3M (MMM) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the 3M fourth quarter earnings conference call.

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

Afterwards we will conduct a question-and-answer session.

(Operator Instructions) As a reminder this conference is being recorded, Thursday, January 28, 2010.

I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Thank you.

Good morning, everyone, and welcome to our fourth quarter business review.

It was great to see many of you in New York last month for our 2010 outlook meeting.

I know it's early here in 2010, but we have set a date for next year's event so please mark your calendars for the morning of Tuesday, December 7.

Complete details regarding timing and location will be available later this year.

Joining me on today's call is George Buckley, 3M Chairman, President and Chief Executive Officer; and Patrick Campbell, Senior Vice President and Chief Financial Officer.

Today's call will summarize our financial results for the fourth quarter and full year 2009 along with our outlook for 2010.

A PowerPoint presentation accompanies today's conference call.

It's available on our Investor Relations website at 3M.com.

Today's presentation and the audio replay will be archived on our website for an extended period of time.

If I could ask, when we get to Q&A today, I ask that you limit yourself to one question and one follow-up.

We have plenty of material to cover today and I'm sure we will have plenty of questions, so we do want to be fair to everybody.

So thank you for honoring that.

And before we begin, 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 expectation of future events that are subject to risks and uncertainties.

Item 1A of our most recent Form 10-K and 10-Q 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.

Turn to slide number three and I will hand it over to George.

Thank you very much, Matt.

Happy New Year, everybody, and thank you for joining us on our fourth quarter call.

As the results indicate, by staying on plan we were able to deliver another excellent quarter, one that came in nice little bit stronger than we forecast.

You all know the fundamentals of our plan.

Tight control of spending at factories while retaining a focus on generating cash and using innovation to ethically drive sales and spur market share and customer excitement everywhere.

We've worked very hard these past few years doing a lot of heavy spade work but it's paying off.

Much of what we did back then prepared us very well for this economic downturn.

That's notwithstanding the superb execution by 3M's people in 2009.

Life will always offer its surprises, but we are increasingly confident in both the design and the implementation of our plan especially because our business gains strength and momentum as 2009 went on culminating in the quarter that we reported today.

So in the context of the economic environment in which we operate, Q4 was a successful quarter in a very difficult but ultimately rewarding year for 3M.

To me a hugely important distinguishing factor of 2009 was our resolve to maintain investments in our future.

And that is going to be paying off.

We maintained a significant investment of more than a billion dollars in R&D at a time when many companies were forced to drastically cut back in this area.

And we still pulled off great free cash flow conversion even with $900 million in investments in CapEx last year.

Those investments are a clear and present signal of our confidence in the future of 3M.

In fact, I've personally never been more confident during my tenure here.

We've demonstrated our ability to not only weather the storm, but to emerge from it as an even stronger Company.

2009 was also a year that certainly tested the mettle of the people at 3M and in many other companies too.

I've often said in communications sessions here that after our experiences in 2009 our team will never be afraid of another business challenge in their lives ever again.

In many ways, my confidence, and that of our leadership team, is a reflection of the confidence our people now have in themselves.

That said, we need to be mindful of the economic challenges that still remain.

After all, sales for the 2009 year was still down 8.5%, and there's still no real sign of sustained demand in some key market segments such as automotive, housing and commercial construction.

Across the abroad it was a very strong quarter with each of our businesses posting impressive sales growth accompanied by even more impressive operating income growth.

As you can see on the chart, we turned in a record Q4 on several metrics and I'm especially pleased that our full year EPS came in at $4.69, well within our original expected range from a year ago.

Quite remarkable really when you think about it.

The $1.30 we earned in Q4 was itself a record high for that particular quarter at 3M.

Among the highlights in the quarter was continued strength in respiratory protection and largely because of H1N1 related demand.

But you know what, before we go off and attribute this whole (inaudible) to serendipity, the fact is we put the capacity in place early for a thorough and balanced assessment to growth in that area and it paid out.

And when demand outstripped capacity in the middle of the crisis we responded superbly and quickly with new capacity.

With our new line of low cost respirators about to hit the market I'm glad that we did it.

We will need that capacity even if H1N1 demand falls off soon.

There is a similar story in optical systems where sales rose by 53% year-on-year driven by new products for ecofriendly LCD displays.

You will recall that we saw the same growth in Q3 as well.

Again, even after some terrible pressure from commoditization of optical a couple of years ago we created the marketing ideas and energy saving and battery life extension and the product to go along with it.

We never gave up.

We stuck to our mantra of new product development, worked our factory costs hard and worked closely with customers on the value proposition that we developed and it paid off.

Great results and certainly not an accident.

Congratulations to those folks in OSD that made it happen.

You should know that we are taking similar [quarters] in a new generation of braces, adhesive labels, renewable energy, adhesives, special dirt proofing super hydrophilic coatings and many others and we look forward to similar, although perhaps not as dramatic, results as these new products and derivatives come on stream.

Moving on to some other highlights, Health Care was again a star in the quarter.

But all our businesses delivered increases year-over-year.

Of note, Infection Protection turned in a superb quarter with 14% local currency growth.

Industrial and Transportation sales grew 10% in dollars led by renewable energy which posted a gain of more than 40% and the capacity for renewable energy films is just coming on stream in Singapore.

[A.C.

Shin] and his management team had an extraordinary tough year in industrial spaces but they dealt with the challenges superbly.

It was a joy to see them do it.

Consumer and Office held its own on organic volume.

And let's face it, that was really hard to do last year.

But the real story here is acquisitions, especially Futuro and ACE, and how they are steadily strengthening our position in the drugstore challenge.

Our target this coming year is to accelerate our consumer activity overseas with the acquisition of new local brands and some new product adjacencies.

Asia/Pacific led the way internationally with gains in our electronics-related businesses and more importantly in our established core businesses too.

Our localization efforts are paying off.

The lab in China in particular is delivering great new products with their new product vitality index already in the mid- to late 30s and growing faster than anywhere else in the Company.

You know, it's funny, but in a year when the chips were down for just about everybody everywhere, as so often happens our people rallied around the cause and delivered super results.

And although it sounds a bit soppy, but I'm really proud of them and I think that they should be proud of themselves, too.

Pat will now give you the details and I will come back to discuss the year ahead in due course.

Pat?

Thanks, George, and good morning.

Please turn to slide number four.

For the fourth quarter, earnings were $1.30 per share on both the GAAP reported and an adjusted basis, an increase of 69% and 34% respectively.

On an adjusted basis this would be a record result for the fourth quarter.

Our business is getting stronger quarter-by-quarter.

And, of course, we all recall how tough things were in last year's fourth quarter.

Therefore, the year-on-year growth rates will be very good.

The $1.30 was ahead of expectations driven by strong sales growth and by a relentless commitment to managing our costs.

I will cover the details in a few charts.

Full year earnings per share were $4.52 on a reported basis and $4.69 adjusted for special items which are largely related structural actions undertaken in the first nine months of this year.

To pick up on something that George alluded to, our original expected range of earnings for 2009 was $4.50 to $4.95.

While we had a few ups and downs, then and now, in the end we posted a $4.69 per share, right near the midpoint of our original range.

Very few industrial companies can make that claim.

So my hat is off to our leadership team for once again getting the job done.

