3M (MMM) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the 3M third-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, October 25, 2011.

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

Good morning, everyone, and welcome to our third-quarter earnings conference call.

Before we begin, I have got two items just to mention.

First, please plan to attend our annual outlook meeting scheduled for the morning of Tuesday, December 6 at the Grand Hyatt Hotel in New York City.

An invitation will go out today.

Second, we will announce fourth-quarter earnings on January 26, so please mark your calendars.

Today we'll discuss our third-quarter results along with an updated outlook for the remainder of this year.

The slide presentation and audio replay will be archived on our website for an extended period.

With me today are George Buckley, 3M Chairman, President, and Chief Executive Officer; Inge Thulin, Chief Operating Officer; and David Meline, Chief Financial Officer.

Please take a moment to read the forward-looking statements on slide two.

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

So with that, I will turn the program over to George.

Good morning, everybody, and welcome.

Today David and Inge will lead the majority of the formal pieces of the call, but by way of a setup, I would like to offer a few words at the beginning of the call.

The quarter turned out to be a very different one than what we expected.

The challenges that we faced were primarily two causes and two effects.

Cause number one was worries about European sovereign debt and the European economy.

Cause number two was the rapid contraction of the electronics end markets.

It began with TV, extended to other consumer devices, and has now crept a bit into factory automation.

Effect number one was a flip in exchange rates a confidence in Europe's ability or willingness to deal with the crisis fell and its economy responded negatively.

Foreign exchange alone will reduce our earnings by up to $0.07 over the balance of Q4.

This is the reverse side of having almost 70% of your sales outside of the United States.

On the second effect, this was simply volume and the under absorption that comes along with it.

In the last few months worldwide IPI forecasts for 2011 have fallen by fully 200 basis points.

This is a reset down in expectations for the global economy.

Those who know our Company well know two things always happen in these circumstances.

First, the changes are always amplified in the supply chain, temporarily suppressing net growth.

Second, we always see the effect early, typically one to two quarters before our industrial peers.

Without these factors or transients, our underlying organic growth would have been almost 6%, so underlying fundamentals are okay.

The better news is this.

Electronics markets always recover quickly and early from these types of flash contractions, as do we.

With that introduction, I would like to turn the call over now to David to begin with the details.

David?

Thanks, George, and good morning, everyone.

Let's turn to page number three.

I'm going to start today with a few brief comments on the quarter along with discussion of our current macro view which has changed since the second-quarter call.

At the time of our July earnings call, the late quarter data was hinting that global economic growth was beginning to moderate.

We felt it in our results and described it as such.

But at that early point, it was difficult to ascertain the extent to which that softness might extend into Q3.

Signs indicated this was temporary and that better growth rates would resume in the second half of the year.

Japan of course further clouded the picture.

In this quarter's results, you will see that several of our businesses grew nicely.

We posted worldwide sales of $7.5 billion, a 10% increase over last year's third quarter and notably a record for any third quarter in our history.

Three of our six businesses posted double-digit increases, namely industrial and transportation, safety, security and protection, and Health Care.

And our consumer business expanded their sales as well.

Growth in these four segments was achieved through a combination of good organic volume, selling price increases, and acquisitions along with a dose of positive currency benefit.

So while there is definitely growth to be had in this economy, certain segments clearly hit an inflection point in the quarter and some retreated.

Western Europe is experiencing challenges given the uncertainty around fiscal and monetary policy direction.

This is impacting consumer confidence and spreading to the manufacturing sector.

Our organic volumes in Western Europe declined 4% in the third quarter after a flat result in the second quarter and a 4% increase in the first.

The consumer electronics market excluding handhelds slowed considerably as the third quarter progressed, which impacted our sales in Electro and Communications and we also saw it creeping into factory automation, too.

We sell a broad array of component solutions to all types of electronic OEMs and roughly half of this business's sales go to the electronics industry.

We know from history that electronic cycles are fast, so volume declines are deep and short.

But the good news is is they also normalize quickly.

In Display and Graphics, LCD TV remains the story as OEMs are fighting a battle to lower prices, reduce inventories, and yet still create value for retail customers.

By and large with the exception of consumer and office and healthcare, we are a component supplier to our customers.

Our products are generally consumed in our customers' manufacturing processes or embedded in the customers' end products.

So our business is fairly short cycle.

This means that when economic trends turn down our customers alter production schedules and we feel the impact sooner than most.

Those changes are nearly always accompanied by temporary inventory transients, which amplify the impact on our sales.

Bear in mind this phenomenon works in both directions.

When the economy turns back up, volumes recover sooner and our growth is amplified as the channel fills again.

We've been through these corrections many times in our past and we know how to respond.

Inge will speak more to this in a few moments.

With that brief intro, I would like to now turn the call over to Inge, who will review the quarterly performance of our six business segments.

Please turn to slide number four.

Thank you, David.

Good morning, everyone.

While there is no doubt the environment is changing somewhat, there's a lot for us to feel good out in the third quarter.

Five of our six businesses achieved positive sales growth, with three delivering double-digit growth and we posted an all-time record for third-quarter sales.

Now let's take a closer look at each business, starting with industrial and transportation, our biggest business.

Third-quarter sales were up a solid 19% to $2.6 billion or 15% in local currency terms.

Sales grew across all businesses, with double-digit increases in abrasives, renewable energy, aerospace, and industrial adhesives and tapes.

Geographically, growth was broad-based, with sales up 28% in Asia-Pacific, 22% in Europe, 15% in Latin America-Canada, and 10% in the United States.

Acquisitions contributed 6.8% to growth.

Winterthur, one of our larger acquisitions in this space, is a tremendous addition to our core abrasives business.

It is a technology-rich company in the area of bonded abrasives for hard to grind precision applications in industrial, automotive, aircraft, and cutting tool markets.

We have long admired Winterthur's technical capability and we are very excited about the combination of our two companies.

Integration is well underway and on track.

Some of our businesses in Industrial and Transportation were affected by the slowing economic activity.

For example, the industrial adhesives and tapes business, with sales across most industries including electronics, was particularly impacted.

In our Industrial and Transportation business, profits grew by 21% to $525 million with a highly respectable operating margin of 20.4%.

