3M (MMM) 2008 Q2 法說會逐字稿

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

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

Afterwards you will be invited to participate in a question-and-answer session.

(OPERATOR INSTRUCTIONS).

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

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

Thanks.

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

I'd like to extend a sincere welcome to all investors and analysts to our second quarter 2008 business review.

You will find this morning's presentation on our Investor Relations website at 3m.com, and these slides will remain on the site 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 number 2.

During today's conference call we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results.

These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties.

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 predictions.

Also, allow me to put in a brief plug for our upcoming investor meeting in St.

Paul on September 9.

You should have received an email last week with a link to our registration site.

If you received the invite, please take a moment and reply as to whether or not you plan to attend.

If, for some reason, you did not receive an invitation, either drop us a note or give us a phone call and we will get one out to you ASAP.

Registration will close on August 29.

As per usual, today is a busy day in that many companies are reporting earnings.

We will do our best to keep the call to one hour.

Again, you can help during the Q&A by limiting yourself to one question and one follow up so that all questions can be fully answered.

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

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

Thanks, Matt, and thank you, everyone, for joining us this morning.

Today I'll make some brief opening comments and Pat will then take you through the detail of the quarter and then I'll return to address some of the key issues, including the state of our optical film business, and our outlook going forward.

After that we're happy to address your questions and comments.

So, to get started, our second quarter is perhaps best characterized as a repeat of the first quarter, a good quarter, especially when you look at the core of the Company.

Where there was any negative color, it was mostly provided by the secular change taking place in optical films.

But on balance it was a quarter in which we fought our way to a good overall result.

Over the past 2.5 years, we spent most of our time investing in and strengthening the core businesses of 3M, driving international growth and fixing our supply chains.

3M has owned and operated these core businesses for many years.

In fact, one of them, (inaudible), we've owned for over 100 years.

It's primarily this recent strategy of reinvestment in our core and in international that that has made the current results possible.

Despite all the headwinds that optical, commodities and the U.S.

economy threw at us, the fact is that we still met our numbers and delivered the bacon.

I'm also pleased to report that at the operational level 3M is performing superbly with our largest three businesses posting double digit increases of sales in the last quarter.

So after that brief introduction, let me turn it over to Pat for an in-depth discussion of our strong second quarter.

Pat?

Thanks, George, and good morning, everyone.

Please turn to slide number 4.

Indeed, this was a very good quarter for 3M and the positives far outweighed our challenges.

We posted record sales for the sixth consecutive quarter and five of our six businesses achieved strong growth in sales and profits including double digit profit growth in three of our largest businesses.

We were pleased that margins were 20% or better across the board.

We converted nearly 100% of net income to free cash flow in the quarter, which enabled us to return nearly $1 billion to our shareholders via a combination of dividends and share repurchases.

On the other side, the challenges we face will not surprise you.

The U.S.

economy remained difficult, particularly in those areas that touch the consumer.

George will update you on optical systems later.

And finally, commodity input prices continued to rise, which pressured our raw material somewhat, but we have a good pricing story here, which I will address here in a few minutes.

Please turn to slide number 5.

All information that I will present today will exclude special items.

So allow me to summarize the special items quickly to get them out of the way.

Last year second quarter results included a net gain of $0.02 per share from special items.

The second quarter of 2008 reported earnings per share of $1.33, included a net charge of $0.06 per share related to a loss on the divestiture of HighJump Software along with charges for exit activities at an industrial and transportation manufacturing facility in the UK.

Excluding these special items, Q2 2008 earnings per share were $1.39 as compared to $1.23 per share in last year's second quarter.

Please refer to the attachment in today's press release for a more in-depth discussion on special items.

Second quarter sales grew almost 10% to $6.7 billion, which represents the sixth consecutive quarter of record sales.

In our three largest global businesses, namely industrial and transportation, health care, and safety, security and protection services, revenues expanded at a double digit clip.

On a local currency basis, sales were up 4.6% versus last year.

Looking at the business geographically, sales growth was once again strongest in our international operations.

Sales grew at a double digit pace in Latin America, Europe, and in Canada, and at 1% in Asia-Pacific.

Importantly, if you adjust Asia-Pacific results for optical systems, sales growth was nearly 17% during the quarter.

Operating income was up 8.5% to $1.5 billion as four of our six business segments delivered double digit operating income percent increases.

Operating margins topped 22% for the quarter with all six of our business segments achieving 20% plus operating margins.

For several years in succession, we have continued to maintain best of breed margins regardless of the business environment.

The strength of our broad business portfolio overcame a tough U.S.

economic environment, all-time high raw material prices for many key materials and a secular transition in our optical film business.

I applaud the efforts of 3Mers everywhere for pulling off what many deemed impossible -- that is maintaining superior operating margins while simultaneously investing in growth programs for the future.

Earnings per share in the second quarter was $1.39, up 13% year-on-year.

Please turn to slide 6 for an in-depth review of the second quarter performance versus the same quarter last year.

We have again isolated the impact of optical films in order to help you better understand our results.

