3M (MMM) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the 3M third quarter 2009 earnings conference call.

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

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

(Operator Instructions) As a reminder, this conference is being recorded Thursday, October 22, 2009.

I would now like to turn the call over to Matt Ginter, Vice President of investor relations for 3M.

Thank you.

Good morning, everyone.

And welcome to our third quarter 2009 business review.

Joining me on today's call are George Buckley, 3M chairman, President and Chief Executive Officer and Pat Campbell, Senior Vice President and Chief Financial Officer.

Today's call will summarize our financial results for the third quarter.

The power point presentation will accompany today's conference call which you can access on 3Ms investor relations site at 3m.com.

Today's slide presentation and audio replay will be archived on our web site for an extended period of time for your convenience.

As I mentioned last quarter, our next investor meeting is scheduled for December 8 from 8:00 a.m.

to approximately noon at the Grand Hyatt hotel in New York City.

We sent out an invitation earlier this month and many of you have already RSVP'd.

If you have not responded to date, please do so.

And if you did not receive the invitation, please contact my office and we'll get one out to you right away.

Before we begin today, please take a moment to read the forward-looking statement on slide two.

During today's conference call, we will make certain predictive statements that reflect our current views 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 10K and 10Q, lists some of the most important risk factors that could cause actual results to differ from our predictions.

So, let's begin today's review.

Please turn to slide number three and I will turn the program over to George.

Thank you, Matt.

And good morning everybody and thank you very much for listening to our third quarter call.

The 3M -- the third quarter was marked by continued execution of our plan.

Tight control of spending while retaining the sharp focus we've had on cash generating, as we simultaneously draw sales and market share everywhere that we could.

I could almost give you my second quarter remarks here again because Q3 was really all about continued execution of the plan rather than any radical new pathway or strategy.

So, while we significantly over achieve relative to external expectations, and we're certainly hugely encouraged by our progress there, do please keep in mind that organic sales volumes are down 7.1% year-over-year.

Sequentially, however, third quarter sales increased by an impressive 8.3% over Q2.

And as I mentioned last quarter, the second derivative of sales, with respect to time, also continues to improve.

We remain encouraged by our ability to operate well and to maintain good margins and generate huge amounts of cash in these times.

I confess that the rate of sequential growth is surprisingly pleasant.

We achieved the free cash flow conversion of 163% this quarter and 145% year-to-date.

So, there's no question that it was a strong quarter delivered by hard slug by the good people of 3M.

Pat will detail the quarter for you in a moment including several factors which helped us again.

And for example, demand for optical films continued strong as it did in Q2, especially films for LCD TVs.

We also achieved good growth in renewable energy, health care, automotive after-market and aerospace to name but a few.

As you would have expected, demand for respiratory products used to help the -- prevent the spread of H1N1 virus remains strong.

So, we're investing an additional $20 million or so over and above the $20 million I told you about last quarter to add yet more flexible capacity to our respirator line up, this time in Singapore.

We will also add a small (inaudible) capacity that will cost about another $5 million.

This is in addition to the recent capacity adds that we made in the United Kingdom.

(Inaudible) purchasing of (inaudible) TVs versus other alternatives and related electronic products has been strong and will probably remain good in the foreseeable future.

Obviously sell through at Christmas will be the determining factor on Q1 and Q2 optical film demand.

Gross margin and inventory improvements show that our control of our factories remains absolutely superb.

Raw material costs and solid price carryover from last year, have also helped.

While it may not be quite so positive next year, at this stage of our planning, we don't expect to see wholesale changes in impact.

Our approach on these factors by the way, is always to manage the price inflation GAAP.

We therefore remain committed to our operating and financial plan, which obviously again helped us greatly in the third quarter.

As we expected, the cost reductions for recent restructuring and other actions gain further traction in the quarter and we anticipate those benefits continuing through the rest of the year and on into 2010.

It's easy to forget how tough it's been these past 12 months and to reflect on the huge changes that have occurred in banking, manufacturing, automotive, retail, and the nation's balance sheet.

The downturn's been a vicious lesson for all of us, but I cannot say enough about how well 3M people have responded.

We do appear to be gaining share in many places but with such volatile swings in demand, you can imagine that it's hard to know accurately how much.

Regardless of trick we need to pull off, we'll be keeping it when things return to normal -- if and when they return to normal and certainly to continue this progress well into 2010.

In short, the 3M team is really executing well and our plan remains the right one for the times.

And I'll address the outlook after Pat's comments.

So, I'll turn the call over now to Pat.

Thanks, George.

And good morning, everyone.

Please turn to slide number four.

Third quarter GAAP reported earnings were $1.35 per share versus last years $1.41 per share.

Excluding special items, this quarter's earnings were $1.37 per share, which is slightly below last year's $1.42 and above our internal expectations entering the quarter.

As most of you know, we've been aggressively restructuring the company since early last year and we continue this effort in the most recent quarter.

We announced the reduction of approximately 200 positions in Q3 with the majority of those occurring in western Europe and to a lesser extent here in the United States.

The related pretax net restructuring charge totalled $26 million in the quarter or about $0.02 per share.

Next, I will recap the third quarter sales growth.

Please turn to slide five.

There are some encouraging data points, in our third quarter sales figure, but to be clear, we're still operating in a weak and uncertain economy, even if the recession has been determined to be technically over.

First, sales to the consumer electronics industry remain good coming off an improved second quarter with particularly good results in our optical film business.

Secondly, demand remains strong for respiratory protection products due to the outbreak of the H1N1 virus.

We are the global leader in disposable respirators with market share and capacity that far outpaces our nearest competitor.

Our respiratory factories have been running 24 hours a day seven days a week since May of this year to keep up with demand, but we've been unable to significantly reduce our back order volume levels.

The good news on sales was not limited to these two markets.

In fact, we posted sequential sales improvements in each of our six business segments in the third quarter with the electro communications, displaying graphics and industrial transportation, all increasing double digits.

On a global basis, sales grew sequentially in all major geographic regions.

On a worldwide basis, sales declined 5.6%, a substantial improvement from the 15% decline we posted in Q2 and the 21% decline in Q1.

So, the business continues to improve quarter-by-quarter.

Organic sales volumes were down 7.1% year-on-year, which was a bit better than our expectation entering the quarter of a negative 8% to a negative 13%.

And also better than the latest global insight estimate for worldwide IPI of 8.5%.

Demand decline in many major industries appear to have bottomed at this point, and inventory reductions have either waned or expected to do so in the fourth quarter or early in 2010.

So, our sales growth should continue to equal or exceed IPI for the immediate future.

Selling prices remain positive, rising 2% year-on-year, and acquisitions added an additional 1.8 percentage points to growth.

Finally, currency impacts reduced third quarter sales by 2.3%.

