3M (MMM) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

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

Afterwards, we'll conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded Tuesday, October 23, 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 third-quarter business review.

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

Before we begin, let me mention three upcoming investor events.

First, as a reminder, we're hosting an investor meeting here in the Twin Cities on Thursday, November 8. If you plan to attend and have not yet responded, please RSVP right away.

Second, on December 12 from 8.30 to 10 a.m.

Central Time, we will host a conference call and webcast, specifically addressing our 2013 financial outlook.

Look for an invitation shortly.

And third, our next earnings conference call will take place on Thursday, January 24 of 2013.

One more item of note, we recently announced a realignment of our major business groups to better serve our global markets and customers.

As we described in our October 3 press release, segment reporting for the new organization will begin in the first quarter of 2013.

And lastly, 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, with that, I will turn things over to Inge.

And please turn to slide number 3.

Thank you, Matt, and good morning, everyone.

Thank you for joining us today.

For us, the third quarter repeated a pattern we have seen throughout the year.

Solid earnings, strong margins, and steady organic sales growth delivered against challenging macroeconomic conditions.

Once again, 3M's operational excellence was an important factor in our quarter.

Our Q3 GAAP earnings per share were $1.65, up 8.6% year-on-year.

Operating margins were again strong at 22.4%.

All six business segments delivered margins above 21%, a sign of continued broad-based effectiveness and efficiency.

Sales in the quarter were $7.5 billion, basically flat when compared with last year.

Currency was again a factor, a drag of 3.1%.

Organic local currency growth was up 2.2%, with increases in all of our segments, including Display and Graphics, and Electro and Communications.

Geographically, the Americas were again strong, including double-digit organic local currency growth in Latin America -- the 11th consecutive quarter that we have achieved that level.

The United States rose 2%; Europe/Middle East/Africa was up 1%; and AIPAC remained flat.

We returned about $0.75 billion to shareholders in the quarter to dividends and share repurchases.

So, all in all, Q3 was another quarter marked by steady organic growth, operating discipline, efficiency, and investment to improve our business.

One example of investment is the acquisition of Ceradyne, which we announced October 1. This is an excellent match on many levels.

The advanced ceramics technology platform, the global possibilities, and in combination with 3M's technology arsenal, their ability to bring new solutions to numerous industries such as automotive, oil and gas, industrial, and electronics, just to name a few.

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

David?

Thank you, Inge.

Let's turn to slide number 4 for a discussion of the third-quarter income statement.

We continue to operate well in the quarter, with excellent factory efficiency and discretionary cost control, both of which were necessary given the continued soft economy.

Sales for the quarter were $7.5 billion, down 0.4 percentage points year-on-year, including over 3 percentage points of currency headwinds.

I will elaborate on the change in sales in just a moment.

Gross profit dollars increased by 1.7 percentage points year-on-year.

SG&A spending declined by 3%, while R&D investment spending rose nearly 2%.

Total operating income increased 6.1%, and operating margins were again strong at 22.4%, an increase of 1.4 percentage points versus last year's third quarter.

The combination of raw material cost reductions and selling price increases contributed 1.6 percentage points to operating margins in the third quarter, while year-on-year increases in pension and OPEB expense reduced margins by 0.3%.

Third-quarter earnings were $1.65 per diluted share, an increase of 8.6%.

Average shares outstanding declined 1.7% year-on-year, which boosted earnings by $0.03 per share.

The third-quarter tax rate was 28.2%, down 40 basis points year-on-year, which increased earnings by a penny a share.

During the quarter, we incurred various restructuring charges totaling $0.01 per share and insurance recoveries added $0.02 to earnings.

As I mentioned before, operating margins improved by 1.4 percentage points to 22.4%, reflecting continued strong operational excellence across all of our businesses.

Please turn to slide 5 for a more detailed look at our third-quarter sales change.

Third-quarter organic local currency growth was 2.2%, with equal contributions from both volumes and selling price increases.

Acquisitions added 50 basis points to sales growth in the quarter.

Foreign exchange impacts reduced sales by 3.1 percentage points, as the US dollar remains strong versus the euro and a number of other currencies.

Again, on a total dollar basis, sales declined 40 basis points versus last year's third quarter.

Looking across geographic regions, Latin America/Canada led the way with strong organic local currency growth of 10.5% in the quarter.

All six of our businesses contributed to this growth, with particular strength in Safety, Security and Protection Services, Electro and Communications, and Display and Graphics.

Health Care also posted double-digit organic local currency growth within the region.

On a country basis, Mexico in particular had another strong quarter with 19% organic local currency growth.

Our teams there have done a fantastic job building the business, with focused investments in a number of key areas.

Those investments are paying off nicely.

In the United States, organic sales rose 2.3%, marking the 12th consecutive quarter of positive growth in the US.

In EMEA, or the combined Europe, Middle East, and Africa, third-quarter sales increased 0.8% on an organic local currency basis.