The strength of our global portfolio was again evident in the second quarter as sales increased almost 10%, or 14% ex-optical.

This 14% growth was a combination of organic growth, acquisitions, and, of course, positive currency impacts.

This marks the sixth consecutive quarter of record sales.

Gross margins were down slightly from last year's comparable quarter.

It was no surprise to us that raw materials rose year on year in the range of 3% to 4%.

Excluding the optical business, we were able to offset this inflation with selling price increases along with relentless process improvements and cost reductions of our own.

So, once again, we are effectively managing through a challenging commodity price environment.

Operating profit grew by 8.5%, or 18% ex-optical, and our premium margins continued at 22.1%.

And, finally, our tax rate improved by almost 2 points to just under 31%, consistent with our tax reduction strategy.

Earnings per share rose 13% to $1.39 per share.

Excluding optical films, earnings per share would have improved by nearly 24% year-on-year.

Let's now focus -- let's now shift our focus to bringing down our second quarter sales growth performance.

Please turn to slide 7.

Worldwide sales growth in U.S.

dollars increased 9.7% led by our international operations with sales growth of 11.9%.

U.S.

sales growth was up 6% in the quarter.

Second quarter local currency growth was 4.6% with organic growth up 40 basis points, price up 10 basis points and acquisitions, primarily Aearo Technologies, adding 4.1%.

Excluding the impact of the optical business, local currency sales increased 8.1% as organic volumes increased 2.5%, selling prices increased 1.1% and acquired volume was up 4.5%.

International sales on a local currency basis increased 3.4% in the second quarter.

Organic volumes increased 1.8% with five of six businesses posting positive organic volume growth.

Selling prices declined 1.1% including a 12% price decline in optical films.

Acquisitions added 2.7% to international local currency growth in the quarter.

Ex-optical international local currency sales growth was 9.1%, including 5.5% from organic growth, 3.1% from acquisitions and 0.5% from selling prices.

On a regional basis, international local currency sales growth was led by Latin America at 21%, followed by Canada at 7%, and Europe with local currency sales growth of 6%.

Local currency sales declined 4% in Asia-Pacific due to a 37% local currency decline in optical.

Excluding optical, Asia-Pacific sales in the local currencies increased 10% over the same quarter of last year.

Economic conditions in the U.S.

continued to remain challenging, especially in the retail, housing, and automotive OEM markets.

Second quarter local currency sales increased 6.6% driven by a 6.5% impact from acquisitions.

Selling prices increased 2% in the quarter with all businesses delivering price increases as we try to offset the continued high price of commodities while organic volumes were down 1.9%.

Four of our six business segments delivered sales growth in the U.S.

during the quarter.

Please turn to slide 8 where we'll briefly comment on our year-to-date progress.

At the end of the second quarter, year-to-date sales were up 9.3% with operating income up 6% and earnings per share were up 10.8%.

Excluding optical, year-to-date sales were up 12.4% while profits increased 15.2%.

And, finally, free cash flow was up 4.7% year-to-date versus the first half of last year.

Please turn to slide 9 for a review of the balance sheet and cash flow metrics for the second quarter.

Free cash flow for the quarter was $909 million versus $866 million last year.

Free cash flow conversion for the quarter was nearly 100%.

Working capital turns were 4.9 turns down slightly year-on-year and in line sequentially.

Foreign currency translation increased accounts receivable and inventories by $243 million and $167 million year-on-year while reducing them sequentially by 36 and 13, respectively.

Second quarter capital expenditures were $334 million, down $14 million versus the same quarter last year, and up sequentially by $36 million.

Through six months, we have spent $632 million on capital expenditures and expect full year CapEx to be in the range of $1.3 billion to $1.4 billion.

Dividends to our shareholders were $351 million during the quarter, consistent with past quarters.

Share repurchases totaled $572 million in the second quarter, which is up slightly from recent quarters.

Weighted average shares outstanding were $712 million, down nearly 3% year-on-year and 1% sequentially.

And, lastly, our debt to cap ratio was 32% at the end of the quarter.

Now let's delve into our performance for each of our segments for the second quarter.

Please turn to slide 10 for a summary of our results for our largest segment, industrial and transportation, a business where innovative solutions help manufacturers improve their businesses.

With broad-based revenue growth across the portfolio, industrial and transportation delivered an outstanding quarter with sales of $2.1 billion, up 15.5%, and operating income up 18%.

Sales growth in the business was led by our industrial adhesives and tape business followed by our automotive aftermarket, abrasives and closure systems for personal hygiene products.

Local currency sales increased 8.7%, including 4.2% from acquisitions.

Year-to-date, sales were up 16.3% with operating income also up 16.3% as operating margins held steady at 21.5%.

All geographic regions saw growth in the quarter including the United States.

Strong market penetration continued in emerging economies especially the BRICP countries where the business drove strong double digit organic local currency growth.

Elsewhere around the globe we saw double digit growth in Europe, Asia-Pacific, and Latin America.

Some of the products driving growth in the second quarter were abrasive use in auto body shops, laminating adhesives providing attachment solutions in industrial applications, diaper closure systems, and packaging, masking, and specialty tapes.

