3M (MMM) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the 3M fourth quarter earnings conference call.

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

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

(Operator Instructions)

As a reminder, this conference is being recorded Thursday, January 24, 2013.

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

Thank you and good morning, everyone.

On today's call we'll discuss our fourth quarter and full-year 2012 performance along with the 2013 outlook.

Inge and David will each make opening comments and we'll leave plenty of time for your questions.

Recall that during the fourth quarter we announced a realignment of our major business groups.

Segment reporting for the new organization will begin in the first quarter of 2013.

Today's results are presented on the basis of our existing segment structure.

We will furnish supplemental historical business segment sales and operating income information reflecting the segment realignments in an 8-K and expect to see this filing sometime around mid-March.

Let me mention a few upcoming dates and events.

First our 2013 earnings conference calls are set for April 25, July 25, and October 24.

Also, we will host an investor meeting on the afternoon of Tuesday, December 17.

I know that December calendars fill quickly so please hold this date and more details will be available later this year.

Please take a moment to read the forward-looking statement on slide 2. During today's conference call we'll make certain predictive statements that reflect our current views about 3M's future performance and financial results.

These statements are based 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.

Now please turn to slide number 3 and I will turn the call over to Inge.

Thank you, Matt and good morning, everyone.

I appreciate you joining us today.

For 3M 2012 was a year of preparation, progress, and performance.

We developed and introduced our new vision and strategies.

And we aligned our organization more closely with our customers and markets.

We combined several businesses for increased scale and relevance and we formed new businesses in promising markets.

We brought new strengths to marketing, sales, and e-business and we gave new emphasis and leadership to Lean Six Sigma.

And we put in place a dedicated team to more efficiently integrate our acquisitions.

Today that team is hard at work on both the FSTech and Ceradyne acquisitions.

You will recall from our November meeting that Ceradyne is both a good business and a strong technology play to build out 3M's ceramics platform.

I'm very pleased that in 2012 we brought portfolio prioritization into the forefront of how we manage the Company.

This is important for long-term success and we are using the process to improve short-term results as well.

In a few minutes I will discuss several actions we have recently taken.

Perhaps the most significant progress made last year was the strengthening of 3M's commitment to innovation.

We expect R&D to approach 6% of sales by 2017 and you see some evidence of our increased investment in the fourth quarter of 2012.

Finally, as you all know, we reset our financial goals for the next five years.

We now have targets that are both realistic and aggressive with real possibility of upside.

All these actions are evidence of preparation and progress.

Let me summarize our 2012 performance.

Please turn to slide 4. For the year, earnings per share were up 6% to $6.32.

Operating income rose to $6.5 billion or 5% increase.

We maintain outstanding margins of 21.7% with five of our six business segments delivering above 21%.

Sales for the year were nearly $30 billion.

In organic local currency terms sales increased 2.6% with particular strength in Latin America/Canada up 11% and the United States up 4% for the year.

Asia-Pacific was flat for the year in organic local currency, impacted heavily by a soft global consumer electronics industry.

And Europe/Middle East/Africa was down 1%.

Currency impact reduced worldwide sales by 2.4% and acquisitions added nearly 1 point.

We returned $3.8 billion in cash to shareholders through dividends and share repurchases, which was 86% of net income for the year.

And finally, return on invested capital for the year was 20%.

In summary a solid year of results during uncertain economic times.

The 3M team is well aligned and the Company well positioned to win in 2013 and beyond.

I will now turn the call over to David for more detail on our fourth quarter 2012 results.

David?

Thank you, Inge.

Let's begin with slide number 5 where I will break down the fourth quarter change in sales.

Fourth quarter sales rose 4.2%, our strongest increase of any quarter in 2012.

Organic growth was 4.3% as volumes rose 3.6% and selling price increases were a positive 0.7%.

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

On a geographic basis, Latin America/Canada was once again our fastest-growing region with organic local currency growth of 9.7%.

This performance was broad-based with all six of our businesses generating positive organic growth in the region including double-digit increases in Health Care, Safety, Security and Protection Services, Consumer and Office, and Electro and Communications.

Brazil and Mexico both posted impressive results.

Brazil grew 11% organically in the face of a still recovering economy and Mexico grew 10%.

Organic local currency growth was 5.8% in Asia-Pacific.

Japan declined year-on-year reflecting continued tough economic conditions and the rest of APAC rose nearly 10% on an organic basis.

For non-Japan Asia this was the best quarterly growth performance in nearly two years.

China was a significant contributor with organic local currency sales growth of over 16%.