Please be aware that in 2010, barring any very large or unusual items, we will be presenting our numbers to you each quarter primarily on a GAAP reported bases.

Likewise, our estimates of future earnings are on a GAAP reported basis as well.

Please turn to slide five for a deeper look at sales.

Sales increased over 11% year-on-year and the growth was very broad based.

Every geographic region expanded sales with notable performances in Asia/Pacific at 22% and Latin America and Canada each at 19%.

We experienced double-digit sales increases in nearly all business segments led by Display and Graphics at 19% and Safety, Security and Protection at 13.5%.

Organic volumes grew 4.4% in the fourth quarter driven by strong demand for optical films and respiratory protection products.

This results to be significantly better than worldwide IPI which is currently estimated at a negative 1.7% by Global Insight.

Organic volumes rose nearly 19% in Asia/Pacific.

And Korea, China and Taiwan posted the most dramatic increases driven by a combination of improved local demand along with the pickup in global electronics.

Selling prices rose 1.1%, so we effectively held on to price increases enacted one year ago.

Asia post selling price declines in the second quarter which is, of course, skewed by our strong electronics-oriented businesses where price down is a given, but net-net we grow through higher volumes.

Acquisitions added a point to growth in Q4 and currency impacts turned favorable at a plus 4.8%.

Now please to slide number six where I will review key elements of the fourth quarter income statement.

By any measure, Q4 performance was a very good one.

Sales grew to 11.1% to $6.1 billion.

Net income rose by 38% and operating margins were 21.9%.

This is a remarkable performance by our global teams and a testament to the resiliency of our very unique business model.

Gross profit improved 18% year-on-year and gross margins improved by almost three whole points to 47.9%.

Factory utilization accounted for over half of the improvement as fourth quarter production volumes improved.

Customer downtime was certainly much better than the in the fourth quarter of 2008 when many of our customers chose to shut down for much of December.

Selling prices were again positive which boosted gross margin by 50 basis points.

Raw materials were down slightly versus Q4 of last year, adding 30 basis points to our margin.

Fourth quarter gross margins also benefited from cost reduction actions which frankly began in early 2008 and continued throughout 2009.

Looking forward, the challenge now is to only add cost to the extent that they drive additional growth.

SG&A costs increased 7.7%, driven by a higher advertising and merchandising investments along with higher compensation costs related to improved year-on-year Company performance.

As a percent of sales, SG&A declined by 60 basis points.

R&D spending was down just slightly versus the fourth quarter last year impacted by Company-wide cost reduction efforts.

We did not, however, -- we did, however, maintain investments in our key growth programs.

Operating income rose 38% to $1.3 billion.

And operating margins were a robust 21.9%.

The fourth quarter tax rate was 26.8%, down 80 basis points versus Q4 last year due to a lower international tax rate and a completion of certain tax audits.

This result is in line with our expectations and our strategy of bringing our tax rate down over time.

Sequential P&L highlights are shown on slide number seven.

Fourth quarter sales were down just slightly versus the third which is a better result than we would have expected to see in a normal year.

Typically, the third quarter is stronger than the fourth as customers build inventory for the holidays and consumer offers in electronics.

In addition, Q4 sales in construction related businesses like traffic safety and roofing granules tend to decline due to colder weather.

2009 was different in that fourth quarter sales improved sequentially in both Industrial and Transportation and Electro and Communications which suggests some underlying improvement.

Of course, these businesses were hardest hit by the global recession so they have some ground to recover.

Health Care improved sequentially as well.

Gross margins declined 1.3% sequentially largely driven by lower factory utilization and mix.

The mix impact is likely to continue into 2010 as businesses like Industrial and Transportation and Electro and Communications are likely to pick up as the economy improves and they have slightly lower than average gross margins.

Fourth quarter SG&A spending was up $56 million, largely sales and marking related including a 30% increase in advertising and promotional investments.

R&D was down just slightly.

Operating income was off 10.8% and net income declined 3.7%.

Please turn to slide number eight.

It certainly is easy to get overly focused on quarterly results these days given what has happened to the economy in the past year.

But we managed our Company for a long-term success.

So seems appropriate that I quickly review a full year highlights.

Although 2009 sales declined 8.5%, with volumes down 9.5%, the decline was right in line with the overall economy.

Our new product vitality index, which measures sales for products introduced in the last five years, was 29% in 2009, up four points year-on-year.

So we are continuing to gain momentum on the innovation front.

We managed our expenses very carefully in 2009.

For example, we restructured a number of businesses during the past two years resulting in calendar year savings of almost $400 million.

In addition, we amended our policy regarding [bankification] which added $100 million plus to the bottom line.

We also enacted temporary furloughs, froze merit pay and reduced indirect spending by 14%.

All things considered, our business teams did a tremendous job in a very tough environment.

Finally, in the midst of this economic storm we invested $1.3 billion in R&D, up slightly as percent of sales.

We continue to support our key larger programs but overall spending was impacted by our Company-wide cost initiatives such as indirect spending reduction and our vacation policy change.

In aggregate, we delivered 21.7% operating margins, equal to 2008.

I believe this was truly an outstanding performance for the organization.

Please turn to slide number nine.

Even more impressive than our earnings results in 2009 was our free cash flow conversion and balance sheet performance which was one of our primary objectives going into these tough economic times.

We intensified efforts in late 2008 to drive up working capital and improve our capital discipline.

These efforts paid off as we delivered record free cash flow of $4 billion, up $1 billion or 32% over 2008.

Full year free cash flow conversion was 126%.

For the fourth quarter, free cash flow was $770 million, up 16% year-on-year.

Free cash flow conversion was 82% in the quarter, impacted by discretionary pension contributions of more than $400 million in the fourth quarter.

Although not shown on the chart, our global pension plans at year end were 90% funded with the U.S.- qualified plan at 96% and our international plans at 83%.

Asset returns in the U.S.-qualified plan were 12.6% and the discount rate finished at 5.77%, down 37 basis points from 2008.

The actual asset return performance, the discount rates, are better than what we assumed in December at our outlook meeting.

Looking ahead, we expect to contribute between $500 million and $700 million to our global pension plans in 2010.

Pension expense will increase by approximately $130 million pre-tax or $0.12 per share.

For your modeling purposes, the additional pension cost increase will be booked almost entirely in corporate and unallocated.

Since we incurred a 2009 GAAP reported loss of $100 million in corporate and unallocated, 2010 will be a loss closer to $200 million.

Improved working capital performance was a big driver of our free cash flow.

Inventories declined by $374 million and turns improved from 3.8 to 4.6 for the year.

AR turns improved from 6.9 to 7.5 at the end of 2009.

This is a record result for 3M and the fact that we did this during a very difficult economy makes it even more impressive.

Capital expenditures for the year came in at $903 million, right in line of our expectations.

We expect 2010 CapEx to be approximately $1 billion.

This strong capital discipline resulted in net debt of $1.1 billion, down $3 billion from one year ago as cash and marketable securities increased by $2 billion and debt was actually reduced by $1 billion.

Dividends paid to common shareholders was $361 million in the fourth quarter and $1.4 billion for the year.

Now let's review the performance of our business units.

Please turn to slide number ten.

The Health Care business is an absolute jewel in our portfolio which we highlighted in our December meeting in New York with nicely growing end markets that are highly stable.