Continued investment in new technology has brought some very innovative new products such as new glass bubble filler that can reduce the weight of automobiles and clean sanding disks that can significantly reduce dust throughout various finishing processes in industrial market and automotive refinishing applications.

Industrial and transportation business continues to bring 3M technologies and solutions to high growth market spaces such as oil and gas, renewable energy, and the aerospace market.

Now please turn to slide 11 for a look at the second quarter highlights for our health care business where we provide the health care community with innovative solutions based on 3M technology platforms to improve patient lives and the productivity of health care providers.

Health care continued its exceptional performance for 2008 with broad based sales growth of 13.1%.

Profits rose nearly 12% to $310 million.

Local currency growth was 7.7%, nearly all organic.

Year-to-date, sales have increased 12.5% with profits up 15.5% and margins increasing 80 basis points from 2007 levels to 28.8%.

Three divisions drove strong double digit growth in the quarter, namely, orthodontics, dental and medical, with orthodontics and dental or our oral care business showing outstanding strength in leading the way.

The U.S.

market had mid-single digit growth while international sales growth was outstanding as all regions drove both double digit growth for sales and profits.

Some of the products that drove sales included advanced wound care and surgical tapes, dental restorative materials and equipment for crown and bridge procedures, and self-ligating brackets for orthodontics.

In our medical business, we closed the Solumed acquisition, further solidifying our position as a provider of leading edge medical products designed to prevent infections.

Also, we were awarded top honors by the International Association of Food Protection for our contributions of food safety technology.

3M's dental business, where we saw double digit sales growth and profits, closed in July a deal for IMTEC, a manufacturer of dental implants and scanning equipment primarily known for the mini-dental implants, which, importantly, patients can be treated by their regular dentist versus seeing a specialist.

We also marketed the first sale of our chair-side oral scanner, a digital impression system that enables the motion capture of accurate and precise dental impressions.

In orthodontics we continued to deliver strong double digit results, and we announced a deal to acquire the German sister company of U.S.-based Lingualcare, expanding our offering for digital orthodontic products into Europe and Asia and helping to meet the surging demand for this invisible orthodontic solution.

Please turn to slide 12 for a recap of our second quarter performance by safety, security and protection services where our products increase the safety, security, and productivity of workers, facilities and systems around the world.

Led by acquisitions, primarily Aearo, along with organic growth in personal protection, window films, cleaning solutions for commercial buildings and corrosion protection, safety, security, and protection services delivered sales of $1 billion for the first time ever, up 30.2% from last year.

Growth in local currency was 25.6% including 19.8% from acquisitions.

Acquired growth was primarily from Aearo Technologies, an Indianapolis-based but global manufacturer of personal protection and energy absorbent products that aids hearing protection and fall protection lines to 3M's -- that adds -- I'm sorry, that adds hearing protection and fall protection lines to 3M's existing full line of respiratory products.

Operating income for the quarter rose 30% while margins remained steady at 21.2% as compared with last year.

Year-to-date, sales have increased 22% with profits up 21% and margins holding steady at or above 22%.

Included in this operating income results are approximately $20 million of one-time Aero acquisition-related costs negatively impacting Q2 and year-to-date margins by about 2% for the quarter and 1% year-to-date.

Driven by the Aearo acquisition, sales were strong across the globe led by double digit increases in Europe, the United States, and Latin America.

In personal protection, we continued to see strong demand for our maintenance-free and elastomeric respirators as well as reflected materials.

And with the Aearo acquisition, we now offer a more complete personal protection solution that spans the industrial, military, and construction markets.

Our Speedglas autodarkening filters and helmet product development team has been awarded Business Week's Gold Idea Award for design excellence.

In building and commercial services, we saw strong demand for our maintenance products due to an increase in commercial construction in many parts of the world.

Also, we have continued to see steady growth in our commercial protection products where we provide pipe coating solutions that extend the life of both the underground and aboveground pipelines.

In our track and trace business, we refined our strategic direction for the tracking of high value assets, asset utilization, and safety and security applications.

In connection with these strategy -- strategic refinements we sold off the HighJump Software business.

Now please turn to slide 13 for details about our consumer and office business, home to some of our best known brands and enduring franchises.

Our consumer office business improved from Q1 as sales increased 7.8% to $899 million in the second quarter.

Local currency sales were up 3.5% including 0.7% from acquisitions.

Profits were up 9.1% with operating income margins of 20%.

Year-to-date sales were up 5.2%, and operating profits are up 1% which we feel is an outstanding result in the current business climate.

We saw positive growth in all divisions with do-it-yourself and home care leading the way.

Overall sales growth was tempered by weakness in the office mass retail channel in the United States.

Geographically, 3M's international subsidiaries continued to drive growth again this quarter with double digit sales growth in all regions led by Europe and Asia-Pacific.

Through expanded distribution, brand presence, and merchandising programs, our consumer office business had outstanding growth of our Filtrete air-filtration products for residential HVAC systems.

Working with key accounts such as Walmart, Target, Home Depot and Lowe's, the Filtrete team delivered sales growth 75% in the second quarter versus last year.

