3M (MMM) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the 3M fourth-quarter earnings conference call.

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

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

(Operator Instructions) As a reminder, this conference is being recorded, Thursday, January 26, 2012.

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

Thank you, good morning, everyone, and welcome to our fourth-quarter business review.

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 2.

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 will turn the program over to David.

Thanks, Matt, and good morning, everyone.

Please turn to slide number 3.

First a brief summary of the fourth quarter which I felt was a good finish to the year.

We drove record sales and good returns and things finished largely as expected.

We once again saw some real strength in our many industrial-oriented businesses along with steady growth in consumer and Health Care.

On a geographic basis, Latin America and the United States were the fourth-quarter stalwarts.

The consumer electronics industry continued to adjust production levels during the quarter to better match demand and supply, much as we had described in our third-quarter call in October, and again at our December investor meeting in New York.

This had an impact on our Display and Graphics and Electro and Communication businesses, particularly within Asia Pacific.

The flooding in Thailand hurt fourth-quarter sales by an estimated $35 million and an operating profit impact of $20 million, which was in line with our estimates.

On the positive side, we recorded $23 million in insurance recoveries related to last year's earthquake and tsunami in Japan.

Therefore, from a profit standpoint, these two items largely offset one another.

We once again drove strong, double-digit growth in Central Eastern Europe and the Middle East, which more than offset weakness in the West.

We have yet to see significant signs of recovery in Western Europe.

Inge will talk more about our businesses in just a minute.

Income rose 5% year-on-year and operating margins finished at 19.2%.

Free cash flow was $1.2 billion and we converted 128% of net income to cash.

A good result and typical for a fourth quarter at 3M.

So the business continues to generate significant profit and cash flow.

Finally, in early January we announced the acquisition of Avery Dennison's Office and Consumer Products business.

Inge will describe this in more detail in a moment.

Let's take a closer look at sales for the quarter.

So please go to slide number 4.

Quarterly sales were $7.1 billion, up nearly 6% year-on-year.

The combined Latin America/Canada region was up a strong 10%, with organic growth more than offsetting nearly 4 points of negative currency.

The United States also had an excellent quarter with 7% organic growth.

US organic volumes have now grown for several quarters consecutively.

Sales in Asia-Pacific rose 3% in the quarter, slower than we have seen in recent quarters.

Part of this, of course, was due to consumer electronics, where the market continued to seek bottom.

We expect the market to turn positive sometime in the second quarter.

Clearly China was also a factor in the fourth quarter as the Chinese government successfully slowed activity to stem inflation.

Our China team anticipates continued below-trend growth in the first half of 2012, with stronger growth returning in the second half.

Europe rose 4%, with strength in Middle East Africa and Central East Europe more than offsetting weakness in Western Europe.

Selling prices rose 2% in the quarter, which exceeded raw material inflation.

And for the full year, the net impact was neutral.

Acquisitions added 2.3% to sales in the quarter, and foreign exchange impacts were basically flat.

Please turn to slide 5 for a more detailed look at our income statement for the quarter.

During this period of slower economic growth, we are paying increased attention to protect the bottom line.

For example, we have implemented hiring freezes in developed countries, and replacements are being limited to key positions that are typically closest to the customers.

Our businesses have also triggered contingency plans with respect to indirect costs.

These costs total over $4 billion in annual spending for the Company.

The early results were encouraging as fourth-quarter, indirect spending was down, both year-on-year and sequentially.

So we are getting some traction here.

In the fourth quarter, sales rose 6%, gross profit increased 4%, and both operating income and earnings per share rose 5%.

Operating margins were 19.2%.

Volume growth added 0.2% to fourth-quarter operating margins.

Selling price changes, net of raw material inflation, added 0.8 percentage points, and other productivity contributed 0.3%.

Higher year-on-year pension and OPEB expense hurt margins by 1% and foreign exchange was a 0.5% headwind in the quarter.

SG&A increased 5% in the quarter, and R&D costs were down slightly.

Recall that in the fourth quarter of 2010, we accelerated investments to bring forward a number of 2011 growth programs.

Given current economic realities, we chose not to repeat this in the fourth quarter of 2011.

Earnings for the quarter were $1.35 per share, up 5% versus last year's fourth quarter.

The tax rate was 26.7% in the quarter versus 25.3% last year, which reduced earnings by $0.03 per share.

Conversely, a lower share count added $0.04 a share of benefit in the quarter.

Please turn to slide number 6.

Free cash flow for the quarter was $1.2 billion, up $116 million versus last year's fourth quarter.

Income was of course up year-on-year, and working capital was a net, year-on-year benefit in the fourth quarter.

CapEx investment was $517 million, consistent with prior-year levels.

Full-year CapEx was $1.4 billion, which was within our original expected range.

During the fourth quarter, we converted 128% of net income to free cash flow.

We contributed $209 million to our pension and OPEB plans in the quarter, which lowered the conversion rate by 22 percentage points.

Note at the bottom of this slide, we intend to contribute $800 million to $1 billion to our pension and OPEB plans in 2012 versus the $600 million that we contributed in 2011.

Of the 2012 contribution, $600 million will occur over the first two quarters compared to $125 million in the first half of 2011.

As a result, free cash flow conversion rates will be lower than historical trends in the first half.

We paid $384 million in cash dividends in the quarter and gross share repurchases were $494 million.