Fourth quarter sales in Health Care were $1.1 billion, up nearly 11% in dollars and up 6% in local currency.

Foreign exchange impacts added nearly 5% to fourth quarter sales.

Sales increased in every business within Health Care, most notably in the infection prevention, skin and wound care and health information systems.

Looking at sales by geography, sales grew in all major areas led by Canada, Latin America and Asia/Pacific.

Fourth quarter operating income rose 26% to $375 million driven by favorable product mix, good cost control and continued productivity efforts across the portfolio.

Looking at a few highlights.

Orthodontic products rebounded nicely after weathering economic storms of late.

And in our infection prevention business, Popular Science magazine awarded 3M the Grand Award in the Health Care category along with the 2009 Innovation of the Year across all categories for our recently launched 3M Littmann 3200 electronic stethoscope.

Health Care is once again driving innovation in a big way.

For the full year, sales were $4.3 billion, up 3.6% in local currencies and, again, broad based, infection prevention and skin and wound care led the way with a multitude of products that improved patient treatment outcomes and increased efficiency for health care providers.

We also drove positive local currency sales growth in the oral care business, a great result considering the poor economy.

On a regional basis, growth rates were the highest in Asia/Pacific, Latin America and Canada.

Full year profits in Health Care grew 11% to $1.4 billion as the team continues to drive operational excellence and outstanding productivity day in and day out.

Operating margins were 31.9% in 2009.

And as we have mentioned before, our longer term plan is to keep reinvesting in this business to drive higher growth even if margins at some point compress to perhaps the high 20s.

We've made several such investments in 2009.

For example, our drug delivery systems business entered the large and growing dry powdered inhalation segment.

In wound care, we strengthened our market leadership in clear wound dressings with new products for IV sites and chronic wound care.

Dental launched a number of new products including new decay preventative sealents, curing lights and impression material systems.

In health information systems, we continue to launch solutions for the new ICD-10 coding, inpatient and outpatient medical record coding, reimbursement and data connectivity.

And finally, we opened or expanded major new R&D and manufacturing facilities around the world including China, Singapore, India and Brazil.

Please turn to slide number 11 where I will discuss the Consumer and Office business.

Fourth quarter sales in this business were $887 million, up 11.4% in dollar terms and up 7.1% in local currencies.

A number of businesses posted positive local currency growth including double-digit gains of home care products and retail health care and single-digit growth in do-it-yourself and mass retail.

The Consumer Office team has executed a successful bolt-on acquisition strategy over the past couple of years and acquisitions contributed 3.7% to this quarter's growth.

Two recent deals drove the growth mainly, Futuro, a leading supplier of braces, support and compression hosiery, along with ACE Products, one of the great consumer health care brands.

These investments combined with our own successful brands give us important critical mass in the retail drug channel.

This leadership team has a long and very successful history of growth in the United States, be it strong category defining brands and outstanding customer relationships, and we are leveraging there success outside of the U.S.

as well.

In fact, in the fourth quarter, sales rose 20% in Latin America, 14% in Asia/Pacific, and 8% in Europe.

Profits rose in all geographic regions as well.

Fourth quarter profits in Consumer and Office were up 31% to $159 million with margins of 17.9%.

Full year 2009 sales were $3.5 billion, down 3% which was largely currency driven.

Margins were a solid 21.9% for the year, up over two points versus 2008.

This business does a fabulous job of creating new products and designing new programs with customers who drive growth and profitability.

Most recently, we won a number of 2009 good design awards including the Scotch Easy-Grip Tape Dispenser, Post-it flag pens and highlighters, and the Scotch Pop-up Tape Dispenser among others.

Product design is often as important to the customer as functionality or price in value which is why many years ago we invested in a product design center in Italy to ensure that our products have the look and feel that customers demand.

Finally, as George mentioned at our December meeting in New York, we recently launched a complete line of adhesive-backed labels for the office market.

Early indications are favorable and the business is beginning to gain good traction with our customers.

Now let's turn to slide 12.

Display and Graphics was a bright spot in the fourth quarter as sales increased nearly 19% to $817 million.

Sales grew 15.7% in local currency and foreign exchange impacts added just over 3 points to growth.

Operating profits more than doubled to $141 million.

Optical films continued to grow nicely in Q4 with sales up over 50% year-on-year.

Innovation was the key driver as our recent film technology break through effectively improves the energy efficiency of an LCD panel by over 30% and can greatly simplify this design.

Sales of these films accelerated in the second and third quarter of this year.

And although fourth quarter sales declined sequentially due to normal seasonal patterns year-on-year growth rates were very impressive.

Optical is a great business for 3M, but there's no doubt it will remain intensively competitive going forward.

Our OEM customers continue to drive price reductions and we will need to respond with continued aggressive cost reduction in productivity in order to fund needed new products.

Our customers want technical solutions to solve their problems and we will be there to help them when they do.

Fourth quarter local currency sales were up slightly in traffic safety systems driven by the December 2008 acquisition of a French license plate provider.

Sales in the commercial graphics business were flat sequentially and down year-over-year as advertising spending remains soft.

However, the business did stabilize around year end indicating some potential positive momentum.

For the full year, sales declined 4% to $3.1 billion and operating profit declined 2% to $612 million.

Operating margins were nearly 20%.

The business here continues to work aggressively to accelerate long-term growth.

For example, we recently formed a new architectural markets business to expand our footprint in film solutions for (inaudible) surfaces and for energy efficient lighting solutions.

We also formed a new mobile interactive solutions business to develop products that will improve projection, personalization and privacy for mobile device users.

In addition, the business recently announced a unique optical film that enables 3-D viewing on hand-held devices without the need for 3-D glasses.

Finally, we are preparing to launch the third in a family of pocket projectors, the MPro 150, which projects high quality images up to 50 inches.

This projector is 50% brighter than the MPro 100 launched a year ago and 25% brighter than the 120 launched in September.

We are pitching this new product as the ultimate tool for mobile professionals with a number of compatible applications including PowerPoint, Excel and Word.

The projector also handles multiple video formats.

It really is the ultimate all-in-one entertainment and business tool.

We got tremendous feedback on the MPro 150 at the most recent CES show in Las Vegas and it will be available for purchase in just a few weeks.

Please turn to slide 13.

In Safety, Security and Protection Services, sales grew 13.5% in the fourth quarter largely driven by our personal protection business.

3M is the global leader in the safety market especially in respiratory protection products.

In May of 2009, we began to see a surge in orders for respirators approved for use in defending against the H1N1 virus.

Since that time demand has continued to exceed available supply.

We estimate that this added about $80 million to the fourth quarter sales in this business and about $95 million for 3M in total.

Last quarter, we approved respiratory manufacturing investments in Singapore and the U.S.

with capacity ramping up in January and targeted for completion by the end of the second quarter.

Elsewhere within this segment, local currency sales growth was slightly positive in our building and commercial business driven by a number of new product introductions, but all other businesses posted lower sales.

We saw double-digit currency declines in our industrial-oriented corrosion protection business and in the businesses linked to residential construction, namely roofing granules.

Fourth quarter operating profit increased over 50% and margins were healthy 24.3%.

Sales in local currency rose 7.9% and foreign exchange impacts added 5.6% to fourth quarter sales.