We also had another very good quarter in the United States with organic sales up 5.2%.

Consumer and Office led the way with strong double-digit performance.

In EMEA or the combined Europe, Middle East and Africa fourth quarter sales declined 1% on an organic local currency basis.

Western Europe was down 0.6% year-on-year.

The economies there have stabilized but are not yet growing.

Our teams in the region continue to focus on market share gains and productivity.

Let's now review the income statement.

Please turn to slide number 6. Sales for the quarter were $7.4 billion, an increase of 4.2% in dollar terms.

We generated $3.4 billion in gross profit and maintained strong gross margins of 46% for the quarter.

SG&A spending rose 1% and we increased R&D investments by 10% versus the fourth quarter of last year.

Operating income increased 5.8% in Q4.

Operating margins were 19.5%, up 30 basis points year-on-year.

Four primary factors contributed to the margin change.

First, as I mentioned earlier we grew organic volumes by 3.6% in the fourth quarter which we leveraged into approximately 50 basis points of higher operating margin.

Second, the combination of lower raw material costs and higher selling prices added 1.4 percentage points to fourth quarter margins.

Selling prices increased 0.7% year-on-year largely due to carryover price benefits from actions taken earlier in 2012.

Raw material cost deflation was approximately 3.5%.

Third, acquisitions in total reduced operating margins by 50 basis points.

As Inge mentioned, we are in the process of integrating two recently closed deals, Ceradyne and Federal Signal Technologies.

Both integration efforts are going well with no major surprises, and from a financial perspective we are right where we expected to be at this point in time.

Adjusting for these deals, operating margins would have been 20% in the fourth quarter.

Finally we experienced lower factory utilization in Q4 versus the same quarter of 2011 which, combined with the other factors, hurt fourth quarter operating margins by 1.1 percentage points.

All things considered we delivered full-year operating margins of 21.7%, right near the midpoint of the 21.5% to 22% range we were expecting.

Fourth quarter earnings per share increased 4.4% to $1.41.

Average diluted shares outstanding declined 1% year-on-year which added $0.01 to EPS.

The fourth quarter tax rate was 28.7%, up 2 percentage points year-on-year which reduced earnings by $0.04 per share.

The fourth quarter concludes another successful year for 3M.

And with our plan in place and our organization aligned, we anticipate a strong 2013.

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

Please go to slide number 7. Sales in the Industrial and Transportation business were $2.5 billion in the fourth quarter, an increase of 4% on an organic local currency basis.

We achieved good growth in a number of businesses, including industrial adhesives and tapes, abrasives, automotive OEM, and personal care products.

We posted double-digit increases in two businesses, specifically liquid filtration and aerospace and aircraft maintenance, where we continue to win business and penetrate further into these important markets.

Our renewable energy business declined 12% on an organic local currency basis.

On a geographic basis, organic local currency sales in Industrial and Transportation increased 6% in Latin America/Canada and the United States and 4% in Asia-Pacific.

Industrial and Transportation's fourth quarter organic sales were flat in EMEA.

Operating income was $469 million and margins were 18.8%.

Adjusting for Ceradyne, Industrial's operating margins were similar to fourth quarter 2011 levels.

Now let's move to Health Care.

Fourth quarter sales increased nearly 6% on an organic local currency basis to $1.3 billion.

Health Care generated $430 million in operating income in the quarter, up 11% year-on-year, and operating margins were 32.3%.

Continuing the trend from recent quarters, the growth in Health Care was very broad-based.

All businesses posted positive organic local currency sales growth in Q4 led by food safety, health information systems, skin and wound care, and oral care.

On an organic local currency basis sales increased in all major geographic regions with double-digit increases in Latin America/Canada and Asia-Pacific.

In developing markets Health Care drove nearly 15% organic local currency sales growth, continuing our recent success in these areas, and we expect the momentum to continue.

In developed markets our Health Care team continues to generate solid profitable growth despite ongoing government austerity efforts in many major countries.

In summary, a superb quarter for Health Care.

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

Sales were $1.1 billion this quarter, up 9% on an organic local currency basis and operating income rose 29% to $230 million.

In the United States, sales increased at a double-digit rate in the fourth quarter.

Holiday sell-through was good and we saw some holiday related sales shift from the third quarter into the fourth quarter.

This shift boosted our Q4 growth rate by an estimated 1.5 percentage points year-on-year.

We continued to benefit in the US from a strong flow of new products in Consumer and Office such as our recently introduced line of Command clear wall hooks.