Our strong balance sheet enables us to return significant cash to shareholders, and importantly, to continue growing the business through economic ups and downs.

Now Inge will address the fourth-quarter performance of our business segments.

Please go to slide number 7.

Thank you, David, and good morning, everyone.

I am pleased to report that our businesses have responded well to the current economic environment.

That was evident in our fourth-quarter results.

Let's take a closer look at each business, starting with Industrial and Transportation.

This business posted outstanding growth in the fourth quarter.

Sales grew 14% to $2.4 billion.

All businesses within Industrial expanded their sales with double-digit increases in most businesses.

All geographic regions drove double-digit sales growth, with Asia-Pacific up 17%; the United States up 15%; Europe up 12%; and Latin America/Canada up 10%.

Organic local currency growth was 8% in the quarter, an impressive result.

Acquisitions added another 6% to growth, the two largest being Winterthur and Alpha Beta.

Winterthur is a Swiss-based, technology-rich addition to our abrasives business, specifically in hard-to-grind, precision applications.

Alpha Beta is a Taiwanese tape manufacturer that strengthens our offerings in [E&C] product lines.

Both acquisitions are tracking very well versus our expectations.

Profits grew by 14% to $472 million.

Operating margins were 19.6%, basically flat year-on-year as the team drove strong productivity to offset the 50-basis-point headwind from acquisitions.

Also, including in Industrial's profits for the quarter was $20 million of insurance recoveries related to the Japanese earthquake and tsunami.

All in all, this was another solid performance for Industrial and Transportation business.

Let's now look at Health Care.

Sales grew 5% to $1.3 billion.

All businesses within Health Care grew their sales, with Infection Prevention and Skin and Wound Care leading the way.

Health Care sales increased across all regions with Asia-Pacific up 11%; Latin America/Canada up 10%; the United States up 5%; and Europe up 2%.

Operating income in Health Care increased 12% to $389 million and margins were 30.8%.

Health Care continues to gain recognition for innovation.

For example, 3M ESPE was recently named the most innovative dental company for the seventh consecutive year.

Our Health Care team continues to exemplify innovation for 3M.

The health care industry has its challenges to be sure, austerity in West Europe for example.

But all business continues to deliver excellent results.

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

Sales rose by 9% to $927 million, all of which was organic.

We drove double-digit growth in Security Systems and in Personal Safety products during the quarter, along with single-digit growth in Building and Commercial services.

Sales declined in the Roofing Granules business due to channel and inventory corrections in the United States.

Looking geographically, sales rose 18% in the United States; 17% in Latin America/Canada; and 13% in Asia Pacific.

In Europe, sales declined 4%.

On the innovation front, this business for the first time ever exceeded $1 billion in new product sales in 2011.

Operating profit increased 4% to $171 million, and operating margins were 18.5% in the quarter.

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

Sales were $823 million and 9% decline year-on-year.

Optical film sales in total fell 17% in the quarter, which was all LCD TV related.

Films for battery-powered devices continue to grow nicely.

This includes tablets, smartphones and notebooks.

Elsewhere in Display and Graphics, sales grew in both commercial graphics and in architectural markets.

Sales declined in Traffic Safety Systems, as government highway funding remains weak, particularly in the United States and in Western Europe.

On a regional basis, sales declined 1% in the United States and Latin America/Canada; 10% in Europe; and 12% in Asia Pacific.

Profits in Display and Graphics rose 10% in the quarter as the team drove outstanding productivity.

Operating margins increased over 3 points to 19.2%.

Moving to Electro and Communications.

Sales were $768 million, down 3%, and profits declined 7% to $153 million.

Margins for the quarter were very close to 20%.

Growth was again led by electrical markets business and sales were flat year-on-year in telecommunications.

Sales in our electronics-related businesses declined high single digits, reflecting ongoing production adjustments across much of the industry.

We expect these adjustments will continue until inventories are back in line with demand.

On a geographic basis, sales increased 6% in Latin America/Canada, 5% in the United States and 2% in Europe.

Sales declined 9% in Asia Pacific, of course heavily impacted by electronics.

Finally, let's look at the Consumer and Office business.

Sales topped $1 billion this quarter, a 6% increase year-on-year.

Half of this growth was organic, with particular strength in our do-it-yourself stationery products, office supplies and home care businesses.

We also added 3 points of growth to Consumer and Office this quarter.

We had a recent acquisition of GPI Group.

France-based GPI produces tapes, hooks, insulation and floor protection products and is an excellent complement to our existing do-it-yourself business.

It will help us quickly expand our presence in the European home improvement channels.

On a geographic basis, sales growth was strongest in Europe at 15%, again boosted by GPI.

Sales grew 11% in Asia Pacific, 9% in Latin America, and 1% in the United States.

Operating income in Consumer and Office increased 2% to $179 million, and margins were 17.6%, diluted somewhat by the acquisition.

If we back out GPI's results, underlying margins were 18.4%, up 20 basis points versus last year's fourth quarter.

Please turn to slide number 8.

We were very pleased to announce the acquisition of Avery's Consumer and Office Products business earlier this month.

As you know, Avery is a leader in this space with labels, binders and other office products.

We anticipate closing sometime during the second half of this year.

The acquisition brings several strategic benefits.

We gain an immediate scale in the United States, as well as several valuable brands, including Avery, HI-LITER, and Marks-A-Lot.