Sales and local currency declined 3.3% year-on-year including acquisitions.

Local currency sales rose by 5.5% in displaying graphics and 4.7% in our healthcare segment.

But declined by 2% in safety and security protection services, 4.8% in consumer office, 6.4% in industrial transportation and 15.3% in (Inaudible) communications.

Looking at this year's sales changed by geographic region, organic volumes turned positive in Asia Pacific at a plus 2.6%.

The first such increase in this region since the first quarter of 2008.

Organic volumes in Europe declined 7.9% as positive growth and safety and security protection services related to H1N1 demand and healthcare was more than offset by declines in the other four segments.

US organic volumes were down 12.4% and the combined Latin America/Canada region declined 9% versus last year's third quarter.

There was no surprise on our selling price performance this quarter.

Selling prices increased year-on-year in all regions with exception of Asia Pacific where prices typically decline year-on-year due to the heavy mix of consumer electronics.

Prices rose 10% in the combined Latin America and Canada region largely due to currency as we routinely raise prices in Latin America when the value of these currencies fall against the US dollar.

Now, please me turn to slide six, where I will review key elements of the third quarter income statement.

For the second quarter, we posted very strong and improving operating margins.

With this quarter coming in at 24.3%.

So, our ongoing and intense focus on operational excellence continues to deliver strong results despite these tough economic conditions.

Third quarter gross margin improved 110 basis points to 49.2%, a very good result considering year-on-year volume declines.

Selling prices' increase of 2% also helped, adding over a full point of gross margin.

Finally, raw materials were again positive versus the prior year, declining about 3% in Q3.

We have aggressively reduced structural manufacturing costs in many of our businesses over the past year to help mitigate more production levels.

And these actions are really paying off.

As a percent of sales, third quarter SG&A and R&D spending were both in line with the prior year.

As has been the case throughout 2009, we are maintaining firm control over our discretionary spending, particularly as it relates to back office activities, while doing all we can to maintain our investments in key growth programs.

Also recall that we've changed our policy as year-on-year SG&A costs.

In short, employees with previously banked vacations, are required to use it up during 2009 and 2010.

This effectively reduces the bank vacation accrual and lowers the expense in the income statement.

Operating income was $1.5 billion, right in line with last year, and as I mentioned, operating margins were 24.3%.

Net interest expense increased $23 million, driven primarily by lower yields on cash deposits.

The tax rate for the third quarter was in line with our expectation at 32.2%.

We're expecting some variability in the quarterly rate during the second half of 2009 due to the resolution of several years of tax audits.

We continue to expect that our tax rate for the full year will be between 30.5% and 31%.

Net income was just under $1 billion for the quarter, which is right in line with last year's results.

As I mentioned, ahead of our prior expectations due to slightly improved market conditions and more favorable currency and continue strong cost discipline.

As I have discussed with many of you in the past few quarters, year-on-year comps are important, but in this environment, it is equally important to look at the business results sequentially.

Please turn to slide seven.

Sales increased almost a $0.5 billion versus the second quarter, virtually all due to volume.

All six business segments in all geographies post a sequential sales growth as economies around the world continue to improve.

Sequential sales growth was led by electro communications at 12.1%, displaying graphics at 10.8% and industrial transportation at 10.1%.

And on a geographic basis, sequential sales growth was strongest in Asia Pacific driven by our optical films and industrial-related businesses.

In the sales and marketing area, we typically accelerate advertising and promotion efforts in the back half of the year to support our customers commercial programs during the back to school and holiday seasons.

And this year is no different.

Third quarter advertising and merchandising spending for example was up 14% sequentially which we fully expect to drive growth once end market conditions improve.

Investments in R&D increased by $29 million sequentially, an increase of nearly 10%, primarily impacted by some specific one-off technology investments made in our oral care business during Q3.

We continue to maintain investments and other high growth businesses such as renewable energy and water purification, just to name a few.

Finally, we expanded operating margin -- or operating income by 16.4% sequentially with incremental leverage of 45%.

Margins improve by 1.7 percentage points to 24.3%.

Please turn to slide eight, while I will recap a few balance sheet and cash flow highlights for the quarter.

Heading into 2009, in the face of such a significant economic collapse, we set very aggressive cash flow targets for each of our businesses.

Ground leaders and their teams have responded with great results.

Third quarter free cash flow is $1.6 billion, up $769 million versus last year's third quarter.

This represents a 97% year-on-year increase.

The improvement was driven by many factors, but most notably by lower capital expenditures, improving that working capital, lower cash tax payments and also reduced cash pension contributions.

Net working capital declined by $415 million year-on-year, with inventory down $443 million and accounts receivable down $125 million.

Inventories again were a bright spot as we drove a 0.4 turn improvement versus September 2008 levels.

A very good result considering the third quarter organic volumes declined by over 7%.

Third quarter free cash flow conversion was 163%.

Year-to-date cash flow increased 36% and we converted 145% of net income.

Net debt was $1.7 billion at September month end, a reduction of $1.1 billion from June levels and one half of the level that we had September last year.

Looking to the fourth quarter, our cash conversion rate will decline and likely be less than 100%, as we will be making some additional cash pension contributions.

But for the full year 2009, we expect that the free cash flow conversion will remain in excess of 100%.

We've paid $361 million in dividends to common shareholders in the third quarter, and consistent with recent quarters our share buyback program remain on hold.

Overall, our balance sheet is very healthy and continues to improve.

The majority of our long-term debt balance does not mature until 2011 or later, and we have very good access to capital.

We are well positioned to fund organic growth investments and also take advantage of acquisition opportunities as a service.

Again, our first priority is to grow the business while maintaining our premium credit rating.

So, that wraps up the balance sheet and cash-flow, so let's quickly review the performance of our business units.

Please turn to slide number nine.

For several quarters running, our healthcare business has generated strong results despite a tough economy and this quarter, they delivered more of the same.

These end markets generally grow faster and are more stable than many of our industrial and electronics markets so this business is a great stabilizing factor in our portfolio.

Third quarter sales and healthcare were up $1.1 billion, up 4.7% in local currency terms.

Currency reduced third quarter sales by 3.1%.

It was encouraging to see very broad based year-on-year growth in healthcare's third quarter results.

Local currency sales expanded at a double digit rate in infection prevention products and a mid-single digit clip in the skin and wound care area.

In addition, oral care, food safety, and health information service businesses drove positive local currency sales growth in the third quarter.

Sales in the drug delivery systems declined by 5%, the local currency terms as this business continues to work through challenging comparisons coming off of a very strong 2008.

On a geographic basis, all regions posted positive local currency sales growth in healthcare led by Asia Pacific.

Operating profit was $340 million, an increase of 12% and margins were 31.5%.

