3M (MMM) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the 3M first-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).

It is recommended that you use a land line phone if you're going to register for a question.

As a reminder this conference is being recorded Tuesday, April 24, 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 first-quarter business review.

With me today are Inge Thulin, 3M President and Chief Executive Officer, and David Meline, Chief Financial Officer.

Before we begin I'd like to mention a few calendar items.

We will announce our second-quarter earnings on Thursday, July 26, and our third-quarter earnings on Tuesday, October 23.

In addition we are planning to host our next investor day in St.

Paul on Thursday, November 8.

We'll provide more details of the future, but for now, please hold this date on your calendars.

Please take a moment to read the forward-looking statement on slide 2.

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 let's begin today's review and I'll turn the program over to Inge.

Please turn to slide number 3.

Thank you, Matt, and good morning everyone.

Thanks for joining us on the call today.

I'm very pleased to report that we are off to a good start this year, with positive sales, operating income and EPS growth.

In fact, we achieved an all-time Q1 sales record of $7.5 billion.

Industrial and Transportation, SS&PS, Health Care and Consumer and Office all performed well, while weakness in electronics hurt Display and Graphics and Electro and Communications.

As we said, we look for the electronics market to pick up as the year goes on.

Geographically for 3M, the Americas were strong.

Asia-Pacific was somewhat slower and West Europe held its own, with very good operational discipline.

For the company, operating margins improved to nearly 22% with five out of six businesses above 20%.

We executed well, and the result was a 7% increase in EPS to $1.59, including a $0.04 charge for a voluntary early retirement program and some miscellaneous restructuring.

In February we announced a 7% dividend increase, 3M's 54th consecutive annual increase.

The first-quarter dividend payment combined with Q1's share repurchases of over $0.5 billion, resulted in a first-quarter return for shareholders of nearly $1 billion.

So we are off to a good start, one that sets the right tone for the rest of the year, and one that gives us confidence in our ability to deliver even against week segments and regions and against an uncertain global economy.

I thank the 3M team for the outstanding work they achieved these very good results.

The quarter highlights their ability to manage 3M's embedded systems and tools to drive operational excellence, and I am extremely pleased with the outcome.

Now David will take you through the detail of the quarter.

David.

Thank you, Inge.

Let's begin with sales.

Please turn to slide number 4.

First-quarter sales were $7.5 billion, up 2.4% year on year.

Organic local currency growth was 1.8% in the first quarter with volumes up just slightly and selling prices up 1.7%.

Acquisitions added 1.5% to sales in the quarter and foreign exchange impacts reduced sales by nearly 1 percentage point.

On a geographic basis, total growth was the strongest in the combined Latin America/Canada region at more than 8%.

Organic local currency growth was nearly 12% in the quarter, so our teams here continue to do an excellent job of building the business.

Currency impacts reduced sales in the region by nearly 4%, largely due to weakness in the Mexican peso and the Brazilian real.

In the United States sales grew 6.3% with double-digit increases in both industrial and transportation and in safety, security and protection services.

The US manufacturing sector remains quite robust, and we are seeing some good growth as a result.

Sales in Asia Pacific declined by 2% in the quarter, reflecting slower year-on-year demand in global consumer electronics along with slower growth in China.

Both were fully anticipated in our prior outlook, so no real surprises here.

On the electronics side, we continue to expect the market to turn positive around midyear.

As for China, we are expecting below-trend growth in the second quarter, with better growth rates returning in the second half of the year.

Sales in Europe were basically flat in Q1, with strength in Middle East, Africa and central East Europe offset by year-on-year declines in the West.

In aggregate, the economies in West Europe have stabilized at least for the moment, so things are not getting worse sequentially, but they are also not getting better.

We built our 2012 plan on this basis, so thus far things are progressing as expected.

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

From an operating standpoint we were quite pleased with our performance in the first quarter.

As expected, the economy is not giving us much in terms of underlying growth, but we have a firm handle on discretionary spending and are off to a good start to 2012.

Sales and gross profit both increased around 2.5% in the first quarter, operating income grew 3.5% and earnings per share rose 6.7%.

Operating margins increased 20 basis points year on year to 21.8%.

Breaking down the margin change, first-quarter selling price increases net of raw material inflation added 0.8 percentage points to operating margin, and other productivity added 0.3%.

Foreign exchange impacts were a headwind of 0.3%, and the combination of higher year-on-year pension and OPEB expense hurt operating margins by 0.6%.

Again, operating margins improved by 20 basis points in total.

Total SG&A increased $19 million in the quarter, largely related to the voluntary early retirement and restructuring actions mentioned by Inge.

And R&D investments increased $13 million, about half of which related to these same events.

Earnings for the quarter rose 6.7% to $1.59 per share.

The tax rate was 28.8% in the quarter, up just slightly versus last year.

Average diluted shares outstanding were 706 million, down nearly 3% year on year, which added $0.04 of benefit in the quarter.