We're also getting the excellent traction in safety products for the retail channel, most notably in protective eyewear under the 3M TEKK brand.

Finally, Filtrete brand filters grew well in Q4 boosted by colder weather patterns in many parts of the country.

Elsewhere in Consumer and Office we also drove double-digit organic local currency growth in Latin America/Canada and low single-digit growth in both Asia-Pacific and EMEA.

On a worldwide business basis our strongest growers were consumer Health Care and DIY with positive growth also in home care products and stationery and office supplies.

All in all this was a strong quarter for our Consumer and Office team.

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

Sales in the fourth quarter were $910 million, an increase of 8.3%.

Optical systems had a good fourth quarter with sales up double digits and stable profit margins year-on-year.

Optical finished the year largely as we had expected.

We also posted positive organic local currency sales growth in architectural markets, traffic safety systems, and commercial graphics.

Display and Graphics grew 12% organically in Asia-Pacific, 10% in Latin America/Canada and 5% in the US.

EMEA sales were down 2% year-on-year.

Operating profits in Display and Graphics were $152 million with operating margins of 16.7%.

Margins declined 2.5 percentage points year-on-year primarily due to the FSTech acquisition along with startup costs in a couple of businesses.

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

Fourth quarter sales were $904 million, down 2% on an organic local currency basis.

We posted good growth in most businesses with notable strength in infrastructure protection and personal safety products.

Sales declined in our security systems division as the market remained soft and the business has been under strategic review.

Inge will address the actions we are taking to better position security systems for success going forward.

On a geographic basis organic local currency sales rose 13% in Latin America/Canada and 1% in Asia-Pacific, and declined 7% in the US and 5% in EMEA.

Operating income in Safety, Security and Protection Services decreased 5% year-on-year to $162 million and margins were 18%.

Margins declined 50 basis points impacted by the aforementioned challenges in security systems.

Finally, let's review Electro and Communications.

Sales in this business totaled $776 million in the fourth quarter, up 1.8% in organic local currency terms.

Operating income totaled $142 million, down 6.5% year-on-year and margins were 18.4%.

On an organic local currency basis sales increased in touch systems, electrical markets, and telecom.

Sales declined a bit in consumer electronics and we are anticipating first quarter will be similar.

In geographic terms, Latin America/Canada rose 10%.

The US increased 4%.

And Asia-Pacific rose 1%, while EMEA declined 3% in the quarter.

That concludes my discussion of the business segment results.

Let's move on to cash flow, so please turn to slide number 7. From a cash flow perspective fourth quarter was quite similar to the same quarter in 2011.

Free cash flow was $1.23 billion, up $10 million-year-on-year.

We invested $507 million in capital expenditures during the fourth quarter, down $10 million versus fourth quarter of last year.

Full year CapEx was $1.5 billion, which was in line with our expectations entering the year.

Free cash flow conversion was 124% in the quarter versus 128% in last year's comparable quarter.

For the full year 2012 free cash flow conversion was 86%.

We returned over $1.1 billion to shareholders in the fourth quarter including $714 million in gross share repurchases and $407 million in cash dividends.

For the full year 2012, we returned $3.8 billion to shareholders or 86% of net income.

So that concludes our review of the fourth quarter.

Now I'll turn the call back over to Inge.

Thank you, David.

Before we get to your questions I'd like to spend a few minutes on 2013 and how we are working to strengthen 3M.

I said earlier that 2012 was a year of preparation, progress, and performance.

With the planning behind us, 2013 is a year of putting our plan into action and truly competing to win.

To win, we are strengthening our portfolio and at the same time working to resolve some challenging business issues.

For example, in November, we announced a combination of our security systems division with our traffic safety systems division.

In recent times these businesses have not performed to the standards we expect and we are addressing these issues head-on.

Government spending for security has decreased over the last few years and those same factors have also affected our traffic safety systems business.

In the big picture, bringing these two businesses together creates an opportunity to optimize the overall business and increase efficiency.

We announced last week a restructuring in this these businesses that will result in the reduction of around 300 positions worldwide and we will take a related Q1 charge of $8 million.

In a Company of our size and breadth, there will always be some businesses under strategic review and while the specific solutions may differ, the underlying principle is the same.

They will not stay under strategic review for long.

We will take action.

And in context, these situations are few when compared to 3M's overall portfolio of outstanding businesses.

For 2013 we will continue to drive our strategies, invest in innovation, commercialize new product as quickly as possible, and work to take market share everywhere.