We saw nice double-digit increases in the Middle East and Africa, along with positive growth in Central Eastern Europe.

West Europe was down 1% in the quarter, an improvement versus the first half of the year, and reflecting the economic growth challenges in that region.

Our Western European teams remain focused on taking market share and driving productivity.

I was encouraged to see that operating margins in the total EMEA region increased year-on-year by nearly 2 percentage points.

So, our teams there are executing extremely well in the face of challenging macro conditions.

Across Asia-Pacific, organic local currency sales were flat in the third quarter.

Growth was strongest in our Health Care and Consumer and Office businesses.

Our businesses serving the consumer electronics industry continue to improve, but by no means have we seen a full recovery.

Focusing on the China Hong Kong region, organic local currency sales were flat in the third quarter.

We saw positive growth in Health Care and Consumer and Office, both domestic-oriented businesses, and in Industrial and Transportation.

This growth was offset by year-over-year declines in renewable energy and personal safety.

Longer-term, China remains a key growth engine for the future and we will continue to invest.

We regard any challenges there as temporary.

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

Please go to slide number 6.

In the Industrial and Transportation business, sales rose 3% on an organic local currency basis to $2.6 billion.

Automotive OEM led the way this quarter with 11% organic local currency growth.

We also achieved good growth in Aerospace, Automotive Aftermarket, 3M Purification, and Industrial Adhesives and Tapes.

On a geographic basis, organic local currency sales increased 8% in the United States, 5% in Latin America/Canada, and 1% in EMEA.

Asia-Pacific sales were flat in organic local currency terms.

This is our largest business by a wide margin, so we are encouraged to see such broad-based growth with excellent profitability.

Operating income was $575 million, up 9% over last year's third quarter, and margins improved by 2 percentage points to 22.4%.

Now let's move to Health Care.

Third-quarter sales increased 4% on an organic local currency basis to $1.3 billion.

Operating income grew 9% to $400 million, with strong operating margins of nearly 32%.

We saw strength across the Health Care business, with the strongest organic local currency growth in Food Safety, Health Information Systems, and Skin and Wound Care.

Drug Delivery was down low-single digits in Q3.

Geographically, sales expanded in all regions, and especially in Latin America and Asia-Pacific, where we have increased our investment levels over time.

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

Sales were $1.1 billion this quarter, up 1% on an organic local currency basis, and operating income was flat year-on-year at $244 million.

Operating margins were 21.9% in the third quarter.

Our strongest growers in Consumer and Office were DIY, Consumer Health Care, and Home Care, while Stationery and Office Supplies saw modest declines on an organic local currency basis.

Acquisitions added 2.5% to sales, due entirely to GPI Group, a leading French producer of home improvement products.

We purchased GPI on October 1 of last year, so next quarter, it will become part of our organic sales base.

On a geographic basis, organic local currency growth was 7% in Latin America/Canada, 6% in Asia-Pacific, and flat in the US, while EMEA declined 3%.

One item of note during the quarter, in light of objections from the Department of Justice, 3M and Avery Dennison terminated the agreement under which 3M would have purchased Avery's office and consumer products business.

Let's take a look at our Display and Graphics segment.

Organic local currency growth rose 1% in the quarter to $936 million.

We were encouraged that sales increased $54 million or 6% on a sequential basis.

Third-quarter organic local currency sales rose in architectural markets, commercial graphics, and traffic safety systems.

Sales of optical films declined just slightly year-on-year, but rose 15% sequentially.

On an organic local currency basis, sales grew by 16% in Latin America/Canada and 3% in the United States, but declined 1% in both EMEA and Asia-Pacific.

Operating profits in Display and Graphics were $199 million, up a strong 11% year-on-year, and margins were 21.2% for the quarter.

Let's examine the Safety, Security and Protection Services business.

Third-quarter sales were $926 million, up 1% on an organic local currency basis.

Growth was led by the Infrastructure Protection and Personal Safety businesses.

This growth was largely offset by declines in roofing granules and security systems.

On a geographic basis, sales rose 20% in Latin America/Canada and 2% in EMEA, but declined 6% in the US and 4% in Asia-Pacific.

Operating income in this business was $196 million, down 3% year-on-year, and margins were 21.1%.

Finally, let's review Electro and Communications.

Third-quarter sales in this business were $820 million, up 0.1% in organic local currency terms.

Operating income increased 3% to $186 million and margins were 22.7%.

Organic local currency sales increased in electrical markets, and declined year-on-year in both telecom and consumer electronics-related businesses.

On the electronics side, a number of industry product launches were delayed, contributing to lower than expected growth in our business.

Overall, the industry is showing signs of recovery, but at a much slower pace than expected earlier in the year.

In geographic terms, Latin America/Canada rose 17%, the US increased 4%, and EMEA rose 1%, while Asia-Pacific declined 4% in the quarter.

Both Electro and Communications, and Display and Graphics posted positive organic local currency sales growth in the third quarter -- the first after multiple quarters of decline.