Sales mix continues to be a positive factor on margins in this business and of course the healthcare leadership team continues to drive outstanding productivity.

What is perhaps most impressive about the results is that we are simultaneously and aggressively investing and expanding our healthcare business for the future.

For example, we are funding important R&D efforts in oral care, such as digital dentistry and mini implants.

Also, our drug delivery systems business recently announced the opening of a new laboratory site in Singapore.

This lab will develop products in both inhalation and trans-germal drug delivery Solutions and will serve Parma customers and patients throughout the Asia Pacific region.

The investment of this new lab, complements our already well established lab network, with sites in both the United States and the UK.

Similar investment examples exist elsewhere in the healthcare portfolio and new product momentum just continues to get better.

Please turn to slide ten for our quarterly details of our consumer and office business.

Our consumer office team posted very good third quarter results in the face of continued tough economic head winds.

Quarterly sales were $923 million, operating income was $227 million and margins continued to improve.

Remember, the margins in consumer and office tend to peak in the third quarter of each year, driven by seasonally high sales and factory throughput.

Total sales declined 6.6% in consumer and office, with almost 2% of the decline attributed to the stronger US dollar.

Organic sales declined 7.6% which was partially offset by nearly three points of acquired growth in the quarter.

Also, recall last quarter that we mentioned that we saw earlier than expected back to school orders begin in late June, as retailers attempted to drive more customers to the stores earlier.

We estimate that this earlier ordering negatively impacted year-on-year sales growth by approximately 2% versus last year's third quarter.

On the organic front, our businesses are doing a great job of driving a steady flow of new products and aggressively driving penetration in order to combat a number of tough head winds at the moment.

Overall, weak consumer spending and a mixed back to school season, really hurt our customers in the mass retail channel.

In addition, slow housing starts and poor existing home sales impacted out do-it-yourself, channel.

And finally, high unemployment levels amongst white collar workers remains a challenge in the office, retail and wholesale channels.

Regardless, we continue to drive innovation to promote more growth.

For example, our leading family of filters for forced air heating systems in homes and buildings continues to gain additional distribution.

You may have also noticed that we ramped up our advertising during Q3 for many of our products including Filtrate as well as our new label product line.

Local currency sales grew year-on-year in both our home care business and in consumer healthcare.

Where growth was (inaudible) by two recent acquisitions.

The first was Futuro, the leading supplier of braces, supports and compression hosiery, and the second was Ace brands, an iconic branded business we purchased from (inaudible) in July of this year.

These deals when combined with our existing organically grown product portfolio are helping us to drive additional growth, particularly in the retail drugstore channels.

On a regional basis, sales in the local currencies increase in both Latin America and in Asia Pacific while sales decline in the United States and Europe.

ll in all the story in consumer office was fairly similar to recent quarters.

Despite the challenging market conditions, our leaders in the consumer office business continued to deliver very fine results.

Now lets review the display and graphics, so please turn to slide 11.

Display and graphics had a good third quarter.

Sales were $896 million, up 5.5% in local currency, including 2.5 points of growth from acquisitions.

Currency impacts reduced sales by 1%.

So, on a total dollar sales basis, sales improved by 4.5% year-on-year.

Operating profits rose 12% to $204 million.

In our optical film business, the positive momentum that began in the second quarter, continued right into the third.

Two factors are positively impacting results in this business.

First, there's been a noticeable pickup in demand for flat panel televisions coming off of aggressive inventory clients in late 2008 and the first quarter of 2009.

And our films are an important performance enabler for those high demanding electronic devices.

Second, we're driving outstanding new product momentum in optical films as well.

Recent 3M film technology breakthroughs, effectively improve the energy efficiency of LCD panels.

Put simply, 3M multi-layer optical films can fundamentally alter the design of a flat pannel device, by requiring fewer light bulbs in the back pannel of an LCD screen.

Sales at (inaudible) began to pick up in the second quarter, and that momentum accelerated further into the third quarter.

Third quarter sales at optical systems increased 26%versus last year's third quarter and were up 27% sequentially.

Optical rule remain an intensively competitive business going forward and our OEM customers will continue to aggressively drive cost reductions.

Citing price pressure will remain intense, therefore, we must respond with aggressive cost reduction and productivity improvements.

Importantly, this productivity will enable our ongoing R&D investment in optical as our customers will continue to demand technical solutions to solve their ongoing problems.

And we will be there, obviously, to help them.

Moving to traffic safety systems.

Local currency sales rose at a mid-single digit rate in the quarter.

Acquisitions were the primary factors for this growth.

Namely our December 2000 acquisition of Bob [Fabricatto], a leading manufacturer of French license plates.

On an organic basis, sales declined year-on-year, as governments and municipalities are facing difficult budget conditions.

Unfortunately, the highly anticipated US fiscal stimulus bill has not helped the highway construction industry as much as we had hoped.

While sales in commercial graphics were down year-on-year, we did see modest sequential sales improvement as the advertising market slowly recovered from the recession.

Now, please turn to slide 12 where I will review our safety security and protection services business.

Sales in this business were $864 million in the quarter, down 6.1% year-on-year.

Sales declined 2% in local currency and currency impacts reduce sales by 4.1%.

Despite these sales declines, profits rose an impressive 10% to $236 million.

In the face of economic uncertainty, we kept a very close watch on expenses in the third quarter and our factories ran very efficiently.

As was the case in the second quarter, there were some very positive sales influences in the business in the third quarter as well as some challenges.

Certainly, the ongoing weak industrial and housing markets remained a drag on sales in many areas such as (inaudible) protection, roof in granules, commercial cleaning supplies, and manufacturing the latest sales of personal protection equipment.

This was no surprise to us.

At the same time, the surge in orders for 3Ms leading respiratory protection solutions, that began in the second quarter, continued right on through the third.

This was directly related to the outbreak of the H1N1 virus and we estimate that the x factor added an incremental $80 million to third quarter sales in our SS&PS business.

Considering H1N1 related sales in other 3M businesses such as healthcare and consumer, the number was probably closer to $100 million.

Our factories have been running flat out since May of this year to keep up with demand.

And we see back orders well beyond the end of the year.

As a matter of fact, we recently approved two new manufacturing investments to produce respirators in Singapore and to add some more capacity in the US which George mentioned.

Please turn to slide number 13 for a look at our largest business industrial and transportation.

As many of you know, that there is one business at 3M that is most correlated with general industrial production, this is it.

So, the leadership team here has to stay on top of their game day in and day out.

And their track record in terms of profitability and return on capital is one of the absolute best amongst large industrial companies.

This most recent quarter was no exception.

Industrial transportation generated $403 million of operating profit in the third quarter and margins were an impressive 21.2% despite sales declines of 8.6%.

On a sequential basis, results were very encouraging.