On the whole, our businesses are executing very well in this period of softer economic growth.

Let's now review our first-quarter performance on a business-by-business basis.

Please go to slide number 6.

Industrial and transportation had an excellent quarter with sales growing at 9%.

Sales increased in every region of the world with the United States leading the way at 13% growth.

As I mentioned, the manufacturing sector of the US economy is growing nicely.

Europe and Latin America/Canada grew at 6% and Asia-Pacific grew 8%.

We posted double-digit sales increases in a number of areas including industrial abrasives and automotive OEM.

We also grew double digits in our fastest-growing aerospace business.

Aerospace has grown tremendously over the past few years and recently was elevated to become 3M's newest division.

It's a great business poised for even faster growth.

Organic local currency growth was 7% in the quarter.

Acquisitions added over 3 points of growth, largely related to Winterthur in the abrasives markets and Alpha Beta in industrial tapes, both of which are tracking well versus our expectations.

Operating income was $600 million, up 16%, and we improved margins by 1.4 percentage points to 22.5%.

The industrial and transportation team has done an outstanding job transforming what was once a low-growth to no growth business into a true industrial powerhouse.

Now let's move to health care.

Sales grew 2% to $1.3 billion, with broad-based organic growth across the majority of our portfolio.

We drove strong double-digit sales growth in health information systems this quarter.

This is an excellent growth business and the industry leader in solutions for coating and classification of patient data.

We work with more than 5,000 health care organizations worldwide, offering software solutions that improve productivity and enhance the accuracy of patient records.

Earlier this month we further strengthened this business by acquiring code right, a leader in clinical natural language processing technology, and computer-assisted coating solutions for outpatient providers.

We also posted mid single-digit growth in food safety, skin and wound care and infection prevention, and oral-care sales rose at a low single-digit rate.

Sales declined in drug delivery systems against a challenging first-quarter comp.

On a geographic basis, sales increased 11% in Asia-Pacific, 9% in Latin America/Canada and 3% in the United States.

European sales declined 6% in the quarter due to economic softness and ongoing austerity measures in many countries.

Developing markets remained a bright spot for Health Care with double-digit sales growth in the first quarter.

The health care industry is just beginning to take off in many developing nations, and we plan to expand our investments here as 2012 progresses.

Operating income in Health Care increased 9% to $402 million, a strong result in an industry with its share of challenges at the moment.

And margins were 31.4%.

Now let's look at the Consumer and Office business.

Sales again topped $1 billion this quarter, a 4% increase year on year.

Our do-it-yourself business grew at a double-digit rate via a combination of acquired and organic growth.

Recall that in October of 2011 we acquired the GPI Group, a French producer of tapes, hooks, insulation and floor protection products.

GPI buys us speed and critical mass in the large European home improvement channels.

On a geographic basis, Europe grew 16% in the first quarter with positive gains from the GPI acquisition, offset in part by lower organic volumes.

We drove 9% sales growth in the combined Latin America/Canada region and 7% in Asia Pacific, while sales declined 1% in the US.

Consumer and Office generated $234 million of operating income in the quarter, up 9% year on year and margins improved by 90 basis points to 22.4%.

Let's move on to Safety, Security and Protection Services business.

Sales were just shy of $1 billion in the first quarter, up 6% year on year.

We drove high single-digit sales growth in our personal safety business, influenced by strong manufacturing activity in many areas of the world.

The outlook here remains very positive.

Our roofing granules business also grew nicely in Q1, driven by warm weather conditions as well as some inventory rebuild at the OEM level.

First-quarter sales declined in the security systems business against a tough comp year on year.

Looking geographically, sales rose 16% in Latin America/Canada, 10% in the United States, 4% in Asia Pacific, and sales declined 3% in Europe.

Good unit growth and excellent factory efficiency drove a 16% increase in operating income for safety, security and protection services.

Margins improved 2.2 percentage points to 23.6%.

Now let's look at our Display and Graphics segment.

Last year, first quarter was particularly strong for D&G so we faced a tough comparison in Q1 of 2012.

Sales were $832 million in Q1, down 12% year on year.

Optical systems sales fell 28% in the quarter, which was all LCD TV related.

Quarterly comparisons in optical get easier as 2012 progresses.

Sales grew nicely in both architectural markets and commercial graphics.

Worldwide sales declined just slightly in traffic safety systems, although US sales in this business were quite strong.

On a regional basis, sales rose 9% in the United States, 7% in Latin America/Canada.

Sales declined 11% in Europe and 19% in Asia Pacific.

Operating profits in Display and Graphics were $163 million, and margins were nearly 20% for the quarter.

Finally, let's move to Electro and Communications.

Sales were $808 million, down 3%.

As expected our electronics-related businesses posted sales declines in the first quarter, reflecting lower year-on-year customer production levels.