As you might expect, we plan to bring much-needed innovation to the business, and in the end, customer will benefit through better product, service and value.

The purchase price is $550 million cash.

As you can see on the slide, the multiples are quite attractive at 0.7 times trailing sales, and 5.7 times trailing EBITDA.

We see potential to expand operating margins to around 20% in the out years.

We are very excited about this acquisition and look forward to bring new values to our customers.

Please turn to slide number 9.

To summarize, 2011 was a good year for our Company in a challenging environment.

We grew sales 11% with double-digit performance in Industrial and Transportation, Safety, Security and Protective Services and Health Care.

New products helped fuel growth, and we finished the year with 32% NPVI.

Sales in developing economies rose 14% and now represent 34% of the Company.

We continue to generate premium operating margins, finishing 2011 at nearly 21%.

Margin strengths were broad-based with all businesses above 20% for the year.

Earnings were $5.96 per share, an increase of 6%.

We once again have generated significant free cash flow of nearly $4 billion, and return on invested capital was 20%.

This strong cash flow allowed us to return $4.3 billion to shareholders through a combination of dividends and share repurchases; up 81% versus 2010.

So all in all, there is much to feel good about in 2011 results and we are well positioned for success again this year.

Please turn to slide 10 where we'll summarize our forward outlook.

While our plans for 2012 have firmed up since we last spoke with you, we still think it is appropriate to maintain maximum flexibility.

We don't know precisely what the global economy will bring this year, so we are managing costs very carefully in the early stages.

But maximum flexibility also means capitalizing on opportunities as they arise.

The key here is to be ready to act quickly on those opportunities, no matter what they are.

We know that in uncertain times, innovation is more important than ever.

It differentiates great companies from the rest of the pack.

So we will preserve key investment in R&D, sales and manufacturing to insure future growth.

We also know that emerging markets continued to present very promising platforms for growth in the future.

Whatever challenges they present today pale in comparison to their opportunities.

There is no better example than China where near-term issues will not affect our investments for long-term success and growth.

Sales in China grew 5% in the quarter and 13% ex-electronics, both clearly below trend.

This is a result of several factors.

First, the China government is successfully calling the economy to managing inflation.

As David mentioned earlier, our China team anticipated stronger growth will return in the second half of the year.

Second, China's prominence in consumer electronics contributed to our lower growth rate in Q4.

And we also expect that to return upward sometime in the middle of the year.

Thirdly, the soft economies in Western Europe, for example, continue to affect exports, and it is difficult to gauge exactly when conditions might improve.

Overall, we agree with the consensus view that China growth will become more robust as 2012 goes on.

But the main point I want to make is this.

Any temporary troubles are trumped by the magnitude of the China opportunity.

And we will continue to invest to create and realize opportunities there.

And the same is true for all the developing countries.

At our December meeting in New York, we described our financial expectation for 2012.

Our outlook has not changed since then, so today we reaffirm those expectations.

We expect that full-year 2012 earnings per share will be in the range of $6.25 to $6.50.

Including in this range is an estimated $0.09 per share year-on-year increase in pension and post retirement benefit expense.

We are estimating organic volume growth between 2% and 5% for the year.

We expect that operating margins will be between 21% and 22.5%, with the lower end largely a function of potential one-time costs on acquisitions that might be completed later in the year.

This is purely a planning assumption at this point.

Finally, we continue to expect a tax rate of 29.5% in 2012.

Sales and profit growth will be challenging in the first half of 2012.

It is our view that first-quarter economic growth will be low and will improve as the year progresses.

Underlying these estimates are several factors.

Europe, of course, is contracting at the moment.

Again, consumer electronics will be tough in early 2012, and we expect to see recovery around midyear.

Optical in particular will have its toughest comparison in the first quarter.

Finally, we expect to incur cost of $0.04 per share in the first quarter related to a voluntary retirement incentive program in the United States, along with some selective restructuring in a few mature countries.

These actions, in aggregate, will be neutral for the full year 2012 earnings with the cost incurred in Q1 and associated benefits realized over the remainder of the year.

That concludes our formal comments today.

Now we'll be happy to take your questions.

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

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

Thank you, good morning.

So just maybe to start with on the Display Graphics.

Margins holding steady at the 19% level despite the top line.

And I know you talked about the first-quarter inventory challenges.

But maybe if you could talk about what margins could look like next year if optical remained at the current level?

I know first quarter there are challenges.

But if things come back in the second half, how would margins look like?

Sure, Ajay.

This is David Meline.

First of all to interpret the margin performance in Q4, what you need to think about is the fact that unlike last year in Q4, where we had quite a downtick in our margins, this year we have been facing into what were known headwinds for the business throughout the year.

So they have been adjusting their cost space through the year and really operating in a much tougher environment.

And therefore, even though in Q4 our utilization in the factories was similar this year to last, the margins were much better, because we have a better cost base we'd put in place.

If we look forward into 2012, we think that optical systems is going to remain under pressure, in particular due to the price environment in the LCD TV business.

And we think that the optical business will run closer to the Company average, and we think D&G as a sector will be a little bit below where they were in terms of margins in 2011.

Good.

And then maybe on the cost saving and restructuring initiatives, you talked about the $4 billion in indirect costs.

You obviously have some initiatives already in place.

