3M (MMM) 2010 Q4 法說會逐字稿

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, Tuesday January 25, 2011.

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

Thank you, and good morning, everyone.

Welcome to our fourth-quarter business review.

It was good to see many of you at our Annual Outlook meeting last month in New York City.

On the morning of March 17, we are hosting another meeting, this time at our headquarters in St.

Paul.

We may tweak the agenda a bit between now and then, but you can expect to hear from several emerging 3M leaders that run big and important divisions, such as Food Safety, Renewable Energy, Industrial Tapes And Adhesives, Electronic Markets, Orthodontics, Automotive OEM and Personal Protection, along with the leaders of our operations in China, India and Brazil.

The senior leadership team will be there as well, including George, Pat and the heads of our six businesses and international operations; and it promises to be a great day.

I make no promises but will do my best to keep away the snow and frigid cold.

If you're on our email distribution list, you will receive an invitation later this week.

So please join us and RSVP as soon as you can.For those not on our list but wish to go, just drop a note or call, and we'll be glad to take care of you.

If you would, take a moment to read the forward looking statement on slide 2 in today's slide deck.

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

We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties.

Item 1A of our most recent Form 10-K and 10-Q lists some of the most important risk factors that could cause actual results to differ from our predictions.

Let's begin today's review, and I'll turn the program over to George Buckley.

Please turn to slide number 3.

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

Thanks for joining us today.

And a belated happy new year to all of you.

Today my remarks will focus mainly on the year in the future, and Pat will go over mostly the details of the quarter.

Five years ago, we set out to move 3M gradually but permanently to our higher growth regimen.

We knew it would require a step change in our attitudes toward growth and especially in our attitude to investments in growth.

That challenge was made a lot tougher by our concurrent goal of maintaining superior margins and returns that you've come to expect from 3M.

Looking at 2010 as a milestone toward these goals, it was a very good year.

Organic volumes rose 13.7% in the year versus estimated worldwide IPI growth of 8%.

We posted record sales of $26.7 billion, an increase of 15.3%.

We achieved record operating profit of $5.9 billion, putting aside historical one-time items with margins of 22.2%, which are up 140 basis points year-over-year.

We posted another all-time annual record with earnings per share of $5.75, an increase of 25% year-on-year.

Free cash flow was $4.1 billion with a conversion rate of 100%.

It was not a long time ago when growth at 3M was limited to a handful of divisions.

Last year, four of our six business segments turned in double-digit sales growth.And every single one of our businesses were up year-on-year.

Sales exceeded 2008 levels by $1.4 billion, meaning the 2009 recession is well and truly behind us, if not perhaps for all western economies as a whole.

Exceeding IPI by 570 basis points mean we took over 0.5 point of share organically across the Company in 2010.

We've accomplished this in a time of tremendous challenge.

So all in all, we're very pleased with 3M's progress on the growth front, and that share gain means we took further steps down the road of building even more enduring franchises.

In fact, we've not recorded double-digit local currency growth for decades, so we're very encouraged by the 14% local currency growth we drove last year, and especially saw in the lack of the uncertain economic conditions under which we were all operating.

It's still probably premature to hang up the mission-accomplished banner just yet, but I think it's certainly fair to say that our growth plan is progressing very nicely.

At the same time, we know that growth of a company like ours is not achieved easily or always smoothly.

There are always countless dials to turn and multiple levers to push to keep things moving on the right trajectory and in proper balance.

You also get the occasional asteroid hit just to keep things exciting.

On the journey to higher growth we've learned a few things about what we're good at, and about what we need to improve.

There is no longer any doubt in our minds that as a company we understand the calculus of higher growth; we understand how to get it, and what to do to accelerate it.We certainly revived our new product development and innovation processes as part of that.

That's working extremely well, and ultimately without that, none of the other aspirations we have for accelerating shareholder value creation will work.

We've also shown that we know how to secure high growth overseas, driven by building new labs, and localizing our technology and leadership there to drive growth.

Given the (inaudible) state of interesting science in the United States, this is strategically very important to our future security.

We've also shown that we can drive our tax rate and bring more cash back to the Company.

Up to about five years ago, for years our tax rate had bounced around the 34% rate.

We've successfully driven that down, and for now, the sustainable rate already seems to be somewhere in the 29% range, but with increasing downward pressure as we grow overseas and build more manufacturing locally.

We'll see it pop up a bit this year, but only because we were so hugely successful in our technical tax planning last year that won't repeat.

So these things have all been very successful.

We've also shown that we can manage a number of boil-the-ocean programs at once, for example, revitalizing innovation, making major changes to our manufacturing footprint, localizing labs and science, et cetera, in preparation for a world where the west is no longer the dominant manufacturing power.

Perhaps the most important of these projects is the rekindling of the innovative spirit at our Company.

3M's scientists and innovators remain our single most important competitive advantage everywhere in the world; and when properly managed and motivated, they create technology and prototype platforms unequaled anywhere.

We've worked very hard to energize and unleash the power of 3M scientists, primarily by getting them back in the business of inventing new products.

Their efforts have driven our new product NPVI up to 34.4% compared with numbers that were languishing in the teens just a few years ago.

It brings me great pride to say that 3M is probably the last of the US's and probably the world's great broad science-based companies.

This is the real basis of our sustainable competitive advantage; using science from a vast array of patents and capabilities.

Mix that in with the vision, energy and optimism, and our magnificent global footprint, and it becomes an almost unbeatable combination, we think.

There are still many great engineering and manufacturing companies around, and even a few excellent chemical companies, but there's really nothing anywhere quite like 3M.

I don't know if we ever should or will ever get proper recognition for this, but it's ultimately what we're all about.

But we're not satisfied that it's all rosy.

We still have a lot of work to do reducing our working capital usage, for example.

You can see the challenge varied in the mechanics and the arithmetic of the problem as we grow rapidly overseas; yet still with a lot of our manufacturing in the United States, and therefore, with long supply chains.The challenge of better turns won't be fully addressed until we've secured a regional source of supply percentage within cycling distance of 100%.

For us, that's a target normally greater than 80%.

Of course, this task is made all the harder by the poor visibility of orders in our sales make-up.

We sell mostly consumables not finished goods, and the nature of that particular beast is short-order visibility.

Please don't confuse this with early cycle, mid-cycle or late cycle.

We sell into all of those markets; so these factors combine to keep us more in mixed stock more than we clearly would like to be in a more make-to-order.

We're building factories overseas pretty much as fast as we can.

Our sales growth rates there almost outstrip the newly-added capacity as soon as we install it.

So we're still making slow progress against that 80% regional source of supply goal.

At some levels this is great news, but it does make progress against our working capital targets much harder.

Lots more to be done and had here.

We also have a few businesses that have large price-down profiles as the nature of that particular beast.Our Optical business is the most visible of these, not to use a pun, so net-net it's often hard for us to post positive annual net price.

The pricing volatility in that market should calm down once maturity is reached in the end market, maybe three or so years out from now, but for now it's a challenge.