Our 2012 plan called for an upturn in electronics sometime around midyear and this remains our best estimate.

We did see sequential sales improvement in Q1, so that is certainly a positive sign.

In the electrical markets business, sales were up year on year while telecommunications declined a few percentage points.

On a geographic basis, sales increased 5% in the United States, 4% in Latin America/Canada, but declined 7% in Asia Pacific and 6% in Europe.

Operating income in Electro and Communications was $168 million in the first quarter, and margins were nearly 21%, a good result in a tough growth environment.

This wraps up our business segment discussion.

Please turn to slide number 7.

Free cash flow for the quarter was $567 million, up $65 million year on year, so we were off to a very good start in 2012.

Bear in mind also that this amount includes a voluntary $250 million contribution to our US defined benefit plan, something we have not done before in Q1, therefore, the underlying increase is much higher.

Our pension funded status is in good shape despite today's low interest rate environment, and we are continuing to stay ahead of the curve.

Working capital was a net year-on-year benefit in the first quarter as our businesses are doing a nice job of managing capital in this environment.

Lower tax payments and higher income also boosted free cash flow.

Capital expenditures were $261 million, up $30 million versus first quarter of last year, and we remain on track to invest $1.3 billion to $1.5 billion for 2012 in total.

First-quarter pension and OPEB contributions totaled $337 million, which was $276 million higher than Q1 of last year.

This was factored into our 2012 plan, and you may remember that we discussed it on last quarter's call.

As you can see on the bottom of this slide, we expect to contribute a similar amount in the second quarter.

For the full year we anticipate contributions of about $1 billion to our pension and OPEB plans.

Free cash flow conversion was 50%, a four-point improvement versus the first quarter of 2011.

Adjusted for pension and OPEB contributions, conversion was 80% this quarter versus 52% in Q1 of 2011.

We returned nearly $1 billion to shareholders in Q1.

Specifically we paid $410 million in cash dividends in the quarter, and gross share repurchases were $524 million.

That wraps up our discussion of the first quarter.

Now I will turn the call back to Inge.

Thank you, David.

So far today we have been focused on the first quarter, but I'd like to change the subject for a few minutes and address a topic that is generating a lot of enthusiasm and support with our employees and with our customers.

And that is our new vision for 3M.

I sense that the vision for the entire company could really inspire our employees and position us positively with our customers, so we set out to capture the essence of 3M with a clear vision that is both timely and timeless.

I shared it with my direct reports on my first day in office, and with all the employees worldwide a few days later.

I introduced it earlier to connect immediately with the employees and to send a very clear message about 3M's direction, purpose and future.

Today it's my pleasure to share it with you.

Please turn to slide 8.

I believe this captures well the essence of 3M -- technology, products and innovation.

It reflects what we do for our customers every day, advance, enhance and improve.

It sets a stretch goal for all of us, every company, every home, and every life, all around the world.

From a performance standpoint, if we can make good progress toward realizing our vision, we can look forward to many more good quarters and many more years of increasing value for our shareholders.

We have had a super response from our employees, very supportive and excited.

It was very encouraging to me also to see how our customers have responded.

Whenever we meet with our customer, we share the vision.

And it resonates very, very well with them.

Of course, a vision means very little if you don't perform.

With that, let's turn to slide 9 for outlook for the rest of the year.

We believe our expectations about the global and market trends are still valid, and we are continuing to manage with them top of mind.

Industrial markets continued to show strength while consumer and health care markets remain steady.

We are seeing some early improvements in the semiconductor market, and we expect the electronics industry to pick up midyear.

Geographically, the Western hemisphere is doing well with Latin America leading the way.

Our teams there are doing a terrific job.

West Europe has stabilized, but at low levels.

Growth in the Asia-Pacific region is slower because of China, Japan and the electronic markets.

But we still anticipate reacceleration in the second half of the year.

As we are executing well and keeping the right balance between cost and investment, the Q1 results give us confidence to accelerate a number of targeted investments in technology, business building and emerging markets.

Overall, we are looking at the range of $30 million to $50 million.

These investments will support faster technology development in promising areas such as biotech and lightning.

We will also invest to grow our oil and gas and mining business, a segment with big potential.

Of course we know this market very well, and with added focus and investment, we will build a stronger position for 3M.

Aerospace, as David mentioned, is another opportunity we were looking to build our strength.

We will also invest more in emerging markets.

For example, Health Care in Latin America and China, and in personal safety everywhere, another high-growth, high-potential space.

So looking ahead, we believe the right outlook for the year is an earnings range of $6.35 to $6.50.

We are raising the low end of the range by $0.10.

We continue to expect organic volume increases within the 2% to 5% range and margins in the range of 21% to 22.5%.

It's still early in the year, and as always, we continue to manage prudently even as we build for the future.

So with that, we are now pleased to take your questions.

Thank you.

(Operator Instructions).

Steven Winoker, Sanford Bernstein.