All in all, it was another solid performance for this business, which represents one-third of our global business mix.

Let's move on to Health Care.

Sales grew 14% to $1.2 billion or nearly 11% in local currency.

The strongest growth came from our infection prevention business, which drove outstanding high single-digit organic growth in the quarter in addition to a nice boost from the Arizant acquisition.

We acquired this company one year ago and so far it has been a home run.

Early indications are that patient warming solutions for the operating room are catching on quickly in overseas markets where 3M has a strong presence in the hospital channel.

Sales also grew nicely in our core skin and wound care business and in health information systems.

Health Care sales increased at double-digit rate in every geographic region, with Asia-Pacific up 20%, Latin America-Canada up 16%, Europe up 13%, and the United States up 12%.

We have been investing more aggressively in emerging markets over the past couple of years to accelerate penetration in our Health Care platforms and we are beginning to see the benefits in our results.

Operating income in Health Care increased 13% to $367 million and margins were 29.5%.

We are very excited about our new products in the Health Care space.

For example, our health information systems business recently developed and commercialized a breakthrough software that helps hospitals transition to a new standard coding system called ICD-10.

We have already been selected by the Centers of Medicare and Medicaid Services to support ICD-10 transition planning in its headquarters in Baltimore.

Also in our food safety business, we have launched a new test procedure in collaboration with a major food manufacturer to monitor shelf life and food quality.

We achieved excellent sales growth in the oral care business especially in developing economies.

Recent acquisitions of orthodontic companies in Brazil and China have expanded our presence in mid and lower tier categories, which will be critical to our long-term success in these early stage, but fast-growing markets.

Let's now turn to Consumer and Office.

Sales increased 7% year-on-year to $1.1 billion or 5% in local currencies.

Operating income increased 4% to $244 million and margins were strong at 22.3%.

Growth was broad-based in the quarter with nearly all businesses growing in local currency.

Notable performance were in our consumer healthcare, do-it-yourself, and home care businesses.

On a geographic basis, sales grew in all regions with particular strength in Asia-Pacific at 18%, where we continued to invest in China and India to establish brand presence in this growing part of the world.

Latin America and Canada grew sales 11% and Europe was up 5% largely due to positive currency impacts.

Sales in the United States were up 4%, a nice improvement year-on-year.

Seasonal sales and new products helped drive growth in Consumer and Office.

Back-to-school met our expectation and provided a nice lift in sales of our command brand books and mounting solutions.

We also expanded our family of market-leading Filtrete product with a new carbon-based home furnace filter that eliminates odor and allergens.

On a global basis, we continue to gain penetration in the home care market, leveraging our leading Scotch-Brite brand.

Overall, it was a good quarter for our Consumer and Office business.

Now let's go on to Safety and Security and Protection Service business.

Sales rose by 18% to $954 million or 14% in local currency.

Organic sales were up high single digits and we added almost 6 points from acquisitions.

All geographic regions posted positive growth, led by the United States at 28%, Asia-Pacific at 25%, and Latin America and Canada at 21%.

Operating profit increased 23% to $202 million and operating margins were 21.1% for the quarter.

This quarter's strong growth was driven foremost by personal safety products with good gains in both respiratory and hearing protection, two sizable platforms within this business.

We also saw a surge in sales from roofing granules, driven by last summer's heavy tornado season.

That demand has worked its way through the channel and we anticipate some slowing in the fourth quarter.

We drove double-digit growth in security systems, accelerated by the December 2010 acquisitions of Cogent Technologies.

Cogent gives us important technologies in finger, palm, face, and iris biometric systems to complement our existing border security and identification solutions.

Cogent also expands our reach into law enforcement, public safety, and commercial access control applications.

During the third quarter, we earned a nice win with the US Customs and Border Protection Agency which is using 3M Electronic Passport Readers in all US air, land, and sea ports of entry.

Let's now look at our Display and Graphics segment.

Sales were $935 million, down 12% year-on-year and down 14% in local currency.

As David mentioned, optical films for LCD TVs drove much of the decline.

Retail TV demand continues to soften, therefore OEMs are lowering brightness specification in order to reduce prices.

In addition, they are slowing production in order to lower inventories.

On the positive side, we continue to see strong attachment rates on battery powered devices such as tablet PCs, smartphones, and notebooks, where the value proposition for our films is very strong.

Excluding optical, total Display and Graphics sales declined just under 1% in local currencies.

Sales in Traffic Safety Systems declined a bit in local currency terms due to lower levels of highway construction funding by governments in the United States and West Europe.

One of our newer businesses in this segment is architectural markets, formed a short time ago to accelerate our penetration in the design solution markets.

Products here range from 3M Di-Noc finishes to advanced lighting solutions.

This business posted double-digit local currency growth in the quarter and continued to show excellent potential.

Finally, let's take a look at Electro and Communications business.

Sales were $838 million, up 4%, and profits were down just slightly to $181 million.

Margins for the quarter were 21.6%.

All geographic regions posted higher year-on-year growth led by Europe and the United States at 7% each.

Sales rose 9% in our electrical market business, a powerhouse franchise that serves the utility and infrastructure markets.

Electrical is a true enduring franchise for 3M that just keeps on growing quarter in and quarter out.

We also saw good growth in telecommunication markets in the quarter.

Sales in the electronics industry rose just slightly, a considerable change versus the high growth rates we saw over the past several quarters.

As David mentioned, this market has slowed, which significantly affected our customers' production schedules in Q3.

This slowdown is expected to persist for the next few quarters.

Electro and Communications announced a number of growth initiatives recently including an agreement with IBM to jointly develop new adhesives to enable the creation of microprocessors that are up to 100 layers thick.

These chips are potentially 1000 times faster than those used today.

We also announced a manufacturing capacity expansion for 3M ACCR high-capacity overhead conductors, which are gaining traction in the marketplace on a global base.

In addition, we are building new capacity for 3M branded Novec products used in electronics, data centers, semiconductors, and medical markets.

Please turn to slide number 5.

As both George and David mentioned, it's clear that the macro trends have slowed and growth rates have drifted lower, which naturally begs the question, how are we responding?

First and foremost, we will stick to our long-term growth plan and continue to invest significantly in the research and development.