But that can cover up a weakness in another area where I think we're sometimes slow to react, and that's in price recovery.

This quarter we saw the effects of Optical pricing, commodity price increases, along with start-up costs in new factories plus some purchase accounting all washing into our gross margin line.

Pat will give you details on that in a few minutes.

The great margins we made in H1N1-related product last year also were part of this mix down in Q4.

The pricing actions have all been taken now, but I think it's fair to say that we were late to the game, but we're on it.

This year we plan to beef up our international manufacturing leadership in those countries that have been receiving lots of new manufacturing assets, and we'll be intensely focused on factory costs.

It's going to be in China, in Singapore, in Poland, in Brazil and a few others; nothing drastic, but these are important strategic steps.

This is the close to market manufacturing model we spoke about many times previously, and it parallels what we've done in technical and business leadership going ever more local.

We've also increased our investment spending in R&D and new business ventures significantly in 2010, simply because the time was right and we could afford it.

In the coming year though, we expect to see a growing payoff on a lot of these investments.

Last year, we provided seed money for a number of business ventures to get them off the ground.

Next year, most will become self-funding.

The successful ventures will survive on their own merit and others won't.

Unless the economy rockets ahead this year, we don't intend to advance this spending beyond where we are today; in fact, not even to repeat some of it.

We successfully closed three sizeable deals in Q4, Cogent, Attenti and Arizant, and hope to make similar progress on Alpha Beta in Taiwan and Winterthur in Switzerland in the first quarter.

Finally, as is our practice, we will spend cautiously in the early part of this year to see where things go.

We know that we're facing a number of sizeable non-operational headwinds, such as pension and tax rate, and tougher Optical pricing, so we'll move forward very prudently.

Before I pass the call over to Pat, let me reflect on one last latent realization in our growth model.Over the last 100 years, we've learned how to compete with our big global competitors; great iconic companies that are household names, and by the way, to win many of these battles.

For the future, the competition that is most dangerous is local competition, whether that's in Brazil, in China, India or Indonesia.

To win the battle against them, you have to be like them.

You have to develop locally, manufacture locally, hire locally, purchase locally, and lead locally.

Unless there are insurmountable issues of scale involved, you have to go local.

With that, I'll now pass the call over to Pat for more details on the year and the quarter.

Thanks, George, and good morning.

Let us look at our full-year P&L; so please turn to slide number 4.

Sales for the full year rose 15% driven almost entirely by organic volume improvement.

We grew organically about 1.7 times the rate of industrial production, so it's evident that we gained significant share in the year.

It's encouraging to see how many of our businesses grew their top line in 2010.

Sales rose in every region of the world, with Asia-Pacific up 35%, Latin America up 18%, Canada up 16%, United States up 8%, and Europe up 5%.

Similarly, all six of our business segments expanded sales during the year, led by Electro Communications at 28%, Display and Graphics at 24%, Industrial Transportation at 19%, and Consumer and Office at 11%.

Even if we dig one level deeper at the sub-segment or the division level, 2010 sales rose across-the-board.

A number of factors are contributing to the growth.

George mentioned that our new product vitality index was 31% in 2010, up 2 full points year-on-year.

Investments in innovation, sales and marketing capability, and localized manufacturing are creating new growth opportunities in adjacent spaces, and our new product launches are getting better and better.

As CFO, I look for -- how does innovation translate to the financial results as sustainable, profitable growth.

Our performance in 2010 certainly suggest that it is working very well.

Gross margins rose by 0.5% during the year -- 0.5 point, as ongoing lean six sigma and other productivity efforts deliver the needed factory savings to offset a 2% increase in raw materials Sales and marketing investments increased in line with sales, including a 20% plus increase in advertising merchandising, to develop our brands and drive higher growth.

In R&D, investment rose at a double-digit clip, albeit slightly less than the rate of sales growth.

Operating income rose 23% year-on-year, and margins rose 1.4 percentage points to 22.2%; right in line with our long-term objective.

Note that all business segments posted operating margins north of 20% for the year.

The full year tax rate was down over 2 points to 27.7%, even after absorbing a 1.5 point penalty for Medicare Part D.

The reduction was primarily a function of some targeted reorganizations of certain parts of our international operations, improved statutory rates in several countries, and benefits from the resolution of several tax audits during the course of the year.

Bottom line earnings were $5.63 per share, up 25% versus 2009.

Excluding special items, earnings were $5.75 per share, up 23%.

On top of a strong sales and earnings performance, we generated at record levels of economic profit in 2010, putting aside the 2006 and 2007 gains from the sale of our pharma business.

And ROIC was nearly 21% for the year.All in all, it was a very good year, and positions us very well going into 2011.

If you turn to slide 5, you'll see a progression of our expectations for sales, margin, tax rate and earnings during 2010.

I included this chart today to shed some light on the way in which we have been managing the trade-offs between accelerating top line growth and margins.

We obviously report numbers every quarter, but we manage the business for long-term success.

Even as early as the first quarter, it became apparent that we could accelerate top line growth.

So we proactively accelerated investments in a number of projects to drive future sales growth.

As the year progressed further, we gained added confidence with the leverage on our higher top line growth, coupled with a lower tax rate for 2010; so we could afford another round of discretionary investments.

Some of these investments are lab-oriented, others were more focused on increasing sales coverage and marketing strength, such as our accelerated investment plan for China.

Still, others were not out-of-pocket investments per se, but sales related that afforded us the flexibility to more aggressively penetrate certain markets, such as B and C tier strategies.

Many investments have already paid off in new business in 2010.

Still others are slated to pay back in 2011.

So naturally, we'll be holding back on new investments early in 2011 to help offset headwinds such as pension expense and a higher tax rate.

At this point, it does not appear that we will have the same level of flexibility in 2011, but as the case every year, we'll see how things play out.

To summarize, as growth accelerated in 2010 and we could see our tax rate improving, we intensified investments in the business.

In the end, we still managed to expand earnings, and importantly, the Company is in a much better position going forward as a result.

Please turn to slide 6 for a review of the fourth quarter.

In dollar terms, sales in the fourth quarter rose nearly 10%, which included an 8.6% increase in organic volumes.

Adjusting for last year's sales boost from H1N1, organic volumes would have been greater than 10% or 1.7 times estimated worldwide industrial production.

Sales rose 22% in Asia-Pacific against a pretty tough comp in last year's fourth quarter.

Inside the APAC numbers, it was encouraging to see a 30% plus growth in Electro Communications driven by new product platforms, share gains, and good underlying strength in the consumer electronics market.

Equally exciting was a 30% growth in our APAC Consumer and Office business.

Elsewhere around the globe, sales rose 12% in Latin America, 6% in the US, and 2% in Europe, although the weaker euro was a drag on sales in the region.

Excluding currency effects, sales in Europe increased by 8%.

Acquisitions added 1.8% to sales in the quarter, and selling prices declined by 30 basis points year-on-year.

Gross margins were down just over 1 point year on year, largely due to higher raw materials and negative mix.

Raw material inflation was approximately 3% year-on-year, which constituted the bulk of the variance.