Good morning.

Just maybe starting with a little bit more picture around the inventory stocking dynamics that lead to the 10 basis points of volume increase -- what were the puts and takes, especially around the electronics side?

Do you think you are through the destocking element?

Is it improving sequentially and when might you think about or are you planning for a rebound on that front?

Sure.

So what I would say, Steve, is inventory stock and destock was not a big feature of the results overall this quarter.

We saw, certainly, last year, quite dramatic impacts on the business as we saw destocking take place.

This quarter we didn't really see anything significant in any of the segments, and that included electronics.

So electronics remained weak as we talked about, but we continue to believe that we'll see this uptick develop around midyear.

So very much consistent with what we had expected previously.

Okay.

And then on pricing power and particularly in Health Care, as a company you've often talked about high 20%'s being kind of sustainable run rate in health care margins.

And clearly you were back up well over 30% this quarter.

To what extent was that a function of something that's sustainable versus just taking down expenses for one quarter to help meet your commitments?

Well, you know, as we -- are right, we have said we would like to run that business in the high 20%s, and that is our objective.

And as I made some comments, we are now looking to accelerate our investment, specifically in the emerging markets, where we have big opportunities.

And it's very nice to see that the leverage is coming based on the investment we have done earlier in health care, specifically in emerging markets, but also in Consumer and Office.

So we have done investment there the last couple of years, and we now start to see the growth coming.

It is a mix issue which is positive for us due to the fact that many of the products that we are selling for health care, specifically into the developed economy, is adding a lot of value, meaning that we are able to maintain very good margins as we penetrate more there.

And in the emerging markets now we start to see that we take good market share and the penetration is accelerating.

China specifically, we will continue to make more investment as we go and Latin America, as well, as I called out on the call.

But you're right, we would like to run it in the upper 20%s, and by doing so I think we will be able to really build out a good position on a global basis.

Okay, great.

Let me hand it off, then.

Thanks.

Deane Dray, Citi.

Thank you.

Good morning, everyone.

And, Inge, congratulations on being the new leader for 3M.

Thank you.

And just since the transition occurred during the quarter, this would be a good opportunity to hear from you and maybe this would be better at an analyst day, but we don't have that luxury.

But what areas are you focused on for the company in terms of what might be different?

And specifically getting a lot of questions about your thoughts on the growth rate over the cycle -- that 7% to 8% that had been set.

So just a little bit more color in terms of what imprint we might expect over the near term, and then very specifically how you're feeling about that 7% to 8% growth target?

Well, thank you.

First of all, my target and objective and focus is to deliver the plan for 2012.

I was part of the team to build a plan here, and that's important for us.

And this as you know is a volatile time, and we are absolutely focused on make sure that we deliver what we have promised you for this year.

So that's initially what is very important to us.

And it's not only important for me; it's important for the whole team.

And the transition had gone very, very well, and it was a very solid and robust process that we had in place.

And I think this is also a good time to thank George for everything he did in that transition, which was just extraordinary, at least for me and for the team here.

Relative to the growth, first of all, this is an organization that is responding very well to stretch targets.

And I think there is more elements to the business on a holistic way than just the top-line growth.

And at least for me, two other very important metrics is margins and return of invested capital.

So we are focusing on that as well.

So I would say that the 7% to 8% is a long-term target for 3M and something that the organization really are responding very well to.

And I would say the mindset in 3M today has changed versus many years ago, where we believe today that we can win and we have a capability to do so.

So we are not at 7% to 8% as of yet, as we know, but it's all long-term target for us.

And our organization, whatever we put out in terms of really tough stretch targets, are responding very well.

That's very helpful.

And then from a follow-up, what is interesting that there is a change that we've not seen previously.

And that's you're talking -- calling out two end markets where you would like to see growth, both oil and gas and aero.

And just give us a sense what that competitive edge might be that 3M would bring to both of those end markets.

Yes.

We have been in those markets for some time, but at least in my mind and the organization's mind here in total, we have not given full attention in terms of additional investment in order to accelerate our growth.

So if you combine oil and gas and mining, that's a big market in total, which is for us, what we can utilize many technology platforms in order to expand our presence into that market.

So I think it's -- in terms of integrated safety, protect and renew; it's also for us to go into water management and filtration and make sure that we add services into the whole environment there.

So that's a business that I believe and we believe here by combining them and make sure that we make additional investment into research and development, and a strong front end in terms of commercialization, really can move forward into and expand and accelerate.

And we will call that business the natural resource management and extraction division, and that will be formed.

Relative to aerospace, for us if you think about our technology platforms there, which is everything from composite films, abrasive, masking product and personal protection, with our platforms there, that's a good opportunity for us to enabling lighter, safer, quieter aircraft, constructed faster.

So that's a business that is growing fast for us as we speak, but we believe with additional technologies that we can accelerate that even more.

So we are very excited about it.