We have confidence in our plan and our people and in the planning estimate we gave you in December, which you can see on slide 10.

We expect 2013 earnings per share in the range of $6.70 to $6.95.

We look for organic local currency growth of plus 2% to plus 5%.

The tax rate is expected to be 29.5% to 30%.

And finally, we anticipate free cash flow conversion of 90% to 100%.

As for the near-term we are naturally a bit more cautious.

There remains a degree of uncertainty as we see some economies growing and others are slower to recover.

These same dynamics can be found in specific markets.

Health Care is doing well, for example, while Consumer Electronics yet have to recover fully.

Specific to the first quarter we anticipate approximately $30 million of restructuring and one-time acquisition costs.

This includes the $8 million in restructuring costs I mentioned earlier.

The point is we will execute our plan to keep improving and growing the business.

Thanks for your attention.

We will now take your questions.

(Operator Instructions) David Begleiter, Deutsche Bank.

Thank you, good morning.

Inge, just in Industrial sequentially, the business sales declined $73 million but operating profit declined $106 million sequentially.

Can you just describe exactly what drove that dynamic in Q3 versus Q4 in Industrial?

Yes.

I think it was we have some businesses that grew well and continue to grow well, like automotive did well.

I think one of the impacts is the RED business that we had an issue with and have had during the whole year.

And the way we look upon RED is that it's a relatively small division for us generally speaking.

It's a $400 million business.

And you can -- you look upon the segment there, there's two segments, one conservation and one generation.

And conservation is like the window film for us; that was type of flat.

And on generation side, which is wind and solar, as you know in the global market that is a declining market.

So we were down on that side.

So I think that was the big piece for us, during the quarter for Industrial in total.

I would just add if I could, David, as we look at Industrial performance in the quarter, the sales were quite reasonable in terms of 4% growth year-on-year.

Certainly Q4 we always see a decline in activity including margins.

And as you know, as we called out, we were also impacted by the costs in Ceradyne.

Very good.

And just Inge on Consumer Electronics you mentioned it will likely be weak through Q1.

Any further insight into when it might pick up via your customers' order book or conversations?

No.

I think it looked like 2013 will look like the beginning of 2012.

Look like the same.

So we don't know where it will come, but probably sometime in the end of Q2 is the indication that we can see at this point in time.

Thank you very much.

Jeff Sprague, Vertical Research Partners.

Thank you, good morning everyone.

Inge, back in November you gave us some good insight to your thinking around business under strategic review.

And I just wonder if there's anything else moving around there.

I think at the time you said there was about $2.5 billion of sales that were maybe in the cross hairs.

Could you just give us some color on how big security and transportation is now that you've put together -- as a percent of that?

And if there's any other businesses moving around in that thought process?

First of all, as I said, we are taking action relative to that.

And as I said, that's about fix, combine, or close in order to see the advantage of the businesses and if we can fix them moving forward.

So I think this is a first good step for us.

We believe by combining those two divisions that it's a very good synergy for us in between the two businesses.

And just to make a comment around it, both those businesses are businesses that are based on material as the core.

So we are very strong in both those businesses in the core relative to materials.

And then both business is a type of reaching out and go into more solutions around Electronics.

So that is the advantage of combining them in order to look upon the synergies.

So when we look upon it specifically you have elements of the customer-facing opportunity, which I think is still very precise in terms of execution; but then you can get leverage around technology, business processes, compliance, and then manufacturing and supply chain.

So when you do that, combine them, you will get more efficiency and also from an organization perspective around the world, where we have all the subsidiaries it will work very well for them because they get more focus, more dedication and can execute better.

And in many pieces there, as you know, it's project management so you need to have specialists that is working with it.

So you combine those two businesses, we feel very good in terms of this is something we can fix, this is something where we will win, and we will move them forward.

And some other businesses, without calling them out, we are working on them in order to find solutions for them as an outcome around the strategic review.

So this was two of them that we looked upon in order to make sure that we can win for the future.

And I will update you as we go as other actions will be taken.

And these two combined would be kind of the biggest single piece of businesses under review now?

So if you look at the businesses under review, we had called out as part of that, the Security division was in there.

And that was a business I think $400 million to $500 million of revenue out of the $2.5 billion.

Traffic safety was not part of that group, but inevitably as you look at how to get the right alignment across the businesses in our total portfolio we've made that change.

I see.

And then, Inge can you just, or David, provide a little more color on what you're seeing in China?

The organic growth in the quarter -- any particular end markets that are standing out?