Action plans are under way, and we fully expect to offset raw material costs in 2011 with selling prices of our own.

During the quarter, given the combination of strong sales growth and a lower tax rate, driven primarily by lower international rates, and some favorable US federal and state initiatives, we opted to invest additional funds in the fourth quarter.

Total R&D and SG&A spending as a percent to sales was up 1.3 percentage points.

We [placed] about $90 million of additional spending in the quarter, which will help us get a jump start on 2011 growth.

Please turn to slide number 7 for some quick commentary on our fourth quarter segment results.

In our largest business, Industrial and Transportation, sales rose nicely at plus 10%, with every division posting higher year-on-year growth.

Notable performances were Renewable Energy up 78%, Aero Space and Aircraft Maintenance up 26%, Abrasives and Advanced Materials both up around 15%, and our Automotive OEM business up 14%.

Margins in Industrial and Transportation were down about 1 point year-on-year, largely due to accelerated R&D and SG&A funding on new growth programs.

Incremental investment levels will moderate in 2011, as these programs become part of the base business and begin to fund themselves.

Higher raw material costs also impacted margins, which will trigger price increases in many parts of the business.

Moving to Health Care, sales rose 4% in the quarter to $1.2 billion.

H1N1 was a big boost to the business in the fourth quarter last year, which lowered year-on-year growth rates by 2%.

On the positive side, our recent acquisition of Arizant, the leading provider of surgical patient warming solutions, added 4 points to growth this quarter.

Margins were 29% in Health Care, compared to peak margins of 32.7% in last year's fourth quarter, which is in line with our longer term expectations of the high 20%s.

A number of factors drove the year-on-year change, including incremental [2007] investment programs and drug delivery systems, and digital oral care.

H1N1 mix had impacts from the acquisition I just mentioned, and some rationalization of two US-based facilities in the fourth quarter of 2010.

In Display and Graphics, sales increased 10% year-on-year, up to $903 million.

Sales rose at a double-digit clip in Commercial Graphics, so things are definitely picking up there.

Sales in Opticals Films increased at a low-teens rate, despite the near term challenges in LCD TV that we articulated in October, and more recently in New York in December.We continue to find new applications to grow volumes across the various device segments, including LCD TVs, notebooks and hand-held devices.

Finally, our traffic safety systems businesses drove low single-digit growth in the quarter.

Despite the higher volumes, margins in Display and Graphics declined 1.4 points year-on-year, largely related to Optical.

In the fourth quarter, we reduced Optical inventories to respond to inventory imbalances throughout the channel, and to make sure that we did not enter [2011] with excess inventory.

Consequently, we undertook extensive manufacturing downtime in Q4 to adjust inventories, as well as to test some new materials.

Optical by its nature has very high incremental leverage, so margin swings are not unusual around production volume changes.

Consumer and Office had an outstanding quarter with sales up 8% and operating income up 10%.

Growth continued to run strong in the Mass Retail and DIY channels, but the nice surprise in the fourth quarter was the Office channel.

Office has been a tough space on-and-off for the past couple years, so our 15% top line growth in the fourth quarter was a welcome change in trajectory.

We've been investing aggressively in Asia-Pacific to strengthen our presence in the retail channel, so it's encouraging that we posted 33% fourth quarter sales increase in this business.

The growth is coming both organically, boosted by accelerated sales and marketing investments that began in the first quarter, and via acquisition, largely due to the April 2010 acquisition of A1.

A1 is the largest office label supplier in Asia, and is performing superbly in the first year as part of the 3M family.

In Safety, Security and Protection Systems, or Services, sales were $847 million, up 7% year-on-year or up 19.4% when you exclude the comps from H1N1.

A full 15 points of this growth was organic volume improvement, spread across all businesses with particular strength in Security Systems.

Acquisitions, namely Cogent and Attenti, added about 4 points to growth in the quarter.

Safety and Security margins were nearly 20%, down 4.8% year-on-year due to two primary factors.

First and most significantly, we experienced negative mix associated with lower year-on-year H1N1-related sales.

Recall that our respiratory factories were running all-out in late 2009 in order to meet surging demand at that time.

Second, 2010 margins were impacted by acquisition expenses related to Cogent and Attenti.

In Electro Communications, sales and profits increased 21% and 32%, respectively.

The story here is similar to recent quarters, in that our businesses that serve the consumer electronics market continue to grow rapidly.

We also posted double-digit sales growth in the Electrical Products business.

A new piece of good news was that in our telcom business, which posted high single-digit growth in the fourth quarter after several tough quarters.

Margins were a solid 20.6% in the fourth quarter.

Finally, in corporate miscellaneous, fourth quarter's operating loss was about $60 million higher than the year ago, largely due to year-on-year increases in pension and other benefit expenses.

Please turn to slide 8 for some balance sheet and cash flow highlights.

Fourth-quarter free cash flow was $1.1 billion, up $330 million versus the fourth quarter of 2009; and we converted 119% of net income to cash.

The increase was primarily due to lower pension expense contributions, along with a number of miscellaneous cash timing differences, partially offset by $250 million in higher capital expenditures.

The CapEx increase is purely timing that certain projects happened to close in 2010, but could have easily ended up in 2011.

We are reducing our 2011 CapEx forecast from $1.4 billion, to $1.3 billion to $1.4 billion as a result, reflecting these 2010 accelerated capital projects.

On a year-to-date basis, we generated a record $4.1 billion in free cash flow, and converted 100% of net income to cash.

Net working capital turns improved by 0.2 sequentially, and were down by a similar factor year-on-year.

Receivables rose in line with sales growth, and remain under excellent control.

Inventories rose 19% year-on-year, as we've built inventory to support the outstanding fourth quarter and anticipated first quarter growth levels.

Strong growth in emerging economies, coupled with our need to import product in several of those areas, will likely translate to higher inventory until we move even more manufacturing capability to emerging markets.

Though not on the chart, I'd like to mention that fourth quarter acquisition investments totalled $1.4 billion net of cash and marketable securities, as we successfully closed three sizeable deals, Cogent, Attenti and Arizant.

For the full-year 2010, we returned more than $2.4 billion to shareholders via a combination of dividends and share repurchases, which is up 60% versus 2009.

And you will note that we began repurchasing shares significantly in the fourth quarter.

Year-end is an appropriate time to provide a pension and post-retirement benefits update; so please turn to slide number 9.

On a worldwide basis, our pension and OPEB plans are 90% funded at year-end, with the US qualified plan at 97% and international plans at a combined 89%.

US pension plan assets returns were 14.4% in 2010, easily exceeding our assumed 8.5% ROA, and a top quartile performance among large US plans.

For 2011, we will again assume 8.5% ROA in the US qualified plan, along with a 5.23% discount rate, which is down 54 basis points versus 2009.

We expect to contribute cash in the range of $400 million to $600 million in 2011; the exact amount will depend, of course, on actual asset returns for the year.

Importantly, we do not have any mandatory funding obligations.