Sales and profits rose 10% and 23% respectively.

And incremental margins topped 40% as factory utilization continued to improve and we are leveraging a much reduced structural manufacturing cost base.

Consistent with what we saw in the second quarter it appears that general industrial activity is stabilizing and showing a slight upward trend.

In fact, most every division within industrial and transportation, posted positive sequential sales growth with the strongest growth in automotive OEM and in the industrial tapes in the (inaudible).

On a year-over-year basis, we drove positive local currency growth in a number of industrial and transportation businesses led by renewable energy, automotive market and aerospace and aircraft maintenance.

Not surprisingly, local currency sales decline year-on-year in those businesses supporting a number of large industrial markets, such as automotive OEM, appliances and the like.

Industrial transportation has introduced an impressive array of game changing new projects, resulting from R&D investments made over the last three to four years.

In the tapes area, we launched new products that protect windows from permanent graffiti damage on busses, trains, and other transit areas.

They've also introduced a number of tapes that bond a seal solar panels.

In our energy and advancement (inaudible) business, we continue to bring value to customers through unique glass microspheres and improve insulation and buoyancy properties in the deep sea oil and gas industries.

And finally, our base of business recently introduced a revolutionary ceramic mineral adhesive technology that has the ability to remove metal more quickly and generate less heat, while sanding resulting, in a longer lasting abrasive product.

Early indications from customers have been very, very positive.

Investments such as these in our core technologies and exciting new growth markets supported by outstanding operational discipline remain fundamental to industrial transportations continued success.

Please turn to slide 14 where I will summarize results for electro communications business.

Throughout 2009, end market declines have been most severe in this business particularly.

In telecommunications, and in commercial construction, so the year-on-year accounts remain very challenging.

Sales were $617 million in the third quarter, down 16.5% year-on-year.

And operating profits declined 26% to $117 million.

Local currency sales declines were fairly broad based.

Declined 15.3% in aggregate and currency impact reduced sales to just under a point.

Faced with such difficult end market conditions, electro communications team remains focused on driving operation efficiency and cost reductions, as evidenced by their nearly 20% operating margin in the quarter.

Despite the obvious end market challenges, there is a Ray of hope here.

Sequential trends were favorable for the second consecutive quarter.

As sales and profits rose 12% and 59% respectively in the third quarter.

Led by our consumer electronics related businesses that sell high-tech products and solutions in the smart phones, mobile hand helds, hard disk drive and semi conductor markets.

Similar to industrial and transportation, things are stabilizing in the electro and communications as well.

That concludes my review of our third quarter numbers.

Now, I will turn it back to George, who will describe our outlook for the rest of the year.

George?

Thank you very much, Pat.

Before we get to your questions, I'd lake to address our outlook for the rest of the year.

We're certainly glad for the positive sales outcome this quarter but we all know that the hardest time to forecast sales accurately is at turning points in demand.

That is where the inflection points, or inflection points, or significant changes, or even in some cases reversals in gradient..

As we might say, changed in the first derivative.

You recall that we said last quarter that the US economy, or at least those collective segments where 3M plays, seems to have reached bottom at the end of the second quarter.

So, that's why you see the changes of gradient.

So, to be fair to everyone, I don't think forecasting is going to get much easier any time soon.

And I hope you'll bear with us as we try to identify the underlying trends and patterns that will help us get better insight into where the world economy is going.

I think 3Ms capability of execution in difficult times, is now beyond anybody's reasonable doubt.

So, the continued $64,000 question on everybody's mind is where's the economy going?

Whenever I get excited about our progress, we see huge progress in new products in market penetration.

I do remind myself of [Keenesview], which I quoted to you last quarter.

And that there can be no sustainable recovery without natural improvements in aggregate in market demand.

The question remains, where will it come from?

First, some people will be wondering -- have stimulus packages led to this improved performance?

The short answer to that question is, no.

Our stimulus packages some countries seem to have done it well, like China for example.

Conversely, some like the United States and the United Kingdom have done it badly.

And some like Germany and Italy have not really done it at all.

So, as far as we can tell, as Pat said, while a lot of the money is being spent, very little stimulus money has yet bled into the US economy at large.

The cash for clunkers program was successful at sparing short-term demand and driving down dealer inventories, but it did not seem to be successful at improving underlying demand.

Here and there stimulus money may have replaced state spending that would otherwise have been cut.

But theres been little or no net volume increase to speak of so far as we can see.

Perhaps more will bleed through later but for now it's not the big factor in the US demand equation for us.

In contrast, we did see measurable impacts from stimulus money in China and to some degree in Japan.

It was targeted mainly at locally made products in retail consumption.

And the impact was almost immediate in its effect for demand for cars and electronics.

That helps quite a bit locally and China seems to be growing significantly again.

I will go over this topic in more detail at our December update, but the key to the puzzle of what happens next year, seems to be unemployment levels.

There are many things to be cautious and worried about.

But there have also been many positive things happening, and achieving a fully balance (inaudible) when we update you in December.

So, our significant economic challenges remain to be overcome, (inaudible) the economy I think this is where our continued R&D spending comes in.

We knew instinctively that doing this would eventually make a difference.

And ironically, the longer a recession goes on, the more advantage, I think, that we gain from it.

Share gains should most certainly be possible and become a real growth differentiator for 3M.

We've already begun to step on the gas a bit more on R&D, as Pat mentioned earlier.

As I told you last quarter, it's hard to forecast the precise shape of the recovery and harder to describe it verbally here on the phone.

Our expectations offer a flattish but short economic bottom then fast restocking which you saw some in the third quarter.

This would be followed by a flat spot as I call it or plateau as end market demand and wholesale demand come into an equilibrium.

And after that, the earnings recovery would just gradually follow economic activity upwards.

That flat spot, if it comes, maybe getting into the late fourth quarter is what gives us the continued note of caution and conservatism.

So, in light of these realities, we're sticking with the fundamentals of the plan, control costs, generate cash, support our customers and earn their business to drive sales plus R&D.

What the third quarter continues to emphasize is the underlying strength of the 3M business model, its diversity combined with discipline and how it provides a great platform of cash generation and performance even in the most challenging conditions like we've seen.

So, we're going to maintain that discipline going forward, even as we make plans to selectively increase our growth investments in the quarter and beyond.

So, with the third quarter complete, we now believe organic sales volumes will continue to improve and for the full year will come in between minus 9.5% and minus 10.5% and that EPS will come in somewhere in the band of $4.50 and $4.55.

Both our material improvements versus our prior outlook.

In conclusion, we're going to stay focused on cash generation and new investments in growth platforms, as the best way for 3M to emerge an even stronger company than it was going into this recession.

It's not too soon to remind ourselves that our ultimate objective is consistently higher growth and we haven't deviated from that.