In fact, we have invested $1.2 billion year to date, up 14%.

New product introduction will continue to fuel growth as we expand our businesses and drive market share gains.

Experience tell us that it's especially important in this times to differentiate ourself from the competition through great products.

This is precisely how we improved our competitive position during the last downturn.

Secondly, we remain bullish on our long-term growth in developing markets and plan to continue investing in those countries.

Emerging markets now represent 34% of the Company, up from 17% in 2000.

In addition, we are targeting $1.3 billion to $1.5 billion of CapEx in 2011 versus $1.1 billion in 2010, a healthy increase.

We have good line of sight to future growth needs in all of our businesses so this new capacity will be critical to our future success.

We maintain a strong balance sheet which enable us to return significant cash to shareholders through the ups and downs of economic cycles.

Through nine months of 2011, we returned $3.4 billion to shareholders via cash dividends and gross share buybacks.

At the same time, we are establishing a 2012 plan with maximum flexibility.

We expect the global economy will grow but at a slower rate and anticipate there will be growth to capitalize on but there will be bumps along the way.

There just always are and we all know it.

We currently expect that the second half of 2012 will be better than the first as electronics will take a few quarters to wash through the system.

Just as we did 2009, we will take full advantage of this time to engage with our customers to develop unique 3M solutions to their challenges.

In terms of driving productivity, we have already been quite active during this year in a number of businesses.

The Display and Graphics team for example has been reducing full-time and temporary positions primarily in Asia to address declining factory utilization levels and put in place contingency plans early around spending.

Electro and Communications responded to weakening demand with targeted action to improve productivity and reduce costs while staying fully prepared to capitalize on an eventual upswing.

In Europe, our new regionalized subsidiary structure is driving speed and simplicity in our operation and will save us $10 million this year.

Importantly, all of our businesses have aggressively prioritized and are prepared for whatever comes our way in 2012.

Going forward, we have implemented hiring freezes in most developed countries.

Replacement will be limited to those key positions that are closest to the customers.

Our businesses have also triggered contingency plans with respect to indirect costs which represent over $4 billion annually, so there's still room for more improvement.

And finally, we are considering the need for more aggressive actions as we monitor economic growth in 2012.

We will have more to say about 2012 at our meeting in New York City during the first week in December.

Again, flexibility in our 2012 plan will be key.

This quarter's slowdown could prove to be short and temporary or it could linger into next year.

We are prepared for either.

So in short, our long-term strategy is intact.

Our financial condition is strong, and we are well-positioned to win in any economic scenario.

That is a quick overview of the business result and operation.

Now we will turn the call over to David, who will provide some additional color on the quarter.

Thank you, Inge.

Let's start with sales, so turn to page number six.

We posted a record third-quarter sales of $7.5 billion, up nearly 10% year-on-year.

In dollar terms, the growth was broad-based with all geographic regions increasing year-on-year.

Of note this quarter was Latin America-Canada region with 14% growth year on year.

This was the eighth consecutive quarter of double-digit sales growth for the region.

Currency was a net positive in Q3 adding 3.1% to sales.

FX added 5% to sales in both Asia-Pacific and Europe and 3% in Latin America-Canada.

However, sales were impacted negatively by the late quarter surge in the dollar, which cost us over 1 point of sales growth.

As I mentioned earlier, organic volume growth slowed in the quarter to 1.9%.

Volumes increased in all geographic regions with the exception of Europe.

More specifically, Western Europe experienced a 4% decline in organic volumes for the quarter.

The two factors I mentioned earlier, namely the decline in Western Europe along with slowing in electronics, together hurt 3M's overall organic volume for the quarter by nearly 4 percentage points.

Normalized organic volume growth for the Company therefore was closer to 6%.

We continued to raise our selling prices in the quarter, a necessity in light of higher raw material costs.

Prices rose nearly 1% year-on-year adjusting for optical, where price down is necessary in order to compete; prices for the Company rose nearly 2% in the quarter.

Through nine months to date all of our other businesses are now in a positive price position and are expected to more than cover raw material cost inflation for the calendar year cumulatively.

Acquisitions added nearly 4% to sales in the quarter.

Please turn to slide number seven for a look at our income statement for the quarter.

Sales, as I mentioned, rose 10% in the quarter and gross profit dollars grew 6% year-on-year to $3.5 billion.

Gross margins were 46.6% versus 47.9% in last year's comparable quarter.

We were able to neutralize raw material inflation with selling price increases in the quarter and we are on track to fully offset raw material inflation for the entire year with the exception of optical.

As the quarter progressed, our sales did not develop as expected, particularly in September.

Demand patterns were very good at times but choppy during others.

As Inge mentioned earlier, we took action to adjust our factory loading levels in some businesses but the effects were not fully realized in the third quarter.

The resulting under absorbed overhead largely explains this quarter's gross margin decline.

Helping to mitigate these factors are ongoing savings in our factories including faster line speeds, waste reduction, yield improvements, energy savings, and other ongoing productivity improvements driven by our Lean Six Sigma teams around the world.

SG&A rose 13% year-on-year with 10 points of the increase coming from FX and acquisitions.

Underlying SG&A therefore rose 3%.

Similarly, R&D investment rose 10% versus third quarter of last year, maintaining a healthy 5.2% of worldwide sales.

Six points of the R&D increase related to acquisitions and FX.

Our business teams are working aggressively to achieve a 32% NPVI target for 2011, which would be an outstanding result considering a lower sales outlook.

Operating income was $1.6 billion, up slightly year-on-year and margins were 21%.

Earnings for the quarter were $1.52 per share, down $0.01 versus last year's third quarter.

The tax rate was 28.6% in the quarter versus 26.8% last year, which cost us $0.04 per share.

A lower share count added $0.02 of benefit in the quarter.

Please turn to slide number eight.

Free cash flow for the quarter was $1 billion and we converted 94% of net income to cash, consistent with our historical third-quarter average.

Net working capital impacts were slowly positive year-on-year as both inventory and accounts receivable turns were right in line with third-quarter 2010 levels.

During the quarter, we contributed $248 million to our pension and OPEB plans, $55 million less than in last year's third quarter.