The 2011 pension expense headwind will be now $0.22 per share, down from a previous estimate of $0.27 per share.

For your modeling purposes, we will record about two-thirds of this headwind in the Corporate and Miscellaneous segment, and the remainder amongst our business segments.If rates stay reasonably close to the current levels, pension expense will actually flip from a headwind in 2011 to a tailwind in 2012.

Our Trader chain deserves a lot of credit as they do a fabulous job managing our pension and post-retirement financial exposure.

At this point, I'll turn the program back to George who will address our forward outlook.

Please turn to slide number 10.

Thank you very much, Pat.

Let me first spend a few moments now on how we see 2010 playing out.

A lot of leading economic indicators are showing mild improvements lately; US retail sales were up about 2% over the holidays.

Growth in China remains strong at about 10%, and based on recent reports from GE and IBM, factory orders for capital goods and products seem to have been increasing.

We've also seen mild improvements in US unemployment data.

But I think in summary there's still a lot of smoke without fire; I think we should all remain cautious.

We need to be sure it's really a dawn and not a forest fire coming our way.

We will be increasing our capital spending in 2011 to about $1.3 billion, maybe $1.4 billion, but it's mostly being dedicated to all US growth; hence our strength in manufacturing leadership overseas.

I think that 3Ms growth and that of the US economy is still going to be strongly led by emerging markets.

I don't expect to see big improvements in the US until employment takes a material turn for the better, and any gains here are likely to be export oriented.

The extension of the Bush tax cuts is the best news we've had, and we think that will make a measurable improvement in our outlook for the US.

We're also bound to see some improvements in the US in 2011, mainly because the base in a number of industries has been so miserable.

In some sectors such as existing housing, the stock of existing homes remains high, and new housing starts continue to fall.

Spring will probably see some improvements, but simply because it is spring; we always see improvements then.

Nevertheless, it will help.

I think housing prices will continue to fall this year, and ultimately at some point that will attract more buyers.That will be the start of the housing recovery.

Faster growth in the United States will become an added focus for us in 2011.

The basket of leading indicators suggests steady and small improvements in the world economy, mildly beyond where we've been expecting it to be in the last quarter.IPI forecasts for Q4 have firmed, showing worldwide growth in Q4 to be 8%.I know it sounds strange looking back this way, but we have to remember only economists get the chance to forecast the past.The softest spot, which we forecast a year ago would come in late Q3 and early Q4, came and went just as we expected, and sales have been very strong since.For example, up 13.2 in December, even with the drag of moderating sales in Optical, and the drag of H1N1 comparisons.So our views today are mildly more optimistic for growth than they were in Q3 and early December.Pension returns were also better in 2010 than we expected, so pension expense will show a small improvement over our earlier expectations.

I think we're going to see strong sales growth in renewable energy, which was up 78% in Q4.In abrasives, in our automotive business, in air and water filtration, and in electronics generally, but particularly in adhesives and fluids in multi-touch technologies and in projectors.The growth is broad-based really, with too many areas of growth to mention all of them specifically.Innovation is, of course, driving it.So for 2011 in total, we're expecting double-digit growth in revenues; I'm hoping we'll top $30 billion in 2011 for the first time in our history.It's a great goal.Organic volumes should be between 5.5% and 7.5%, and that foreign exchange impact should add an additional point or 2 at current FX rates.

We'll add 3 to 4 points of growth via acquisitions that have already been announced or closed, and we anticipate another 1 to 2 points from deals not yet identified.We expect that operating margins will be between 21.5% and 23%, with the lower end largely a function of potential one-time costs on deals not yet identified or closed.But please note that this is purely a planning assumption at this point.

We expect the tax rate to be approximately 29.5%, which is down from a 30% previous estimate.A better than expected 2010 tax rate gives us confidence to nudge it down a bit for 2011.So we're raising the upper end of our expectations for 2011 EPS guidance by $0.10, to $6.20, reserving some caution at the bottom end of our guidance by elevating it by $0.05.Our expected range for 2011 will now be $5.95 to $6.20.

Thank you all very much for your attention, and we're now happy to take your questions.Thank you.

(Operator Instructions)Please limit your participation; one question and one follow-up.

One moment please while we compile the Q&A roster.

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

Please proceed with your question.

Hi, good morning.

Good morning, Scott.

Guys, I know it's still early in the year, so I don't want to nitpick too much on guidance but I'm struggling a little bit to reconcile.

If I look at the numbers apples to apples, looks like you're targeting roughly 10% to 12% top line at the mid point, roughly let's say ex pension and vaca roughly 11% - 12% at the mid point for EPS.

I guess my question is this, if you're incremental expenses aren't going to go up substantially as it relates to some of the comments, things like advertising, R&D, some of the past investments that you made that you don't expect the same ramp, why wouldn't incrementals -- incremental margins in the pull through be a little bit better and allow you to get a little bit more leverage off of that?

Is it just solely -- just Display and Graphics or is there some other -- or just conservativeness on your part?

It's probably not conservatism, Scott.

If you look at the margin expectation in our guidance, that's really where we're targeting, 22 -- it's 21.5 to 23 but as George said the 21.5 is really reflecting some potential acquisitions that may play out towards the back half of the year that really don't add much in the way of income.

So think of it as in the 22 range.

That's about where we're targeting to run the business.

If you think of it from an EPS perspective, you've got tax rates going up, we were 27.7% this year even up to 29.5%, so that's a piece you haven't seen yet.

You have pension going up, we have some vacation benefit this year that obviously we have to offset as we go into next year.

Our assumption is that basically our pricing material costs will be kind of flattish, that we'll be able to offset materials so effectively it's going to be whatever the volume pull-through is, and as we showed at the meeting, if you kind of look at that in kind of a 35% incremental margin and so forth, that's about where that leads you.

Yes, okay.

Well, we can kind of agree to disagree because when I do the math, I get something more like 640 - 650 on a 30% incremental.

But let's move on to my second question.If you look at LCD TV, the commentary you made at the December meeting was fairly cautious and can you give us a sense of a state of the union incrementally, January, now that we're towards the end of January, versus mid-December, have things stabilized?

You mentioned that you brought inventories down.

But how about the sell-through?

Can we talk about that?

From my knowledge, of course this is a very fast-moving space, Scott, so what I tell you today could be wrong, next month.

But to our knowledge right now, we've got good design in of current models that are in production.

Inventories are still a little bit on the higher side than I think the industry would like, but they have done a nice job of bringing them down.

Early indications are in the quarter that activity seems to be very good.

I'm very thankful that we adjusted our inventories here in the fourth quarter.

I think, early in the year, if the sell-through works which thus far they're respecting that, of course, there's a big lunar new years in Asia the first part of the year, Japan is going to go through a digital change I believe on June 1, so the first half of the year is going to be quite important relative to sell-through in Asia and we, of course, won't know that until probably end of the second quarter how well that's going.

But thus far, it seems to be progressing reasonably well.

Scott, I think the, it was a little better than we thought in the early part of the year.

Attachment rates have also been a little bit better than we thought.