And we're taking the necessary steps to make sure that it happens.

Again, we are heartened by the power of our business model and by the professionalism and dedication of our people around the world and we're more and more convinced than ever that 3M is a superior and profitable investment.

And with that, I'd like to turn the call over to your questions.

Thank you very much for listening in everyone.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster.

Our first question will come from the line of Deane Dray with FBR Capital Markets.

Thank you, good morning everyone.

Good morning, Deane.

Good morning, Deane.

George, my first question was to going to be to update us on the expected recovery pass.

But I think your remarks really honed right in on expectations there.

And you've had a pretty hot hand, so I think that, you know, I won't pursue that further.

I think that its pretty clear on your expectations.

So, instead, I'd lake to focus a bit here on what you call the x factor and the respiratory mass.

And just give us a sense.

The last update was 40% of capacity being had and it looks like you've done a little bit more than that, but can you (inaudible) for us the back order?

And is there a risk in overexpansion here in chasing this demand?

And might you consider licensing out the product?

And just give a sense of how you're managing this high quality problem?

Yes, sure, thanks, Deane.

The capacity that we added was closer to 30% rather than 40%.

So, that gives kind of a sizing of where we've gone.

As for the high quality problem of outsourcing, the practical matter is Deane, is nobody has any capacity, so there's no body to buy from.

So, the challenge at one level is not to disappoint big customers and very large and powerful customers like governments.

So, we chose to make these relatively small incremental investments.

And I do think that H1N1 may -- and of course we could be proven wrong, but I think it may have changed people in government's attitude to these quite virulent viruses.

So, we don't think -- because of what we spent, where we spend it and how we structured it and sort of flexible shut downable capacity that this will be a big challenge.

And it is, of course, a chance, Deane, for us to gain market share continued influence without customer.

So, we think on balance it is the right thing to do.

And just to clarify, I know you don't break out margins by particular products but just when you look at this incremental revenue coming through, how does this compare to the margins for the segment?

I would say -- Deane, Pat here.

It's similar.

Every one of these tenders are different okay, but on average it's not all that different from the business as a whole.

Great.

Thank you.

Thanks, Deane.

Our next question will come from Shannon O'Callaghan with Barclays capital.

Please proceed.

Good morning, guys.

Good morning.

Good morning, Shannon.

George, just a question of how you're thinking about the tradeoff between the margin and investments at this point.

Your focus has always been really more on ramping the investment and trying to accelerate the growth of the company.

I mean, with the margins coming in as strong as they are, I mean, I see you're ticking up R&D a little, which is nice to see.

Why not put the pedal done a little more?

How are you thinking about that tradeoff as you look out the next couple of years?

Well, its always -- you know, the thing in life, Shannon, you know this.

It's what we call here in turn of the baby bear strategies.

Not too hot, not too cold.

Not too soft, not too hard.

And we could certainly do what you suggest but I think we always have to keep in mind the stability that we offer to our investors.

We will certainly tick up our investments next year, absolutely no question about it.

And we've already gone through our planning process, and we have lots of great ideas.

And that's one of the really nice things that's really happened to us.

If you go by not that many years, we had a lot of money and not maybe as many ideas as we have today.

Now, we have lots of ideas and plenty of capabilities.

So, I think that you'll be pleasantly surprised next year as we step on the gas to invest in a number of different places in healthcare.

We talked about that in the past but in industrial and renewable energy.

A lot of really really good ideas ever coming through, Shannon.

And I think you'll be pleasantly surprised.

But in the end, Pat and I will always try to find that balance point so we don't bind the pendulum from one side to the other.

Because in the end when you do that, you end up with inefficiencies and we tend to take a view of our company of it's always better to have funding and R&D a little bit tight than a little bit loose.

And thats probably the way that we will fall out half way next year.

But I think you can look forward with encouragement and anticipation to what we plan to do.

Okay.

Thanks.

As you see the sequential volumes picking up here nicely, how are you thinking about overall employment at 3M?

I mean, in terms of increasing people's hours as a first step then actually bringing people back, are you hitting that soon or how do you think that plays out?

Well, I don't think we're -- we're past that because you know we've got -- at least this year we do have some added capacity because we've had people on -- a lot of people on layoff, a lot of people have been on enforced vacation.

So, we still have some already good internal capacity to respond to those things.

It's an excellent question but it's why we managed the business in the way that we did.

Rather than laying people off and then struggling with the recovery, we said no, we need to do furloughs, we need to do mandatory vacations, those sort of things.

Because there were bigger vacation accruals.

And that's really I think helped us in preparing for the future.

But there is another side to the question, and that is the quality of people that are available out there.

And we certainly will step on the gas a little bit here in investing people that will help us with e-commerce, with some of the electronic products and software opportunities that are emerging.

We will almost certainly -- I mean, the plan's in construction right now, accelerate investments in -- I won't be too specific but you'll be able to figure them out very quickly.

Some overseas markets, that provide big opportunities.

But I think we're going to try to do it as best as we can without a lot of wholesale hiring apart from the kind of cherry pickers charter that I think we've got from some great manufacturing industries in this country in particular.

We'll do that.

But we're going to try to do it steadily and without, again, banging the pendulum to the other side.

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

Please proceed.

Good morning, guys.

Good morning, Scott.

Hi, Scott.

It looks like you have several billion dollars of cash now on the balance sheet which is kind of a high-class problem I suppose.

The -- you know, any particular reason, I mean I guess one, can you give us some context on the size of the pension contribution that you're looking at for 4Q?

And then two, when does it make sense?

You know, or what's holding you back, I guess from, taking a look at share buybacks again?

Is it just on certain market environment or potential acquisitions that you think you have out there that could potentially be a cash call in the next year?

Scott, we kind of have short memories, don't we, as to a year ago, we're kind of facing, you know, kind of a concern about bank failures and everything else.

So, we're going to let a little bit of time here pass.

But to answer your question on pensions, we're probably looking in the order of magnitude of $300 million to $500 million in the fourth quarter is what we're looking at contributing at this stage.

And of course we'll look at how the fourth quarter develops and where rates move and so forth.

But that'd probably be the order magnitude that we're looking at.

Okay.

The second question and I don't want to take away from other people who may have heard this correctly, but safety, security and protection, it wasn't clear to me.

It looks like if you do an apples to apples, minus N1H,1 that your sales would have been down about 15%.

Where were the weakest points there?

ell, the weakest, even within the, I'll call it the personal protection, that's related to industrial activity, that business is down as we mentioned, you know, corrosion protection which is heavily driven by oil price.

And of course now with oil prices kind of going up, that business my see a little bit of a rebound here.

Industrial metals was down a little bit and also our commercial care business was also, you know, was also down.