Full year 2009 safety and securities sales totaled $3.2 billion, down 7.8% in dollar terms and 2.7% in local currencies.

We drove positive local currency growth in personal protection products but all other businesses were down.

The global recession took a toll on our industrial and construction-related businesses within this segment.

Despite the sales decline, operating profits remained flat versus 2008 and margins rose by almost two points to 23.5%.

Please turn to slide 14 for a look at our largest segment, Industrial and Transportation.

This is a very large and diversified set of businesses that in aggregate correlate well with the broad industrial economy.

Sales declines early in 2009 led to swift and aggressive restructuring and cost reduction plans to offset lower volumes.

On top of that were large inventory reductions in the wholesale distribution channel.

Inventories began to stabilize around mid-year and it now appears that inventory and point-of-sale levels are in reasonably good balance.

Sales in industrial transportation rose 10% to $1.9 billion in the fourth quarter.

Year-on-year local currency growth was 4.6% which included organic volume growth of 3%.

This is a great result considering industrial production is expected to be in the negative in the fourth quarter.

Fourth quarter local currency growth was led by our renewable energy business at 40% and our automotive OEM business which grew almost 19%.

We also drove positive local currency sales growth in the industrial adhesives and tapes, automotive aftermarket and in our businesses that supply fluoropolymers and [nalestimers] into the oil and gas and transportation industries.

Other businesses in this segment posted mid-single-digit local currency sales declines in Q4.

On a regional basis, growth was strongest in Latin America and Asia, where our China business grew at three times the rate of industrial production.

The combination of better sales volumes, higher year-on-year production levels and a best-in-class cost structure resulted in outstanding Q4 profit growth of 59%.

Margins improved by 6.4% to 20.8%.

I doubt you will see better numbers this quarter from any of our industrial peers.

Full year 2009 sales were $7.1 billion, down 12.9% in dollars and down 10.2% in local currency.

Foreign currency impacts hurt sales by 2.7%.

Operating profits were $1.3 billion and operating margins were 18.6%.

In addition to driving outstanding results this past year, the Industrial and Transportation business continued to invest aggressively to accelerate its growth capability.

For example, our renewable energy business recently opened a new large-scale high tech manufacturing site in Singapore and industrial bases opened a new state-of-the-art manufacturing site in North America.

Recently, 3M purification systems launched a high quality disposable filtration system for the biopharmaceutical industry.

And finally, our automotive aftermarket business introduced the 3M Dirt Trap Protection System which increases paint (inaudible) productivity and reduces daily maintenance costs in auto body repair shops.

I can't say enough about the incredible job this team has done to fundamentally reinvent its business.

Innovation and growth are once again top of mind.

And this business knows how to drive out cost, prioritize the best opportunities and execute their plans.

Please turn to slide 15 where I will summarize results for the Electro and Communications business.

This business continued to gather momentum in the fourth quarter with sales up 1.7% sequentially, bucking our normal trend of sequential fourth quarter decline.

The growth was led by our businesses that supply the consumer electronics and the semiconductor industries.

On the flip side, our infrastructure-related businesses in telecommunications and commercial construction remained soft in Q4.

Fourth quarter sales increased 4.6% to $628 million.

Local currency sales were up 1.4%, again, led by electronics and semiconductor-related businesses.

We sell number of value added and highly innovative materials and solutions into these large and important end markets.

Electro and Communications relentlessly drove productivity again in the fourth quarter posting nearly 14% operating margins.

This margin was nearly four times that of the first quarter.

The team deserves tremendous credit in driving efficiencies to offset what has been an extremely challenging global business environment.

At the same time, the team has recently developed and introduced a number of new products including solutions for touch-enable mobile handheld devices and smartphones.

Other recent launches include electrically conductive optically clear adhesives, wafer handling systems for semiconductor manufacturing, a new line of high voltage terminations and splices for new 3G closures and cross-connect blocks for telecommunications applications.

Sales for the full year 2009 were $2.3 billion, down 19.7% with local currency sales declining 17.8% and foreign currency reducing sales by 1.7%.

Operating income for the year was $333 million and margins were 14.6%.

All things considered, our Electro and Communications business had a very successful year.

We are encouraged by the steady sales improvement and by the great progress in streamlining their cost structure.

We look for continued improvement throughout 2010.

That concludes my review of the fourth quarter numbers and the full year.

Now I will return it back to George, who will describe our outlook for 2010.

Please turn to slide 16.

Thank you very much, Pat.

Before we get to your questions, I would like to address our outlook for the rest of year.

Frankly, not a great deal has materially changed since our December outlook meeting, but I'm pleased to say that here and there things have (inaudible) a little more positive than we saw in early December.

Of course, as you expect from us, we will maintain our typical conservative stance on these things.

You'd think over the years that increasing experience would teach us how to forecast the next year ever better.

But it seems that each of these past few ones have been as deeply mysterious and clouded as its predecessor.

But for context, recognizing that I'm an engineer, anything I can't forecast exactly is considered by me to be mysterious anyway.

In all seriousness, there are lots of moving parts again in the world economy with a complex mix of factors driving different parts of the world economy up, down or sideways.

We try to sort them out in a balanced way in arriving at our consensus view.

As I said to you in New York in December, the challenge of forecasting is always hardest around turning points, or if you like, whether there are changes in gradient such as peaks and valleys or points of inflection.

That's what we have here in 2010.

Let's not be fooled by the arithmetic magic of year-over-year comparisons.

For most companies, if we indexed to 2007 major economies and companies still have a lot of digging out to do.

I mentioned in New York that there are five things which affect our sales in any one year.

First, performance of the end markets.

Second, supply chain filling and emptying.

Three, X-factors.

Four, creation of new markets via product releases, and, five, share gains.

Some of these will be positive in 2010 and some a little negative or perhaps at least uncertain.

For example, I think share gains and new product growth should be positive.

X-factors, of course, remain X-factors.

Supply chain filling should be neutral or positive and blended end market neutral or marginally positive.

As Pat mentioned, there are some headwinds in pension and possibly price and labor cost.

Stimulus packages, to the extent that they made much difference outside of China, will be negative.

But taken all in all, this paints a slightly more positive picture than heretofore.

But nobody anywhere could afford to take their eye off this particular balancing economic ball.

In terms of specific markets, health care will remain positive as will renewable energy, occupational health, security and LCD TVs.

I don't expect much positive news in residential housing, commercial construction or automotive.

Consumer markets will likely grow slightly for us led by new product innovations in air filtration and labels and perhaps water, too.

So we have a split of positives and still negative market news, but with the positives nudging out the negatives overall.

The only market that might get markedly worse in the United States is commercial construction and our presence there is not that large.

Let's remind ourselves again of Keynes' view that there will be no sustainable recovery without natural improvements in aggregate end market demand.

Longer term that's what must happen.

And clearly we have not seen those improvements yet in the United States or Europe to any significant degree.

Asia, on the other hand, has improved nicely with China and India growing rapidly again, so absent any economic retrenchment in those areas we will get some additional lift internationally.

As I said at the December meeting, unemployment seems to be the key determinant of what happens next in the United States.

The danger is being deceived by the potential illusion of falling unemployment rates which might occur only because people are losing benefits faster than new entrants are joining the unemployment rolls.

So while we might be through the worst of the tempest, we are still sailing in some very choppy economic waters.

