Steve, and I said this a little earlier, the set managers make a scrambling for share.

There is a reordering of the power base in the marketplace, the leverage has swung more to the set manufacturers than it was previously in the power manufacturers or the upstream manufacturers, and those dynamics are extraordinarily difficult to forecast accurately, Steve, they just are.

All I will say to you, and I will pull you back to the other position which is you have to look at 3M in its total context.

The core of 3M has done so very well it was able to overcome and surpass the challenges in optical roundly.

Does that make us feel better about how to predict your accurately what's going on in optical?

No, of course not, but what it does do is make us feel a little happy about what we can predict in 3M in total.

When things begin to fall in a marketplace like that, when they have these rapid changes, Steve, it is very difficult to know is the trajectory down 25% a year, 50% a year.

The end game error can be significantly worse with once set of assumptions versus another.

All you can do is go to your customers, try to get the lead information, try to bring products that they want to mitigate some of these changes and bring value to the customer.

And I started also by saying this morning this is a business that we enjoyed the upside, and it is now transitioning it appears to be a business very much more like the balance of 3M, and that's what we currently expect.

Right.

And then just lastly on the 4 X contribution to get to your 10% growth, it was I guess $0.07 year-over-year, but doesn't the comp get a little tougher as you move into halfs or just taking the $0.07 and multiplying that by four?

That wouldn't seem to be the right math on that.

I am just curious because this is kind of a key aspect now of you guys getting to your annual target.

Doesn't that EPS impact get a little bit lighter as we move through the year?

Steve, you're right.

Exchange rates started to move more towards the back end of the year, so it is not as simple as taking 7 times 4.

There is something else in the 25 to 30, then?

We also have to look at where our hedging situation is.

Remind you, Steve, that we hedge about half of our exposure.

So your kind of on a year lag for about half of it.

So, on some are hedges when you kind of look at the bang back half of the year on a year-over-year basis will be probably better off on those than we were in '07, so that's kind of what probably evens it out a little bit.

Okay.

That's great.

Thanks a lot.

In the interest of time here we're going to have to close.

Thank you very much, everybody, for listening, and we appreciate it very much, and we look forward to continued success through 2008.

Cheers everybody, thanks.

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

You may all disconnect, and thank you for participating.