So, those are very industrial kind of related, economic related businesses.

So, you know they were all down and so as the overall economy improves across SSPS that, you know, we should see an overall improvement in the growth rate outside of the H1N1 piece.

Our next question will come from Lawrence Alexander with Jeffries.

Good morning.

Good morning.

(Inaudible)

I wanted to follow-up on -- you commented a few times on market share gains and specifically for the auto after-market, but also more broadly.

How much of a tail wind do you think you can get from market share gains in the early part of the cycle and how sustainable do you think you can get from market share gains in the early part of the cycle?

And then how sustainable do you think that will be?

You know, Laurence, I think we've thought about it across the company.

There's clearly going to be some better gains in some areas than others.

(Inaudible) offers vast opportunities for share gains in automotive after-market.

And that will be one of the investments that we make next year, I'm pretty sure about that.

But you know, overall, you know, you try to assess, you know, what can you really get on market share?

I think it's possible to get in the half to one point of market share a year for the entire company.

That would be the kind of target range that we would be thinking about, and you know, we've continued to spend on R&D, Laurence, and we've maintained our investments.

We've tried to make sure that we didn't run out of capacity where those opportunity lay, and you have to imagine if you're in our shoes now, it's time to make that pay.

And that's basically the attitude that we're taking.

And I think we are doing it in, because I mentioned on my remarks it's quite difficult to make measurements of these things, because in many industries, the data isn't there, so you end up making some kind of educated guesses.

But it is going to be a push for us next year, Laurence.

And then lastly, just briefly on pension, what's the end game?

I mean, are you aiming to finally get the pension plans to the point where you can immunize them or is it just going to be sort of moving to sort of, you know, year by-year just to maintain within the statutory limits?

Well, of course, we have a significant international plans, Laurence, as well.

So, you have to kind of look at them on a plan by plan basis.

Generally speaking, we like to keep in about a fully funded situation.

If the opportunity ever arose, okay, they gave us the opportunity, okay, to immunize ourselves, okay, that's something that we would strongly, strongly look at.

Thank you.

Thanks, Laurence.

Our next question will come from Jeff Sprague with Citi Investment Research.

Thank you, good morning everyone.

Good morning, Jeff.

Good morning.

I just wonder if you could help us kind of piece together kind of the restructuring variances and, George, to some degree this idea of the way you've managed costs out on the way down with vacation and furlough and things like that?

I mean the, jist of my question is, you know, what kind of carryover benefit do we have, you know, into 2010 on the good old fashioned restructuring versus maybe the stuff that creeps back in on kind of undoing some of the more kind of near term things in the heat of the moment?

Hello, Jeff, I'll take a stab at -- this is Pat.

On the vacation side, we've got about another year to go there.

There's a nine and ten.

And then of course that -- the issue there will be what happens in 2011.

And that runs order of magnitude of $100 million in both nine and ten, a little bit heavier in nine.

On a restructuring basis, based upon what we've launched and announced, we probably have something north of $100 million benefit going into 2010.

Right.

And so, just to be clear on the pension -- I mean I'm sorry, vacation, it's not an incremental hundred more in 2010, it just kind of stays at where we were?

es, let me -- to be clear for everybody, when we went into the situation, you know, we had a -- I'll call it an accrual balance of about $200 million for earned vacation, okay, outside the current year.

So, effectively we'll be drawing that balance down over a two-year period.

So, it comes out about $100 million down in nine and another $100 million down in ten is the way it works.

Okay.

And Pat or George, can you give us a little more color on just the price environment overall?

You know, looks like you've got that big Latin benefit you attributed to FX.

But now we're going the other way on the [riale] and other things, I don't know if there's other currencies we should be worrying about here.

But, I would assume that you'er near kind of positive cost variances on a year-over-year basis.

So, just kind of tie together the price versus cost dynamic as we look, you know, forward the next couple quarters.

Yes, sure, Jeff.

First of all, to a large degree, most of our pricing will start to anniversary as we get into the fourth quarter.

So, our reported price will start to diminish.

There still is some pricing going on in Latin American markets.

You bring up Brazil, but Venezuela's also a very large, sizable business for us as well.

So, there still will be some positive price related to some currency moves.

If you look at it as George said in his comments, you know, on a longer term basis, we really try to manage price cost spread.

I think it'd be fair to say that in today's world, our teams have done a marvelous job on going after price and input costs, as we mentioned, are probably down about 3% here in this quarter.

So, we've got a favorable gap there.

But, on a long-term basis, we will look at trying to manage those together.

And if I'm really thinking about it on a more going forward basis, I think from a planning assumption standpoint, generally, you think of it being kind of a wash is the way that you would, you know, think of the model going forward.

I'm sorry, just if I could sneak one more in.

Having planning to put this pension contribution in Q4, if you tie that up with where your returns are now and what you're looking at on discount rate, can you give us some back of the envelope on pension head wind for next year?

Yes, I can.

And again, I'll probably give you some more in December, Jeff, when we meet.

And of course, we won't know the final answer until the year closes, but right now, if I had to kind of draw a snap line, we're probably about $300 million of head wind next year or $0.30 a share.

And that's about $100 million more than we gave you.

Last time we gave a number which I think was in the April time frame.

And that's exclusively related to the change in the discount rate.

Yes.

Interest rates have -- well, at least corporate rates have come down significantly.

So, it's really on the discount rate side is where that movement has occurred.

It's not really been on the return side.

Yes.

Thank you very much.

Thanks, Jeff.

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

Please go ahead.

Thank you.

Good morning.

Good morning, John.

Good morning guys.

So, other than optical, were there any of your businesses sort of of as the quarter progressed or segments or whatever facing price pressures that incrementally got worse and any incrementally facing price benefits?

I'm just sort of trying to think of the mix between all of your various moving parts here.

John, I would say that nothing is significant to call out.

So, George when you talk about market share gains there are obvious areas.

I mean obviously you've got a lot of new products in the pipeline that you're launching, but are there segments or areas as we've looked back over the course of the recession, where you feel you've made meaningfully significant inroads with respect to with share gains?

Well, I think there are two immediately come to mind, John.

Obviously the respirators, we've done extraordinarily well.

But we did add capacity early.

We were able to capitalize on those investments in particular you know the plant that we're building career.

We were ahead of the game there.

The extensions in the UK and now these new ones that I just talked about.

So, I think in that area, John, we will have done well.

In the optical area, I don't think there's any doubt, either, there because we see the reported attachment rates that we have in those businesses and those are picking back up again quite substantially.

So, we're clearly gaining share in that area.

In the renewable energy, John, where that business is still small, the stamp of our footprint is getting put down this.

We're building a new plant for Singapore in for films for that business.

And as soon as that capacity comes on stream we'll be able to gain that share there.