As we have demonstrated in recent quarters, this past one included, this kind of overall economic picture is by no means bad news for 3M.

We have great cash flow, high margins and a powerful balance sheet with some choices some other companies don't.

So the current conditions present us an opportunity to continue and even to accelerate key investments and to press forward aggressively to gain market share from our competitors.

We can finance our growth internally and we're not dependent on external resources that might get tighter, rarer or more expensive.

Of course, we still stay consistent with our core plan of controlling costs, generating cash, and ethically driving sales.

I think 3M's business leaders and managers have done a wonderful job this year and have proven their ability to navigate the worst of the turbulence well.

We are moving more forcefully to drive growth again through new products, by managing the full spread of the market pyramid, through new acquisitions, and, of course, pushing ourselves forward internationally.

The excellent news is that our sales growth momentum continues.

End markets internationally are part of this and we are getting some lift from translation too.

But organic growth is still higher than one might expect from these factors.

It does appear that the new product push is paying dividends and that we are gaining some share on new markets that are being created.

So given this recent performance and our growth trajectory we are now working with an improved planning framework for 2010 of EPS of $4.90 to $5.10, which is an increase of 2009 of 8% to 13%.

This improvement over our December 8 numbers is helped by a lower pension headwind.

Our 2010 planning framework includes an organic sales volume of plus 5% to plus 7% with faster growth naturally occurring in the first half of the year due to some easier year-over-year comparisons.

We expect currency effects to be positive bringing about another one to two percent point in sales lift compared with our previous estimate in December of plus 2% to plus 3%.

We have been very successful in holding operating margins in the 21% to 22% range.

And we expect that pattern to continue in 2010.

But the great news here is that within these figures we will be accelerating our investments in new business ventures, overseas growth and R&D by over $100 million.

This new economic fuel is going to stoke the growth fires if not all seen if 2010 it should be felt in 2011.

Assuming that there are no changes in tax policy by the U.S.

federal government, we anticipate an effective tax rate of 28% to 29% for 2010.

And finally, we expect shares outstanding to fall somewhere in the range of 721 million to 725 million.

We shall most certainly be doing our best to make 2010 a banner year where the previous heavy spade work and investments will pay off for us all.

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

Thank you very much for listening.

(Operator Instructions) One moment, please, while we compile the Q&A roster.

And our first question comes from the line of Scott Davis of Morgan Stanley.

Please proceed with your question.

Hi.

Good morning, guys.

Good morning, Scott.

Can we talk a little bit about guidance and the timing of some of the cost that may come back.

It looks like you are expecting a pretty good leverage off of that sales volume.

But you did cut advertising expense a little bit in 2010 and had some benefit from vacation policy changes.

Are there costs or timing or sequential timing issues that we should think about?

Scott, I can't think of anything major.

On the vacation front, we will have a little less benefit in 2010 than in 2009 but not, nothing too significant.

I wasn't exactly clear on your comment about cutting advertising and merchandising.

If anything, we are going the other way.

We are actually increasing our advertising spending.

We ramped it up in the back half of this year.

I think you saw it in the fourth quarter.

A big piece of that is in the Consumer business both domestically and internationally.

So those increases will continue into our 2010 plan.

Okay.

That's good clarification.

Can we talk a little bit about China?

You are throwing up some pretty big growth rates there.

And maybe it will be helpful for background to understand your business mix.

I know I visited your folks out there.

It's my understanding that a big chunk of that is auto and auto has been strong in China, so it helps explain.

Maybe start with the business mix and then talk to us about whether you are gaining share in China or just have more products selling into the region as you've established yourself more or whether there's a restock.

Just a little bit of color, please, on China?

Yes, I will and I kind of anticipated that a number of people are concerned about recent news coming out of China about relative to try and slow things down.

George and I just happened to be there last week so we kind of have a fresh view on things.

I must say the business there is performing very, very well and even into the first part of this year.

Our China business, depending upon how you define it, if you took mainland China, probably throw Hong Kong in it, it is about 5% to 6% of our revenue base.

As you would expect in China, our business is heavily focused around industrial and infrastructure-related businesses at this point in time.

So our Consumer business and our Health Care business would be smaller pieces of the portfolio vis-a-vis the Company-wide average, which is only natural for a country like China as it continues to grow economically.

So most of our businesses there, our larger businesses, are around industrial-related -- automotive is a big market for us as well.

But think of it heavily around the infrastructure, as well as a lot of electronics businesses that are migrating to China as well.

A lot of the optical systems business is migrating to China as well, not necessarily for local consumption but for export purposes.

And generally speaking, our strategy in China, Scott, to remind you is very much a China-for-China strategy.

We other than the optical systems business where we are effectively following our customers, most of our business there has really been developed for local needs.

And as George pointed out in his presentation, the lab that we have in China is just absolutely phenomenal and on fire relative to new product development, relative to really developing local products for the local market.

My sense is that still in China we are under penetrated where we need to be.

So we can still be -- we still have very significant growth opportunities.

And for those of you who attended New York's meeting in December, of course, we had Kenneth Yu talk about our strategy for China which really is kind of very much an accelerated ramp-up there.

You can imagine, Scott, we pursued this point when Pat and I were in China last week.

And the opinions of people on the ground there is the Chinese government is dealing with this very thoughtfully.

Yes, they are trying to cool demand and it's forced some people to get concerned about asset bubbles and then if you cascade that into worrying whether the same sort of thing could happen there that happened here.

But the profile of the consumer is very different than it is here.

People put deposits, very large deposits down on houses.

They're much more conservative with their spending and their savings habits.

The savings ratios are much, much higher than what you see in the United States.

And so I think the consumer end of the equation, we are unlikely to see much in the way of any real trouble.

On commercial construction, there is some concern there that maybe some of those assets have gotten inflated.

But if the Chinese government is successful in the actions that they are taking, and they have these guys so far have proven time and time again, whether it's in growth, whether it's in restarting their economy, that they are very, very smart.

We meet a lot of the community leaders and industrial leaders and government leaders there and what is beginning to happen progressively is they are staffing those positions with superbly well educated people, extremely able folks.

And certainly, heretofore, I think they have proven they know how to manage this particular situation and I think at this juncture our assessment is that the risk is not that great.

Okay.

Thanks, guys.

I will jump in or I will call afterwards and let other people jump in.

Thanks.

Our next question comes from the line of Deane Dray of FBR Capital Markets.

Please proceed.

Thank you.

Good morning, everyone.

Good morning, Deane.

And, George, it was nice to hear that you're still somewhat in the economic forecasting business here.

We appreciate your thoughts about the recovery path.

Now you mentioned this twice, so I wanted to follow up on it.

You grouped 3M markets, residential, auto and commercial construction as saying you weren't expecting much in the way of a lift.

Now no question -- I wouldn't think you would say that -- I would agree that you would say that about commercial construction, that's a small piece by maybe 2% by our estimates.

But both residential and auto have that element of early cycle and you do have some sizable exposure to auto, OE and aftermarket, maybe it's split 12% total, 6% each.

So why would you not be seeing a bit of a lift, maybe some restocking, higher auto production.

Why would those not be seeing that benefit as well?

My logic, Deane, was really tied off the unemployment.

Obviously, I'm speaking specifically about the United States when I make those references.