Could you maybe talk about whether you are done with the actions that you wanted to put in place for the cost savings?

Or is there more to be done?

So first of all indirect costs at 3M, there is a broad definition of cost.

So this includes basically all of our costs with the exception of material inputs and our people costs, compensation and benefits.

So broad definition, we were pleased in terms of how we have managed down those costs in a tougher environment.

So if you look at discretionary spending, like external costs for consultants, in this type of thing, if you look at travel expenses, if you look at other discretionary items, we have managed that down in obviously a tougher environment for the Company.

And we expect that to continue in a similar fashion, certainly through the first half and probably through the entire year, depending on how the year develops.

So in terms of additional actions, I would say I think you are seeing the kind of environment right now and performance that will continue into 2012.

Got it.

Thank you.

Deane Dray from Citi Investment Research.

Thank you, good morning, everyone.

I might have missed this.

Is George on the call this morning?

He is.

Okay.

Because my question relates to -- it is a delicate topic, but Management's succession.

And maybe this is more appropriately directed to 3M's Board, but I'm surprised there has not been more clarity about succession plans at 3M.

And if you compare the big industrials, UTX, GE always have these well-signaled transitions, and it has been really frankly ambiguous at 3M.

So does the Board not consider this to be a priority?

What comments can you share with us this morning?

Well, Deane, obviously they do consider it a priority.

It is obviously, must be, one of the most important things on their mind.

But I think they are trying to figure out what is the best way forward.

And we have a Board meeting coming up.

I'm sure they will be considering it at that; and when the appropriate time comes, they'll be letting people know what their decision is.

And I don't think there is much else I can say about that, because in a sense, I am the informed, not the informer, if you know what I mean.

George, I really appreciate that.

I know it's a delicate question, but I just wanted to put it out there that from our perspective, it has been ambiguous.

And we will leave it there.

And then in terms of the quarter, I'm trying to reconcile a comment earlier that innovation is important, focusing on new product development is important.

But still, you have chosen not to invest in R&D in the quarter, compared to the spending a year ago.

So what is the trade-off that you are making today in holding back on what might be incremental growth investments?

Yes, Deane, what I would say is that we think that the investment that we have got in place, including in Q4, is certainly perfectly adequate and a very strong level of R&D commitment that the Company has.

So don't misinterpret what we are showing in Q4 as being us changing our view on the importance to 3M's business model of a very strong R&D investment trend.

But obviously R&D, just like the rest of the areas, as we get into a tougher cost management environment, we have had to temporarily defer some of the things that we would like to do.

We have had to hold down spending just like the rest of the Company.

But what I can assure you of is we are not throwing overboard important and good opportunities for the business.

And just last one for me is, I know you are not in the quarterly guidance business.

But just based upon commentary, it does not sound like you are expecting to show EPS growth in the first quarter; is that fair?

In terms of EPS growth in the first quarter, if you look first of all at the overall business for the year, what we have said is that we are driving to improve our margins by about 1 point for the year.

And we expect 2% to 5% organic growth.

Obviously toughest in the first half and in the first quarter.

So I think it would be fair to say that we could see a level of performance that would be carryover or even considering this $40 million of items we have got in the first quarter could even be a little bit below last year.

Great, thank you.

Steven Winoker of Sanford Bernstein.

Good morning, thank you.

Just want to get a sense for -- quickly first, that insurance recovery, which I think is $0.02 to $0.025 per share or so, it sounded like?

Is that it or is there more coming?

Yes, Steve, that's right.

It is $23 million in total, so a little over $0.02 a share in the fourth quarter.

We do have more claims that are in and under discussion, and we are very confident that we will get some more recoveries beyond that.

What we don't know is, will those recoveries occur now in 2012 or sometime beyond that in 2013.

But yes, the answer is we expect some more.

Okay, but it sounds like certainly not in the first half of the year, right?

These are longer-term recoveries now?

I can't say first half.

Second half, what is true is, I think importantly, we expect to get some recoveries, but we don't have that explicitly built into the plan right now.

Okay.

And that $0.06 of Avery Dennison dilution, that is baked into your $6.25 to $6.50 guidance?

No, it is not.

Okay.

So that is in addition -- that would be, okay, separate from -- (multiple speakers)

That would impact, and obviously depending on when it occurs, will also have the positive impact of the underlying performance of the business.

So we want to leave that out until we want get a better visibility on the timing of the closing.

Okay.

And then on pricing, so 200 basis points with significant move up in several of the businesses, and sounds familiar to the '09 experience where you really were able to drive pricing to hold margins and drive margins.

How should we think about this time relative to that time?

What is different, sustainability?

Any particular areas that you would call out would be helpful.

In terms of pricing, to be honest, you are right, we have had to push hard in this environment, particularly driven by the kind of cost inflation that we saw in 2011.

As we mentioned in December, we do expect to see certainly more modest, but in certain commodities, we expect some cost pressure on us again in 2012.

So that is part of our planning.

But we don't see any reason why, as was the case in 2009, that we can't hold onto our price.

If you look at the business model, it is very much driven by innovation and having fresh product that is attractive to our customers.

And therefore we are -- our experience is typically we can hold price once we put that through.

Right.

So this is still more a function of material and commodity driven escalators as opposed to new products and mix?

Yes, I would say -- well, we always have new products which enables us to hold price and hold margin.

