3M (MMM) 2008 Q3 法說會逐字稿

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

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

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

(OPERATOR INSTRUCTIONS) .

As a remind your, this conference is being recorded Tuesday, October 21st, 2008.

We would now like to turn the call over

Good morning.

This is Matt Ginter, head of Investor Relations for 3M.

And I'd like to welcome all investors and analysts to our third quarter 2008 business review.

As a quick reminder, please mark your calendars for the morning of December 8th.

We will host a meeting in New York City, the primary purpose of which to discuss our 2009 business outlook.

Stay tuned for full details and of course this event will be Webcast.

As always, please take a moment to read the forward-looking statements on slide two.

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 and 10-Q list some of our most important risk factors that could cause actual results to differ from our predictions.

George Buckley, our CEO and Pat Campbell our CFO will both be speaking today and then we will get to your questions.

During Q&A please limit yourself to one question and one follow-up.

Now, please go to slide number three, then I'll turn the program over to Pat.

Good morning, everyone.

And thank you for joining us this morning.

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

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

Last year's third quarter results included a net gain of $0.03 per share from special items.

GAAP reported earnings per share was $1.41, which included a net [$0.01 percent] charge in 2008.

While I recognize this charge is small on a net basis, it's important that you understand the pieces.

First, as disclosed in our first and second quarter 10-Qs, in March we entered into a sale leaseback arrangement relating to our existing outdated office building in Italy.

This was a lucrative transaction for us as the real estate was in a very desirable location and allows us to reinvest in a new, very modern- facility over the next year.

We recorded a $41 million gain in Q3 as a result of this transaction.

This gain was more than offset by nearly $50 million of severance and exit activities in several of our businesses and corporate headquarters as we are aggressively balancing or business structure to a slower growth environment.

Excluding these special items, Q3 2008 per share earnings were $1.42 as compared to $1.29 per share in last year's third quarter.

Please refer to the attachment in today's press release for a complete discussion of special items.

We delivered record third quarter sales, an all-time quarterly records for operating income and earnings per share in the third quarter, even in an increasingly challenging and more uncertain global economy.

Sales for the third quarter increased 6.2% to $6.6 billion, as five of our six business segments posted positive sales growth, led by double-digit growth in safety, security and protection, healthcare and industrial and transportation.

On a local currency basis, sales were up 4.4% over the same period last year, and were in line with sales growth trends for the first half of the year.

Looking at the Company geographically, third quarter sales growth was balanced across the globe with the US growing 6.5%, international posting growth of 6%.

International sales were led by double-digit increases in Latin America, and in the Asia-Pacific region, excluding our optical systems business.

Operating income increased almost 9% to more than $1.5 billion, as all six segments posted greater than 20% operating margins and three segments saw double-digit year on year operating income percent gains.

In this environment, this is very good performance.

Earnings per share in the third quarter was $1.42, up 10% year on year.

Our third quarter performance reinforced the strength of our customer-focused diversified businesses, technology platforms, unparalleled geographic reach and our relentless attention to operational excellence.

These foundational pillars along with our balance sheet strength provides stability and consistency in an uncertain global economy.

Please turn to slide four for an in depth review of our third quarter P&L performance versus the same quarter last year.

As in past quarters, we have isolated the impact of optical films in order to help you better understand our underlying results.

The strength and consistency of our global portfolio continue to drive sales in the third quarter.

Sales increased 6.2%, or nearly 10% excluding optical versus the same quarter last year.

Gross margins increased 30 basis points due to a combination of selling price increases, foreign currency translation and a continuous focus on driving operational excellence which more than offset material inflation of nearly 5%.

This quarter, operating income was $1.5 billion, up 8.7%, and almost 19% excluding optical.

You may have noticed in the attachments to today's press release that our corporate and unallocated had operating income of $35 million this quarter.

There are two primary reasons.

First, we continued to reduce costs in our corporate overhead areas.

Total Q3 overhead spending was down $33 million year on year, $15 million of which resulted in a gain in the corporate and unallocated.

This is consistent with the strategy that we've been driving for many years.

Second as we have discussed in past quarters, we are experiencing a reduction in pension expense in 2008 versus 2007.

To the tune of approximately $24 million per quarter.

Rather than allocate the benefit to other businesses we elected to record this year on year improvement in corporate unallocated.

Operating income margins for the quarter was 23.2%, up 60 basis points versus last year.

Net interest expense was $24 million, up $8 million year on year, primarily due to higher net debt balances.

The tax rate for the third quarter was 32%, or 31.5% on a year-to-date basis, both of which are in line with our expectations.

Earnings per share increased 10.1%, to $1.42, or approximately 20% if you excluded optical.