The real key here is going to be how good are we at retaining that attachment rate.

Typically the profile that you see historically is the attachment rates are good in the early part of the year because model changeovers take place later in the year, so really the, we're probably going to do fairly well is my guess, in the first part of the year, at least on a tax rate.

Pricing, of course, Pat went over that in New York, is still a tough issue in that marketplace, and that will be the thing that puts pressure on earnings and on leverage in the way that Pat described it earlier.

So I think that whether we cross the finish line successfully as we hope, or better than we hope, is all really going to be determined by later in the year, perhaps in the last four months of the year, of 2011.

Thanks, Scott.

Okay.

Fair.

Thank you, guys.

Our next question comes from the line of Bob Cornell with Barclays Capital.

Please proceed with your question.

Hi, everybody.

Hi, Bob.

Couple questions again, going back to the top line growth guide, the 5.5 to 7.5, are you still looking for the same, 15% to 20% growth in emerging markets which would apply at the mid range 4.5% in points of organic growth, maybe because of the disaggregate that 5.5 to 7.5 and Pat, you can dial in the level of conservatives you may have built in there.

No, there's really no different than we kind of shared in December.

We had a chart in December that talked about the segregation of sales that developed markets probably would be in the 3 to 5 range and the developing would be in the 10 to 12 range.

If you said, where is there any upside I'd probably say it's more on the developing side than on the developed side to address your question.

I guess the sub-text there is some people talked about China slowing late in 2010, have you seen any of that?

We have not.

Thus far, we just had our entire leadership together last week to spend some time obviously with the Asian group and specifically Kenneth who runs China, and thus far we have not seen any alteration, okay, in our growth rate in China at all.

Bob, the more recent growth rates in China are being -- excuse me, in emerging markets have been up above 30%, 31% or so and that's still about a third -- as we've told you before, about a third of our sales.

There's no question we get a great lift from that.

Whether in the end we get to the top end of that growth range is all dependent on how these, shall we say the more traditional or slower markets in Japan and the United States and in Western Europe behave.

I've got it.

Can you give us some more color on the label initiative?

Consumer Office didn't get quite get there.

You had some investment spending, I think probably.

How much of that was in labels?

Maybe just give us an idea of how you're succeeding relative to plan there to push forward in that business broadly?

Yes, Bob, I'd say you'd have to view this as being a long-term opportunity for us.

This is not an initiative that you just necessarily win overnight.

You've got a pretty well-entrenched competitor.

We've made some very good in-roads with certain of our SKUs, but it will take a while to really establish ourselves.

It's also a relatively expensive conversion you have to go through, Bob, because one of the things you have to do, is of course, you have to take the competitor's product off the shelf.

A retailer is not going to just absorb that expense so, part of the conversion cost is that to take somebody out effectively, you've got to take over some of their inventory.

The transition is a little bit costly, but we're absolutely convinced it's the right long-term strategy.

It will be a couple years before it really -- you'll start to see big growth rates but it's a very solid initiative and we got absolutely the right product.

I think we have the right relationship with the retailers.

It was just a matter of time.

We've won one of them, Bob, completely over, others we've won over in varying degrees, so I think at this date, it's so early in the transition, it's actually been quite successful.

Thanks, Bob.

Okay, thanks.

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

Please proceed.

Good morning.

Good morning, Steve.

Just a growth and then a margin question.

On the growth side, looking at Health Care coming in on core growth at 1.6% last quarter, 1.5% and you had four quarters of 4.5% to 7.5%.

When you think about your core growth going forward, how do you think about Health Care?

Are we in a long-term period of this, you mention a lot of double digit and other growth in your presentation -- where was it weak?

In Health Care specifically?

Yes.

I would say it was weak in -- our Drug Delivery Systems business was a little bit weaker.

Oral Care is in more of a low single digit rate at this point in time.

Health Care is going through a pretty significant shift relative to, I'll call it the underlying market dynamics.

We still see that obviously as a very good, very solid business, but I think for a period of time, it's going to be a more single digit grower.

We've got some great efforts in places like Food Safety.

We feel very good about this acquisition we just made in Arizant, around patient warming and the like.

We've invested a fair amount in R&D and sales and marketing programs, and Brad and the team are aggressively going after international expansion as well.

That probably is where some of our best opportunities really are in some of the developing market opportunities to play as those markets develop.

And, Steve, here's George -- just to give you kind of a little bit more color, I don't think that long-term those Health Care markets are going to be struggling because certainly there's going to be some reordering of the way that market behaves.

People -- insurance is going to want you in the hospital and out of the hospital as quickly as you possible can.So there are going to be growth in some secondary markets that we can and will address.

So I think ultimately in the end, unless the rate of accidents, the rate of illnesses begins to fall in a secular way, which is not reasonable to expect, I think with the kind of parts that we supply, you'd expect -- as long as we service each of those touch points, we're going to do okay.

As Pat rightly pointed, one of the great opportunities, we have the first new regulations in 30 years in food safety, one of the great new opportunities there and that will be roughly speaking a couple hundred million dollar business.

It's already growing at double digits and I expect that to accelerate.

H&S is another very good one.

All in all, I think we're going to be okay.

Although we will see the same kind of pressure that's being seen in other companies.

I think we're going to see some of that for a while and that probably won't change until unemployment begins to come back, and you ask yourself how long can people put this stuff off but they actually do.

Okay.

And then second question on margin, the -- if I look at the 250 basis points year on year Delta and then within that the non-pricing related cogs, the 90 basis points and you mentioned 3% increase in raw materials; so, of the 90 basis points, would you say that just raws was 60 of that or 70 by my calcs or is it something different?

What about wage inflation and productivity as an offset?

I'd say your number is relatively close on the material side.

On the wage side, we have a tendency that, I'll call it, our people productivity will offset generally any kind of a wage inflation we have.

Okay.

So the other -- so it's mixed?

Mix and materials, yes.

Okay.

And then as part of that, the SG&A and R&D, I'm trying to get a sense for how much of this was people and advertising and other investment versus wage inflation or other negative things.

How much of that is going to help growth versus just being a tough cost.

Think of it as the bulk of it should help growth, okay?

As compared to underlying cost inflation.

Okay.

Great.

Thanks.

Thanks, Steve.

Our next question comes from the line of Ajay Kejriwal with FBR Capital Markets.

Please proceed.

Thank you, good morning.

Good morning.

Just following up on Optical Film, maybe you can provide some color on expectations for volume and then pricing this year.

You talked about moving pieces in the first half with China and then Japan, but if you could provide us some color on what do you think volume could be and what went into your numbers?

I guess I'll try to, this is one of the more difficult ones obviously to try to forecast.

Our -- if you think of more of I guess a planning basis, we're anticipating that the Optical revenue will be relatively flat year on year.

That would imply that obviously you get some more volume and you have the continuous priced down nature of the business.

That business usually runs something in the order magnitude of a double digit price reduction.

So that probably will be the order magnitude as we think about the top line for this year.