At present we are planning to contribute another $200 million to our plans in the fourth quarter, which would put the full year pension and OPEB investments at $600 million in total.

Cash taxes paid were $43 million higher year-on-year.

Investment in CapEx for the quarter was $336 million, up $108 million year-on-year.

We anticipate full-year capital expenditures of $1.3 billion to $1.5 billion, up from $1.1 billion in 2010.

More than half of this investment will be in international locations supporting our ongoing strategy to localize production and better serve our customers around the world.

Gross share repurchases in the third quarter totaled $849 million, putting us at $2.2 billion through nine months of the year.

For the full year, we now anticipate spending in the range of $2.5 billion to $3 billion, up from a prior range of $2 billion to $2.5 billion gross for the calendar year.

Turning to slide number nine, with three-quarter of the year behind us let me address our updated outlook for the year.

We now expect that earnings per share will fall within the band of $5.85 per share to $5.95 per share versus a prior expectation of $6.10 to $6.25.

Organic volume growth will come in between 3% and 4% for the year versus a prior forecast of 6% to 7.5%, reflecting the more challenging economic environment we face.

This is expected to reduce full-year earnings by $0.25 to $0.30 per share.

Partially offsetting this is the impact of a lower share count.

We have been more aggressive in purchasing our stock of late, which has the effect of boosting full-year earnings by $0.04 to $0.06 per share.

On the tax rate, we now estimate that our full-year tax rate will be approximately 28.5% versus our previous projection of 29%.

This equates to an additional $0.04 of earnings versus our July guidance.

Finally, foreign currency impacts will be positive for the year.

However, recent US dollar strength has reduced the estimated benefit by $0.06 to $0.10 per share for the full year versus our prior forecast.

Approximately two-thirds of this reduction can be attributed to the fourth quarter.

Full-year operating margins will be approximately 21% for the year.

As a reminder, we are absorbing $0.22 per share pension and OPEB expense headwinds in our 2011 results.

Our new guidance adjusted for this item implies year-over-year EPS growth of 8% to 10%.

Lastly, I would like to share our early thoughts on next year's pension and post-retirement expense.

We are currently estimating a $0.10 per share headwind in 2012 related to pension and OPEB expense.

This forecast assumes that the discount rate on our US plans remains at 4.5%, which is equal to the rate at September month end.

It also assumes US asset returns of positive 6%, also equal to our actual performance for the first nine months of the year.

This wraps up our formal comments today.

I look forward to seeing many of you at our meeting in December for a complete discussion of our 2012 plans.

We hope you can make it.

Now we will be happy to take your questions.

(Operator Instructions).

Laurence Alexander, Jefferies & Co.

Good morning.

On demand trends, can you give a little bit more detail on what you're expecting in terms of year-end shutdowns?

And if any of the regional end markets where you've seen a deceleration, you are already seeing signs of trends troughing?

On the first question concerning year-end shutdowns, what we see in particular is in the areas where we have seen weakening demand.

So for example in the optical systems division, we expect in the fourth quarter to have a continued weak demand in that area and so our factories supporting that activity will be running much lower than their full capacity, approaching the level that we experienced last year in the fourth quarter.

If you look at D&G for the year, we had last time indicated we thought Display and Graphics sales for the full year would be about flat.

We are now expecting that to be in the low to -- in the mid to low single digits on a negative basis.

If you look at the electronics business in ECB, likewise we are seeing reduced demand and declining requirements from a number of our customer areas not only in consumer electronics but also as we had mentioned, spilling over into some of the factory automation area.

So we will have lower demand there which will lower our overall sales for that sector to the mid single digits for the year.

In terms of troughing, I would say we haven't really seen yet -- we don't expect to see an upturn yet, but what the indication is right now on October sales is that we are running pretty consistent with what we had had for the overall third-quarter sales base.

Laurence, this is George here.

Just as a kind of add a little bit back onto the back end of what David said, we typically see these things -- when they happen if you sort look at the cause-and-effect, if you go back to the numbers in IPI and the last couple of quarters they have dropped by 2 full percentage points, 200 basis points.

What we always see is that sort of amplified in our supply chain and then it bumps along the bottom for a couple of quarters depending on the efficiency of the supply chain clearing the excess inventory and then it begins to creep back up.

So we wouldn't expect to be seeing it just yet but we would probably -- if that model that we used in 2009 that seemed to work so well there, if that continued, then you would expect to see that begin to ease back up toward the end of the year or maybe into the first quarter next year.

That's kind of what you'd expect from the dynamics that we've seen in the past.

Thank you.

Steve Tusa, JPMorgan.

Good morning.

I just have a question on the 100 bps of margin improvement for next year.

Is that coming from the unusual factory loading, some of that reversing in the fourth quarter?

How visible is that margin improvement?

Yes, so obviously we are still right in the middle of doing our '12 planning right now but the way we are looking at this is with the running rate where we expect sales to be more moderate next year, sales growth to be moderate, what we're really looking at is rebalancing our plans so that we are going to run much tighter on the cost side through the year.

And so we would expect that to show up, that improvement to show up in combination between not only cost of goods but a big piece of that we would expect to see in the SG&A area.

Okay, on the plant front, your CapEx went up pretty dramatically this year.

Should we think about CapEx being flat to down next year after this big bump up this year?

How do you kind of manage your growth spending from a capital perspective?

What I would say is that exactly, we've seen an increase this year which is being driven across the business as we localize our production around the world and respond to the fact that coming out of the last recession we've run up against capacity limitations in a number of the areas.

In the context of what we are looking at for next year and beyond, right now we are not expecting a double dip recession like the kind of recession we had in the last period.

And therefore, we expect actually to see those capital expenditure demands to continue into 2012.

So we don't see that right now backing off significantly at all.

(multiple speakers) Okay, one last question.

Just I think we backed into kind of a flat to down organic for the fourth quarter.

Can you just give us an idea of the segments and kind of the moving -- there's a lot moving around here.

Obviously electronics pretty weak but the rest of the businesses holding up okay from a growth perspective.

Could you maybe give us an idea of how quickly some of the nonelectronics businesses slow into the fourth quarter?

Sure.