Right?

Right.

So in some way that is in the base.

And then the type of extraordinary pricing push we put on, including now we are seeing the real benefits of it in Q4, is certainly we work to offset the raw material cost inflation.

Okay, great.

Thank you.

Shannon O'Callaghan from Nomura Securities

Good morning.

So when you think about these dynamics and China consumer electronics, Europe, putting price aside and just looking at core volume growth, right, it was up 1.3 in the quarter.

These pressures in the first half, are they incremental pressure on top of what you are already seeing?

Are core volumes going to get tougher before they get better?

Maybe how to calibrate a little bit how this plays out as we enter '12.

So if you look at -- and we can talk about segments -- but if you look at the overall volume trend, what we observed in Q4 was very similar in total to what we saw in Q3.

And so, our perception right now on a total overall basis is that we have found the bottom across the various areas where we are seeing pressure.

That being Western Europe, that being in the consumer electronics business.

We do think that we will continue at this lower level of activity, as we said, through the first quarter and through the first half of the year at some level.

So I guess what I would leave you with is our sense right now is that we are stabilizing here on an overall basis.

And barring an economic crisis, which we don't have in our plans, we would say eventually the next step would be a level of recovery for the business.

Okay, thanks.

And then just on this Avery deal, kind of interesting.

The deals you guys have done recently have been sort of growthier, I would say.

And I know this is trying to reinvent the category or revitalize the category I guess, but it is a lower multiple, more cost synergy-related type deal.

Might we see more of those types of deals versus more growth-oriented acquisitions?

Well, this is Inge.

Acquisitions will come in many shapes and forms.

And maybe this could be viewed as slightly different than the ones we have done before.

However in this business, scales matter.

And this is very important for us in order to maybe build out our position in the market.

So we believe that this is very good, because we will be able to add innovation to that business.

We will be able to streamline our supply chain, mainly we will be able to give better services.

I think overall, this is good for our customers and also for the shareholders of course.

So I think generally speaking, that this is slightly different; it is very much US-based.

But in this business, scales matter.

And we will be able to add a lot of value to our customers.

We will also, with this business, be able to expand outside of the United States.

So we think overall this is a good addition to our Consumer & Office business.

It's a core for 3M.

We know how to do this, and have done it very well in the past.

Yes, no, I agree, it looks good.

I was just curious in terms of your pipeline of deals.

Are there more things like this where it is a lower priced deal but where you can add scale to something you already have versus maybe expanding into some new growthier areas that you are not currently directly in?

Yes, if I could, Shannon.

What I take away from this, that we have not changed our approach in terms of the pipeline.

We are still interested in not only deals like this that add scale and leverage, but importantly we think that to continue to have a chance to grow the business as we foresee doing, that we are also looking and will continue to look at transactions that involve businesses that might help our growth rate.

Okay.

Thanks a lot.

(Operator Instructions) John McNulty Credit Suisse.

Hello, this is [Avi Rejainrin] calling in for John.

Could you talk a little bit about your expectations for the linearity of volumes through the course of 2012?

Are you expecting an incremental pickup through the course of the year?

Or is there a bigger step-up baked in for the second half potentially?

Yes, so what I would say is, if you look at the volume trend, just like the outlook for the economy, we do see a rising volume trend in the second half, which would be a combination of both the way the economy is developing -- if you look at Western Europe, Global Insight for example is calling for positive economic growth by the fourth quarter.

If you look at the electronics business, which is impacting us, that obviously has some very dynamic features to a correction, which are a very hard and fast trend down.

And typically a recovery also looks like that, which is a pretty vertical recovery.

So depending on the segment, I think it is fair to say that we would expect to see some acceleration in the second half.

And the other element of that, which we have talked about in the past is, if you look at the inventory cycle, that is a very relevant impact on our business.

So if you look at our reported volume in Q4, it was about 1%.

But we believe that if you adjust for inventory, it would have been closer to 5%.

So if you think about that inventory cycle, we expect that that too would then be reversing as we move through 2012.

Okay, great.

Thanks very much for the color.

Just a quick follow-up.

Excluding the acquisition effect, margins in Consumer and Office were basically flattish year-over-year despite the top line growth.

Was this driven by some heightened spending or was there any other factor driving this?

And also how are you thinking about margins in 2012, including the potential addition of Avery's business?

Yes, you got it right, which is that if you look at the margin year-over-year, it was down.

But excluding the acquisition, it was flat to up a little bit.

We do expect it.

It is a tough consumer environment out there right now, in particular in the mature markets where we have the biggest presence.

So what we expect is that kind of tough environment will continue.

And if I think about 2012 margins in Consumer, I expect they'll be pretty flat with 2011.

Okay, great, thank you very much -- (multiple speakers)

And Avi, just to reiterate, you asked about Avery.

Any impacts from Avery are not in our guidance at this point in time.

So as we get closer to close, we will provide some more insight there.

Perfect.

Thank you.

Scott Davis of Barclays Capital.

Good morning, everyone.

I wanted to go back to Avery and see if we can dig in a little bit more details.

A couple questions.

When I look at the initial guidance, it seems relatively conservative, at least on the back of an envelope.

I would imagine there's some dual capacity and dual warehousing and stuff that would be fairly easy to take out, so I would love to get your view there.

Second, are there any limitations on what you can do with the brand, given that Avery Dennison does still exist as a company?