China and India are seeing sort of rocket ship growth in some of those segments.

I'm really speaking about the United States.

I think -- I don't know if I should say pessimism, but caution at the very least, is tied there to the unemployment rates.

I'm just of the mind that until I see some -- here and there -- minor improvements in the unemployment picture, I'm going to be cautious on those two segments.

I think you are right, Deane, that given where inventories are and I track those and Pat does, we all do, it does appear that some of the inventory drawdown in the United States in a number of different segments is kind of reaching bottom.

We were seeing a little bit of pick up here and there.

Maybe in the coming quarter or two quarters we might see some restocking.

But in terms of end market demand, I am kind of taking a cautious view on those market segments in particular.

I don't expect them to get worse worse, by the way, Deane.

So I'm not in any way forecasting that they're going to go down.

I'm expecting them to go sideways or they may get lifted through restocking.

But generally speaking, kind of sideways motion, maybe some benefit from restocking, but not any appreciable change in the overall pattern in those marketplaces in the United States.

And then just as a follow-up, where would you expect to see the restocking occur for those?

Before we were thinking electronics in Asia perhaps, but has your thinking changed there?

No.

I think electronics, some people will forecasting Armageddon a year ago.

But what's happened, when you look at fab utilization rates that have just shot back up from numbers in the 30s to numbers in the 80s.

That looks all very good.

I think the overall, just the general industrial space in the United States will begin to restock a little bit here, Deane.

I kind of made some some comments on that in my remarks.

Obviously, I'm bound to think that Asia will be in front.

The United States a little bit behind.

Western Europe a little bit behind that.

And Eastern Europe a little bit behind them.

Latin America, though, is probably, and certainly we saw good growth in the fourth quarter, will probably pop back more quickly simply because their economy is more internal.

Pat mentioned the kind of China-for-China.

Well, in a sense we are following a Latin America-for-Latin America, China-for-China, India-for-India kind of strategy.

We aren't really dependent in those markets, Deane, of a lot of exports.

As they naturally improve through their own sort of efforts, we remain quite positive about those markets.

And, of course, we've had just wonderful improvements in the renewable energy area.

You always wonder how long those sorts of things can last, how many years will that go on for?

But, nevertheless, it's really bringing us some very, very nice growth right now, as are the other sort of energy sensitive, energy-related kind of markets in films, both for windows as well as LCD.

So Health Care is not going to do really anything that different than this year.

It may actually begin to pick up a little bit with some restocking there.

There was some destocking that took place in that market, too, Deane.

So overall, despite my caution in residential construction and automotive, there are more positive signs in these other areas and we test very, very hard amongst ourselves about this issue of gaining share.

Of course, it's what you want to happen and you want to believe it, but you want to prove it, too.

So these early numbers do suggest that we are gaining some share.

If you think about this just in pure arithmetic numbers we have about 9% market share of markets around the world, even 1% market share gain is a 20% growth.

So share gain will be a big factor I think this year.

Obviously, it will start off with lower numbers and we hope to accelerate to higher ones.

All in all, I think we were far better equipped, Deane.

The economy isn't going to get worse.

It is naturally going to gradually improve in this cyclic way these things do.

So net-net I'm not predicting any sort of great resurgence.

But I think we will see steady improvement and as the year goes forward we will be all over this to take advantage of it.

Deane, just one thing I would add on the automotive side is, I would expect probably the first quarter, being the year-on-year comps are so easy, okay, they won't be bad.

I think the wild card here is a number of governments spent a fair amount of money on stimulus around Cash for Clunkers last year.

It's unclear, okay, if that will continue.

That actually could be a significant headwind on a global basis.

I think from a timing standpoint earlier in the year because the comps are easy we'll probably be okay.

The question is later in the year will the demand kind of rise.

And obviously the cost we have on both autos and housing is to make sure that people don't think this will return to where it was.

That we believe there is going to be a permanent reset in both of those markets.

On automotive aftermarket, Deane, that business has really done quite well this year.

I don't suggest that it's in anyway impervious to the economy, but it's certainly less sensitive to the economy than the automotive OEM business.

So we are kind of encouraged by that one and expect quite a bit of growth in here the U.S.

but in particular in Asia we expect that.

And so I think in that area in particular the news is mostly good.

Very helpful.

Thank you.

Thanks a lot, Deane.

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

Please proceed.

Thank you.

Good morning, everyone.

Good morning, Jeff.

We have done a lot of macro.

Let me kind of drill down into a couple of businesses if you don't mind.

First, on optical, George or Pat, could you just give a sense of the state of play on the evolution of competition if we think about trying to guard against ultimate commoditization of DBEF given what happened with BEF.

Do you see the forces marshaling against you there?

Maybe some comment on your lead.

And this 3-D technology that you are talking about sounds very interesting.

Is there a reason why it only applies to handheld devices?

Or is that something that can apply to flat screen televisions and things like that with some more work?

Let me have a poke at that if I can, Jeff, please.

On the sustainability of that model, our patents are pretty solid for the next couple of years.

We get some insulation from that.

In any market, we both know, we all know who are on this call, that competition is always going to try to follow markets which appear to be the growing faster or have a decent earnings capability.

But when you think about what's going on in the LCD TV market in particular, prices have gone down of units, I think the high gravy train days are gone.

Doesn't mean you can't make decent money.

I think the incentive to be drawn to this market is a little lower today than it was say four or even five years ago.

On the BEF versus D-BEF comparisons, the manufacturing challenges of DBEF are far greater.

Orders of magnitude more difficult than it would be for DBEF.

On the other hand, there are some great manufacturers around, I'm sure would try to have a bite at that business.

I don't see the sort of the, everybody coming out of the woodworks kind of competitive response in DBEF that we saw in BEF.

So I think it's a little more insulated, Jeff, than that was.

On the other hand, let's also be realistic.

You never seem to be more than a year or a year and a half away from D-contenting in this business.

So the kind of approach that we've taken strategically is to work genuinely really hard to get ever more close to the customers to work on specific innovation for them.

And even during the toughest of times these folks always remarked if ever we want innovation the only people we really can turn to is 3M.

So I think we have a value proposition for these people that is very sustainable long term.

Nevertheless, all in all, I think you can't keep on taking content out of televisions until they cost nothing.

And the approach that we've taken is basically to take a look at the building material of monitors, of laptops or LCD TVs and basically say, okay, what have we got in our portfolio of ideas and products that we can apply to these products to take out content.

So in other words, we are part and parcel of the charge to take out cost and make these businesses successful.

All in all, in summary, I'm less concerned about D-BEF than I was about BEF.

I just hope that my forecast here turns out to be right.

Great.

And on the 3-D technology?

Sorry, Jeff, I forgot about that.

On the 3-D technology we started it off in cameras.

That was our sort of first launch with one of the Japanese camera manufacturers.

There is now interest in this for gaming, even for televisions.

And it's early to predict exactly where this market will go, but it's a unique technology and I think it's got some legs.

It's got some legs for sometime.

Although probably not -- I mean, I think it will, to be honest with you, Jeff, will be -- this is a [guesstimate], never more than a 10% piece of that TV puzzle.

That would be my educated guess.

Okay.

Hey, Jeff, the other thing I was just going to add on the LCD story is, of course, there has been quite a movement here on LED at the same time.