We expect similar momentum in the fourth quarter, helped by favorable year-on-year comparisons.

That concludes my discussion of the business segment results.

Please turn to slide number 7.

Free cash flow for the quarter was $987 million, down $39 million year-on-year.

This amount includes $246 million in pension and OPEB contributions, which was similar to the last year's third quarter.

Year-to-date contributions totaled $918 million and we expect approximately $1 billion for the full year.

Capital expenditures were $358 million, up $22 million versus third quarter of last year.

And we expect to invest approximately $1.5 billion for 2012 in total.

Free cash flow conversion was 85% in the quarter versus 94% in last year's third quarter.

We returned $735 million to shareholders in the third quarter, including $408 million in cash dividends and $327 million in gross share repurchases.

So that concludes my discussion of our third-quarter financial results.

Now, Inge will address our forward outlook, beginning on slide number 8.

Thank you, David.

Earlier this year, we shared 3M's vision, followed quickly by our strategies.

Consistent with our strategy to build relevance and presence in the marketplace, we recently announced a realignment of our major business groups to better serve both global markets and customers.

As Matt said, we will begin reporting results under the new structure in the first quarter of 2013.

Very simply, we move from six businesses to five business groups -- Consumer, Industrial, Health Care, and two newly-formed business groups, Electronics and Energy, and Safety and Graphics.

The realignment is a natural outcome of our strategy to increase relevance to our customers and to broaden our presence in the markets we serve.

By building scale more broadly across the Company, we create critical mass in each business group to take better advantage of innovation and commercialization opportunities.

The Electronics and Energy business groups illustrates this concept very well.

We will bring together all of our capabilities in these markets to increase our impact and relevance with big global OEM customers.

At the same time, we enhance our ability to leverage key manufacturing and marketing assets.

I'm personally very encouraged by early feedback from multiple customers, who look forward to strengthen our partnership for mutual success.

Please turn to slide 9. In the short-term, however, we still face the challenge of sluggish economies in large developed regions like Western Europe and Japan.

As David said, the teams there are working to take share and drive productivity, and I'm very pleased with our progress.

In China, the year clearly has not played out the way most anticipated.

But as we have said many times, short-term challenges will not divert us from the future opportunity, so we will continue to invest, and build our business and our capabilities locally for the long-term.

Our China-for-China approach is the right approach, as the Chinese economy evolves away from its dependence on exports and towards domestic consumer-oriented businesses.

Of course, China is not the only location where we are investing to improve our business and strengthen 3M innovation.

In Q3, we announced plans to build a new state-of-the-art laboratory facility at our headquarters in St.

Paul, Minnesota.

The new laboratory, scheduled to open in early 2015, will house some 700 scientists who currently work in other facilities here.

With the latest in equipment, it will be an environment designed specifically for the development of innovative technologies, and an important hub in 3M's global research network.

Let me now turn to the outlook.

Please turn to slide 10.

With one quarter left in the year, and no indications that condition in the fourth quarter will be dramatically different from the third, we are adjusting the full-year earnings outlook to a range of $6.27 to $6.35 per share.

This range includes $0.03 per share of anticipated acquisition-related expenses, largely at Ceradyne.

On organic local currency growth, we now expect the range of 2% to 2.5%.

We look for a currency penalty of approximately 2.5%, a little lower than it has been running.

And we look for margins in the range of 21.5% to 22%.

In summary, Q3 market conditions were challenging, and we expect this to the end of the year.

We will continue to expand our business, drive productivity, and execute our plan with strong discipline.

Thank you for the attention.

We will now take your questions and comments.

(Operator Instructions) Steven Winoker, Sanford [and] Bernstein.

Could we just maybe start with pricing and inventory trends?

On the pricing side, you've got a healthy 1.1% again, which is great, in more value versus raw materials.

But this is also down, I guess, on the pricing side from last quarter year-on-year.

Maybe just talk about the trend and the sustainability, what your expectations are, both into next quarter and as you see going forward.

What's the ability of the organization to continue to get pricing in the near -- near-term?

Right, Steve.

So, if you think about pricing in terms of what we've talked about this year, we indicated in the last call that we thought we would have about a 1% price performance for the calendar year.

As we look now at Q3 and into Q4, I think it's going to be 1%-plus.

So maybe a little bit above that level.

If I look more specifically at, as we trend to the end of the year, I think we'll have positive price performance in Q4, but it will be a little bit less than what we saw in Q3.

And it's very consistent with the plan that we had in place, which is where we took quite significant price adjustments here late last year and earlier this year.

And in the current environment, we don't see -- both on the negative side, we're not seeing significant concerted price pressure on the business.

So, we're able to be in more of a holding pattern on the context of weaker raw materials.

I would say the one exception there, which is probably no surprise, is, we're seeing typical price dynamics in our Electronics business, specifically in Optical Systems, where we'll probably see double-digit price declines on the year, which is pretty typical in how we plan the business.

Okay, that's helpful.