Please turn to slide number five where I will break down our third quarter sales growth performance.

Worldwide sales grew 6.2% with the US rising 6.5%, and international up 6%.

Third quarter local currency growth was 4.4% including 4% from acquisitions.

Selling prices increased 60 basis points, which if you exclude a selling price reductions in our optical film business would have more than offset material inflation in the third quarter.

Organic volumes declined slightly in the quarter.

Foreign currency added 2.1% to worldwide sales, which was less than one-half the benefit that we saw in the second quarter.

If we use the current exchange rates we would expect the sales impact from foreign currency to be in the range of a negative 3% to 4% in the fourth quarter.

Excluding optical, worldwide local currency sales increased 7.8% as organic volumes increased 1.6%, selling prices increased 1.8 and acquisitions added 4.4.

As mentioned, third quarter sales in the US increased 6.5%, led by safety security and protection, and healthcare.

Four of our six business segments delivered positive sales growth in the quarter.

We increased prices nearly 3% in Q3, which was needed to offset US raw material inflation of just over 5%.

Consistent with the first half of the year, organic volume growth in the third quarter continued to remain challenging in the US declining 2.5%.

We continue to find outstanding bolt-on acquisitions in the US.

However, which are helping to bolster many of our core businesses.

In aggregate, acquisitions added 6.8% to US growth.

International sales on a local currency basis increased 2.7% in the third quarter.

Organic volumes increased 1%, with five of six businesses posting positive organic volume growth.

The one exception of course was display and graphics which is living through the secular transition of optical films.

Selling prices declined 70 basis points but would have increased 110 basis points excluding the anticipated price declines in optical systems.

Acquisitions added 2.4% to international local currency growth for the quarter.

Excluding optical, international local currency sales growth was 8.2%, including 4.4% from organic volumes, 2.7% from acquisitions and as mentioned 1.1% from selling prices.

Regionally speaking, local currency sales growth was led by Latin America at 18%, followed by Canada at 9%, and Europe at 4%.

Local currency sales declined 3% in Asia-Pacific, heavily impacted by a 34% decline in optical.

Excluding optical, Asia-Pacific sales in local currency increased by more than 10% over the same quarter last year.

We're facing another challenge of a slow US, West Europe and Japanese economies.

And are making disciplined decisions to maintain our focus on operational excellence in using our healthy balance sheet to become an even stronger Company in the future.

Before we move to the business segment highlights, please turn to slide six.

Here is a quick synopsis of our year-to-date progress.

Through the first three quarters, year-to-date sales were up 8%, with operating income up 7% and earnings per share up almost 11% to $4.19.

Excluding optical, year-to-date sales were up 11.5%, and profits increased a healthy 16.4%.

And finally, year-to-date free cash flow was up 8% versus the prior year.

All things considered, these are very good results under these economic conditions.

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

Free cash flow for the quarter was a strong $792 million, which included a $200 million US pension contribution.

Third quarter is typically when we make this contribution.

We converted 80% of net income to free cash flow this quarter or a full 100% if you adjust for the pension contribution so cash flow remains very strong.

Working capital remains stable at about five turns.

Capital expenditures totaled $376 million which is about flat year on year and up $42 million sequentially.

We're on track to invest about $1.3billion to $1.4 billion in 2008.

Dividend payments for the quarter were $348 million, and share repurchases totaled 515 million, both consistent with recent quarters.

Weighted average shares outstanding were 703 million, down nearly 4% year on year, and 1.3% sequentially.

Please turn to slide eight.

Given the credit market's turmoil I thought it would be helpful to provide some more insight into our liquidity position at quarter end.

The strength of our capital structure and consistency of our cash flows provide a real competitive advantage at times like this, as they afford us stability when many of our competitors face uncertainties and constraints.

They also allow us to continue to invest in our businesses, strengthening our competitiveness and aggressively be pursuing new business which is exactly what we're doing.

During recent dislocations in the financial markets, we have successfully issued commercial paper and in fact we've been able to place commercial paper with 2009 maturities since the end of September.

We have achieved this at interest rates which we have seen well before the recent market malaise.

We also raised $850 million via long-term debt issue in August at a very attractive rate.

For now, anyway, we'll weather the storms very safely.

Our cash and debt position is displayed on the left hand side of this chart.

At third quarter end we had $3.6 billion of cash and marketable securities on hand.

Short-term debt was $2.3 billion, including $1.7 billion of outstanding commercial paper.

Long-term debt was $4.8 billion.

Debt maturities for the next five quarters are detailed in the middle of the slide.

As you can see, $950 million of debt will mature through the end of 2009.

This amount includes a $350 million dealer remarketable security classified as short-term debt that is due for remarketing in December of this year.