So just on that pricing, as inventory kind of stabilizes here, maybe end of first quarter into second, would you expect the pricing declines to kind of reverse back to the historical trend rate of 10% to 15%?

Any thoughts there?

No .

It's a tough one to kind of deal with.

In our planning, we are basically planning to be competitive in that marketplace.

We have to, of course, negotiate everyone of the new designs.

So, I would say that, we'll be a more traditional price down would be our expectations.

The other thing that of course comes into play here is you're constantly innovating new designs.

So getting to a pure price to price becomes a little more difficult in this business just because the design is different from one model to the next.

But traditionally, what you'll see in high tech, fast growing markets like (technical difficulty), you'll see something in the order of a double digit price reduction so that's what's in our

It all depends, Ajay, on the mix of sales.

As Pat said, traditionally this is a market that's got double digit down price.

TVs, parts has got double digit down price.

Down price obviously exists everywhere, but the mix of hand helds and monitors and laptops changes the overall mix a lot, and as Pat rightly pointed out, obviously you're trying to innovate here where price doesn't get reflected in the overall model.

Clearly what you've got is pressure on the one and on price.But luckily with some increase in area volumes, you get absorption built into the equation.

But it is a very, very fast-moving market.

It's something that has these abhorrent times where these large corrections take place where you've got shut-downs, fewer sales and pricing all combining in one sort of set of pressures.

So it is hard for us to predict any more really accurately than what we've told you already.

Good.

Maybe one more if I could squeeze in very quickly, on R&D up 19% in the quarter and you're close to 6%, maybe you can talk about -- versus expectations and then George, if you can share any parts on the metrics you use on the efficiency of the spend there?

Well, you saw the number or heard the number, Ajay, at 31.4, so obviously our R&D efforts have been very, very successful.

Ultimately, it's this that drives our top line as long as we can predict canabalization, it's what drives our top line.

So it's very important to us.

I don't really see any need to be increasing that dramatically beyond where it is today.

I think I'm quite happy where it stands.

It might even back off a little bit in terms of total dollar volume.

And we'll be holding the investments in our new business ventures and things like that a constant.

But if you look at the numbers, I think we showed them in the December meeting, the productivity numbers have improved dramatically in R&D in the last few years.

I don't know ultimately where they can go.

I suspect they're probably as far as -- or close to being as far as we can go.I'm happy with the number where it sits and I don't want to increase it any more for now.

We'll see how this stuff bears fruit.

Thank you.

(Operator Instructions)Our next question comes from the line of Jeff Sprague with Vertical Research Partners.

Please proceed with your question.

Thank you.

Good morning, everyone.

Good morning, Jeff.

George, obviously a little bit of a dust-up in the press a month or two back about the remainder of your tenure and how transition plays out.

Can you just share some thoughts on what we should expect perhaps someone gets elevated to President or something mid-year, is it a way to signal what's going on or just in general what the time line is?

In the end to me personally, unless I drop dead first, I'm going to work here as long as the Board wants me to work here, so I'm not anxious to be going fishing just yet, although when the time comes I will.

Obviously the Board has been looking at the issues of transition very closely.

We've been doing it for years by the way, Jeff.

This isn't something that started last year.

It started almost the day that I walked through the door because I, for one, was determined that the next CEO of 3M was going to be an internal candidate, not an external candidate and I think we've got ourselves into the position where that is.

We got a lot of awards on our people development and our folks here do this extraordinarily well.

Later in the year, the Board will -- assuming it arrives at a consensus will make its announcements on how that transition takes place.

I suspect that it will be sort of classic profile.

We'll have a few other steps in between now and me ultimately retiring and I think it all will be very orderly.

People will know everybody.

It won't be a great surprise.

It won't be a great threat like someone coming from the outside.

So I think it will be a fairly well-managed and fairly orderly transition and I hope obviously it's going to be very successful.

I have a lot of personal self-interest in this going very, very well.

I'm sure.

So quit worrying, Jeff.

Also just on really big picture stuff and not to parse words, maybe it was a throwaway comment.

But George, you made the comment about I don't know if we'll ever get proper recognition in your opening preamble, and I just wonder if you could elaborate on that thought.

Obviously you guys have made a lot of progress, and you've started to allocate capital a little bit differently.

Maybe the jury is still out on how that all works.

What are your thoughts on overall strategy, capital allocation, is there any change there?

On driving the top line, Jeff, our long-range goal in 2015 is to have this NPVI number at 40%, so it's obviously -- a lot of money is still going to go into R&D.

In terms of capital, I think increasingly the proportion of spend will get made overseas, primarily in emerging markets in low tax areas, in low cost areas but not necessarily always in low places, because clearly we've got good markets growing in the United States and our model is near to market manufacturing.

You can't with the kind of supply chains we have always spend in low-cost markets.

So we'll appropriately send in these local markets.

I think the pattern that you've seen on dividends will remain, we'll keep dividends growing somewhere between the rate of inflation and the rate of earnings growth, depending on what other investment plans we have during the year.

I think you'll see us, as Pat already spoke about briefly, you'll see us picking up the pace of stock repurchase in the early part of this year as part and parcel of the value return to the shareholder.

So it's -- I think all in all, more emphasis on overseas investments and capital, and probably in -- certainly this year, a little more emphasis on stock repurchases.

Just a quick one for Pat, if I could, Pat, how much actual deal dilutions less purchase accounting, et cetera, was absorbed in the quarter and what should we think about for 2011?

I think, thinking about 2011, we've got most of it behind us relative to obviously the deals we had here in the fourth quarter, in the first quarter we'll have -- I guess first part of the year we'll have maybe a couple cents relative to Alpha Beta and Winterthur assuming that obviously closes.

But it's not a significant number, Jeff.

And the fourth quarter was very similar to kind what we had outlined going into the year.

Thank you very much.

Thanks, Jeff.

Our next question comes from the line of Deane Dray with City Investment Research.

Please proceed with your question.

Thank you.

Good morning, everyone.

Good morning.

Just to follow up on Jeff's question on the capital allocations, specifically on M&A, Pat, I don't know if this was an intentional point but you seem to set expectations for that 1 to 2 percentage points of growth from deals being more a back half of that, so maybe update us on the pipeline pricing.

Is the back half -- because you did a flurry of deals at year end.

Is there a pricing that is not appealing or why might it be pushed back to the later part of the year?

I guess if I had a better crystal ball, I guess we may have given -- I mean, the reality is, you never know exactly when these things are going to happen.

Obviously we got a little more visibility as to what we have in the current pipeline that we're working at, so the ones we've announced will be the ones obviously in the first part of the year, so just realistically by the time we act on them and by the time you get them closed, more than likely they'll be more towards the mid to back half of the year, other than the ones that we've already talked about.

And any expectations or just observations on pricing and maybe geographies?

It's all too expensive for George and me, but it's hard to generalize, okay?

Sometimes you run into some small ones that we still feel that, we get decent pricing that we're a very good strategic fit with somebody.

The more you try to play in I'll call it the public domain, sellers' expectations continue to rise as the market rises, so I don't think that's, there's nothing secretive about that.