We obviously gain share partly through acquisitions in the automotive after-market.

So, you know I think those things will continue, John.

We have some marvelous products in abrasives.

If we see you in December, we'll try to bring along some either good graphics or maybe even movies.

You'd think that it was not possible to ever make any more innovations in abrasive, we shouldn't take people's time on the call to give you the details but absolutely marvelous.

So, I think in a fairly broad front, John, we're going to be able to gain share.

You've always got to be careful not to be too optimistic about how you can get it because, other people have to give it up and they don't always do that willingly.

But I think we're going to do well on share gain, because of the investments in innovation, they certainly lift and in some cases the investments in capacity.

So, I think we can continue down that pathway fairly strongly, John.

Thanks, George, just lastly --

John, the other thing, and I won't give you exactly specifics here, I'll give you more of a general comment.

The other thing that's happened, of course, is with the economic conditions, there are a number of suppliers who are not the healthiest today.

And a lot of large multinationals have re-reviewed their supply base during these kind of times, and so we've spent a lot of time with big customers during these kind of times, it doesn't show out in the results today.

But I think as business returns, I think we're going to see that we will be treated, okay -- I think with some additional volume just because they know one, is we're going to be around and two, obviously, we -- our innovation capability.

So, I think we will pick up some as the economy returns here.

Just one more.

The -- on healthcare with the US going through this big debate, can you guys remind us how much of your healthcare business runs through US hospitals?

And can you guys remind us how much of your healthcare business runs through US hospitals and is that business not going to be subject to some form of manage pricing pressure over the course of the coming years?

Well, John, let me try to answer that maybe a little bit different.

Maybe the guys can see if they can figure out what the hospital number is.

But, here's how I think of that business, about half of it's from the US.

And there are certain elements of that business that to some degree may actually benefit a little bit, okay, from some of the uppers.

Taking our health information systems business, they may actually benefit.

So, you know, as we look at the various rounds of debate thats going on around healthcare, of course we don't necessarily like any kind of, we'll call it, taxation, that's put on the healthcare industry, but what we're looking at under the various scenarios right now is something that we think is, you know, its just kind of a manageable expense for us.

There's a piece that will be on the medical side.

There could be a piece that leaks over into the oral care side, okay, as well, but as we've thought about it and looked at it, you know, of course none of us liked to have any kind of, you know, penalty.

But the reality is, we think within the size of our business is a pretty manageable thing at this point in time.

Great.

Thank you.

Thanks, John.

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

David, are you there?

David, your line is open.

Why don't we go on and we'll come back to Dave right after?

Our next question will come from Steven with Sanford Bernstein.

Good morning.

Good morning, Steve.

Just a quick question on CapEx first.

Its down 37% roughly year-on-year and cash from ops is up 15% and historical rates have got around $1.5 billion depending on which year on a full year basis.

So, how are you thinking about stepping the -- pushing the accelerator down on that part of the equation?

I'll start.

Okay, and then George and I, we're kind of debating, okay, where this is going to kind of end up.

He's got a big smile on his face.

And part of it, Steve, obviously what we're trying to judge as George talked about, we just kind of completed our planning process, and there are some really good ideas inside of the company.

So, we're trying to settle down on that number.

As I would have probably told you a quarter ago, I would have probably said that number was going to be kind of flat, okay?

Which I still think it's going to be flat to maybe up a little bit is kind of how I put it, Steve.

Steve, we've got a lot of these -- the big products are kind of coming to completion.

So, the carryover from '08 into '09 would have been much bigger than the carryover from '09 into 2010.

So, even though it sounds, when Pat says, they're flat to a little bit up, in point of fact, there's a significant new elbow room is being created by the completion of earlier products roughly $900 million or so that we'll spend this year.

So, it is going to create some capacity chances for us.

And then obviously what Pat and I will do is -- and are doing as we speak with David's help are going over each of these projects, the most important ones, the ones with seemingly the best returns, all the ones that have the greatest strategic capability and probably will end up allocating a little bit more to those.

Tempered to some degree by some strong demand in one or two areas hike respirators, like optical films that will again color that mix.

But I think overall it will give us a little bit of elbow room more than we had last year, to start now allocating some of that money to growth.

And we may top it off with just a little bit to make sure that we're not leaving any really good opportunities on the table.

But you're basically looking therefore at CapEx.

These run rates are closer to normalized a little better than these than what you used to run historically as you were going through all the major capacity changes and supply chain effort?

Yes.

We've still got some of those things to complete, Steve.

But I think that I mean, if you think, you know, the normal run rate within $100 million plus or minus where we are today, I think you'll probably find that's how we'll run for sometime.

And Just a business unit question, consumer and office to organic local currency sales were down 7.5% versus 4.3% in the second and 3% in the first.

It's the only business unit where I saw organic local currency sales fall before acquisitions and currency.

Can you once again just clarify a little but what that is -- .

Steve, Steve, Steve, and maybe this will answer part of your question.

The -- if you recall on the second quarter call, and I tried to remind everybody at this time, is that this was a little bit of movement in back to school shipments that went into second quarter, okay that normally was in the third quarter.

It was about two points of growth.

So, the second quarter actually benefited by about two points of growth that normally was a third quarter activity.

So, if you kind of move two points of growth between Q2 and Q3, I think you get back to something I think that's more of a normal trend.

Okay, and then the last question is sort of another spin on the, I think the pricing and margin questions that have been asked three times.

Which is, when I look over 40 years of gross margins and operating margins, the peak margins that I can find are sort of 51% and 25% respectively.

And you're pretty much just about there now.

So, as you think about all of these investments and changes and drivers in organic growth, is there a new level that you're driving towards as you think about it in terms of sustaining?

You talked about pricing.

You talked about the cost cuts that you're doing.

How are you guys kind of debating and thinking about that looking over a little longer term?

Steve, our margins really -- we don't have a strategy that says that our margins ought to be X, and then we kind of drive everything off of that.

It's kind of an outcome of all of the individual pieces that we put in place and the great work of the business and I do think that 3M has a very, very unique business model and capability which is the reason why these margins are so high and so sustainable.

And we'll talk to you some more about that in the December meeting when we think of it.

But, I mean the reality is we've improved our business and kind of your observation is, we've improved our business to the point where of course our peak margins are now better than historically been.

And of course you look at history and we've been in different businesses at different times so its not -- its never really the same company.

But the reality is we have done that, which actually provides a great platform for George.

I didn't think about where do you grow?

There's a lot of good opportunities we have to grow the business.

And with the incremental margins we have in many cases, any growth we get just actually makes the results better, you know, better when you drive growth.

So, even with the acquisitions we've made and some of the strategies we've made on going further down the pyramid and so forth, we've been able to hold our margin structure together with it which I think shows the power of the underlying capability of the company.