In our home care division, we recently launched the Scotch-Brite Ultra Nail Saver as well as Fur Fighter pet hair remover that has taken off with customers and which has recently been endorsed by Martha Stewart as well as gaining the Good Housekeeping Legacy and Seal of Approval.

In addition, Consumer Reports just listed our Ultrathon insect repellent as an everyday best buy for 2008.

We also launched our Nexcare cold sore treatment product, leveraging our experience in manufacturing products focused on skin wellness to provide consumers with lasting, permanent relief from cold sores.

Other products driving growth in the second quarter were Scotch-Brite scouring products along with the Scotch blue masking tapes and Command mounting and fastening products.

Please turn to slide 14 where I'll provide an overview of results for the electro and communications business where we are also a leading supplier to the electrical, electronics and telecommunications industries.

Sales for the quarter increased nearly 8% versus the same quarter last year.

Profits rose 11.4% driven by outstanding cost discipline producing margins of 20.1%.

Sales in local currency increased 2.2% mostly from organic growth.

Year-to-date, sales have increased 8.5% with profits up 12.5% and margins growing by 70 basis points to 20.1%.

Overall, electro and communications saw double digit growth in three of its businesses, electrical markets, electronic materials market, and communications markets.

International sales growth was the strongest, led by double digit growth in Asia-Pacific and Europe.

Some of the products driving growth in the second quarter were outside plant and central office equipment used in the telecommunications industry, insulating and protecting products used in the electrical applications and electrical and powergrid solutions used in the energy and electrical power industry.

We continued to see our volumes for inkjet printer circuits decline which adversely affected sales by 1% and operating income by nearly 3%.

To date, our aluminum conductor composite reinforced, or ACCR, product, which allows energy suppliers to transmit more than two times the capacity without the risk and delays of major construction projects, has had 25 installations with the most recent installs being announced in Shanghai, British Columbia, Brazil and Silicon Valley.

Please turn to slide 15 for a review of our second quarter results for our display and graphic segment where we make the films that brighten the displays on electronic products such as flat panel computer monitors, cell phones, PDAs and LCD televisions along with reflective sheeting for transportation, safety, commercial graphic systems, and projectors and projection systems.

During the second quarter, we saw positive double digit growth in commercial graphics and single digit growth in our traffic safety systems where we were recognized by the American Road and Transportation Builders Association for the first place award for environmental protection and mitigation.

And if you watch closely during the upcoming Beijing Olympics, you will see our commercial graphics specialty films at work all around the sports menus.

Overall, second quarter sales for display and graphics were down nearly 16% with profits down 36% driven by the sales and profit declines of 36% and 54%, respectively, in our optical film business.

Operating margins held constant at 21.7%.

Excluding the optical film business and divestitures, display and graphic sales increased 5.3% and profits were flat.

Display and graphics saw the effects of the slowdown in the U.S.

driven markets for traffic safety solutions and commercial graphics.

Highway construction and commercial graphics for the trucking industry have both slowed as a result of sequential U.S.

macroeconomic softness during the course of the second quarter.

Despite the headwinds in the U.S., geographically we saw good performance of these businesses led by Europe, Latin America, and Asia-Pacific.

3M's mobile projection technology, an ultra-compact LED-based projection engine for personal devices, is now in production.

We are continuing to see interest in this new technology across a range of personal electronics options including cell phones, lap tops and PDAs.

This concludes my formal comments and now I will turn the program back over to George to give you color on the optical film business as well as our thoughts for the rest of the year.

George.

Thank you very much, Pat.

I'd like first to give you another update on the transition of our optical films business.

There are so many investors who don't know the background to the challenges of this business, so let me give you a quick (inaudible).

First, of the four optical film segments that we serve, three of them, plus the polarized films, are relatively stable and strong for us.

The issue is, of course, in the supply of films to LCD TVs.

Fundamentally, the rapid rise of Visio as a club brand was the catalyst for the secular change.

Beginning about two years ago they rose from eighth place to first place in the U.S.

market in less than nine months.

They were able to do what they did by reducing brightness and off-angle viewing standards, vigorously driving out the cost to keep price points and getting a great distribution channel.

As new and lower price points were hit, the consequent explosion of the volume in the market at the bottom of the pyramid surprised us all.

As the market commoditized, it rankled the large branded-set manufacturers.

(inaudible) by following Visio's decontenting example and worked to compete better.

The net result was that by lowering specifications,TV manufacturers were able to design out a lot of the high performance films and 3M did not have the product at the bottom of the market to sell.

We had needed that low cost film product three or even four years ago.

So for 3M the impact was that we suffered loss of volume from decontenting as well as huge pricing pressure leading ultimately to the results and financial transition that we are experiencing today.

You recall that on our April call, we said that we expected the balance of 2008 to follow the same pattern for optical that we saw in the first quarter, and also that it would be the toughest year of transition for that business.

So the pattern that played out in the second quarter was pretty much as we expected.

Optical margins for the quarter actually came in a little better than our expectations though sales were a little below where we thought.