So, that's obviously something we have to just keep in our mind as to, I'll call it the relative our value versus their value and just because the market goes up won't bring the shareholders any more value necessarily.

It's something we just have to keep a close eye on which -- we have a great discipline process to look at what we want to buy.

Just can't always anticipate when something pops, we've got a strategic road map on what type of businesses we'd like to invest in.

Obviously we do a lot of prospecting ourselves as to businesses we'd like to go after.

Sometimes you just don't know when things are going to show up on the radar screen.

But pricing, to be honest with you, is kind of back to, it's like the recession never happened.

I think in particular, Dean, the pricing in emerging markets are very high.

If you look at some of the opportunities that are being purchased in India, they're well beyond the level of Pat and my stomach.

There are other ways you can get at these by -- if you have to come across a US acquisition that's got one of those things already in place, they could add a nice little piece of the puzzle in India, say for example but at relatively modest prices.

I think ultimately that market is going to cool down.

It just has to.

The PEs that you see in that market are so stratospherically high, people just can't get the returns.

I think ultimately that will cool down and we'll do a little bit of watching and waiting and probably opportunistic buying plus trying to buy by the back door in the way that I just outlined at least in those markets Deane.

That's very helpful, thank you.

Our next question comes from the line of Laurence Alexander with Jefferies & Company.

Please proceed with your question.

Good morning.

Good morning, Laurence.

I just wanted to extend on your answer to the last question, as you think about M&A and some of the faster growth markets, I think you mentioned Renewables were growing north of 70% this quarter.

Yes.

When you think back a year ago, the fact that you didn't do deals -- was the issue to valuations or was the issue that you look at some of these fast growth markets and you're concerned about the sustainability.

I guess the second question I have, just a very quick one on gross margins, the lag that you're seeing between raw materials and pricing, is it fixable or do you think this will be structural at least for this cycle given your business mix?

Laurence, I think on pricing in these markets, if you go back and look at the question, did we or would we try to buy some things in these high growth bases, we did actually try to buy a number of businesses, but in the end the prices were nose bleed and we said, look, there's still a return on investment even with very, very high growth, businesses like this, so we have to be prudent and sensible about where we can.

We also have to think about the capabilities inside 3M.

We can grow a lot of this stuff ourselves candidly speaking.You see that example in the Labels market, that one of our colleagues was asking about earlier.We had that capability, why pay for something we can do on our own and to some degree for nothing.

It all depends on what technology we have, what market presence we're trying to build and try to chase, and Pat and I are, I suppose, legendarily conservative on those sorts of things and I don't think that's going to change dramatically.

Nevertheless, we are seeing here and there some opportunities that are more modest in price and we will look at those carefully, and if we can get the deals done, we'll do it.

But I don't think you should expect to see any head long sort of rush into things which are high-priced, even though they are high growth.

Ultimately, I don't think any market can be sustained just on the basis of government subsidies.

So you have to sort of think about how this market matures to a place where it's self-sustaining and that then, might result in more secure but perhaps less expensive opportunities coming up at a time when the market is more mature.

So we have to balance all those things, let them ride as we think about what to do now, what to do later.

Then just quickly on gross margins?

Oh, yes.

I think the original question on pricing material, George's comment -- I think it would be fair to say that we were a little slow, okay, to go after pricing.

I don't see it being a structural change in this cycle.

We've got pricing plans in place and we'll go after these in this new year.

Thank you.

Thank you, Laurence.

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

Please proceed with your question.

Thanks Pat.

Wondering if we might get a little bit more color on 2011 margin expectations by segment.

And I guess where I'm coming from is, if we look ex corporate the segment operating income margin rolled up for all the segments at closer to higher end of your guidance, looks like up 75 or 100 basis points.

I'm just wondering if you could talk through the segments, what's above that, what's below that for us.

We dance around a little bit but maybe you can help with some more color there?

Terry, you never give up, do you?

I try not to, some days you want to though, I'll tell you.

Yes, I know.

I don't -- realistically when I look at, forget about quarters for a second.

If you look at the whole year, is the way I have a tendency to more think of this.

I don't really see a significant change in our margin structure that significantly.

ECB's got some momentum behind it, okay, so maybe they'll be a little higher on a total year basis on a year on year basis.

But realistically I think everybody else will be relatively close to where they were in 2010.

Maybe Industrial may have a little bit of leverage kind of in their business if they get some top line to them, but Health Care will be relatively similar.

I think Consumer will be relatively close to what it was this year.

Again, all of this is absent any kind of new acquisition impact that may kind of be dilutive in a given business.

But I don't really see a big change.

I'm a little surprised with Optical flat that maybe you wouldn't have said D&G down a little bit which maybe suggests some greater strength in the non-LCD part of Optical and/or the rest of D&G.

Can you comment on that?

I think Terry, that would an fair read.

Okay.

Commercial graphics had some good momentum behind it, we think TSS will do well on this side.

We think the micro projector, okay, has some good legs to it.

That team's has done a very nice job coming back, so I do see it as being -- maybe some of the other businesses helping to offset a little bit of lower number in Optical.

And again just to clarify then, the Optical piece margins would be down the rest up and you would end up about where you were this year.

That would be the right way to read it, as we see it right now.

Okay.

George, maybe one more on this capital allocation because of the separation of companies in multi industry is something that has a lot of people talking.

You mentioned in the past or you've questioned in the past whether the market's really recognizing the value in the very high and sustainable margins in Health Care.

You mentioned at the analyst meeting that maybe the Optical business has got too much volatility for the business model in the long-term.

Should the Company be considering in this environment more seriously how the pieces of the total might on their own add up to more than what we see the market assigning value right now as?

It's an excellent question, Deane, and I'm asked the question often.

I really do and I know people do try to do this.

I try to dissolve the notion this is a conglomerate rather than a multi technology company.

Let's sort of take Optical films.

These are shared between -- the capabilities and patents are shared between Optical, they're shared between the Renewables Energy business, some of the work leaks into Traffic Safety, it leaks to a lesser extent or will leak in to a lesser extent depending on how we do on liking into Consumer Office.

The problem is, Terry that the technologies are shared, the plans are shared, the patents are shared and it's not that easy in 3M as a general rule to pull out pieces of the business because of the way they're interlocked on shared plans and shared technologies.

So it isn't nearly as easy.

And it also, by the way, proves the point that we're not a conglomerate in the classic sense.

That doesn't mean that there aren't bits and pieces of the Company that you couldn't pull out and try to capitalize on.

On the other hand, we -- we're trying to figure out, let's say we sold a big piece of the business.

By the time we paid the tax leakage, we might struggle to look for other opportunities that would drive growth anyway.

So it isn't as easy in this particular company, Terry, as it is in pretty much any other companies that I've seen, and so a lot of this stuff is very sticky and it's inter relationships and it's sharing.

And the way actually we use some of these platforms in curious ways from Automotive going into Health Care, from Dental going into Automotive in a way that most people would not see, so while I -- I know the thing you're referring to, AT&Ts recent dissolution, shall we say -- it really isn't as easy an issue nor as relevant an issue in our particular Company.