Are there any limitations as far as how far you can, whether you could, expand this brand out and other SKUs?

We really asked in the due diligence relative to what we can do as we move ahead.

So I think one thing is we'll be careful in terms of any comments due to regulatory we are under at this point in time.

But as we have looked upon it, we believe that in that specific market around office supplies, that we can capitalize on those brands and be able to build it out.

Of course in terms of cost synergies, we expect quite a bit that what we will be able to do.

And that will be a good benefit for us, both in terms of manufacturing and supply and how we go to market.

So we believe there are strong brands that we will be able to capitalize on.

There is a very good commercialization machine in 3M today that will be able to take those products and commercialize them in a more effective way, in a more cost-effective way.

And then of course, the whole supply chain will be streamlined as we go ahead.

So are there limitations with what you can do with the brand?

I guess I wasn't clear.

No, there is no limitation of what we can do with the brand.

Okay, great.

Second question is just related to R&D.

I think if you take a look back at the last 20 years or so at 3M, there has been varying levels of spend, mostly around that 5% of sales level, but varying levels above and beyond, give or take 100 basis points.

Has there been any analysis done into what is the optimal rate?

What is the rate where you are able to outgrow peers, hold onto your margins and earn an appropriate return for shareholders?

I'm just curious to see if there has been a real analysis of that?

Or if there's any way to really measure that, the ideal spend?

Hi, Scott, this is George here.

Maybe I'll take a crack at that for you.

We have in fact done some of what you are suggesting.

There's always this question that hangs over the effectiveness of R&D.

And I'd like to make two or three points.

You know R&D spend goes up and down depending on what we -- we may have some external projects that we fund.

So you shouldn't really imagine that R&D spend would be perfectly flat all the way through the year, or for that fact, monotonically increasing every year.

So there's that kind of variability mixed into the equation.

But coming back to your point about the effectiveness of R&D.

It is quite interesting that we really don't spend anything more in terms of as a percent of sales.

If you take the pharmaceutical business, when I first came to the Company, we picked up spend.

And it's sort of flattened, and we've kept it in that similar percentage of sales number all of the intervening years.

But what has happened is this new product vitality index, especially in the core, has somewhere between doubled and tripled.

So the effectiveness of R&D has become very, very strong.

And it's a big -- as David said earlier, what a lot of people perhaps overlook is the impact of these inventory corrections in the second half of our results from last year, the underlying growth is still very, very strong.

And we expect it to continue.

So whether anybody could ever answer the question, what is the optimum spend, but if you speculate in your mind, and you look forward at the plans that we have for driving this NPVI, and the way we think about it is, we separate this class III, which is replacement stuff, as offsetting, yet, natural attrition, and the balance of that.

So today, this year, the number will be about 32 for the year.

Net/net 15 in sort of replacements.

17 in new products.

You can just get a rough idea of the growth rate which is underlying by just dividing that.

It's not absolutely accurate.

But just by dividing the 32 minus 15 equals 17, divide by 5 will get you 3.4.

So you know that that is what the underlying growth in the Company.

Now, where would it be the right thing to do?

We think right now we can see our way to around 40%.

And that is what we need to get to that underlying organic growth rate that Pat and I talked about what seems like all those many years ago.

So I think it is in that range.

And the interesting thing then will be where should spend go?

Can we flatten it out?

Can we reinvest?

Should we hold the investment to that level, the growth rate to that level?

That is a ways away, but I think the thing, the observation we can make, is the impact of R&D and the efficiency of R&D has just gone up tremendously in 3M in these intervening years.

And that is probably the thing we ought to focus on.

That's very helpful.

Thanks, guys.

I will pass it on.

Jeff Sprague of Vertical Research Partners.

Thank you, good morning, gentlemen.

I'm just wondering if we could dig a little further into Display and Graphics in just a couple of questions.

First, can you just ground us on where you ended '11 on your mix in optical between -- however you have it, but I'm thinking TV, battery devices and other.

I'm just thinking about that crossover point.

Sure, Jeff.

So if you look at the mix overall first for the calendar year '11, it was 53% battery and 47% plug-in.

If you look at the mix in the fourth quarter specifically, it had risen to 58% battery and 42% plug-in.

And as we have talked about going to somewhere two-thirds to three-fourths of battery next year.

So very much on that trend line that we'd laid out in December.

All right, and that is a revenue number?

That is revenue.

And can you tell us where you ended the year on attachment rates for LCD TV?

Yes, in the fourth quarter we were running at about 20%.

And we think next year, in our plans we're expecting attach to run between 15% and 20%.

Okay.

And just one other detail question and I will pass it on.

Commercial graphics and architecture, you pointed to that.

Do you discern any particular your turn or pickup in the commercial construction activity?

Was there something unusual going on there?

Just any color on that nuance in the segment.

Well, commercial graphics is broad-based, as you know, in terms of both personalization and corporate identity programs.

That is going very well and we are expanding very well in that area specifically.

Architecturally, it is a new business, a new investment for us.

But we make very good inroad, which means that despite our construction is doing overall, we are able to go into that market and take marketshare and build our businesses.

But interesting for us is that commercial graphics is often a business that will give an early indicator of down or upturn in the economy, and we have not seen a downturn.

In fact they're doing very, very well.

I think one of the reason is this new personalization program that had been introduced, which was one of them.