To give you an idea of the scale of the change, year-on-year sales of optical films for LCD TV applications have declined by over two-thirds while profits have dropped by 80%.

So after dealing with a tough transition here, I think we can see the bottom even if we haven't quite reached it yet.

I don't expect this subsegment to completely disappear since there's always a small percentage of consumers who want high performance from TVs, and some films will be retained for that purpose.

So what are we doing to manage through this transition period?

First, the new management team has been in place in Asia for a few months now, and I'm impressed by their quick understanding of current realities -- the realities of both market dynamics and the value proposition that we bring to our customers.

Their quick uptake is helped by the knowledge of consumer electronics that was in their background.

To strengthen our competitive position, we're taking additional actions to get our cost structure in line with these new market realities.

Today we announced the elimination of 300 jobs in optical systems all across the business, mostly in the U.S., but some overseas too, these were SG&A, manufacturing, R&D and other areas.

This represents a 20% staff reduction in that business.

We're also improving manufacturing efficiency by consolidating several film converting sites in the Asia region.

Collectively, these two actions will save around $30 million annually.

Additionally, our former film converting plant in Poland has been taken out of the optical films division and has been transformed into a multiuse, multidivision facility for other 3M businesses.

We also have intense manufacturing cost reduction activities underway everywhere, and they are beginning to make an impact.

As we said, margins and optical systems improved by 1 point sequentially as some of the cost reductions began to take hold.

At the same time we are actively addressing the market situation by simplifying our product portfolio and making it more relevant to our customers.

Our optical products will continue to add value to our customers through technology, even in TVs.

This is especially so as energy reduction is now becoming more important to set, monitor and notebook manufacturers and to consumers as well.

Our technologies also contribute to the trend toward thinner TVs.

I've said this before, but 3M optical films allow a reduction of 50% to 70% in energy over typical configurations and consumers have that reduction today.

You can imagine that we are working this issue very hard and it provides one of the upside opportunities in LCD TVs as does continued unit growth.

So to summarize in optical, the bottom appears to be in sight if not quite here yet, and we have a new team in place to (inaudible) our customers and we are aggressively taking cost out, and we are working hard to maintain margins and protect the bottom line.

We're expecting this transition to be complete in 2008 with the possibility of some bleed over into early '09, but if so, this impact here should be small.

Of course, we are also working hard to maintain margin and protect the bottom line all across the Company as we continue to drive our growth agenda and also even as we fight our way through these not too favorable U.S.

economic conditions.

As Pat described, it's tough out there, particularly in retail, housing and automotive OEM markets.

No surprises there for anybody.

And we will continue to see blips in some of our short cycle businesses where the impact to volume is realized quickly and fortunately where that impact stabilizes quickly also.

I'll state as well that our approach to growth investments is a very practical one.

It's not ideological.

Like all public companies, we must always keep one eye on the long term and one eye on the short term.

We're most certainly determined to drive growth for the long term, but we will do so prudently and with the attention to maintaining optimal flexibility in the timing of those investments.

And, as always, you will see constant attention to operational discipline as it accompanies and enhances our drive toward growth.

So let me quickly update you on our guidance for 2008.

Please turn to slide 16.

For reasons that Pat and I have outlined today, we remain committed to deliver 10% plus earnings per share growth for 2008.

With year to date operating income margins of 22.7%, we continue to expect full year operating margins to be in the range of 22.5% to 23.5%.

Our tax expectations for the year are also in the band 31.5% to 32%.

And finally, our 2008 full year capital expenditures range between $1.3 billion and $1.4 billion, and this remains unchanged from previous guidance.

So that concludes our formal comments here, and so now we're happy to take any questions that you might have.

Thank you very much, everybody.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from Deane Dray from Goldman Sachs.

Sir?

Good morning.

Good morning.

I'm not sure if you gave this data point but it would be helpful on the optical film businesses.

What was the impact on price and volume in the quarter?

Well, price was down 12%.

Total volume was 36%.

I think volume was 24.

Okay, And that down 12% is still within the band of what has been the recent trend, so it wasn't like that worsened is that correct?

Yes.

And then just if we can recalibrate where does LCD TVs now fit in terms of the optical film sales?

It used to be in that 30% range.

Where does it stand today on a run rate basis that'll contribute?

As George mentioned, Dean, it is kind of a declining piece of the business.

It's probably more in the 20 -- 25% of the business on a current basis.

Okay.

And just a quick last question if I could.

How much did pension contribute in the quarter?

Is that what we're seeing in the unallocated portion there?

Yes, Dean, that number will stay the same throughout the year.

It's about $100 million for the year.

So it's 25 to 30 for the quarter.

Terrific.

Thank you.

Thanks Dean.

Our next question comes from Scott Davis from Morgan Stanley.

Sir please continue with your question.

Hi guys.

Good morning Scott.

I was positively surprised on the margins given some of the raw material prices that we've seen, just most notably out of DOW chemical.

I guess my question really is, it looks like your mostly FIFO accounting.

Is the impact of the big May-June price increase not quite flown through to your margins yet or are there big price increases out there that would offset this?