And on the inventory (multiple speakers) -- that's all right, go ahead, Inge.

Yes, this is Inge.

I'll make a comment on inventory.

You know, now, as we are three quarters into the year, and we -- all of our customers went into a year which we knew will be uncertain, I think everyone have really focused on the inventories and the turns.

But both ourselves and our customers.

So, as we said on the last call, it's managed very well, so we don't see it as an issue by definition.

I think the inventories, generally speaking, are very well in line with demand.

I think we saw a little bit of uptake relative to TV sets, whereas as you maybe recall, last quarter, we said it was seven weeks.

It's slightly higher but not much.

But I think that's the only thing we have seen.

And then I will see in the retail side, they also manage it very tight.

So when we look upon back-to-school this year, it was okay; it was not great.

But that's indicating for us that they are managing the channel very well.

So as we see it today, broad-based everywhere, it looked like maybe due to the fact that everyone went into this year with a view of uncertainty, it's managed it very, very tightly.

So, we have not seen a change from last quarter by definition.

Okay.

And Inge, could you maybe comment -- on the segment realignment, we haven't heard much in the way of cost repositioning as a result of the realignment.

What is your view on the implication and the cost side?

Well, this was done in order to serve the customers better and make sure that we can accelerate growth.

So I think that's the starting point to make sure.

That is the prime objective.

So our focus here was to make sure we get more aligned with our customers and the market; create, I will say, speed in between what we call customer-inspired innovation, right back to our laboratories, and back out again, so we can commercialize faster.

So I think that's the prime thing for us to be able to do, and that is where we focus now.

Now, by definition, we should see, which is built into our overall aggressive model, some productivity improvement.

But I hope that we should be able to reinvest that in order to get the growth rate up a little bit higher than we see today.

So, I will say that there will be an efficiency in the organization, hopefully, with less internal meeting, more external meeting, but use the resources in order to make sure we align with customers, so we can get these things going.

And as I said in my opening, I received multiple, very positive response from very big global OEMs that really can see this as a benefit for them and us in the way we work.

So that's how I would look upon it.

And as you know, we are driving our model constantly in terms of improved productivity and efficiency.

So the prime objective here was to be offensive, and make sure we align better with the customers and the markets.

Great, thanks.

I'll hand it off.

Ajay Kejriwal, FBR Capital Markets.

So maybe just continuing on that pricing question, it sounds like you still will be positive in 4Q.

Could you maybe comment on RoHS, so it looks like that pricing RoHS spread was a nice positive 3Q.

How should we be thinking about that spread into the fourth quarter?

Yes, right, Ajay.

So if you look at raw material costs, you're right.

We did see actually what we expect to be the best year-over-year comparison year in Q3 for the year, which was over a 2% decline in raw material costs.

And right now, what I'm looking for, for the full year, is around 2%, including continued positive performance in Q4; although we're starting to get into a period now by Q4, where some of the trends in raw material price declines were already starting to be apparent last year.

So we're starting to get into a year-over-year comp issue.

But nonetheless, we think that we'll continue to see good performance on that side.

Got it.

So, then on your margin guide, the low end kind of implies 4Q margins would be flattish year-on-year.

And you've been seeing nice improvement last couple of quarters.

It sounds like you'll continue to manage costs and pricing raw materials would be a positive.

So how should we think about that low end?

Is that just being conservative?

Or is there any of the segments that we should be thinking about?

Yes, good question.

So if you look at the balance of the year and the guidance, basically, I think it would be fair to say you would align the low end revenue guidance with the low end margin.

We don't see any particular notable change in terms of the trends of the business sectors, other than the fact that, seasonally, we always have slower sales in the fourth quarter and lower margins.

But no particular trend to note other than the fact that we have seen what we believe will be the bottom in the electronic cycle, as we've been calling for through the last -- well, frankly, through the last five quarters.

And so we will see some continued positive trend on the electronics space, although that's, frankly, more of a comps issue right now than necessarily seeing the kind of strength that we'd originally foreseen in that recovery.

Thank you very much.

Very helpful.

Steve Tusa, JPMorgan.

Sorry, just to go back to the price cost question.

Can you just -- that bridge is very helpful in showing what the impact is on margins.

So we can kind of put it together doing the math.

But I guess, just to get to the point, so the fourth quarter will be around what?

It was 1.6 points this quarter.

What do you guys expect for the fourth quarter?

We think that the trend on price costs will continue in a similar fashion, so raw material cost trends, we don't see any inflection point further up or down, as we move into in the fourth quarter.

And as I described from a pricing perspective, we get into a tougher year-over-year comp, as we had a very strong price performance last year in the fourth quarter.

So, when you look at that price performance, we think it will be positive in the fourth quarter, but less than what we saw in the third.

Okay, that's helpful.

And then on the -- I guess just digging into the segments a little more, the Safety Security business had a pretty dramatic step down in the margin.

There may have been something in the second quarter I'm forgetting about, but was that a mix issue?