So in terms of by segments, the nonelectronics businesses, so if I look at consumer and office and healthcare, we expect that the running rate on those on an organic volume basis will be similar to what we saw in Q4.

So if you look at the full-year sales for those businesses, we expect them to finish a full-year basis to be at the low end of the original guidance we have given last year in December.

If you look ITB and SS&PS in particular, we are seeing some softening in the third quarter.

We expect the running rate in the fourth quarter to be similar to the third-quarter rates which would put those two businesses towards the low end of the range that we'd set out last year for organic volume growth for those sectors and the primary driver of that softening is what we saw in Europe in the quarter.

So I think that answers the question.

(multiple speakers) One thing on the CapEx.

Obviously we allow our CapEx plans and plant capacity and building over a period of many years and our guys have not backed off their positive feelings about our growth prospects going forward, and about the many markets that we are managing to make great inroads into.

So I think we wouldn't necessarily want to send any signals that we are suddenly giving up on the future just because there are these sorts of turbulent issues which are taking place partly in Europe and partly in the consumer electronics business.

So we'd just like to sort of reassuring you that there is a pretty bright future out there and we expect to make it happen.

Thanks for all the detail.

Appreciate it.

Deane Dray, Citi.

Thank you.

Good morning, everyone.

George, it's been a while since we've actually looked into the crystal ball.

You were real helpful in the early stages of 2008.

But just give us your perspective.

We heard from David give kind of two scenarios.

It could be the shorter slowdown version or could linger into 2012.

And just from the basis of the destocking phenomenon we've seen this before but I never got the sense that there was a lot of restocking going on.

So maybe that will help dampen it but just kind of take us through your thinking of the scenarios from here.

Yes, sure.

Thanks.

I happen to have the unfortunate position or joy, I'm not sure what it was, of forecasting that last sequence and getting it right.

And I think it was you that said I couldn't get out of the business until I got it wrong so I hope I'm not going to get out of the business right now but anyway, let me give an answer to your question.

The modeling that I did actually back -- and it was a long time ago, almost in 2010 -- suggested that we would have -- I'm speaking here, about US numbers.

We can use US as kind of a proxy for the world but the US would begin positive growth.

It would peak -- that growth rate would peak somewhere around the middle of 2012, but the average over the half cycle would only be about 1.8% or 2%.

That's what that forecast suggested.

So we are in not actually expecting any kind of a big double dip.

In fact I've called it internally a double dimple if it actually came, a little bit of a play on words, I know.

So I think we certainly see the reset, we certainly see the worries I think in the consumer market.

A lot of stuff driven of course by this European sovereign debt idea but I think probably somewhat slower growth next year for the United States.

My personal guess is in fact the calculation says 1.8% that I personally did for next year.

So you can take that as positive because it's at least the numbers are positive and it's not a sort of cataclysmic downturn.

So I think we will see this kind of contraction.

It will pass through the system.

Those markets which are being affected absent Europe are pretty fast turnaround markets, so I think we are going to be okay for next year.

I don't think absent some pension headwinds I think we will see because of returns and discount rates, but above that, we feel quite confident we will still have a decent year next year.

And the comment about the destocking might not being as severe?

Well, of course we've made the calculations based on the same model we used in 2009 and they actually add up not too far off the numbers that we've seen.

And you've got this aberration of optical going out that is kind of muddying the water up but even if you did the quick calculations dropping from 5 to 3, we usually see that delta of 2 amplified by about 3, which would give you negative 1.

Add the growth that we are getting from NPVI would put you back up in the mid-2s, early 2s, and that's about what we are seeing.

So it seems like the model still works.

As long as you don't try to put too much precision and accuracy into it, it seems to be working okay.

And if it followed the same pattern in supply chain efficiency that we've seen before, the thing would begin to ease in December maybe early in the first quarter of 2012.

Recognizing of course December itself is usually a pretty kind of blah month for most of us anyway since there's not much activity.

But generally more cautious but generally positive outlook.

And then last question for me.

On slide five, David referenced the ability to be more aggressive on restructuring and would be interested in hearing what are the trigger points that you are looking for in terms of when might you start doing that further cost-cutting?

Yes, so if you look at the comments that Inge made on that, right now what we're looking at is first of all, 3M's model if you think about our business model, we are always in some kind of a change.

I wouldn't call it a restructuring but we are adding, we are trimming, we are moving people, we are redeploying assets and so that continues.

So as Inge mentioned in a couple of the businesses, while we haven't talked a lot about headline restructuring, we have adjusted the manning levels for example in Mike's D&G business by 1200 people in the last quarter and we are adjusting in electronics where we are also seeing the biggest effects.

So we are making those changes as part of the normal course of the business.

We continue to do that.

Obviously in a weaker growth environment overall, we are also making adjustments.

But the $5.85 to $5.95 we have in the guidance now does not contemplate any type of additional special restructuring costs beyond the normal course that we are doing.

And in terms of the planning for next year frankly, we are going through that right now.

As I said, as we looked at it we were driving towards a point improvement for the business.

That will involve taking a more cautious line in terms of how we are investing to grow in that growth is going to be delayed and eventually we have to look at all of our businesses and make sure we are competitive.

So we will have to come out with more details here as we firm that up.

This is Inge.

Just a comment, David commented on Display and Graphics and Electro and Communications.

As you also see on the results of course, West Europe and we have taken action there relatively early in the process.

I think already 18 months ago was when we looked upon that organization and we did two things.

We split off Central/East Europe and Middle East/Africa from West Europe, so we separate out organization and at the same time, we regionalized in West Europe.

You saw the savings that we see there around $10 million for this year.

And so that has been to adjust organization based on the situation in West Europe.

So I think that's an important thing for us to make sure that we optimize the structure, reduce the layer, go for more investment in the front end, and [type] of reduce in the back offices.

That's one of the things where we have gone in Europe and formed those regions where we today rather than have four fully subsidiaries in Nordic, we have now one Nordic organization.

We have one organization in Benelux rather than two subsidiaries.

We have one region in Alpine versus two subsidiaries, so Switzerland and Austria.

And we have also Iberia, which is a combination of Portugal and Spain.

All of those savings is helping us a lot and we are adjusting that as we go.