And as David said we moved that from a department to a division recently, meaning more focus and investment will go into that business.

Thank you.

Ajay Kejriwal, FBR Capital Markets.

Thank you, good morning.

Just maybe first on the pricing raw materials -- very impressive, positive contribution in the quarter.

So maybe talk a little bit about what you saw on the raw materials side, and then what is your expectation on pricing raw for the rest of the year?

Right.

So Ajay, in terms of price raw materials, we did see -- we continued to see some level of raw material cost increases in Q1 to the tune of about 2%.

So if you may recall last year we had raw material cost inflation of a little bit over 4%, so obviously we see some moderation, and we continue to believe 1% to 2% for the year in terms of raw material cost increases is going to take place.

And then in terms of pricing, yes, we picked up 1.7% in the quarter, more than offsetting raw material costs.

And that was basically a consequence of the carryover effect of the pricing actions that we took last year.

So if you look at that through the year, of course, that will have less of an effect on a comparable basis as we move through the year, but we think it's reasonable.

We had said 0% to 1% on price for the year.

It's reasonable to think that we'll get to the top end of that range as we go through this year.

Got it.

And then on SG&A, it looks like if you exclude the restructuring, flattish year-over-year; it is very impressive.

Maybe talk about some of the initiatives that you have on cost control; and then what are the expectations on SG&A for the rest of the year?

Yes, right.

So as we had said, as we had the meeting in New York in December, we really were posturing ourselves this year for a weaker growth environment in the first half, and frankly unfortunately, that's developed as we expected.

We expect that to be true again here in the second quarter, a pretty weak economic environment.

And so we have taken a posture to really be carefully managing our discretionary spending.

The other part we saw come through very positively in the first quarter which we were pleased with is really the factories were running very efficiently in the quarter.

Lean Six Sigma is a key focus there and that is certainly coming through, including in a lot of the newer locations that we've put in place around the world over recent years.

So combination of carefully managing spending and also running the factories effectively.

As we look forward, then, we expect as we go into the second quarter here, to maintain a tight rein on spending.

And then secondly as Inge mentioned, we are more confident now of the outlook for the year.

And we believe it appropriate to continue to selectively look as to where we can target some additional investments.

Got it.

Thank you very much.

John McNulty, Credit Suisse.

This is Abhi Rajendran calling in for John.

A few quick questions on M&A.

One, could you provide an update on the pending Avery Dennison Office and Consumer acquisition, and what sort of timing you're looking at to close that transaction?

Yes, We are still in that regulatory process, as we have talked to you about before.

But our expectation is to close that in the second part of this year.

This is Matt.

To be clear, just as we said last quarter we have not yet factored in any financial impact from Avery into our guidance.

It is not in those numbers yet.

Great.

Just a quick follow-up, just a general M&A question, could you talk a little bit about the health of the M&A pipeline overall, as well as which businesses are the primary areas of focus for potential add-ons through the course of the year?

Sure, yes.

So if you look at the pipeline right now it looks very similar and healthy compared to where we have been over the last couple of years at least.

We've announced a couple transactions thus far here in the first quarter, the one being the Avery and the other one being this code right business that we are bolting onto the health information systems business, which we think is a very good opportunity for us.

And we foresee going forward a combination of acquisitions that have good growth characteristics as well as from time to time doing transactions that give us scale and leverage similar to Avery.

So as you might know we look across the business.

We look for opportunities where we can fill in gaps in existing businesses or adjacencies that we think we can bring our own capabilities to bear, whether that be our global reach or whether that be technology combinations that we can really drive businesses with.

Okay, great.

Thanks very much.

Terry Darling, Goldman Sachs.

Good morning, guys.

Hey, Inge, I am wondering if you could -- I'm following up on Deane's line of questioning about potential changes in the formula under your leadership.

I'm wondering if you might address the idea that a lot of companies, not just multi-industry companies, but a lot of companies use divestitures of slower-growing businesses over time as a way to reinvest in higher-growing businesses that hasn't been a big part of the 3M formula historically.

I'm wondering if you're considering a change in that regard.

I would say that as you know that both relative to organization and relative to businesses, it's always an evolution as you go.

And first of all, as I said earlier, my initial focus here together with the team is to deliver this year plan.

As we go into the strategic planning season in the middle of the year, I am sure that as we always do we will have those type of discussions in terms of performance of businesses, where they fit into our overall direction as we move ahead, and make those calls.

But it's not top of mind on my agenda at this point in time.

As I said, we're very focused on this year, and then we will evaluate it as we go.

I see it that we have a broad based business opportunity for us with the six businesses and the way we are spreading ourselves geographically with the execution capabilities.

So at this point in time it's not top of mind on me.

Top of mind for me is to deliver this year plan.

Okay.

And, Dave, I'm wondering if you might be able to calibrate the organic volume assumption for the year up 2% of 5%, first quarter close to flat.