When we talked earlier, and David made the comments earlier of, some investment that we did in the end of the year of 2010, in terms of accelerated programs.

Two of the programs that was done, one was in personalization for commercial graphics.

And the other one was around labels.

So I see now that those programs are really taking off for us.

And we have really some good momentum going there.

So that is the perspective on commercial graphics specifically.

So there was early investment, and it is paying off now all over the world actually as those programs start now to roll out in commercial graphics specifically on the personalization side.

Great, I will pass the baton.

Thanks.

Terry Darling of Goldman Sachs

Thank you, good morning.

Dave, wondering if we could talk a little bit more about the nice improvement in pricing again.

And I think in the past, sometimes you have given us a breakdown between the electronics businesses and the others.

If that is not available, I am wondering if you can talk about which segments maybe benefited the most on a sequential basis from that improvement?

Right.

So in terms of pricing, yes.

As you observed, we were very pleased with the results.

We have been working on this obviously through the year.

And to see the 2% number of print for us in the fourth quarter was very encouraging.

If you look at pricing in the quarter ex-electronics, that was actually 2.7%,so not atypical of the electronics business.

We did have price down in particular in optical systems, which impacted us there.

In terms of where we have the most significant price improvements, it was most in the areas where we had the most cost pressure, which was more on the industrial side of the business.

Okay.

And do have that breakout for 3Q by chance?

Which breakout, Terry?

I'm sorry, between electrical and non-electrical?

The sequential improvement, was that just electrical getting less negative?

Or did the industrial side actually pick up significantly to drive that?

Or maybe was it a bit of both?

Terry, electronics generally speaking is about a 1 point impact on total price change for the Company.

So I don't think it changed that much really Q3 versus Q4.

Okay.

And what is the price improvement assumption for 2012?

We've got zero to 1 in terms of price in 2012.

Okay, that's helpful.

And on the strong health care margins in the fourth quarter.

Maybe backing up, David, I guess the question is relative to where you guys were in December, as we think about your organic growth range for the year?

Can you just refresh comments on segments above and below the midpoint of that range?

And has anything changed there?

This is on the volume discussion or on margins?

Yes, why don't we just talk about the volume discussion?

Volume.

So yes, if you think about the ranges that we provided in December for 2012, we don't see any reason to be thinking differently about those trends as we finish Q4 and move into the first half.

Obviously, while those trends indicate a full-year figures, we are certainly thinking, as I said earlier, that Q4 and Q1 are not going to look terribly different in terms of the volume momentum overall.

And I'm sorry, just to come back -- (multiple speakers)

Terry, we have got a bunch of people in queue.

So can I come back to you?

Sure.

David Begleiter of Deutsche Bank.

Thank you, good morning.

David, any views on China post the new year, any visibility yet into your order patterns or order books in that region?

This is Inge.

What we see, as I laid out earlier, there's three things that affected the growth in Q4.

And I think most of what was billed out for the Chinese New Year came in in Q4.

And we have seen a little bit of uptick here in the beginning.

But it is too early in this quarter to talk about the orders inflow in China and the impact for the quarter.

But I think the three things, as I said earlier, that made the result for China, was the successful execution of the government to slow the economy in order to manage inflation, is clearly the economic environment overly in terms of exports going over to Europe and United States, but specifically to Europe.

That now stands for 19% of the export out of China.

And then the prominence in the electronic industry also made that there was a little bit of slowdown.

But as both David and myself and George talked about here earlier, we see all those three things, type of, moving up as the year progresses.

But it looked like Q1 for China will be very similar to Q4 as it looked like now.

And just lastly on raw materials.

We see a number of your chemical commodity prices come down, but you're still looking for raw be up year-over-year?

Where are you seeing or expecting to see inflation in raw materials in 2012?

The areas where we see it, some of our chemicals still are experiencing some level of inflation.

Resins as well.

Rubber and rare Earth materials are the most prominent areas of cost pressure for us.

Thank you.

Steve Tusa, JPMorgan

Good morning.

Just a question on health care.

Very strong margin there and sequentially I think revenues were flat, but the profits were up.

What is going on there?

Is there a mix issue?

Or something else?

What is the longer-term view on health care margin?

Yes, the fact is that health care, just like the rest of the business, we have gone into a fairly tough environment where we are marshaling our resources and really focusing on managing costs.

So as we have talked about pretty consistently, we believe the sweet spot for the business is in the high 20s.

But from quarter-to-quarter you are going to see this thing move up and down a little bit.

So this quarter we had about 1 point of pickup.

Does that again signal that we have got a different view of health care going forward and their margins?

I would say not at all.

What is true is we are seeing very good performance in some of the sectors.

So for example, in infection prevention, it is having strong performance.

Skin and wound care as well, which is also helping the results.

What is your most positive margin, just directionally?

What is your favorite business there, marginwise?

Actually health care's portfolio is all pretty profitable.

Got you.

So no real modification.

One last question.

Just on the sequencing of the quarter.

We have heard a lot about November maybe being a little bit weak.

You guys seem a little bit better on the tone of the economy.

Did you see anything change second half of December or towards the end of the year, maybe into this year?

No, we didn't see any new inflexion point.

Obviously, we like the market was looking at 3M and looking for were we stabilizing, and we're pleased to see that that occurred in Q4.