Steven Winoker, Sanford Bernstein.

Thanks and good morning.

Let me just start with a couple follow-ups to the earlier questions.

First one, on that restructuring, how much restructuring is already built in for this year in terms of -- I know you are saying you are not doing it beyond what's normal.

But what is the normal amount that's baked in?

We don't -- to be honest, Steve, we don't quantify in a specific way X amount of dollars in a quarter or a year because it's the normal course of the business that the guys run.

So as I say, redeploying resources, repurposing assets is normal course.

So I frankly wouldn't call out a particular dollar amount attributable to that.

That's fine.

Just I often do hear that from some of the other companies, so that's why I'm trying to get at that.

On the CapEx side, how much of that is maintenance versus growth CapEx?

Let me talk about trend-wise.

What we have seen this year and if we look at the 2012 plans, there has definitely been a shift for us moving obviously more to the growth investments, so it's probably up if I were to guess -- and Matt can confirm after the call -- but it's probably up 10 points from something like 50% to 60% is what we would call growth CapEx in 2011 and we expect that to continue.

I think it is in that neighborhood, Steve, but we will follow up.

(multiple speakers) Just let me say one other thing which I hope will be helpful to you.

Just remembering that we -- we're investing to try to get the manufacturing capacity that we currently have in the wrong places in the right places, so there will always be an element of our CapEx spend which is a little bit above perhaps what you might relate just to demand alone.

So there's an element there and so the patents that you see flowing from that are greater spend overseas, greater spend in markets which are growing very fast, energy conservation and so on and so forth, some of which, oddly enough, may actually be resident here in the United States.

And then last but not least, one of the things that we decided we were really going to push on this coming year is to try to find a way to allocate an incremental cost, a piece of that capital to focus on driving gross margin, which is a supporting piece of the overall numbers that we are going to target for improvements next year.

I will tell you that's while David is absolutely right, we haven't finalized these plans at all, we are still in that process.

You can imagine some elements of it have already been exposed and we feel pretty confident not just from a gross margin improvement location through efficiency and through automation but actually in the overall cost reductions, we feel pretty confident we can get at those numbers or even better numbers.

So it's well within our sights, well within our capability, and we will give you some more details on that, Steve, in December when we speak to you.

Okay, just last question.

On the op margin declines in Health Care of 30 basis points and Electro and Communications of 120, I noticed that volume and price together were up, what, 5.6% in Health Care and 90 basis points in Electro.

So just maybe give us a sense for the impact of, given that dynamic, what pricing was and what the investment level was.

I know you have increased investment to some extent there.

Just a little bit more clarity about why you had these going in opposite directions.

In terms of margins, if I -- I'll see if I can respond and if not, you can come back at me.

Health Care, we did 29.5% in the quarter.

As we've said before, we think that's the sweet spot for the business in terms of the high 20s.

We are getting the kinds of price improvements that we have expected from the businesses.

They are modest because obviously there's a lot of pressure in particular in the mature markets but we've been very encouraged here in Health Care.

Through the year, we have seen increasing momentum for the business in the emerging markets as we have been investing to improve our position.

So margins -- we look at that.

We think that for the foreseeable future is a good level from a planning perspective.

In terms of ECB, we have not seen an overall price decline.

Of course, think about ECB.

It's a combination of about half of the businesses is in the communications and in the electrical infrastructure space and half is in the consumer electronics.

So a combination of those is we're able to maintain price on an overall basis and the key issue for us in terms of managing the price/cost equation in consumer electronics of course is to continue to be spec-ed into new products to continue to innovate so that we can offer value to the customer and continue to get acceptable margins on the products.

And I would say that's definitely true despite this temporary correction that's taking place.

We are very pleased with the momentum in the business in terms of achieving exactly that objective.

Additional comment on Health Care.

I think as I made some comments in my opening remarks, we have accelerated our investment in emerging markets for Health Care and we now start to see the results in terms of penetration.

Also as we build out our capabilities around patient warming, that is going right into infection prevention based on the acquisition we made one year ago.

That is also working very well for us but there's some investment on that which is mostly for additional investment into the international markets where we have still opportunities.

Great, thanks, guys.

John McNulty, Credit Suisse.

This is Alina Khaykin sitting in for John.

Just a few quick questions.

One on the raw materials, I know you said that you expect that the pricing that you put through so far will recover the raw material cost.

But how much pricing do you think you will have to give up, if any, when raw material costs do decline, say in 2012?

Alina, this is George.

Historically that has not happened.

I think perhaps we have suffered a little bit in the opposite direction in this particular case.

We were probably a little bit late to the party on price this year.

We have done some great job I think of catching up but of course when you see a declining market, it is harder to get price.

But we haven't found anything in our history that would suggest that we have to give up price.

So I think the chances of that happening are low, but I think it's a good question.

Okay, thank you.

One other thing, can you just talk about where the vitality index is now and kind of how it's tracking and what's really driving that?

Yes, sure.

It's running around -- I think our target for the end of year we were hoping to get to around 33 but it's running around 32.

There was a big -- this is just sort of -- in a sense part of it is an exercise in arithmetic.

There was a big drop-off of a big optical product that was $500 million in sales, so arithmetically it was just a bit of a harder target this year but it seems to be running very, very well.

And I got some data from Chris Holmes in the industrial business yesterday that suggested this thing continues to accelerate and we think ultimately it's unquestionably the way to make sure our growth rates are sustained.

Notwithstanding the fact you do get these transients that most people who know our Company do see and they come and they go.

We see both sides of them.

We get the penalty when their adjustment is down and we get the benefit when their adjustment is up.

But they are not long-lived.

They are typically about six months and we hope that pattern will follow here in this particular case too.

And that's the corporate average.

If you take Electro and Communications, it's way above that.

That's also one of the reasons why we continue to make sure we make the right investment in research and development as we move ahead for some of those businesses.

One, Electro and Communications, where it's very important to have the latest technology as the market will turn at a time here which we think is a couple of quarters.

Okay, perfect.

Thank you very much, guys.

Shannon O'Callaghan, Nomura.

Good morning, guys.

On the margins for next year, maybe just a little more color.

Health Care you're saying high 20s sweet spot, so that kind of stays where it is.