Was that something that -- did the weakness kind of come at the end of the quarter there, that kind of caught you offguard?

And I guess, similarly for Consumer and Office, I mean, this business has been running at such a hot rate, but the margin down year-over-year.

Just on those two segments, what's going on with the margins and what would you expect in the fourth quarter?

Yes.

So if you look at -- well, first of all, Steve, as I just mentioned, to Ajay, I wouldn't see -- other than normal seasonal factors, I would foresee that trends in all of the segments, including those two, would be pretty similar in Q4 to Q3.

If you go specifically first to Safety and Security, business -- what we saw this year was a couple things happening.

So, first of all, if you look at the margin, 21% in the third quarter, which was very steady on a year-over-year basis.

What's also true is if you look at, in particular, our OH&ES business, our Personal Safety business, it was up in the mid-single digit range, which is quite good, but it is slower than what we saw in the first half.

So part of what you've seen is a general slowdown in the macroeconomy that did impact the personal safety business overall, even though it's still printing mid-single-digit growth.

The second thing sequentially, which I think is important, is we saw a pull forward in demand in the roofing granule business, which was driven by the fact that we had very mild weather here in the US in the springtime.

And so there was a pull forward, which really supported the first half, including the margin there; you saw very unusually high margin in the second quarter.

And so now what's happening is, demand in that segment is correcting -- and the exception, to Inge's general comments on inventory, we are seeing an inventory reduction there.

And that's coming through in the results here in the third quarter.

Okay, and then just lastly, I guess you guys had some discretionary cost take-out from last quarter.

Any discretionary cost take-out in the second half here in the third quarter?

Yes, so in terms of restructuring, we've done now $80 million year-to-date, including about a penny a share around $10 million here in the third quarter, which is, again, normal in our business, in particular in a time like this.

We've been working hard to look where there's opportunities to improve our efficiency and competitiveness.

So we did a little bit more here in Q3.

Okay.

Thanks a lot.

Deane Dray, Citi.

For the $0.02 insurance recovery, did that show up in SG&A?

Was there anything else in SG&A that had brought that a little bit lower?

Actually, that shows up in Other Expense line, and so, not in SG&A.

SG&A really is a story around managing the business in a fairly tepid growth environment.

So, same kind of expense patterns that we've seen through the year.

I think, importantly for us, what we're really trying to do in that area is make sure we're prioritizing to invest in that area, in the key growth areas.

So, if you look at some of the emerging market segments we've talked about before, such as Health Care in emerging markets, we continue to add structure and resources in that area around the world.

And at the same time, we're looking as to how we can be most efficient, including in places like Western Europe, where our overall margin year-on-year was up over 2 points.

And that's -- not an insignificant piece of that is related to how we're really driving efficiency.

So that would be the -- should we use a run rate of third quarter for fourth-quarter estimates for SG&A?

For SG&A?

Yes, in terms of absolute terms, I would say yes, obviously, there's a seasonal factor that's always impacting us in Q4.

Okay.

And then last one from me is on the acquisition of Ceradyne, Inge, I'd be interested in hearing the dynamics on how you can leverage all these different technologies of ceramics.

You rattled off a number of them, you know, Auto and Oil and Industrial.

But you've got a decline in body armor sales that's been well-known within Ceradyne.

But it looks like 3M would have an opportunity to really leverage some of the other material science opportunities.

So if you'd just expand on that and maybe a timeframe where we would start to see some penetration there?

Yes, first of all, we are still in the process, as you know, in terms of completion here.

So some of the comments I will make here will be more generic.

But if you look upon it from a technology perspective, and when you add what we have in terms of chemistry and solutions coming to shapes, what will be added here is minerals and powders, meaning that we will have a much broader base in order to develop relevant solutions in the marketplace.

And so I think you look upon it from many platforms and many businesses.

In fact, today, what we have in ceramics ourself, it's around $3 billion in sales where it's touching.

Right?

So touching for us 18 divisions.

And we'll be able to build that out in many, many places.

So we hope now to complete it here during this year, and then we will start the integration very fast.

And we have an integration team in place.

And then we hope we'll be able to talk more to you around specifics as we close it down.

And we'll be very excited to do it.

What is really interesting for us here and different from many other acquisitions we have done, this is broad-based for many businesses for us, and is a technology play, where I think the combination of what we have today and what Ceradyne is adding to us from a technology perspective, will be really, really powerful.

So, you're right in terms of your comments on short-term cycles in the business.

But we look beyond that and believe we really can leverage this big time as we move ahead.

So we believe this is a very good acquisition for us strategically long-term, but also with short-term revenue benefit added into next year.

Thank you.

Andrew Obin, Bank of America Merrill Lynch.

I just want to clarify something.

In one of your comments, you talked about broad macro.

So, as you go into the fourth quarter, are things getting worse globally?

Or they just remain sluggish but stable, just to understand what the macro framework is here?

I think we will say stable as we go into the fourth quarter.

We don't see any uptick, but we believe it's stable.