The majority of our longer term debt balance of $4.8 billion does not mature until 2012 or later.

While credit markets remain volatile, our capital structure remains very strong and continues to differentiate us from weaker competitors.

We will continue to manage this asset very carefully.

Now let's turn briefly to an explanation of our performance of each of our business segments in the third quarter.

Please turn to slide nine for a summary of our results of our largest segment, industrial and transportation.

With broad based revenue growth across the portfolio, industrial and transportation delivered an outstanding quarter with sales up 10% to almost $2 billion.

Operating income rose 8% versus the same quarter last year.

Sales growth 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 7.1% including 4.2% from acquisitions.

Year-to-date sales and profits were both up 14%, and operating margins held steady at 21.2% for the year.

All geographic regions drove sales growth in the quarter led by double-digit growth in Asia-Pacific and Latin America and even in the tough US economy we managed to generate positive sales growth in the US.

We continue to derive strong market penetration in emerging economies, especially the high growth- countries where the business drove strong double-digit local currency growth.

Now please turn to slide 10 for a look at the third quarter highlights for healthcare business.

This is an absolutely fabulous and under appreciated part of the 3M portfolio where we provide the healthcare community with technology driven innovative solutions to improve patient lives and the productivity of healthcare providers.

Healthcare drove strong sales growth of 10.7%.

All major businesses within healthcare drove positive growth in the quarter, led by oral care and medical.

Local currency growth was 9.2% with 2.7% coming from acquisitions.

Profits in the quarter rose 17.2%, to $304 million.

Our healthcare team drove double-digit growth in Asia-Pacific and Latin America and mid single digit sales growth in both the US and Europe.

No doubt this was another fine quarter for the global healthcare business.

Year-to-date sales have increased 11.9%, profits have risen 16.1% and margins have improved by a full point from 2007 levels to 28.7%.

Please turn to slide 11 for a recap of our fastest growing segment, safety, security and protection.

Sales in this business rose an outstanding 27% in the third quarter to $1 billion.

Our recent acquisition of Aearo Technologies contributed 19 points of growth in the quarter.

Aearo is a great fit with 3M as it broadens our personal safety product offerings in a market that we know very well and thus far has proven to be everything we thought it was and even more.

Organic sales was impressive 9%.

Led by growth in personal protection solutions, protective window films and cleaning solutions for commercial buildings.

Operating income for the quarter rose 42%, while margins increased 2.3 points year on year to 22.8%.

Year-to-date sales have increased 23.7%, with profits up 27.3% and margins holding steady above 22%.

Sales were strong across the globe, led by double-digit increases in the US and Asia-Pacific.

Profits rose at double-digit rates in the geographic regions, to round out another outstanding quarter for this business.

Now please turn to slide 12 for details about our consumer and office business.

Home to some of our best known category defining brands and enduring franchises.

Consumer office sales increased 5.2% to $946 million in the third quarter.

Local currency sales were up 3.7%, with 0.5% from acquisitions.

Profits were up 12.7%, with operating income margins at 22.9%.

Year-to-date sales and profits were up 5%, year on year, which we feel is an outstanding result in the current business climate.

In the third quarter, we drove positive growth in all divisions with home care and do it yourself leading the way.

We drove two points of sales growth in the US this quarter, which is impressive considering the state of the US consumer and the retailers.

Our international subsidiaries continued to drive growth again this quarter, with double-digit sales increasing in Latin America and Asia-Pacific.

Please turn to slide 13 for a review of our third quarter results for display and graphics.

As you well know, our results in this business have been impacted in 2008 by our optical systems business which is in the midst of a transition from a hyper growth business to a more commoditized business.

The good news here is that the LCD TV business appears to have stabilized sequentially and is now running in line with our expectations.

Forecasting LCD films is no walk in the park by any means but predictability has improved immensely, and the operating team is really driving to get their arms around the business, and drive costs out at levels we have never seen before.

We posted sales of $853 million in display and graphics in the third quarter.

Sales declined 16%, but were up 2% excluding optical.

We drove positive sales growth in both traffic safety and systems and commercial graphics.

Optical systems declined 34% year on year but improved 5% sequentially.

Operating margins were down year on year, but it was encouraging that we held constant sequentially at 21.2%.

On the new product front, 3M's 110 MPro, an ultra compact LED projection engine for business and entertainment use is now in production with sales beginning in October.

I will wrap up my comments on slide 14 where I'll provide a brief overview of results for electro and communications business.

Sales for the quarter increased nearly 3% versus the same quarter last year.

Profits rose 7.5%, driven by outstanding cost discipline, producing margins of 21.4%.

Sales in local currency increased slightly.

Our electro communications team drove double-digit growth in two of its businesses, namely electrical markets and electronics markets and materials.