I thought that was kind of the thinking on consumer too, as you try to build out more internationally.

So are there any segments where you are expecting sort of greater than 100 bps to get the whole thing up more?

I would say again early planning.

We haven't finalized, Shannon, so we'll do that in December, certainly.

But do we expect any big swings?

I would say probably the area that we will be focused on in terms of possible change in margin will be in D&G because we expect frankly that the TV business, which is part of the optical systems division, is likely to continue under pressure next year for us, which will put some pressure on the margin in that business.

So take that into account.

We think that it's still reasonable to expect to move the business back up in this case more to a 22 type margin from where we expect to complete the year at 21.

You can expect, Shannon, in some places as you look, as you kind of scan down the array of businesses that we have and the geographies that we have, there are different leverage ratios in different businesses.

Some are at one or little under one.

Some are at much higher and the obvious correlation is those which have the lowest leverage of those that we are making the most investments in where we expect the highest growth and those that we have the greatest need to either restructure or find ways to cut costs and get productivity, they will have the highest leverage.

And so it's a bit of a smorgasbord of different numbers right across the Company, but net-net certainly in our preliminary work, it looks well within the chance of doing.

Okay, then you mentioned sort of weakness spilling over into factory automation, which was kind of interesting.

Is that isolated to kind of the electronics end markets that you were seeing or maybe a little more color on that comment.

Well, I made the comment because what I wanted to do is not just damn consumer electronics but to recognize that some of the businesses that we serve serve not just consumer electronics but electronics more generally in medical and even in automotive in some cases.

So I wanted to just hint to people that -- this is not just in these locations alone and you can well imagine that if weakness was to persist for a long time in consumer electronics, then you have to expect that it would then ultimately begin to creep out in other places.

We do see it in our results, Shannon.

We do have for example in the Industrial and Transportation business, our industrial adhesives and tapes business, which is in that segment serves the electronics market, all electronics markets and they certainly saw some softening as well, which was consistent and contemporaneous with that in the more traditional electronics businesses that we report separately.

So I suppose the thing that we all wonder about is is this going to be contained only in this area?

The beauty of electronics is the blasted thing comes back so fast.

I remember, Shannon, the forecasts on TSMC utilization being at 35% in 2009 and some people trying to convince me that they would remain under 60% for five years.

And I said it's just not going to happen, guys.

So these things just they do recover very, very quickly.

You could argue that there needs to be a catalyzing event in the end market but I think it's too soon to be forecasting any broader malaise and with a little bit more data, we will know.

But I think for now it's a bit too early for that kind of forecast.

Just to clarify, are you seeing that spill over into Health Care and auto and other areas yet or you're just saying if it continues we would expect to?

I am suggesting if it continues we would expect to.

It's not in Health Care right now.

In fact actually the Health Care results, as you've seen, they had a tougher period of time last year and have begun to sort of recover this year and have actually done quite well.

And automotive has really followed the same pattern.

You do have a little bit of sort of another fly in the ointment as you might say, which is this issue of Thailand.

We've got these floods in Thailand and Thailand is a great source of automotive components for the world, in particular for Japan.

And they have a very -- they are a strong two-wheel market.

So as I sometimes said, just when you thought it was safe to go back in the water, not to use a pun in Thailand, we may yet see some other cascading impacts from our supply chain in Thailand that give Japan a little bit of a ding as well.

So that's additive to this mix and it's too soon to tell whether that will be or will not be a problem.

Okay, got it.

Thanks a lot.

Jeffrey Sprague, Vertical Research.

Thank you, good morning.

Having mentioned Japan, I wonder, George, can you --?

Are we totally kind of normalized there?

And I am wondering, have you seen or are you seeing any insurance recoveries in Japan yet?

Thanks, Jeff.

Japan is actually probably doing a little bit -- notwithstanding what I said about Thailand, Japan is probably doing a little bit better than what we thought and it's probably a little bit in advance of where we thought in its recovery.

So I think that part of it is okay.

Remind me the second piece of the question, Jeff.

I forgot.

Sorry.

Any insurance recoveries yet?

We've not actually got any money in over the transom but we met with our insurance people yesterday and there was some -- without me being specific about the numbers, because David will strangle me if I am, there was reason for optimism that somewhere around half of our number of our impact might get recovered.

Is that included in your guidance?

No, it is not.

I'm just wondering bigger picture on display and graphics now, I guess the good news on all this pressure on TV is that its percentage of the optical segment has to be declining by definition.

How far are we away from some type of crossover here where handhelds and other products maybe overtake TV and surface area, or dollar value or however you want to look at it?

Very close is the answer to that question, Jeff.

Now we are down at about 20% attachment rates in TVs.

That thing historically in the old days, in the glory days of optical, was up in the 7 days.

It sort of went through a transition over a period of a couple of years, bumped down even as low as -- we were expecting to go as low as 12 or 13.

I don't think it ever actually quite made that number, but it certainly got into the teens and now we're bumping along in the 20s.

I think in all candor, it's like a tale of two cities; it really is.

The mobile device, hand-held type device market, even the monitor device, there's some lovely new innovations due to hit the market in monitors that you will see that we benefit from.

But in the -- that seems to be completely robust.

It's a wonderful, wonderful business that grows rapidly, highly profitable.

TVs on the other hand is the flip side of that coin.

It's a market which is characterized by way too much capacity, scrambles for share, full channels, incentives to retailers, incentives to customers to flesh it out.

Of course, then that all backs up in very, very heavy pricing pressure on people of the supply chain.

So that TV piece of the business is not all that profitable, but net-net optical is still very profitable.

So I think we are getting to the point, Jeff, as you asked really where this just ultimately I think in two to three years becomes a vanishingly small part of the problem and ultimately, if not disappear, it will certainly fade into the background of our company.

Right.

And just finally, Inge, good to have you on the call.

I'm wondering if you could give us a little more granularity on Europe.

I think until this quarter, most companies were saying the weakness was in the periphery but maybe not so much Germany and other places.

But we have been hearing now more kind of weakness in the core.

Could you just elaborate on what you are seeing in Europe and how you think the fourth quarter plays out?

Yes, as we all know, there's many things going on in Europe.