So, we will continue to drive growth.

If you really look at obviously how do we drive shareholder value in this company, it really is getting more top line growth.

It's not by squeezing more margin out of it.

So, we'd be happy if these numbers stayed, these margins stayed reasonably in this band and the leverage that we do, the operating leverage that we get, Steve, we can just use that as fuel to stoke the growth fire.

That's the kind of the way that we're thinking about this.

And we've done quite a bit in this particular recession.

We've done quite a bit of insourcing.

Stuff that actually historically we outsourced, maybe we outsourced it ten years ago.

It seemed to have a good value proposition at that time now it doesn't make sense.

And we're bringing that stuff back inside.

I think maybe $150 million of sales this year or so.

We're bringing that inside and getting it better prices.

So, all of that's helping to leverage our gross margins.

And actually shorten our supply chain so there seems to be an awful lot more juice in this lemon yet that we can use, but our intention is to use that juice to fund more growth not necessarily fund more margin.

One other thing I guess I'd lake to maybe point out is also -- and I know your question was really a comment on operating margin basis, but I don't want you to lose the reality that we've also been able to significantly get our tax rate down as well.

So, if you look at it on a net margin basis, we've been able to make some very good strides on our tax rate over time as well.

So, when you look at it on a net basis, and then the other thing that we didn't talk about, but the other thing that is sacred to us, is we're looking at our overall ROIC as well.

So, you know, we've got some objectives that make sure that our returns remain, you know in the 20% plus category.

So, this (inaudible) margins end return is what we focused on.

Thank you.

Our next question will come from John Roberts with Buckingham research.

Good morning, guys.

Good morning, John.

When you look below the aggregate sales, at the individual customer order patterns, have they firmed up in terms of frequency, in terms of average order size and things like that to give you a little bit more confidence and predictability than you had earlier?

I'd say on the margin, okay, maybe it's slightly better, but I can't say -- we're not back, okay, to where we were a couple years ago from kind of a demand planning standpoint.

I'm not talking about the aggregate numbers.

I think before that, you had less confidence because they were coming in, in infrequent basis and smaller amounts.

Well, I wouldn't say it has -- you know, any time you start back up, okay, I think it starts to improve, but I still think it would be fair to say that we are seeing smaller orders, okay, than we used to see, okay?

And they're kind of in the more sporadic nature.

I do think customers will continue to be very cash flow conscious as they recover here.

So, I think that's going to have an impact in, you know, supply chains really across, you know, across all industries as this thing recovers.

Because I think there's just going to be a little bit more hand to mouth view for a while here.

I mean they're going to be more cautious, John.

You expect people to be more cautious and they may or may not be reinstructed by credit.

Both of those factors, if they're real will come together.

Probably, to the point that you just asked, which is probably for a time here, we'll have more small orders, more frequent small orders.

But we've done well in responding to that and hopefully that settles down and accelerates to return to more, shall we say, more normal ordering patterns as volume builds.

Let's hope that's the case.

Thank you.

Our next question will come from Steve Tusa with JPMorgan.

Good morning.

Good morning, Steve.

So, just a commodity cost benefit.

And I'm not sure if you guys gave that number.

Sorry if I missed it?

In the third quarter, we said that our input cost was down about 3%.

Okay.

And when I hook at the guidance, just trying to kind of get my hands around the seasonality here.

So, when you look at the fourth quarter EPS at the high end, looks like, you know, it's going to be about 26% of the annual number, and when you look at the implied margin at the high end of around, I don't know, 20.5%, you know, that's down more than your kind of normal 150 bips decline from 3Q to 4Q and just jumping back quickly to that EPS comment, with 26% of the year in the fourth quarter.

That's kind of normal seasonality.

But that would seem relatively conservative to me in the context of how this year's played out give that you know 1Q was so horrible, and it looks like you still have a lot of these tail winds going for you in 3Q and 4Q.

So, I guess the bottom line is, you know, can you just maybe discuss the seasonality dynamics here in the third and the fourth quarter?

It doesn't seem to me like it should be normal.

Or maybe there are reasons why it should, if you could just talk about that.

Steve, I'm surprised this waited until the last question to come up.

It's an interesting --

I can't help that.

No, that's fine.

I guess, your observation's true.

If you look at our top line guidance though, I guess if you kind of do the math, I think you'll probably see that we've probably taken our top line expectation probably down a little bit from our normal seasonality.

And to be honest with you, that's a little bit of just a plan around, we don't know what's going to exactly transpire.

I feel pretty good about October.

The wild card for me is December.

I really don't exactly know how December is going to play out, December could either, you know, continue on kind of a steady trend basis here or could be a complete collapse.

So, we've kind of obviously, you know, probably hedged our bets a little bit when we looked at our fourth quarter, you know, expectations there.

So, don't read anything, you know, more to it than just maybe a hesitation we've got into, you know, trying to operate in a kind of an uncertain world here.

I just don't know where really December's going to fall out.

But if I look at our margins probably for fourth quarter, they will come down off the third quarter.

They won't be, at least my expectations in the 20s, okay?

They'll probably be maybe 22 or so, Steve, is the way I think of it.

Okay, so you're basically, you know if there's normal seasonality there's upside to the range is what you're saying?

I would say probably is, Steve.

What it will also do, Steve, thats the other thing we're trying to keep some flexibility open here is depending on how the fourth quarter goes and how the Christmas season goes.

Doing it the way that Pat has suggested it has -- will allow to us have a little bit of money in the back pocket to drive so, increase that merger if you saw (inaudible) on some other R&D programs.

It looks like we might be able to pull ahead.

So, it'll give us that flexibility if we so wish based within the numbers that we've told you.

And then, you know, just a question for the H1N1 stuff.

Is there any way to give us what a bottom line impact is?

I mean, how far?

And if you're not comfortable doing that, I mean, are these above or below average margins?

Steve, I think of it from a modeling standpoint, just put them in at average incremental margins, okay?

Because -- and I'm thinking it really -- you almost look at it -- have to think of it more from a gross margin perspective, Steve.

There's not much infrastructure costs.

At least SG&A costs or R&D costs were required to sell these additional mass.

So, it's more of an incremental gross margin business.

But, to some degree, some of the tenders are very, very competitive, okay so to some degree, you have to discount a little off of that.

So, if you were to kind of bracket it someplace between a normal operating margin and a gross margin would be kind of a decent way to think of it.

That's a good range.

Thank you.

Thanks a lot 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 remarks.

Well, thank you very much, everyone.

We appreciate very much the time that you spent with us, especially in these busy times.

So, thank you very much.

And we look forward to seeing you and talking to you in the beginning of December.

Thanks a lot, everyone.

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

You may all disconnect and thank you for participating.