Maybe a little color around how the full-year expectations may have changed for the various segments relevant to the 2% to 5%, and how you're seeing the second quarter within that range.

Sure.

So first of all, if you look at the full-year expectations by segment, right now, we continue to believe that the ranges that we set out are still very good.

So we don't see any change in terms of the prospects for growth across those segments.

If you might recall we had highest expectations for growth for the year around our industrial-oriented businesses, that being Industrial and Transportation and Safety and Security.

That continues to be our view.

And the toughest segments, obviously, D&G and the electronics business; again, we don't see any change.

We had 0% to 5% for the year on electronics and a negative growth rate on D&G, and we think that's going to be the case.

What is also true as you work through the year, second quarter, we think we'll continue to be relatively modest in terms of the growth opportunities, and then we are expecting a pickup in the second half still, which is a combination of improving trends, for example, in the electronics business, as well as the fact that the comps get easier for us as we work through the year.

Okay.

And then just lastly on the cost-cutting narrative, David, you've talked about in the past.

You had SG&A pretty much flat on a year-over-year basis, and there was an indication that you would modulate that as you move through 2012 based on how you saw the growth and risks around the business.

Sounds like you are seeing things pretty much spot on, so cost-cutting essentially the same message as we had before, not stepping that up, not stepping that down to fund additional growth; maybe just refresh us there.

Yes; no, that's right.

I think you put it well, which is if you look now, kind of looking back at Q1, we feel very good about what we are able to achieve here.

And we also feel very good about our ability to deliver for the year, having got off with quite reasonable results despite pretty weak growth.

So we'll continue to run with that posture here into the second quarter, and looking for that growth upturn, which is yet to be validated, so we are going to be pretty careful in terms of how we are managing on the cost side in the near term.

But again, as both Inge and I have mentioned, we do need to be very clear and continue to focus on where we are investing for the future because we need to get the right balance there.

And we have the capability to do that.

Thanks very much.

Jeff Sprague, Vertical Research.

Thank you.

Good morning, everyone.

To David's point, you guys are off to a good start, but Inge, your comment that the focus is really to execute on this year's plan, and obviously you don't have control of the end markets -- what in your view is kind of the biggest challenge if you will as you think about the remainder of the year?

Is there execution within a certain division you're focused on?

Is it cost?

Is it restructuring?

What if anything is really kind of taking the majority of your attention here in near term?

Well, you know, first of all, it's important for us to see growth coming.

And as you know, one of the challenges, which is not a 3M challenge by definition; it is the global economy, is of course Asia, with China being slower than we have seen before.

And Japan also has a recovery that is slightly slower than people expected.

And then you have West Europe.

So I think those are the three things that is top of mind for me that I would like to see us coming back and materialize the growth as we have laid out in the plan.

I think that's important.

Now if you think about China for a second, we've talked about that on the last call.

There are three things that impacted China growth.

One was domestic growth due to government management of spending there.

It is an export to West Europe and it's electronics.

We said at that time and we still believe it's correct that export to West Europe will probably not come back this year.

But we see an uptick in electronics, and we also see a slight uptick on the domestic market there.

So our business in fact last quarter or this quarter, Q1, we had a 20% sequential growth versus Q4, and it was an all-time high in China, meaning our base business grew 8% plus, our infrastructure business was flat, and the electronic business was down around 16%.

But as I said, as we see the semiconductor business type of -- get a uptick in terms of utilization in factories, we believe that will come back.

So I think that's -- if we see that coming, that's a big point.

That's my biggest concern at this point in time.

I think in West Europe as that has stabilized, but at a lower level, and we have a very good business model and very mature team in place there, I think we will be able to deliver the plan, but still I hope that we can capitalize and take some market shares there.

I think it's very much to make sure we continue a very controlled management relative to our investments; let out some of them as we talked about in oil and gas and mining, aerospace, emerging markets specifically for health care and for personal protection.

And when we see that coming and electronics start to pick up and we see them materializing in terms of real growth midyear, then I think we are -- I see more positive on the outlook.

But I just would like to make sure that I see it before we move forward full time.

That's good color.

And just a little more on China if you could.

How different from normal sequential patterns was that lift from Q4 to Q1 that you saw?

Very -- very similar; very similar to the past in terms of sequential.

So -- and we see Q2 still be tougher in China, but as we go in the second part of the year, according to the plan, we will start to see the growth coming.

So very similar; that's the answer to your question.

But a good sign.

I think a good sign all time high in terms of growth in China first quarter for us, which I personally see very positive.

Right.

And then just on optical, can you give us where your plug-in versus battery mix is now?

Yes.

So on the first quarter as you might recall, we exited the year fourth quarter, battery was 58% of the sales of the optical systems division, so that being handheld devices in particular.

In the first quarter we were a little higher than that; it was I think 64%.

So we had said about two-thirds of the sales this year we expected to be battery and one-third plug-in.