Geographically speaking, -was led by our international operations in Asia-Pacific and Latin America.

Year-to-date performance in electro communications has been outstanding with sales up nearly 7% and profits up 11%.

Year-to-date margins have improved 80 basis points to 20.6%.

That concludes my formal comments this morning.

So now I will turn the program over to George.

George?

Thank you very much, Pat.

And good morning again everybody to our third quarter call.

As it turns out our operating earnings were well ahead of expectations and delivered an incorporated EPS of $1.42, despite a significant reversal of currency and softer demand in some sectors and locations.

The global financial crisis which happened right towards the end of the quarter caused a number of last minute cancelled orders from distributors and retailers in their own, understandable, 'just in case' attempts to preserve cash.

But for that, earnings would have been even a little bit better.

Another reality of being a short cycle company is that we see the effective demand reductions more or less immediately right across 3M's product portfolio.

We live right on the edge of that razor blade.

When there are just temporary blips rather than trends they also pass through the system quickly.

3M is a company that can be I'm impacted by downturns quickly but it's one that usually recovers quickly also.

Housing and consumer durables have come to the forefront of people minds again.

I must say that because of the nature of our business, apart from the financial crisis, there's really little new market news in this for us.

Or in what's going on in the broader world economy today.

We've been experiencing and dealing with the impacts of a slow US housing market, a tough retail environment, a slow US automotive market and softer industrial manufacturing for a long time, about two years, in fact.

When you add to this the impact of the reinvestment burden we carried, and the commodization taking place in the LCD-TV market, it has been a very challenging operating environment for us and one which I think has been well-handled by 3M's management team.

As you know, at the beginning of 2006 we began to vigorously rebuild 3M's core.

We added manufacturing capacity that we needed.

We insourced core products that had been outsourced and were creating competitors.

We invested a lot more in R&D and in new products and we reopened our research lab that had been closed in 2002.

We used acquisitions to help us speed up the rebuilding process.

After three years of doing this, the rebuild is now mostly completed.

We're now gaining share in every one of our core businesses.

Margins have remained at their previous levels and despite some pressure from a weakening dollar in '08, returns have stayed in premium territory.

I tell you this story only to drive home the point that the underlying strength of 3M has improved dramatically in the past three years, 'this is not your father's Oldsmobile' as they used to say.

We have some excellent competitors and we have a great deal of respect for but we are now making them feel 3M's competitive presence everywhere and I can assure you that we intend to do that continuously.

We now have the strength and products to do it.

It is this fact that is going to equip us well to deal with some circumstances that are likely to be even tougher in 2009.

Like everyone else who consolidates in the US, we have some welcome help from currency but rebuilding of 3M's core which has allowed us to perform consistently well even with the gale force economic headwinds and a commonditizing TV business.

I want you again to look at the Company's sales and earnings number that Pat showed you with and without optical.

That clearly shows the power of 3M's wonderful core businesses and I think the importance of that great base will ultimately be recognized one day.

I will continue to say this while there is breath in my body, that the diversity of 3M, geographic spread allows us to put in the kind of performance in this kind of time.

Take a look at the consumer office results also, please.

They delivered 2% organic growth in the US, at a time whenever normal expectation for them would be negative.

This doesn't happen by accident.

It comes from a string of innovative new products that they've released and industry leading customer service.

As Pat outlined the same is true almost all across 3M.

The only - exception being display and graphics.

Their numbers were heavily colored by the LCD-TV commodization, and slow traffic sign sales because of the delayed highway bill.

I think our numbers again show the merit of investing in our great core franchises right across the board.

Despite having done well in the face of some pretty tough challenges, we are far from feeling complacent about what lies ahead.

This is going to be a tough period for everyone but we aren't scared of it either.

This what is we're paid to do, operate well in a range of environments.

So the $64,000 question is this.

What can we sensibly say about the future and what are we doing to prepare for it?

On the first question, you know we don't give quarterly guidance except de facto for the fourth quarter.

The challenge now is to give a plausible forecast for Q4, at a time when volatility makes the future almost impossible to predict with any degree of precision.

So I'm not going to give you any sales projections for Q4.

Operating margins came in strong again in Q3, and we believe year-over-year margins will hold reasonably steady in Q4 and even going on into 2009.

Given that we're always affected quickly by the economy, the quality of our Q4 earnings will no doubt be colored by the strength of the Christmas season and on currency and the impact of tight credit on various end markets but I don't think Christmas will get cancelled this year if it turns out to be a little more weaker than normal.

Economic turmoil and skittish customers suggests that there's more down side risk for more than there is upside opportunity but I don't expect this to be large.

We are not immune from economic pressure.

I also think 3M will show a lot of economic resilience and will gain share during this time.