So that's also the way we have looked upon the estimation for the rest of the year.

So it's -- there's many uncertainties in the market, as we all know, but we all manage it well and have done so, so far this year.

But we don't -- we see it stable for the rest of the year.

We don't see any upticks by definition.

We will continue to drive our operational excellence in West Europe that we have done successfully this year.

And as David said, we are very pleased with the team there in terms of how they are able, both to take share but to drive productivity and improve margins.

And as you saw, United States is moderating a little bit in growth for us.

But, again, we show local currency growth.

And some of the businesses here like industrial had, in fact, an 8% growth in United States in the quarter, which is very encouraging and very good.

Then, when you look upon emerging market and so forth, I think one thing is for the whole electronics part of the business, the recovery is slower than expected by the industry.

So, this is not 3M.

This is slower than expected by the industry.

And sequentially, we improved.

So I think that's good for us -- as you saw, both Display and Graphics, and Electro and Communications show positive organic growth this quarter.

So, it's slower but it's improving.

Could we just dig into a little bit more in China just a couple of things.

Could you talk more about some trends between Industrial versus Consumer Trends?

When do you guys -- what are you hearing underground about if and when growth will accelerate?

Yes.

Well, first of all, I think the way we look upon that, this is to say, first of all, our strategy that we have now executed for many years that is around China for China, is now proven to really be the right one.

China's economy has historically been very dependent on export.

And I will not categorize it that they are moving from export to domestic.

I would say export will continue to be important, but what I will call domestic and consumable part of the China economy will be more important as we move ahead.

That is why we are very well-positioned and we have invested now for many years in Health Care that is coming -- growing very, very well for us now.

And the same in Consumer.

So we have made investments here during the last five years or so in order to be prepared for this.

In terms of the Industrial side, in fact, for us, if we take our renewable -- the renewable business, in the quarter, the Industrial business grew by 9% for us in China.

So we think it will come back here in terms of growth.

And I think it's very much dependent on the uptick in West Europe for exports going over there in United States.

And do you have any expectations of -- baked into your guidance as to when the Chinese decide to accelerate their economy or it's just steady as she goes?

The way we've built the guidance for the balance of the year, Andrew, is really steady into the fourth quarter.

That would be in China as well as across the business generally.

Thank you very much.

Jeff Sprague, Vertical Research Partners.

Just a high-level question first and then maybe to follow-up.

Inge, just back to the reorg, can you give us a little more color on how it actually makes you better?

And what I mean by that one, when I think of customer intimacy, I think of smaller divisions and smaller P&Ls, not consolidating from six to five.

And I know there's a lot of businesses under the surface at 3M, and it sounds like that's not changing.

But it's unclear to me how the reorg actually makes you competitively better.

Yes.

First of all, it, as you see, that a couple of businesses become more sizable, meaning it will be easier for them to prioritize inside the businesses.

So I think that's an advantage relative to making choices as we move ahead.

And as you know, I'm a big believer in prioritization, so I think that'd help you.

The other thing is, it will now become easier for us to utilize our capabilities, both for manufacturing and research and development in direct to our customers.

So if you think about electronics and energy, that's big markets and big customers.

A total market space for us now would be very, very sizable.

And what we will be able to do here is to line up our resources, which will help us in terms of the speed for commercialization -- which is, again, based on customer-inspired innovations.

So I think that linkage is very important for us.

So by definition, size and scale is important, and that we have some other alignment relative to smaller divisions below that, that will happen.

But very much where you think about the divisions that we have had, maybe in two different business segments before, doing business with big global OEMs is slowing us down, relative to our interaction, response, et cetera.

So I think that really will help us as we move ahead.

And as I said earlier, I've got many positive comments relative to the improvement and alignment that this will help us with.

Great, thank you.

That's helpful.

And then just near-term trends.

Inge, we heard a lot of companies suggest that July and August were just kind of basically in line with what they thought, and then they didn't get the normal seasonal bounce in September or September orders were disappointing.

Do you see that anywhere in your business?

How did you actually exit the quarter?

And any early read as you look into October here?

Well, you know, when we looked upon billing per day, in fact, during the quarter, we had a slight increase as the quarter went on.

So I think that what you're referring to what other people are saying to you, I'm not sure that's correct for us.

David will comment here as well.

But what we saw was that the invoicing per day, per billing day, had a slight increase as we went through the quarter.

So that was a positive thing for us.

Yes, I would just add -- so, in the context of our prior view of the year, obviously, we've brought down our revenue growth for the year to a lower range.

So I think the way to think about it as we do is, we had steady sales through the quarter.

Obviously, September was a shorter month, so some people may be interpreting the overall sales impacted by the less billing days.

But our expectation has been actually a stronger rise specifically in the Electronics segment, which didn't materialize.

Hence, steady sales through the quarter, not rising as much as we'd foreseen in one particular sector.

And therefore, we've adjusted our outlook for the year accordingly.

Great.

And then just finally, David, one quick one for you, if you could.