And we have a very, very good value proposition on the LED side.

As George points out that you kind of take this design by design.

You never take anything for granted, but we think we are in reasonably good position here at least for the near term.

And then just one on Health Care and I will pass the baton.

Pat, I think it was your phrase in Q1 that it was running hot at 31.2% margins and every quarter in 2009 has actually been higher.

I assume some of that is mix.

Can you just kind of address the dynamics in Health Care margins and kind of what we should expect going forward?

Jeff, good question.

Brad and his team have an amazing portfolio there that he reviewed in the December meeting.

The way, of course, you bring margins down in that business is obviously our level of investment in the business.

And we -- so what we are staging here is looking at what kind of new product pipeline they have and then looking at the degree that we want to fund new investment options that we've accelerated that over this past year.

It's an interesting model, though, because Brad and his team have done just such a marvelous job ongoing productivity work as well that it would be more profitable business over time.

But there is a little bit of a mix advantage going on in the business right now.

Some of the businesses that have held up are stronger than the others from a profit margin standpoint.

Okay, thank you.

Our next question comes from the line of Terry Darling of Goldman Sachs.

Please proceed.

Thanks.

Good morning.

Good morning, Terry.

Pat, I'm wondering, recognizing you don't give first quarter guidance but I just thought that it might be helpful for all parties here for you to talk qualitatively about any big sequential movers.

Obviously, the corporate line is going up for all of the reasons that you've talked about.

Tax goes up a little bit.

But any other kind of seasonal items in the businesses or things like your advertising spending rate?

Things like that you want to call out for us?

No, I guess, Terry, the only thing I want to remind everybody is that the way our stock optioning expense flows through the year because our grant is in February, we get a much heavier hit in the first quarter and I think we scale that at probably $40 million, $50 million higher in the first quarter.

As people are thinking of their first quarter estimates they ought to make sure they dial that in.

It's not a change from last year.

It's a change from a couple years ago.

That's really about the only thing that I see.

We will be seeing, commodity prices are starting to rise.

I think we may be able to get through the first quarter a little bit or maybe part way through the first quarter, but we will start to see some pressure on material costs.

Now, of course, our purchasing guys are trying to find offsets to that.

But we could see a little bit of pressure here in the first quarter.

Okay, and then coming back to the earlier question on optical.

I think your comps are very, very easy in the first quarter.

Does that drive Display and Graphic organic up a lot sequentially?

Yes.

Well, yes.

Probably, maybe a little bit sequentially, but definitely on a year-over-year basis, Terry, optical will be a lot higher because the first quarter was a terrible period for us last year in that business.

At least on a year-over-year basis it will be up and actually that industry has remained -- maintained a fair amount of discipline in it this past year.

Probably see more of a normal trend there.

You know, I think you called out optical up 50% year-over-year in the fourth quarter.

I missed whether that was local currency.

Can you calibrate us as to where that ended up on the full year and maybe within the context of 2010 what you are assuming there?

I'll be honest with you, I think for the full year I think that businesses is just up slightly, okay, for the full year because we had -- the first half of the year was a very difficult period and then, of course, that business came on strong starting in Q2.

But on an all-in basis the sales of that business are just up slightly for the whole year.

And for 2010, should we be thinking kind of moderate to low double-digits or something better than that?

It actually, we are expecting that business will perform very well.

Now if I look at the D&G business in total, which, opticals imbedded in, that was one of our higher growth rate businesses that we reviewed in December primarily because we expect that there should be some recovery in the traffic signs, and commercial graphics is kind of in a difficult period that maybe they got a little bit of a momentum as well.

And then just coming back to the second half organic indications on the outlook slide for the whole Company, I'm trying to think 2% to 4% second half organic, recognizing your commentary about being conservative, but trying to map that back to the December meeting where you are talking about taking organic for the whole Company up 7% to 8%.

Is that just comps are getting tougher?

Timing of new products?

Can you just flush out why we decelerate below that kind of longer term organic growth target that you are talking about in the second half?

It's like three quarters away, okay.

So that's probably as much as anything reflection of -- we think in the first part of this year the, one, for comp purposes and, two, the momentum we've got we feel pretty good about it.

Let's face it.

I don't think any of us has a crystal ball, okay, as to how the back half of this year is going to play out.

Some of the pundits basically are concerned about the back half may not be as strong.

So as we put our plan together, what we are basically indicating is we need to get off to a very, very rapid start here in Q1 and Q2 and position us for whatever happens in the back half of the year.

I think it will be probably fair to say, Terry, that we probably have a more conservative view in the back half of the year.

I also think, Terry, let me chip in.

This year is a year of transition where you've got easy comps at the beginning of the year and harder comps at the end of the year.

Your net-net, I don't think the numbers probably will be a lot different than what you suggested.

And on a sort of normal run rate that number that we quoted you is what we expect.

You are bound to see quarter-over-quarter bumpiness when you have a year of transition like this one is from a terrible year last year.

Understood.

And then I guess lastly, just wondering, talking about things are a little bit better since December.

You've raised guidance.

It doesn't seem like the guidance is really assuming a step-up in sort of balance sheet deployment, 6% net debt to cap in the fourth quarter.

I guess the question is just what are you waiting for to maybe get a little more aggressive with the balance sheet and maybe you can talk about the M&A pipeline in that context, too?

You kind of raised one of them, okay.

One of them is we have started to, I'll call it, stimulate the M&A process.

We will have a better read here as we go through the first half of the year as to what properties we are interested in, what is available.

We did run a little stronger than we thought from a cash flow perspective.

Realistically, I think it will probably be more by mid-year or so before we feel comfortable trying to address a different solution.

There is a nice pipeline developing in the Consumer and Office spaces.

Nice pipeline developing in the Safety and Security spaces.

With sort of dominance in the way these things are coming up overseas where we have a lot of cash.

I think it won't be too long before you see that sort of rolls back into bloom, so to speak.

Great.

Thank you very much.

Appreciate it.

Thank you, Terry.

Our next question comes from the line of Steven Winoker of Sanford Bernstein.

Please proceed.

Good morning.

Good morning, Steve.

I'm trying to get a better sense.

I know it's hard to do but look at core growth attributable to new product sales versus the footprint, the geographic footprint in the end market overall.

Just product vitality index, in terms of where that's running now, and in any sense for this?

It's running, Steve, it's just a [teeny weenie] bit under 29% for last year.

And moving at about, for the Company as a whole, moving about two points a year.

Now we also have the other thing we were trying to do which as we sort of managed the breadth of the pyramid a little bit better we are trying, as best we can, reduce sort of the leaky bucket cannibalization.

So hopefully as a consequence of that we might get a little bit more lift in the growth as we try to plug the bucket as well as fill it with new products, if you'll forgive my sort of analogy there.

I think this -- by the way we said this in New York -- this is a number that's dominated by the core of 3M.

Whereas if you'd gone back to 2005 and a number in the low teens it's more than doubled since that time.

We are very enthusiastic.

You are in a Company like 3M it's like some sort of technological candy store.

But let me tell you the candy store is going to a super store from what we can tell right now.

And the ideas are coming out all over the place.

Now if we can just make sure our colleagues in the R&D and the marketing areas get this stuff launched in a timely fashion, it's extremely encouraging what we see with the delivery of these R&D numbers.