Thanks very much.

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

Please proceed with your question.

Hi.

This is James Sheehan in for David this morning.

On raw materials, Pat, you mentioned the price in raw materials would be roughly down in 2011 and given that we had a 2% rise in raw materials this past year, could you just quantify for us your expectations what raw materials will increase this year?

I'd say it would be similar at this point in time.

At this juncture, I guess it's a -- I still have a little bit a of concern, could we see a little bit higher inflationary number this year play out, but coming from a planning standpoint, it will probably be pretty similar.

Okay.

And then just on the share count, can you just elaborate on the increase in the share count sequentially and how do you see buy-backs impacting the share count in 2011?

I guess we have to get back to you, because I actually think sequentially share count probably comes out a little bit with our buy-back activity.

We'll talk to you offline on that.

But generally speaking, what we had talked about in December was a gross repurchase program of $2 billion or so in the 2011 period.

We'll come back to you on the shares.

Okay.

Thank you very much.

Thank you.

Our next question comes from the line of Jason Feldman with UBS.

Please proceed with your question.

Good morning.

Good morning, Jason.

I know that you don't give quarterly guidance but given the unusual comps last year bearing across the year much harder in the first half.

Is there anything we need to keep in mind when thinking about the progression of the earnings over the course of 2011 that differs from normal seasonality?

No, I don't, Jason, offhand, I can't think of anything from a macro perspective or a Company strategy standpoint that would necessarily be kind of a different mix during the year.

I hate to bring up Optical again, okay, but Optical can have some pretty significant differences by quarter.

But generally speaking, our seasonal patterns don't change all that much.

So, what we had last year, of course is -- in 2010 we had kind of a growth strategy that we wanted to get out of the first quarter and make sure we started solidly but then we had a series of growth programs ramping up through the year.

We knew going in that we would have a, I'll call it a margin profile.

It was a little bit better the first half of the year than it was back half of the year.

I don't see that same thing playing out this year.

I think what you ought to see is a more even margin structure going through the year but nothing different really from a top line perspective.

Okay.

And then last thing is early last year you attributed some of the extremely strong organic growth to share gain and for some competitors were weak in coming out of the downturn.

As conditions have normalized over the last couple of quarters, have you seen any change in competitive condition, different -- competitive environment?

I think George alluded to a greater strength from some of the smaller companies in emerging regions lately.

Yes, let me pick that up Jason.

Certainly the numbers last year show that we continued to gain share.

We obviously gain share, I suspect in some businesses more than others net-net probably around 0.5% if you do the mathematics.

I really don't expect that to change a great deal.

I'm hoping that we can continue that strategy.

The part of the -- a piece of the growth comes from share and that we build the capability and presence of our Company in these markets step by step gradually.

But it was really sort of a rather than a note of caution so much -- although it was a note of caution.

Is it explains why we have to be more local, because these small companies, Jason, many of them are growing very, very rapidly and they're very able, and very nimble.

Unless you try to the extent that you come to be like them, they're going to go eat your lunch.

So I think the strategy that we followed of more globalization, more localization of manufacturing, of leadership, of technology and increasingly of manufacturing is a good sort of shield against that kind of pressure.

But ultimately, it is going to be about our speed, our efficiency, and our ability to be competitive in each of those markets in every single segment that we compete in.

If we do that, we have nothing to fear from them.

Thank you.

Thanks.

Our last question comes from the line of Steve Tusa with JPMorgan Securities.

Please proceed with your question.

Hi.

Thanks for us letting me in.

Lots of good questions.

Just a question on D&G, I'm sorry to bring this up again.

I was having trouble reconciling the results.

Revenues were up year over year, yet the margin was down.

I understand, the Optical business was weak but it was still up year over year.

So I'm just curious as to how that -- is that a mix issue that the businesses that grew -- I know there's other businesses that are picking up slack for Optical and that's a dynamic that you expect into 2011.

But is there something with regard to the profitability of those businesses that's an incremental drag along with what's happening at D&G -- or at Optical or is this just like a horrendous Optical quarter that we're going to climb out of over the next several quarters?

Steve, you're talking about fourth quarter by itself, not the year, right?

Yes, fourth quarter D&G, correct.

What really the issue is and really is, in Optical is really a primarily an Optical issue.

What happened in that business is that even though the top line was relatively okay, the -- our manufacturing output was way down in the fourth quarter.

When we looked at inventories in the channel and kind of what customers were saying, and what we talked about in our December meeting.

We took a decision to really significantly alter our production volumes in the fourth quarter.

I think the number I heard is that our output may have been about half of what it was last year for the fourth quarter, so you have some high volume manufacturing assets that aren't making much in the quarter and it has a pretty significant impact on your margins.

So I think I kind of isolate it to be more of that situation in the fourth quarter.

How did you guys get stuck with that much inventory?

Was that a -- because that's a pretty decent amount, that's a pretty big disconnect between sell through and what you actually produced.

Is that -- I mean, I don't think the retail volumes were bad but were they that bad or just the visibility in the chain of inventory?

Steve, what part of it was that obviously they were continued to be billed in the channel, not only at the retail sector but all the way back through the manufacturing processes.

We had been running 24 by 7 in that operation all year long.

Customers kept demanding more and more product for us.

Those were still the signals that we were getting going into the fourth quarter.

But it becomes very clear that when you look at what the inventory channel looks like that's including the back light manufacturing and so forth that they had excess inventory.

So it is -- it takes a while to get the entire supply chain cleansed of where you have the imbalances.

So there was -- it's fair to say that there was a build-ahead that effectively led to excess inventory going into the fourth quarter.

So we decided that it was the right time to get ourselves squared around in the fourth quarter.

But if you look at it for a whole year, if you look at Optical on a total year basis, they really had a very nice business result across the year.

Just that the fourth quarter was weak.

Certainly and growth is good in the fourth quarter.

And one follow-up on Health Care.

What do we expect for the margin of Health Care next year, is that a flattish type of performance or will there be a little bit of pressure there given volumes are still kind of trending a little bit weaker than the long-term growth rate there?

It ended the year, I think at 30.2.

I expect it will be in that ballpark next year.

Okay.

Steve, this is George one last point before we ring off.

I think just to sort of underscore what you said about the toughness of the fourth quarter in Optical, I think that business suffered something like 8% or so down price in the year, maybe it was 9%, but about half of that was stuck, attributable to the fourth quarter and that's why you heard Pat say that we expected double digit down price going forward in the coming year.

It really was as you said, it was a tough transition that quarter, very, very low production and very, very high pricing pressure.

So that business had a below 10% margin or was that still -- it saw a double digit?

No, it was still a double digit.

Okay, great.

Thanks.

Thanks, Steve.

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

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

Well, thanks for joining us, everybody.

I appreciate your patience.

A lot of good questions, and thanks for your interest in our Company, and we'll look forward to talking to you next quarter.

Thanks, everyone.

Ladies and gentlemen, that does conclude the (end of audio)