We still expecting to grow EPS in the range 8.5% to 10% for 2008.

Specifically, we think earnings will be in the band of $5.40 to $5.48 for Q4(Sic-see press release), assuming exchange rates remain around where they were today.

We'll give you more in depth view of 2009 in December as Matt already mentioned.

Apart from the obvious worries about the US, the biggest headwinds that we see for now are a reversal of currency gains and slowing economies in Western Europe, Canada and Japan.

Absent optical, Asia remains reasonably strong for now as does Latin America, the Middle East and Eastern Europe.

Cost pressures on commodities have eased somewhat and with varying degrees of success we're clawing back prices that were oil or commodity based.

To the second point, how are we preparing?

In fact, we've been preparing and taking action for some time.

We've been working to get well ahead of the cost curve and have eliminated over 1,000 positions, spanning the US, Europe and Asia, with Asian reductions being heavily focused on optical.

We will continue with sales productivity improvements in Q4 as we continue to work to stay ahead of the bumpy business environment.

So for now we continue to operate our company very tightly and here are some of the things that we're doing.

We're in cash preservation and build mode and not in the market for stock in any meaningful way.

We've slowed capital expenditures, stopped all hiring in the US, Canada, Japan and Western Europe except for replacing key sales and production positions.

We also embargoed US acquisitions for the time being until we see how the end markets play out.

We are closely watching receivables for negative trends, none so far, I might add.

We have already reduced our capital budget for 2009 by about $200 million.

Inventory will also be a focus.

We will do more in all these cases if circumstances require it.

All discretionary spending has been put on hold, though we've opted not to slow R&D expenditure.

That is our Company's future, and we want to make sure it's there when we need it.

Prudence and careful tendering of our Company's economic garden has always been the order of the day here and it will remain so.

That said, this is not the time to play figurative corporate tortoise in any sense of the word.

By that I mean being slow moving, or pulling our head back inside our shells.

This is the time to be vigorously working with our customers and moving fast to capture as much business as we can.

We're going to do everything we sensibly can to get sales and continue to win share, operate excellently, and manage our cash well.

Trouble is not the only thing born in these times.

Opportunity is born also, especially for strong companies who can use it as a platform to grow stronger.

We have planned for that, and intend to take any sensible opportunities for growth that we can.

Chance always favors the prepared mind.

With that I'd like to turn the call over to your questions, thank you very much for listening.

(OPERATOR INSTRUCTIONS) .

Our first question comes from the line of Scott Davis with Morgan Stanley.

Please proceed with

Good morning, guys.

Good morning.

I applaud the actions, your structuring actions.

What was not entirely clear in your comments, George, is that the guidance for 4Q looks a little bit lighter than what we had in our models and is that an indication that you're being extra conservative, given the macro, or has October really, you said September finished off a little weak.

Did that continue into October which is driving your conservativeness right now?

Scott, it was weak at the end of Q3.

We saw that as kind of a temporary blip.

-Early part of the quarter, but then perhaps a little softer than we would hope.

So we're being a little cautious here.

I think it's a prudent thing to do at this time.

There's no medals for any heros at this time so we're taking a very prudent view of what's likely to happen in the fourth quarter.

Scott, Pat here.

The other thing that is kind of changed quite a bit of course is exchange rates.

Exchange rates have moved quite a bit, from last time we talked to you, even really since the end of the quarter here.

So if the exchange rates stay where they're at, specifically I think more the US dollar to Euro combination and some of the other currencies that have weakened quite a bit, that's kind of what has kind of impacted our thinking for the fourth quarter.

Right.

Just to dig in a little bit to your organic volumes and your price changes in the quarter, the pricing up 2.9% in the US but down 0.7% in international, I assume that's because of optical, but maybe you could put some clarity behind that and then same with organic volumes down 2.5% but up 1% in international, it's a real slowdown in international, obviously, but still positive, just a little bit surprised you're able to give such good -- I guess my question is your prices are going up in the US and volumes are going down, was it the price actions that drove the weak volumes in the US and am I correct to assume that the weaker pricing international is optical?

I guess kind of deal with it a little bit reverse.

The optical, the answer is right.

We would be positive price excluding optical on the international side, so it was heavily impacted by optical.

On the US side, we don't believe at this point in time that our pricing actions have materially affected our volume performance in the marketplace.

We think the strength of our products and brands in the marketplace gives us the opportunity to price.

It's obviously something you would prefer not to have to do for a customer or customer's sake, but with the raw material situation the way it is we really had no other choice.

Just lastly, healthcare margins have been just great all year and growth also.

Is there anything -- I know you don't want to give '09 guidance per se, but is there anything that would lead us to believe that that would slow down in '09?