Just a little bit of color on that, please?

Yes, Scott, you are correct.

We are primarily a FIFO based company, but don't be worried about a huge increase coming through the system here.

What we saw in the second quarter was a 3 to 4%.

We don't see a significant change for the Q3.

So don't anticipate a drop off here.

Does that mean there are price increases in the hopper or does it mean that materials are a little bit less than what I have in my models?

Raw materials will probably go up sequentially a little bit, but we also have further price increases going in effect in the third quarter as well.

Okay.

Fair enough.

Last question really relates to inventories at the customer level and consumer office came in stronger than we expected and doesn't totally match up I guess with results that we have seen from other companies like Avery, Denison, for example.

Do you have a sense for inventories at your customers' level?

Are there customers buying ahead of these price increases or anything that could be deemed as unusual?

Scott, if I was to kind of characterize the consumer business just kind of overall, we started to see a slowing tail end of last year and definitely into the first quarter.

We think the second quarter reflects a little more of a-- I'll call it a business as usual approach.

We are keeping a close eye on inventories at both the big retailers Staples, Office Depot, the like, but of course we also have the back to school season here in September as well.

But we do keep a very close eye on that.

That's one of the things that you have to be just a little careful on any given month in any given quarter within the consumer business because we do fall a little bit out of sink especially with the retailers.

Yet I'd also say that versus a lot of the other suppliers into the consumer business, our team has continued to do a marvelous job of new products and penetration programs across the board.

So we continue to gain business every quarter.

You would hear, Scott, you heard Pat mentioned earlier that in the Filtrete business, sales were up 75% and what a lot of our customers have been doing is expanding their presence of 3M products, displacing in some cases other products.

So we've been very successful in gaining share here and it's really the innovation, taking on best technology and innovating into new products that's pulled that kind of thing off, and this has been pretty consistent across the vast majority of our retail customers.

So we have done well simply -- better should I say simply because we've been penetrating with new products and it's the innovation and differentiation that is getting that kind of edge over the competition.

And the power of free enterprise.

Fair enough.

Thanks guys.

Thanks Scott.

Our next question comes from David Begleiter from Deutsche Bank.

Sir?

Good morning.

Comment what you are seeing in Europe.

Any signs of slowing?

Dave, Pat here.

Good question.

I would say that the large Western Europe Yan markets have performed similarly for both the first quarter and second quarter.

No noticeable change.

You-- definitely worse in Spain and Italy part of Western Europe and probably the UK.

The continent remained low single digit for us.

So that piece has remained solid for us.

Central Europe remains very, very strong for us.

We haven't seen any impact there at all or the mid east.

No noticeable difference between Q1 and Q2.

Okay.

And just on healthcare margins in Q2, they were down versus Q1.

What drove that down?

First of all, I wouldn't worry about it.

If I look at the year-on-year results, strong, double digit growth, both top and bottom line, that business will operate in the 28 to 29% margin range, Dave, in any given quarter.

We happen to invest a little more in marketing activity in the second quarter vs.

the first quarter, which is kind of a normal pattern for us.

So there's nothing for you to be worried about, Dave.

It's a great business.

Seems to be growing well.

Continuing innovation.

Especially in dental, very, very strong in dental, and orthodontics is a subcomponent of that.

Just doing extraordinarily well.

So nothing for you to be worried about.

The other thing I guess for everybody just to remind you in the second quarter we have a larger impact of stock option expensing sequentially Q1 to Q2 because our grant date is in the second quarter so our retirement eligible, well we have to book retiree eligible people, is kind of peaks in the second quarter.

So all of our businesses sequentially Q1 and Q2 have a little bit of a hit.

I think on the company basis we're sort of about half a point of margin.

Thank you very much.

Thanks Dave.

Our next question comes from Jeffrey Sprague from Citi Investment.

Just a quick follow up on the corporate before I get to my questions.

Pat, I thought the swing from negative $15 million last year in Q1 to a slight positive in corporate in Q1 this year was pension, but we've taken another step up to a bigger positive in corporate.

Is there something else going on there?

It includes the pension.

It also reflects some of the cost efforts we have for some of the staff activities here.

Of course we anticipated where the economy is going, we have started to streamline even more of our overhead costs here at the center and part of that flows through that corporate unallocated piece as well.

Would that be falling through as a negative, not a positive?

It's a positive, but it's a positive where we take cost out, okay, it obviously is a positive from the income point.

So it's the reflection of actions you've already taken?

Right.

Jeff, we fix, sort of fix, the amount we charge to the businesses and if there's an over absorb we'll put it in corporate.

Okay.

And, George, just a little strategically actually around HighJump.

I don't remember if that was your deal or not but it wasn't that long ago that it was bought.

But whether you were at the helm for that one or not, I kind of thought conceptionally and strategically you had been thinking about kind of a software and electronics type overlay where you could across the businesses.

Is that still the case?

And if so what was about this particular asset that just didn't fit the mold?

Jeff, let me try to handle the historical piece of this, and I'll let George kind of deal with the future.