But as I said earlier, we think now, unfortunately we are in a fairly weak environment at least through the first quarter.

I would like to just make one additional comment relative to health care, because I think there's a couple of elements that is working very well and it is overall based on the strategy for the Company.

First of all in infection prevention, this arise in execution that was done last year is playing out very, very well for us.

And then in addition, we have introduced some new products here, specifically the new silicon tape that is making a big difference in the market.

So many things in health care is going on in terms, both driving productivity in the commercialization part, but also the execution of the position they have done and new product introduction, specifically then in wound and skin health.

So I think all those elements are driving good margins for us.

Great.

Thanks a lot.

Nigel Coe of Morgan Stanley.

Thanks, good morning.

Just wanted to, one of the big headlines come out of the CES show this year was the introduction of [some] OLED screens, primarily in the TV market.

How does the transition from LCD to OLED change the game for your film's business?

We see OLED of course coming on.

And we don't have any impact as we go into 2012.

In fact, we see with some of the innovation that we are working on in our laboratories that there could be an advantage for us, because the LED segment need to respond to it.

So again in that segment, of all the important thing is to have innovation so you can meet competitive trends.

And for us, is for us to be able to provide our customers with alternatives.

And there is a couple of very, very good programs going on that will help them to be able to defend their position.

Overall in that segment, which is the same for, if you think about some of the Display and Graphics businesses, but also for Electro and Communication is that's a very good space for us to be in due to the fact it is about technology innovation and cost out.

And that is what 3M does very well, and both those businesses have very high NPVI.

I think Electro and Communication is the highest in the Company of over 42%, meaning as they now develop the new platforms for the future, we are there working with them, because that is the future for us.

Okay.

And then just a follow-on.

George just talked about inventory adjustments in the past.

And you've obviously seen some pretty big inventory adjustments in Electro and also in films.

Can you just maybe describe what you are seeing as far as inventory reductions right now?

Perhaps focus in China and Europe, and which businesses are you seeing the most severe inventory adjustments?

I think that one thing we see that generally inventory levels have reset to healthy levels.

And when you go in, as you talk specifically around film businesses for Electro and Communication and optical, they are now at 5 to 6 weeks in the channel.

So when we talk to our customers and when we get the information from our own business heads here, it's inventory levels have reset to a more healthy level.

Okay, thanks.

Laurence Alexander, Jefferies & Company.

Good morning.

Two quick questions on asset footprints.

First, what kind of deceleration or deterioration in the longer-term growth rates in Europe would you need to see to significantly rationalize your European footprints?

And secondly, George, over the years you have made several remarks about the need to shift the business model towards more of a solutions mindset.

There's a lot more information-technology intensity.

Do you think that is something which the Company needs to do more aggressively over the next few years in terms of larger scale M&A?

Or do you think that is within 3M's zone skill set?

Thank you, Laurence.

This is George here.

If you think about what has really affected your life in the last 10 years, there's all sort of different things.

But probably 70% of the impact on your life was electronics.

And the things you carrying in your bag, the things you have on your desk and so on and so forth, communications.

So I do not expect that pattern to change.

There are some other supporting things that we don't have time now to go over.

But what we have done is gradually seed this into the Company.

And you'll see it in the makeup of the Company's products, more and more electronics, more and more software-oriented businesses.

I expect this pattern to continue.

Whether I'd want to sort of recommend to anybody, to the Board in particular, that we make a big, very expensive, software acquisition, because these tend to be for us much more sort of engineering oriented.

We have a good group in the Company already that does that.

We'll expand that probably organically.

So I don't expect to see any sort of big, get-leap-frog acquisitions in software, Laurence.

On Europe, Europe generally speaking is an area that has had lower growth than pretty much any of the other areas that we have in the world.

These economic cycles come and they go.

This one will be the same.

I think there has been a trend in our Company, just progressively, to push down and really demand more productivity in Europe.

That won't change.

I don't think there's going to be any, again, cataclysmic restructuring program in Europe.

We will just continue to drive it down.

Just one last comment.

If you just think about attrition in its own right, we're treading around 5% a year.

So we can get some pretty good productivity out of that, notwithstanding having to book -- not all skills are fundable.

So I think it's going to be largely attrition-driven and probably specific issues from time to time, squeaky wheels that we oil.

That's probably about the way the world will likely handle it.

Thank you.

Our last question comes from the line of John Roberts of Buckingham Research.

George, I noticed on the Display and Graphics segment, you got actually a win with your new power-over-ethernet film.

(laughter)

Does that drive your content back onto power devices?

Well, very interesting.

You have to take the people that are going to be very interested in this as a continued push-down on energy.

The rate of adoption, obviously we don't know.

It is a new product.

We'll have to see.

But I think it is a very interesting product.

And I suspect it will drive up the content, in particularly in monitors and all-in-ones as we go forward.

So I'm pretty optimistic and pretty upbeat about that.

So I suspect, without me get into the forecasting business on that one product line in that one segment, I think it is going to be a nice lift for the business as the year unfolds, and more people adopt it.

Is it similar content per device as your optical film?

It was similar charges per square meter, yes.

And a few of the bits and pieces of course that we get along with that sale, through that innovation.

So probably content will go up a little bit.

Thank you.

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.

Thanks for joining us today, everybody.

Good questions.

And we look forward to talking to you as the year goes on.

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.