I mean, was there a flurry of new product introductions or something that really drove that growth in '08 that may not repeat in '09?

No, I don't think there is anything that is unique, Scott, in the healthcare.

We have a fantastic healthcare business.

I think if you aligned our healthcare business up against any other healthcare company out there, you would see that our positions in the marketplace are in the top two to three spots in many cases and the margins really are sustainable position.

A lot of it's about leveraging the strength of the whole company is the reason those margins can stay there.

And we are the most innovative product company in most of those healthcare categories, which provides room for price as well as our product positioning as well.

Super.

Thanks, guys.

Thanks, Scott.

Our next question comes from the line of Jeff Sprague with Citi Investment Research.

Please proceed with your question.

Thank you very much.

George, for starters, could you give us a little color.

It sounded like the brick piece were in fact pretty decent in Q3 but is there some signs yet that kind of the leading edge of some of the short cycle businesses in those end markets are starting to soften up also.

No, Jeff, not really.

You could pick on any one market, any one country and express some concerns about it but broadly speaking, the big P countries remain solid.

As does the Middle East, as does Latin America, more generally and even China remains strong.

There's been just one or two points erosion of growth in China but generally speaking those countries where you would expect growth, Jeff, are good and that of course is the place that we want to make sure that we continue to invest next year.

It would be easy to sort of pull back in those places where we can accelerate growth and I think the temptation for us is to avoid that.

And then just a question for Pat on the liquidity.

George actually mentioned an embargo on US deals and no share repurchase.

I mean, obviously you need US cash to do US deals and US share repurchases.

You look real liquid but I guess the question is most of the cash offshore and what is your flexibility to bring it back home if you would want to?

Jeff, I think as in the past, most of our reported cash does remain outside the US.

We did do, the bond offering here in August, which gave us some cash here in the US.

So we actually have a little more cash sitting in the US than we normally have at the end of a quarter.

But I think you understand the dynamics pretty well is that our cash in the US we usually for dividend repurchase as well as our own CapEx and acquisitions and to the degree we can bring cash back internationally we do do that.

We do repatriate a fair amount of cash every year and of course at the end of the day it ends up being an economic choice.

We probably have right now I guess it would be fair to say probably about $3 billion of cash outside the US, probably $2.8 billion I guess is probably the more appropriate number.

We can probably bring a $1 billion or so of that back in a reasonable time frame.

The other requires a little more planning.

If I could just sneak one more in, Pat.

Could you give us any early read on how to think about pension for '09, whether you make more '08 contributions as you exit the year or just some early thoughts on kind of the sensitivity around returns and where discount rates are and things like that?

Jeff, I think it's a fair question, with the state of the markets.

We're fully funded in our US plan going into the year, as we took a look at it at the eastbound of the third quarter, depending upon your set of assumptions, we think we're still in reasonably good shape from a funding standpoint in the plan.

We'll continue to assess the performance here through the end of the quarter and obviously make decisions based upon where we see it.

But kind of the tradeoffs is right now of course most people's asset returns are below water, especially against any assumptions they would have made.

But on the flip side, the interest rate market especially in today's credit market actually has a tendency to increase your discount rate.

So when you look at it on a kind of a funding standpoint, we're really not in that bad of shape as we stand today.

All right.

Thanks.

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

Please proceed with your question.

Thank you, good morning.

If I could also ask a question on the liquidities update and that was a terrific slide in terms of showing the position, and Pat, best indicator there to us was that you're issuing CP with a 2009 maturity so can you give us a sense of what the average maturity has been on the commercial paper?

I'm going to turn that, Jan Yeomans is our Treasurer, I'll just ask Jan to respond to that question, Deane.

Right, Deane, that varies over time.

But what I will say is that in the last couple of weeks we found the markets much more conducive to business as usual.

So it's been with that in mind that we've been showing paper out into 2009 at what we consider to be very advantageous rates and we've had an increasing interest in people buying that paper.

So at this point, we're feeling very, very comfortable about being able to access the commercial paper market.

So no significant change to any of our profiles there.

Great.

Thanks, Jan.

And then on the consumer and office side, versus expectations that was a positive surprise this quarter.

Can you take us through some of the dynamics, how much of it was back-to-school, better was it new product driven, just take us through those details if you could.

I think the simple, simple answer to the question is it's really the new products and the relationships that we have with the key accounts in the US that are driving our additional business in the US.

I would say that back-to-school was not better than it has been, so it's not a back-to-school rush, by any sense.

It's really around a better flow, continuous flow of new products including what we brought up last quarter was our Filtrete program continues to expand.

We actually had a very good program with command hooks this quarter in the construction home improvement business.

So it's really across the board, good scouring products, sales and so forth.