George was not here when we bought HighJump, I was, it was a 2004 acquisition that we made in our industrial business, and it was really trying to get at a space where a lot of our customers had some significant deal warehouse type management issues.

We thought we could incorporate it into our many of our industrial offerings in that we basically dealt with almost all industrial customers.

Actually, it started off reasonably well, but as you got into it, it became very obvious that there were a lot bigger players in that space that we just could not compete.

We didn't have the scale to compete head on head with the likes of SAP Oracle because they decide to enter that space as well.

It was-- we thought it was worth a shot.

We-- eventually it didn't pan out in the industrial business.

We moved it over to the safety security business as part of our track and trace efforts to see if it could get some traction there, and realistically it didn't fit kind of our long term strategy there.

And there is enough interest in the market that we were able to find a buyer for it albeit at a loss.

So I'll let George handle the future piece of that.

On the strategy, Jeff, it's true we have aspirations to move towards some more electronic content in many of our products where it's appropriate but I think it's a sort of secondary strategy.

We clearly have those up front and central invest in the core, invest in international is the big lead dogs in our strategy.

So all that we-- as we invest in electronic things, it will only be at the margin.

So you shouldn't see this as any great strategic piece, Jeff, and certainly not as Pat has outlined and explained, I had nothing to do with HighJump.

And then can you give us an update on what you're kind of expecting for restructuring over the balance of the year kind of the in the context of $0.02 that you called out here in the quarter and I guess as part of that is becoming quite normal for companies to just absorb that in the pay as you go and continue to march.

Just what's your philosophy on that going forward?

Well, we will continue to assess the business.

We talked specifically about the optical one.

We will continue to assess really in a couple of different areas as we look at our supply chain strategies over time, we may have some needs to do some restructuring.

But don't think of massive restructuring.

Think of it more as of a one off situation.

But we'll continue to assess kind of our resource levels.

We are currently doing that here in the U.S.

to see if we have a need to do something.

So we'll continue to look at this on a quarter-by-quarter basis, looking at a long-term needs as well as what the short-term opportunities are.

But don't expect anything large scale.

We will take a charge here during the third quarter for the optical correction and that would both be people as well as around a few facilities that we have.

We will more than likely have some offsetting asset transactions going the other direction.

So in the third quarter we will have a few things probably going both directions, probably some asset disposals as well as restructuring charges.

That's the policy we follow, Jeff.

We've tried for the main, we can't always synchronize these things.

Wherever we've done these restructurings to the extent that we can and to the extent it makes sense, we've tried to synchronize them so you have an offsetting gain to cover the loss.

In all companies it's just ongoing tweaking, assessment of efficiency and productivity, assessment of market conditions and taking appropriate action as you go forward.

But generally speaking, if you-- for the most part you'll see compensating offsets in the round.

Thanks a lot.

Thanks a lot, Jeff.

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

So on operating margins, can you just talk through some of the businesses in the second half?

What do you expect to get better sort of second half versus year-over-year?

You've had margin declines 1.2, 2.2; there's been a mix in that, to get the flat top 100 basis points we have to start showing improvement in the second half.

What businesses do you expect to drive that?

Shannon, I wouldn't read too much into -- we're running 22.8 year-to-date.

We've kind of said 22.5 to 23.5.

I don't see that as being kind of a significant change.

Second quarter, as I mentioned, we had kind of an unusual, about a 0.5 point move because of the recognition of our retiree stock option obligation.

But other than that I don't really see a significant change.

Q3 has a tendency to maybe a little bit better and then Q4 has a tendency to be a little bit down, okay, in some industrial-related businesses.

But I don't see any path that is going to be unusual this year.

And, Pat, you mentioned that 28 to 29 for healthcare.

First quarter was kind of I guess an outlier.

I'm not sure what drove an unusually high end result there.

But is that kind of the right range to think about healthcare?

I would say in that 28 to 29 range, I think, is a legitimate range.

In any given quarter it may be a point higher or lower depending upon what we do, but as I mentioned the second quarter happens to be that we have a larger portion of some of our discretionary marketing programs going on and sales may or may not exactly fall in that quarter.

So it's probably a normal range.

And just on display, you mentioned the optical sequential large improvement.

Do you guys feel more confident that since you had a little bit up sequentially here in D&G that even though maybe the market dynamics haven't bottomed, your margins have?

I would not go as far as to say that the margins have necessarily bottomed in D&G.

We feel good, we are fighting this battle that we have kind of a stable margin quarter on quarter, but I'm not ready to say that it's going to stay there, okay, for the rest of the year.

That happens to be one of the businesses that possibly could see kind of a margin drop here of another point or two at the end of the year.

Okay.

And just last one for me is given the movement in this corporate line, can we get a guidance number for that line?

It's been a little tough to model.

Where is that supposed to come out this year?

I think you can take my simple model would be take Q1.

Q2 average them and use that for Q3, Q4.

Okay.

Thanks guys.

Thanks, Shannon.

Our next question comes from Stephen Tusa from JP Morgan.

Good morning.

How dilutive was [Aero] in the quarter?

Actually we are very pleasantly pleased with the start up here of Aero.