I just am becoming increasingly positive about the model that we've got and the way that the technology folks at 3M have just lifted their game and absolutely done everything that we asked of them.

I'm really pleased and very optimistic for the future.

Even if you look at just 2010 and you have been running at this two points per year, you actually see the slope of this steepening significantly, the trajectory increasing?

Well, it's all about the definition of the word significantly.

I don't want to get so it sounds [Clinton-esque] or anything like that.

It is going to move a little faster.

I think we've made our targets clear.

We want to be, before 2014, we want to be at that 40% number.

Now if we could drive it past that that is great.

But given the kind of erosion and cannibalization that you see in the Company that 40% is really going to help us drive toward those higher growth numbers that we spoken about several times now.

So it's so nice to see in the Company many of these longer standing issues that we dealt with, fixed, supply chain running very nicely.

The R&D stuff picking up.

The pyramid management thing seems to have been an absolute God send in the way we handled it for this time.

So there is so much positive news and Pat and I are the keepers of the gate on capital.

Almost doesn't seem a day goes by where people are saying to me, well, I'm getting a new order for this and new big launch for that.

We might be tight on capacity.

It feels a lot, lot better than heretofore, Steve.

And since you mentioned capacity, I remember that I think the December 2008 guidance for CapEx was down something like 10% down.

And you ended up the year down closer to 40% and you're guiding to this year up mid-11% to 22% so that billion dollar level.

How should I think about that, what happened versus what was expected and as you look forward ramping up capacity?

Well, I guess, Steve, we kind of executed what we said we would do for 2009.

We had invested in some capacity and so forth over the last couple of years.

so we consciously pulled that back.

We aren't going to let CapEx hamstring our growth here.

Our guidance is a billion dollars here for 2010.

We think $1 billion to $1.2 billion is a good run rate for the Company.

I will tell you, I would love to come back to you mid-year and say we that have so many other good growth ideas that we want to take our CapEx number up even higher.

But that's our current thing -- as George says, just in the last probably couple weeks, months there has been a number of good breakthroughs with some customers in spots that we have some capacity issues.

George and I will be facing, what we thought we had as a little bit of a kitty for the year has been used up by the business people very rapidly for a good growth program.

And if that number creeps up, I wouldn't be surprised because it will be for absolutely the right reason.

Wouldn't be bad news.

But I think that's kind of order of magnitude for you.

Okay.

And can you give us some idea for where some of those businesses are, where you are getting some of these nice surprises?

I have to tell you it is literally almost all over the portfolio.

I can think of some in Health Care.

I can see some in Industrial.

I can see some in Safety and Security, some in the electronics group, okay in the Consumer --.

So is it literally across the board.

And I really do think, Steve, it's a response to the commitment that we had to reinvent the technological core of the Company.

I really do think that's happening.

The customers are seeing it.

The customers love it.

The scientists are just totally committed to it.

It just feels so much better now.

And hopefully as 2010 unfolds we will see more of this accelerating and then you guys will be able to accuse Pat and myself of being overly conservative as you usually do.

Let's hope that's the case.

Hey, Steve, I think there is another element of this.

As we just said, we just got back from a trip to China and India and a few other spots.

I think the other thing that's happening as our local lab capability gets better and better and better we are getting more and more local product development done and they are also realizing that they need more and more local manufacturing as well.

I think that's also going to, as our new product development for local markets continues to accelerate we will have to deal with some of the local manufacturing issues as well.

I mentioned it briefly earlier, Steve, that abrasives thing that I showed you in New York, I mean, it looks like it's an absolute game changer.

It changes the basis of competition dramatically and I can point to many others like that.

I'm just so enthusiastic by what's happening.

Let's hope that this year tends to be kind of the start of something big.

Sounds like a cue for a song.

And just as a last follow-up.

It sounds like when you talk about this growth, a lot of your decision about where to guide to on operating margins, of that 21% to 22%, was a decision about how much to, quote, reinvest in the new business ventures and some of the other items you mentioned about $100 million increase.

Is that decision to invest more, is it really $100 million incremental?

Or is there more there that I'm not seeing?

Well, Steve, it's at least $100 million, okay.

And it's going to appear in a number of cases.

In some cases it's R&D investment.

Other cases it's [ad/merch] investment, okay, in some international markets and the like.

It will be a broad-based kind of category relative to investments.

And by the way, there is a number of people that are still in the queue that would like to invest and we have to kind of make a judgment.

One is do we have the organizational capability to pull it off and then, two, how well is the business running.

I think you're spot on when you kind of look at the way I think of running the business in this margin range is, what I want to do is make sure we were investing in all of the great growth opportunities we have.

As we do that, obviously, you'll have a tendency to maybe trend toward the lower end of that margin range.

And I'd like nothing better than to actually have the business be running stronger here on a top line basis and our ability to reinvest back in some additional growth ideas.

Thank you.

Thanks.

You're welcome.

And our last question comes from the line of David Begleiter of Deutsche Bank.

Please proceed.

Thanks.

It's actually Jason Minor sitting in for David this morning.

Hi, Jason.

Hey, for a moment I thought Pat said you had a new line of pocket protectors.

I got sort of excited.

(laughter) I probably did.

You want me to send you a new pocket protector?

Please do, please do.

But I will pay full price.

The commodity inflation you mentioned, Pat, are there any segments in particular you'd highlight where you're raising prices to offset raw materials at this point?

Not specifically.

We take a very close look at that on a business by business.

The business people have to lead that forward.

Not as close to that.

But it is spotty, okay.

Those that are kind of impacted by, I will call it, oil-drived commodity increases.

And it is a little more spotty on a business by business basis.

They know what they have to do from managing that.

And some cases they have raised prices.

But I say it will be on a much more select basis as we go into 2010.

That's the way I would see it right now.

Okay.

That's helpful.

Then to double back on respirators, George, you mentioned a sort of hand off if H1N1 were to slow and new products pick up.

On balance for the year, do you guys at this point anticipate any sort of headwind from respirator sales?

Not materially.

You obviously don't know exactly when the H1N1 demand will fall off.

Certainly there will be some tied to the seasonality of, all around the world for that matter.

So demand at the moment still seems to be robust.

But I think you have to be realistic about it that it will come to an end eventually.

But I kind of mentioned a connected point that we have been working on, obviously, on improved N95 respirators that can reach down into parts of the markets that we could never touch previously.

That will demand some capacity.

Those things are very close to being released.

We are not going to make as much money, candidly speaking, on those products as we would have done on some of the others.

So we'll probably see sales okay.

So we may see a little bit of margin compression depending on what kind of mix we get out of that.

But all in all, again, it's another great business.

And we've proved ourselves to be, I think, the folks over in that business masters of managing this kind of crisis and I think it's one of those businesses we remain very positive about and I think with the new products coming out, all in all it will be okay.

Excellent.

Thank you very much.

Thanks, Jason.

Thank you.

There are no further questions.

I will now turn the call back over to 3M for some closing comments.

Thanks for joining us today, everybody.

We had a lot of material to cover.

We did have some very good questions.

I know we did have a couple we could not get to in the interest of time.

So we will be back in touch this morning with you.

Thank you for coming.

Look forward to talking to you next quarter.

And in between as well.

Thanks.

Thanks, everyone.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your line.