So it's really across the board and as you expect, the one business probably is a little more impacted right now would be more on the office, on the office products side.

But the flow of new products continues in that business and we continue to stay ahead of the pack.

And Deane, another piece of this, along with that, along with what Pat said, we won a lot of new plan grams, a lot of new shelf space.

A lot of new programs like the Filtrete program that Pat mentioned are continuing to gather momentum.

The end customers are seeing the value of the product and of course our products are very successful for the retailer.

So they like to sell them.

They're attractive.

We weave in good industrial design.

We always try to add in new technology and new features to the product and perhaps this is one of those cases where quality is the right mission.

In the words of my old grandmother, I think we all had grandmothers who said this, too poor to buy cheap.

People are buying quality, buying things that they trust.

The last thing I would add would be service, in terms of service to the customer, this is one of the strongest areas of the company as you can imagine, given the very demanding customer base.

But we serve them very well.

Our on-time and full rates are as high in this business as they are anywhere in the company and that's very, very important to these particular customers.

So when they want the product, they get it.

That's the important part of the equation.

Thank you.

Thanks,.

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

Please proceed with your question.

Good morning.

It's actually Jason Miner sitting in for David.

Good morning.

Hey, there.

You know, industrial and transportation solid performance but the sequential decline surprised us a little bit so I wonder, George, if you could maybe illuminate for us some of the underlying details of what might be happening there and driving a little maybe a decline to the trajectory of growth.

Well, I don't know that there's anything to be concerned about in this business at all.

Obviously, US automotive has slowed but I don't think there's anything to apologize for these results.

And a lot of good work going on behind the scenes to drive growth yet further in some new markets such as alternative energy.

So I don't think there's anything to, for you to be concerned about in these numbers.

Pat, you want to add anything?

Jason, I would echo the same thing.

There really isn't anything that I would call material.

You look at FX rates have kind of weakened a little bit so if you look at top line reported numbers, that may be getting in the way a little bit, Jason.

But if you look at the underlying growth rates in that business, nothing to worry about from our side.

And of course, Jason, the margins sequentially were spot-on, so --

okay.

That's helpful.

Just wanted to go back to, George, your comments on CapEx.

You said the transformation is largely complete but we have been looking forward to some possible benefits from supply chain improvements and just if we're having to pull back I wonder if there's any of that at risk or if you could kind of outline what we have to tighten our belts on.

Well, there's always a -- in companies like ours, there's always a great appetite for capital.

We always think there's more things you can do.

It's a question of prioritizing properly.

We'll continue to fix the balance of the supply chains that are the most important, that carry the high volume and we probably in some cases where we might have been a bit more optimistic about volume, we'll dial back on those things until we see where these obvious economies lie.

But I'm actually pretty pleased with the way that whole program has gone.

In reality, it's probably going to be incremental additions in that program for the next two or three years yet until we've got the whole program done, if the whole program is ever done.

If you continue to get growth, there's always going to be capacity you need to add.

So I'm pretty pleased with the way that has gone.

There's a sort of an invisible piece of this, Jason, which is what's being gone on inside the United States.

People have hone in on the plant construction, there's a lot of supply chains have been straightened out inside the United States that will eventually as time goes on will deliver some working capital and cost improvements for us so I'm not looking at the moment for any sort of great economy program.

I think it's just prudent watching, a little bit of tweaking and dialing back here and there but no great crisis.

Excellent.

That's very helpful.

ism going to try and sneak one more in too.

I can't let optical films go unmentioned.

I'm just wondering, you know, we've talked about this as a transformational year, if market conditions are making you suspect that the transition lasts a little longer or how the shape of the plateauing, if you will, looks into Q4 and Q1, thank you.

Yeah, we -- we forecasted at the beginning of the year that the vast majority of the transition was going to be complete in 2008 and there's nothing there, there's no new news that we've seen.

It could bleed over as we said in earlier calls into the first quarter.

I think there's likely a little bit of that possible.

But absent the end market contraction, I'm talking about now with the market for TVs soften a little bit.

Absent that, we're doing very well.

It seems that attachment rates have stabilized and it also seems that here and there there's quite a bit more interest now in the energy play, using films as a means of reducing energy by in some cases 50%.

So that's the possibility for growth in the future.

But we don't want to celebrate that right now.

It's too early to celebrate any victories on that but we're pleased that the trends are headed in the right direction.

Very helpful.

Thank you.

Our next question comes from the line of Shannon O' Callaghan with Barclays Capital.

Please proceed with your question.

Good morning, guys.

Question on price.

It's been ramping up here.

It was a strong contributer in the quarter.

Pat, you mentioned the raw material pressures that have contributed to that.