And it looks very much in line what we are seeing in optical division to that plan.

And likewise, very tough comp in the first quarter.

Not a surprise to us, the result here.

And we expect to be up modestly sequentially on optical systems, but still on a year-over-year in Q2 it will be down quite substantially again.

Great.

Thank you very much.

Shannon O'Callaghan, Nomura Capital.

Good morning, guys.

Can I just get a little more clarification on that China comment, in terms of -- so you said, still tough in 2Q but yet you've got this sequential recovery in 1Q.

Do you mean that it -- does the sequential recovery continue into 2Q and you're just at a tough year-over-year spot?

Can you just maybe give us what you're looking for on a year-over-year basis for those quarters?

Yes.

So as Inge said, the sequential performance we saw in Q1 was typical of past performance, which gave us some comfort that we are not seeing a further decline.

So as you might recall in the second half of last year, ex-electronics we were running now around high single-digit to low double-digit growth.

We expect then as we move through the year in China that we will see modest sequential growth on an absolute revenue basis continuing through the year.

And therefore on a year-over-year comp basis, that will be a rising percentage comp as we move through the year.

Okay.

And so far it sounds like the electronics side of things is where you have seen the pickup.

I mean have you seen anything on I guess more the industrial business or the infrastructure-related businesses?

Can you maybe break it by the pieces?

Yes.

So electronics sequentially was up, but if you look on a year-over-year basis, not yet.

So it was following a typical seasonal pattern.

Industrial was modestly growing, but at a similar level to what we saw in the second half of last year.

And infrastructure as well.

So really no big changes in terms of the individual segments in the first quarter.

Okay.

Just on the $30 million to $50 million of increased investment, is that just going to kind of spread evenly now, or are you going to do it all at once?

How does that kind of flow out?

Yes.

So that you can expect will spread through the year.

What we are doing is in a number of cases we were managing very tightly spending, and so to some extent we are loosening up on that as we see specific areas where we have opportunities.

In others, we are taking the opportunity to devote more focus and resources, such as these couple of divisions that Inge talked about.

So I think fair to say you can think about that being timed throughout the year.

Okay, great, thanks a lot.

John Roberts, Buckingham Research.

Good morning and, again, congratulations on a good start.

Inge, on slide 9, you indicated Japan along with the other areas that were slow, but don't you have pretty easy comps in Japan right now against the earthquake-impacted year-ago results?

I think we will start to see that in the second quarter.

And that I think that's where you will see the comparison becoming a little bit easier.

So what I talk about it is to say that -- it takes a little bit longer time for the investment back in Japan in the country in order to recover.

And I think as we have a broad-based business there, which in fact is one of our biggest subsidiaries in the world, as you know, it takes us a little bit longer time to see the growth coming as well.

Okay.

Thank you.

Nigel Coe, Morgan Stanley.

Thanks.

Good morning.

So David, you mentioned you still feel pretty good about the full-year guidance by segment.

But can you maybe just spin back to 1Q, and which businesses or geographic areas exceeded your plan, your internal plan?

Obviously you don't publish guidance, but internally, which businesses came in stronger?

If I think about it by segment in the first quarter, what I would say, Nigel, is actually you look at it, first of all zero growth on an organic basis is nothing that we get too excited about at all.

But if you walk through the segments, again, we were pleased with the momentum we continued to see in the industrial-related businesses.

I mean you look at industrial and transportation, both good growth around 9% and quite a substantial margin pickup to 22.5%.

If you look at Safety and Security business, again, good growth, 5.5%, and a nice margin pickup, including sequentially.

So we feel good about those businesses continuing to run, but of course we had them pegged for the highest growth through the year.

If you think about Health Care and Consumer, I would say very much in line with what we expected here in the first part of the year.

Consumer retail is in the mature markets in particular continues to be quite soft, although we were pleased with our own performance in the US, which was indicating some pickup of share.

And certainly in the case of health care, with the exception of the drug delivery business, all of those businesses ran quite nicely, in mid-single digits to double digits in the case of health information systems.

So tougher environment for those couple of businesses.

Both performed in terms of managing the margin and growth question.

And then, finally, electronic segments, including display and graphics and Electro and Communications were very much in line, I mean very, very much in line with what we were expecting.

And as we discussed, we continue to expect to see that recovery develop, and there is some indication such as in semiconductor that that's on the horizon.

I do have -- this is Inge.

And one thing to add to that is also our performance in Latin America that is very strong.

And this has been going on for multiple years now, and, yes, continuing.

And that's a very, very good sign for us.

That's a part of the world where our brand equity is very high.

We have an incredible, solid organization there that is both able to execute with operational excellence, and are able to grow in most segments that we are in there.

So we are very, very pleased with Latin America.

And as I said earlier, there will be some additional investment there for some businesses.

But we are very, very pleased with them.

And I would like just to highlight that in addition to what David said as well.