Originally we said it would be $0.02.

diluted.

It's probably closer to a $0.01 diluted.

We said we have $20 million of one time charges in the second quarter, but it actually has superb operating results both top and bottom line for the whole quarter.

So really nothing of significance at the corporate level.

I mentioned that the sector or the segment will probably impact the operating margins by about two points in the quarter, but we kind of rolled that into the company, kind of gets, obviously, metered that point in time.

I wouldn't say it was a big impact.

Okay.

And then as far as the plans that you are starting up around the world, are those going according to plan, and are they still operating at losses?

Are you loading them?

Just give us an update on the various plants around the world and how that's going.

Steve, they are mostly finished down.

We are back into construction.

The vast majority of them went absolutely perfectly.

There were a few that got permitting delays in locations where it was a little more challenging in China and Russia, for example, but nothing of a material nature.

And they are progressively getting loaded.

The ones that we completed earlier like the one in Korea is doing extraordinarily well, and we are probably at the point where we'll see a sort of tipping point in terms of contribution in the next quarter.

So seems to have gone -- seems to have gone I won't say without a hitch because that is always tempting providence, but it's an operational execution piece of 3M that is just been superb.

So no cause of concern.

Everything is running to plan and over time those things will load up and begin to make a bigger contribution to 3M on sales growth and operating income.

And there are no problems with regard to external factors like demand where we are having trouble filling things up and getting them started to appropriate volumes?

No.

In fact in some cases, Steve, and the ones on [Tegaderm], and the ones on the respirators, we would have been in a real pickle had we not had that capacity.

It's the counter.

I mean, the only one way you can point some criticism on that is the optical factors obviously is a consequence of the transition that we saw.

They are not being loaded as heavily as we want.

But all in all it worked out to be a good strategy.

Thanks.

Our next question comes from John Roberts from Buckingham Research.

Hi guys.

Could you discuss the sequential performance in optical?

I know TVs have a seasonality to them but it would seem that seasonality is a secondary factor right now.

Have you seen the bottom in profitability even though you haven't seen the bottom in revenues, and would you expect some sequential performance as we go through the rest of the year on improvement?

I guess if you look at sequentially, John, most of the top line reduction Q1 and Q2 was in the TV segment.

The other businesses seemed to perform about at the same level from the top line.

Bottom line, I think you could probably, if you've seen kind of the further reduction in optical profitability Q1 to Q2, that's still may fall off a little bit here further in Q3 and Q4 but we are a lot closer to the bottom of it right now.

You heard me, John, say earlier that sales have fallen by about-- in that segment, in that LCD TV segment, fallen by about 66% from over what they were a year ago and profits have fallen by about 80%.

So you can sense that even if we lost all of the TV segment, which I think is unlikely, that we are close to the bottom here.

I think it's an educated guess in some sense but there will always be a portion, this is what we see, there will always be a portion of that market that's want high performance televisions.

But we'll give you something of the order of 5 to 7%, maybe 5 to 9% detachment rate.

I think the bottom is within sight.

I'm not making any predictions here, but there is gathering momentum and interest in energy, and of course one of the ways that you can use our films is to take a TV or a monitor or even for that matter a notebook and take out lamps and use the films to brighten them.

So you end up using less energy.

And that factor is now getting a lot more interest from the set manufacturers than it once did.

So all I would say is there's a bit more to go would be my estimate, but we are getting close to the end, and I'm hoping by the end of '08, we are going to pass.

If there's any bleed into '09, I think the bleed over should be relatively small.

That leads to my follow-up question.

Can you point to any low end TV products in the U.S.

that advertises lower energy consumption or is it some place you can point us that show that your TV customers that would think this is an important consumer marketing factor?

At this point in time, I can't think of one, John.

There are in the notebook space but not in the TV market.

Okay.

Because that's battery vs.

plug in.

Thank you.

But it is an emerging issue.

It may not be there today, but I do think this will get more visibility as time goes on.

John, won't keep you on the phone call long here, but there's technology that we have today that will cut the energy usage in a television by 50% It's here today.

You can have it today.

At some point the market will get interested in that, and relatively little or no premium.

I think the forces are aligned over the coming months for that to gather some momentum.

We'll have to see.

Is there any government movement to put energy rating on TVs like you have for refrigerators?

Yes, the EPA has this energy star rating they put on TVs.

Whether the EPA or anybody else, the state of California or perhaps the European Union will take any action remains yet to be seen, but of course if they were to -- if they chose to get involved, it would be a real catalyst for some growth in the films and actually, in the end, more environmentally friendly televisions.

John, it's kind of surprising, we've actually seen it in places like China, okay?

China has taken initiatives especially within the government procurement offices of mandating, buying energy efficient electronics and the likes.

So there is a momentum there.

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

At this time we will turn it back to 3M for some closing comments.

Yes, this is Pat.

Thanks for joining us this morning.

We look forward to seeing you all on our September 9th investor event, and have a good rest of the day.

Thanks a lot everyone.

Thank you .

Ladies and gentlemen, this does conclude today's conference.

You may now disconnect.

Thank you all for participating.