With raws coming down sharply and the economy slowing, it seems reasonable that that's not going to be the contributor it was this quarter.

I mean, is that the way you look at it or do you think it's still going to be a positive contributor for you guys?

Well, Shannon, it will continue to be a contributor on a carry-over basis so the prices that we've increased in the marketplace we plan to hold those.

They will continue on for a period.

We'll of course monitor the material position, not all raw materials have necessarily come down in line with what the underlying commodities, so we have to keep a very close eye on that.

So it's a balancing act.

We're trying to manage obviously the, our growth rate and profitability at the same time and price is an element of that.

Are you hearing your customers push back on you at all yet?

Customers push back all the time.

Specifically on the raws, given the headline raw numbers coming down, have you had that comment coming back at you yet?

Of course you do, you've got it all the time and in conditions like this you would expect to have it.

And this is where I think having a strong product, strong brand, strong relationships really carry the day.

So we're , I'm not worried

Okay.

And how should we think about this R&D percent of sales, I mean it was down last quarter, down again this quarter.

George, you mentioned not wanting to slow R&D and that's one of the things you're going to stay committed to through the cycle.

Should we be thinking about a dollar amount here more than a percentage of sales or is that going to vary as a percentage of sales going forward?

Kind of went through this a little at the Investor Day but it's ticked down again here this quarter.

We don't manage to a particular percent of sales.

It's not a sort of target spend in that area.

And not all of the spend is in people, sort of lumpy spends quarter-to-quarter in equipment we buy, in small investments we make that we take to expense and so again, there's no story to be seen already into that trend.

We still remain committed to use R&D as a sort of a dreadful, competitive weapon and so I don't think you should draw too many conclusions from that sequence of numbers.

You know, Shannon, the other thing that you run into is that depending upon the mix of business in any given quarter and I think about this quarter as an example, consumer's heavier in the third quarter, their R&D spending is lower than the average, so you get some mix effects as well on a quarter-to-quarter basis, so that's why we don't get concerned about the consolidated number.

We look at it business by business.

Okay, thanks, guys.

Our next question comes from the line of Steve Tusa with JP Morgan.

Please proceed with your question.

Hi, good morning.

Good morning, Steve.

So you gave us a little bit of color on the for ex impact in the fourth quarter on the sales line.

What would that be.

How does that translate to the bottom line on an EPS basis?

Well, for the fourth quarter, the numbers today, Steve, would imply probably about a $0.10 hit in the fourth quarter from what we previously were thinking going, if you kind of go back to the last call and so forth.

So that's about the impact that's it's going to have on us.

So that's a swing from I guess a modestly positive to a negative 3% to 4%.

Probably on an EPS basis, slightly negative in the fourth quarter.

And does that kind of, I guess margin on ForEx at all into next year, is that the way we should think about it as we look at the negative ForEx as we think about '09.

That's not '09 guidance, that's just the way the model works there.

It will obviously carry into the '09 expectations and we'll give you some more color on that when we meet here in December.

Okay.

Great.

And then one last question, just on the fourth quarter.

You know, to get to your operating margin target, you're going to need a pretty good fourth quarter margin number.

And since you really aren't giving us sales guidance, how can you be so confident in that margin when, I guess you're not confident enough to give us a volume target?

Well, I think a little bit, Steve, it's kind of our historical operating performance that gives me the confidence we can run in that range.

At the end of the day we try to balance the top line, bottom line, mix of the company.

The wild card as we just kind of talked about a little bit is the foreign exchange side but, so I guess I'm not overly concerned about a specific number at 22.5, you know for the year.

Obviously implies that the fourth quarter will be below that, so --

Right.

But I mean you did 20.8 in the fourth quarter last year and maybe I'm just not remembering some negative issues in the last quarter, last year's fourth quarter.

Just curious, I'm just curious, is there something outside of sales that we should be thinking about, maybe you guys have a little more cost that you've taken out or something that contributed to that solid fourth quarter, because it was somewhat important as far as our thinking into next year in a weak volume environment.

I guess thanks, Steve.

I guess what we're implying is that on a year-over-year basis we'll probably end up with a slight margin improvement.

-So think of it as probably being more cost oriented.

We talked about the severance actions that we've been taking in Q2, Q3, likely here in Q4.

So we are definitely squeezing on the cost side to make sure that we can deliver the earnings to you.

And is that something that is sustainable in the next year?

Definitely.

Probably have to do more.

Okay.

Great, thanks a lot.

Thanks, Steve.

That concludes the question and answer portion of our conference.

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

Thanks for joining us this morning and we look forward to seeing you in New York at our December event.

Thank you very much, everybody.

Ladies and gentlemen, that does conclude our conference for today, you may all disconnect and thank you for participating.