Okay, great.

And then, Inge, you commented about so you feel more confident in the growth environment or maybe the 2012 plan.

Can you maybe just go through how you think in terms of managing discretionary costs versus growth investments?

And are we now in a slightly more bias towards growth investments versus discretionary cost management?

And does that mean that maybe we've got a bias towards a higher revenue number, and perhaps a slightly lower margin number?

Well, it's not either/or.

It's always a balance, as you know.

And I am not there yet to say that I am confident that the growth is on the back.

So that's why we are holding also the $6.50 on the top of our guidance range, because we would like to see it really coming through.

But, as I said, we are letting out for the year here as a first step $30 million to $50 million in very targeted investments for growth, and that's the starting point for us.

So -- and as I said it's not either/or.

We are committed to the commitment to you, and that's where we will deliver.

But I think the areas that we now have identified for additional investment based on the platforms we have and the presence, and specifically around global customers, plays very well for us.

So the business is, we talked about earlier, which is aerospace, oil and gas and mining, etc., the global customers -- and we can serve them very well, not only with solutions from a technology perspective, but also with a geographical reach as we have subsidiaries all over the world.

So this is a perfect space for us, but we are rolling it out carefully.

And I would like to see growth materialize and feel more confident before we make an even bigger investment.

Okay, that's clear, Inge.

David, do you have the book-to-bill ratio for Electro this quarter?

Could you repeat that?

Do you have the book-to-bill ratio for Electro segment?

We don't; and we don't, in fact.

Yes, that's not a number that we monitor, Nigel, book-to-bill explicitly.

Okay.

Great, thanks.

Steve Tusa, JPMorgan.

Good morning.

So can you just help me reconcile how -- the leverage obviously this quarter was phenomenal; maybe that was price/cost.

But you guys have said pretty consistently that your emerging markets or Asia business has -- is kind of accretive to margins, yet this seemed to be more of a developed markets kind of quarter.

So is it just that price/cost dynamic that is throwing that off?

Or I'm just trying to kind of reconcile those comments.

Yes; what I would say, Steve, first of all, is we did see very good performance not only in the mature markets; for example in the US we were up over a point in margin, but also developing markets continued to deliver on margin despite what was a weaker growth environment.

So we don't see any big shift as between kind of those sources of income for the business right now because we've been managing into what we expected to be a softer growth environment, and that's true really across the globe for us and across our businesses.

And I think as you look at the margins, certainly as you can see it by sector; and I would tell you that's not dissimilar geographically to what we traditionally deliver on.

And then just on Health Care, another blowout margin there.

Can you maybe get into what was the key driver of that margin number?

And then how do we think about that margin going forward?

You guys have said high 20%s; you know you are now kind of comfortably above 30%, if you could talk about that.

Yes.

What I would say is what particularly was encouraging for us is the factories are really running efficiently right now in Health Care, which had a material contribution to the margin this quarter.

We've also been able to offset what were raw material cost increases that came through, particularly last year.

And then finally we have been continuing to invest to grow that business.

And typically with an increasing product portfolio, that enables us to hold and to increase margin over time.

And we are encouraged by the results of those investment efforts that are also we believe coming through to the results.

What's your most favorable division there?

Quite honestly, they are all very, very strong businesses.

Okay.

All right.

Great, thanks a lot.

Laurence Alexander, Jefferies.

Good morning.

Two quick questions.

Can you parse the growth that you're seeing in Latin America and the trends that you're seeing in terms of how much is underlying demand versus market share gains?

And then on the CNG agreement with Chesapeake, if you look out five, six years, what kind of market opportunity or size business could this be for 3M?

Yes, so in terms of Latin America, the growth that we saw, it was actually very impressive.

So if you look at across our six business sectors, with the exception of one that ran at 9% growth, the others all had double-digit growth in the first quarter.

So it was a very broad-based growth pattern we saw in Latin America, which is nothing new for us and obviously quite encouraging as we look across our businesses.

So answer is in fact, yes, we are picking up share across those businesses as Latin America, while economic growth was reasonable, certainly in particular in Brazil, if you look at the data, it looked quite weak in the first quarter, and frankly, we had some concerns going into the year.

But the team did a really nice job in our biggest markets, Brazil and Mexico.

And also importantly the smaller markets, the guys have done a great job across the business.

Your second question didn't come through.

What was it?

So on the compressed natural gas announcement with Chesapeake, if you looked out five, seven years, what you think is the possible business size could be for 3M?

Yes; we actually have not put a number on it.

The guys are really excited, because if you look at the nature of this -- the CNG containers that we're partnering with them on, we think it's a very significant opportunity for the company, but to be honest, we haven't put a number on it yet.

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.

Good.

Well, thanks for joining us this morning.

The questions were very good.

We appreciate your spending time with us.

And we will look forward to talking here as the next quarter progresses.

So, bye bye.