If you just kind of snapped the line today on pension, can you give us a sense of what the headwind would look like next year?

Yes, if we were to look right now -- and obviously, we'll have a lot more detail in December in the call, and I also will talk in some depth in the November meeting, as we're going to look at the long-term -- but if I look at pension right now, despite the fact that we would expect to see a flat or modest decline in the discount rate next year, basically, we've been amortizing deferred losses over time.

And that amortization is now declining.

So, we have a declining amortization of prior discount rate changes.

We have quite good return on asset performance.

I think, this year, through September in the US, it was somewhere over 10%.

And therefore, I'm presently expecting that our pension expense next year will certainly not be a headwind.

And there's -- the more likely scenario is we'll get some modest tailwind next year.

Great, thank you.

Nigel Coe, Morgan Stanley.

So, David, if I can just follow-up on that last point there, is the reason for the amortization falling is because you amortized the five years?

Is that correct?

We have a three-year amortization buildup, and then we amortize the balance through over a 10-year period after that.

So, if you think about the trends, which is, we've taken quite substantial reductions in the discount rate over the last couple of years, that's now being fully built into that schedule.

And likewise, we've seen, as I mentioned, good return on asset characteristics as well, which gets amortized.

So, to the extent we perform better than assumptions, that likewise gets amortized.

And so we're building out actually better layers of positive asset performance.

So the combination of those two would lead to the outcome that I mentioned.

Okay.

That's pretty helpful.

And then just switching back to inventories, you're heading into 4Q with a bit of a [Q-on-Q] increase in inventories.

I'm sure some of that's due to the weaker dollar.

But are you planning to take any unusual reductions in inventory as we head into 4Q?

I know we normally do see inventories coming down into 4Q, but anything unusual there?

Yes, I would say not unusual, and yes, it wouldn't be surprising to see us bring down some inventory in the fourth quarter, which is typical of the seasonal pattern.

And does that have any measurable impact on margins in 4Q?

Certainly, lower production levels have an unfavorable impact on margins, as is typically true.

I mean, if you look at prior years, I think that would give you some guidance how to think about it.

Okay.

And then just finally, you got some debt maturities coming up over the next 12 months.

Obviously, it's a favorable time to go out and refinance debt.

Any thoughts on maybe topping up the debt balance and take advantage of the low interest rate environment?

Yes.

So we've been looking at -- we would agree.

We've got a $500 million maturity here in the fourth quarter.

As we looked out at the situation, we decided that it was a good time to do some pre-funding.

So we went in here, and in June/July time frame, and did a $1.25 billion issuance, which was intended to, in anticipation of both the rollovers as well as the fact that we view the market situation to be quite favorable at the time.

So, yes.

Okay, thanks.

Shannon O'Callaghan, Nomura.

So just when you think about operating income, it was up 6% in the quarter and really came from the price RoHS this quarter, pension was ahead when FX was a little headwind.

So those sound like they'll get more favorable and you just mentioned about pension.

But price RoHS is a big number.

So can we sustain kind of the 6% op income growth if volumes stay soft?

Is there another sort of driver to keep that going or maybe any other dynamics?

Yes.

So I think -- I guess my answer, Shannon, is that as we look at running the business, certainly, as we came into this year, we were quite cautious in terms of the growth opportunities.

And therefore, we postured ourselves to -- well, we had talked about a 1% year-over-year margin improvement in the Company, which we're certainly on track to deliver for the year.

As I look out forward, frankly, we haven't finalized the 2013 plan, if that's what you're referring to.

But certainly, we'll have to look at what's going on with growth in the economy.

We think we'll be able to continue to grow our business at and above that trend, based on the investments that we've been doing.

And certainly, efficiency is part of the model that we'll need to make sure that we're balancing with also investing in the business.

So we feel good about the business right now.

We think the sustainability is very good in terms of our overall performance.

And obviously, we'll have to be able to adjust to the extent we see movements up or down in the economy.

And would you -- I mean, would you go out and get more price or would there be restructuring savings?

Or what -- I guess what would replace the current kind of price RoHS lever?

Yes, I mean, I would say we'd have to look at all of those factors in order to drive the business.

But bottom line, we think the equation is very sustainable.

We have a number of levers that we can pull on.

And we'll have to look at all of those pieces as we roll this out here for next year.

And then just a little follow-up on Electronics.

So, I mean, you guys had been a little more encouraged coming out of 2Q on a pickup in Electronics.

And now it didn't come through.

Can you just give a little more color on sort of what you saw that it had encouraged you?

And then what the setback was from that?

Yes, you know, first of all, what happened in the marketplace was that there was weakness in semiconductor and hard disk drives.

So the outlook has weakened from Q2 for both those segments.

So I think that was a clear change in the outlook as we had it back in Q2.

So, for us, electronic-related business was down nearly 3%, with Optical down 40 basis points.

But optical was up almost 16% sequentially, with profit up 20% year-on-year, and 40% sequentially.