Everything started maybe with consumer confidence.

That is down, right?

But if you look upon it geographically, it's a couple of places that still are doing well, and Germany is doing relatively well.

So is Nordic and also the Alpine region.

So that means that Germany, Switzerland, and Austria together with Nordic are still doing well for us.

And I am saying well.

We have local currency growth there in the quarter from 8% to 12%.

So doing well, slowing a little bit, and why it's slowing is very much also due to the fact that there is government spending is down, which means that for traffic, safety and security, that will slow down our business.

And also a little bit into Health Care of course, right, even if that is a private sector.

So that is slowing a little bit.

And then we saw generally speaking I would say over Europe in this quarter specifically as you saw, our growth was down that the manufacturing sector is cutting back production and overtime in the plants.

Automotive was a key driver for that.

So when we looked upon it, we would say that the Industrial and Transportation business is a big portion for our Company in total.

As the manufacturing sector slowed down a little bit led by automotive specifically, we felt that of course.

And then you take the government spending holding on which then impacted Display and Graphics specifically in traffic safety systems.

I think that's what we saw.

You know as we know that still Italy, Spain, and in some cases UK, has a little bit of challenge of growth.

We also saw due to the Industrial and Transportation, we also saw a little bit down in respirators, which is going into overall the manufacturing sector.

On the other hand, if you take Central East Europe and Middle East Africa, it's doing well for us, so the growth is still coming there.

We are doing well and in fact, Middle East Africa as you know, we have been -- not we but the world have had a war going on there and our organization have done remarkably well.

Now one thing that I would say relative to Europe is everything is coming down to leadership and I can tell you that our leadership in West Europe is remarkable and very strong.

We have local managing directors in those countries except for two, which is in the UK and in Iberia.

Those people have been through this before.

And they are very, very experienced and they can take under this localization strategy that George laid out and we have executed here the last five years, this is now a strength for us.

We have very strong people on the ground that know the countries that can act immediately.

They don't need to wait 24 or 48 hours in order to figure out what is going on and get some direction from us back here.

They know the country.

They can take action immediately.

They speak the language and have all their authority and we have empowered them to take action very fast, that things that are becoming tougher.

So I will say that the one thing I think that we as management here feel very good about is the strength of our leadership as managing directors back in West Europe and at a time like this when we see news the whole time and every day in the papers of what is going on or what has not been going on, you sleep a little bit better when you know that we have very seasonable management back there.

Thank you very much.

Terry Darling, Goldman Sachs.

Thank you.

David, I'm wondering if I could just clarify the commentary on the fourth quarter organic picture.

I think I heard essentially D&G expected flattish year-over-year; Electro and Communication down significantly and the other businesses kind of close to zero.

If we focus on an average that gets you to zero, which gets you to the high-end of the 3% to 4% range.

Is that basically the picture?

Yes, just to walk through it again, we expect in D&G and ECB for Q4 on a year-over-year basis to be down negative growth, which will be somewhere between zero and mid-single digits.

And then the rest of the businesses we expect will continue to run close to the levels around the levels that we saw in Q3.

Does that help?

In terms of the year-over-year growth rates?

(multiple speakers) In other words Industrial and Transportation around 8%, Health Care around 5%, 6% etc.?

(multiple speakers) Because how does that get you to zero?

(multiple speakers)

That type of a trend, so what I expect when we close the year if I look at my total organic volume for ITB and SS&Ps, it will be at the low-end of the original guidance range.

So we have said 7% to 9% for ITB for the year.

I expect to be towards the low end of that range.

SS&PS we had said 4% to 6% for the year.

Again, I expect to be at the low end.

In both cases the key driver of that, which is a softening from what we expected when we were on the call in July, is primarily around Europe and a little bit in ITB may sell into the electronics business.

Terry, those are the actual numbers.

We can work through what it means here off-line if you want.

Well, I guess just where I'm heading with it is to try to understand in the context of the new guidance, are you assuming that you have further deceleration in 4Q or that the rate of deceleration in September just kind of continues into 4Q?

Yes, we're looking at 4Q right now as being in the range that we experienced in the third quarter.

So relatively flat.

And to try to come at the impact from inventory, I don't know if it's possible to do this but if you look at the delta in the organic revenue growth guidance for the full year, call it 3.5% versus 7%, about $800 million on a year-over-year basis, I'm just wondering is there any way to swag at what the impact from inventory clearance in electronics and other areas might be in that context?

This, it would be a swag here.

This is George.

(multiple speakers) Recognizing it's really a good idea to make too many swags.

But I would say it's a good -- that inventory correction is probably 1.5 points of growth on the year would be my guess.

Okay, that's helpful.

And then in terms of the confidence in improving margins next year, how are you thinking about R&D?

You've got sort of this two-speed world where developed markets is where the pressures are coming from ex-electronics, which is global.

You're trying to still grow the emerging markets.

How does R&D shake out in your thinking preliminarily here at this point for '12?

I don't think there's any material change in our outlook on R&D.

It comes from a couple of points.

Number one, these are not resources -- these are not like factory resources that you can kind of turn on and turn off.

These are Ph.D.

scientists that in the end they are not something you can park away and bring them back in a quarter or half year's time.

So you have that challenge.

Above and beyond that, we have always taken the view, Terry, and it certainly worked out very, very well for us in 2009 that we can't eat seed corn.

In this kind of time it's ever more important to be able to differentiate our products through the new product development in R&D, and it has worked so well for us.

So in the future, Terry, I don't see any material changes in that as an approach.

We may at the margins -- we often have, David and I and now Inge have a little bit of a kitty that we keep to one side that we will invest in new business development.

That could be $100 million or even $200 million in some years.

We probably will be a little bit more circumspect with those sorts of things but I think in the net core R&D, we don't expect to change our philosophy essentially at all.

Okay, that's helpful.

Thank you very much.

Thanks, everybody.

It's a busy day with a lot of companies reporting.

We have a few still in the queue and I apologize.

We are going to end the call but we will follow up directly with those that are in the Q&A queue.

Thank you very much, everybody.

It's great to talk to you all again and we look forward to talking to you sometime in December.

Thanks a lot, guys.

Goodbye.

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.