So that was an interesting move for us and very good.

So very profitable and they did well.

I think that we see a modest recovery in Q4, and what we see also is improvement in handheld and smartphone market, where we have good penetration.

So that's working in our favor.

So I think that's what you have to see if you look up our weaknesses, it was the semiconductor and hard disk drives.

And that's no surprise for you and -- or for us, what we have seen what happened in the market.

And then we see improvement in handheld and smart phones, which is based on our solutions working in our favor.

So --

Right, okay, great.

Makes sense, thanks.

Jason Feldman, UBS.

Latin America and Canada as a region seem to have been particularly strong now for quite some time.

It looks like it's beyond just end market for us but also improving penetration.

When you look at that, is it really just because you're coming from a lower base there?

Or are there lessons or models kind of from that region that you can apply elsewhere?

Well, first of all, when you look upon Latin America, we have a broad-based very good performance.

And as David said earlier, specifically Mexico at this point in time is doing very well.

And that's due to that they had built out a very strong platform that we have had for many years, in terms of our commercialization capabilities.

But now build out with more local manufacturing and with more research and development.

So, as you saw in the quarter here, was 19% organic local currency growth, which was very good.

Brazil is a big subsidiary for us and also doing very well.

And again, the success there is that we have invested since many, many years -- we have been in Brazil since 1946.

So we have made investment not only for commercialization capabilities, but manufacturing and research and development.

Now the good thing in Latin America, it's all the other countries are also doing very well.

And our portfolio is very balanced, generally speaking, in Latin America.

So we are not so heavy in one of the bigger businesses.

It's broad-based, with Health Care strong; Consumer and Office have a very good position with very good brand equity that they are leveraging.

So, I think it's the thing here for them is that they have gone very early on the localization strategy, and that's paying out very, very well for us.

So, good base, continue to grow.

We're very happy with the performance there.

It's also the team, I will say, when you go down to execution, that have this fantastic balance of both entrepreneurial, in terms of finding new businesses, but also driving operational excellence very, very effectively.

Maybe I'd just add one point, which is, if you look at Latin America -- I'm building on that theme -- it's our most mature of those emerging market investment areas.

And you can see how well the model works over time.

We're applying exactly that same model in places like Southeast Asia, like Central and Eastern Europe, like Middle East and Africa.

And we think that portends well for the future.

Okay.

That's helpful.

And then lastly, we're beginning to see kind of an increase in prevalence of touchscreens for monitors for traditional PCs in advance of Windows 8. Is that an opportunity for the optical films business?

And when do you expect that to actually wind up being big enough to make a difference, if so?

Well, I would position it slightly different.

I would say that it's an opportunity broad-based for 3M technologies.

I would not hold that to optical film.

And that's one of the reasons why we have realigned the organization with an electronics and energy business.

So coming back to the question before, what is the advantage?

We have so many technologies that are going into the electronic industry, and you go into specifically handheld, that this will be the advantage.

So the answer is yes.

Please broaden out in terms of many other products and solutions that we would provide.

On the timing, we are working very close with our customers.

And we cannot talk about that at this point in time, in terms of when they will introduce the platforms.

But the answer is yes, this is a good thing for us.

Okay, thank you.

Laurence Alexander, Jefferies & Company.

Good morning, this is Lucy Watson on for Laurence.

On your current order visibility, I guess, how is your visibility on order trends in the industrial and auto markets, in particular?

And are any of your customers alluding to plans for longer year-end shutdowns this year?

Yes.

So I guess I'd just pick up on some of the earlier comments.

If I look at specifically the auto OEM business, we saw double-digit growth again this quarter, which is roughly twice the rate of the build.

So, what we're -- it's quite clear to us that we're seeing very good market share pickup in that space, and we're pleased with that.

What we also believe to be true is that, in the fourth quarter, we will see a decline in the sales in that space, which is consistent with what's going on with schedules, which is we do see the fourth-quarter schedules for automotive build globally is down.

I think, as I recall, it's about a 3% year-over-year increase.

So we see that coming down.

Do we have specific additional insight beyond that?

Quite honestly, frankly, as I stand here, I don't, so.

And then industrial, generally, the trends -- we have seen, I mean, there's been, if you look at the numbers, you see some softening in the industrial momentum, which is very consistent with what's going on in the macroeconomy.

As Inge commented, as we look through third quarter, on a daily sales basis, we were encouraged, frankly, to see that the sales were pretty steady.

And to be honest, we're watching very carefully.

We've taken a more conservative posture in terms of the outlook for growth for the full year.

That reflects a more conservative view of the fourth quarter, because we think there's plenty of uncertainties out there.

So, while we've been encouraged with our ongoing performance, we're also, frankly, trying to be appropriately cautious right now.

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.

Well, thanks for joining us today.

I know it's a very busy earnings day.

Appreciate your time and attention.

Appreciate your continued interest in the 3M Company.

Look forward to seeing you in November, those of you that are coming.

And we'll talk real soon.

Thanks.