I guess everybody's question really is, is there a legitimate recovery of some sort now underway there as opposed to the hopes for one that everybody had last year?

Well, we saw a recovery -- as you saw, we had growth in the quarter of 16% in total.

Our base business, which is excluding Electronics was like 10% so it's a good uptick for us.

And I would say that when we -- and that's the best quarter for us last year, right, 2012.

Looking into 2013, our base business I would say will continue in the same mode as we saw in the end.

We don't know yet the terms of Electronic.

Electronic maybe will still be a little bit of a challenge as we move into the year, but for the base business, we see recovery coming.

And we feel optimistic about that but we're still cautious as you said because when you look upon it quarter-by-quarter, it's not all China if you like.

There's a different baseline that we need to grow out from.

But we can see recovery coming in the base business.

And that is a big portion for us.

And so we see sequential improvement in that as we move ahead for the base business going into Q1.

Electronic is a little bit more of a question mark for us as we speak.

If I could add, so base being Industrial, we saw good growth again in Health Care in the quarter in China as we've seen all year.

And also recall or you may recall that we had a very weak quarter in China last year in the fourth quarter, so quite honestly there's a bit of an element here of the year-over-year comparison.

I think five of six businesses grew in China in the last quarter.

Okay.

Thank you.

Deane Dray, Citi Research.

Thank you, good morning everyone.

On Health Care, those are stellar margins, above 32%.

And typically when we start seeing the margins bump up that high there's some cautious comments about sustainability, that you may be making some investments in this business.

But how would you frame for us in terms of that level of profitability and the outlook over the near term?

Sure, Deane.

So as I commented in the speech, we are encouraged of course by the fact that we see broad-based growth across all of the divisions in Health Care again now in Q4.

We did see a little bit of a pull forward in sales into Q4 in part due to those activities that will be impacted by the medical device tax.

So you saw it tick up a little bit in terms of growth, and we know about a half a point of that growth was associated with that pull forward.

In terms of margins, we continue to believe now that in 2013, we do expect the margins to run at 30% plus for the time being.

But looking at this one, obviously we had everything came together at the same time in that quarter.

And so I wouldn't suggest to you that you would bank us continuing to operate every quarter at that level.

That's fair.

And then a broader macro question, I think a lot of folks on the industrial side were braced for some anxiety in December related to the Fiscal Cliff, and certainly didn't see it in your organic revenue growth at 5.2%.

But could you provide any color in terms of customer behavior?

Was there any hold off or push out in orders other than that Health Care getting pulled in?

But broadly anything that you think may have been delayed, that may then snap back in January?

No.

I would say, Deane, if you look through the quarter, the trends during the quarter were quite stable.

We didn't see any particular effects that we could point to other than the one I just mentioned in Health Care.

Obviously the other piece of course we were very pleased with was the holiday performance for Consumer, but beyond that, were there other notable ups or downs or inflection points?

I would say we didn't see any.

And therefore as we look at our guidance into 2013 by sector, we think that the growth ranges that we called out in December still look good in terms of what we expect in 2013.

Great.

Thank you.

Yes.

Shannon O'Callaghan, Nomura Securities.

Good morning, guys.

One question, just in terms of the overall margin walk you had this utilization and other bucket.

The volumes were up nicely and accelerated.

What is going on in the utilization?

Did you actually choose to take your production a little bit down to get rid of inventory or was there anything else going on in that bucket?

Yes.

So if you look at the margin walk, we did have about 1 point there related to utilization.

And it was really a couple of things that are the biggest pieces of that.

One of them is we included in there some costs related to startups of some new factories that we're starting up.

So, we've got in particular, if you look at Singapore, in the traffic signage business, we have a new factory that started up here in the fourth quarter.

So that impacted our utilization because there are costs as you ramp up the business.

There's also -- there was a new project we've got in the Electronics space in touch panels that impacted utilization in a similar way.

And then we also had -- if you look at our utilization year-over-year, in a couple of areas, we did see a lower level of activity, those being in some of the Consumer Electronics related spaces.

So if you look at utilization in the semiconductor space amongst our customers, that was lower in Q4 and that impacted our business.

As well as, Inge was referring to RED or the renewable energy business; we saw some lower utilization in some of those factories.

So that was really what drove that impact.

Okay.

And then just looking specifically at the display and graphics margin you had a few factors in there.

You had FSTech, you had some of the startup costs there.

And then I guess traffic safety has also probably had down margins, right.

Exactly, yes.

So can you just give a little color on the buckets of those and how much they contributed to the margin line?

Yes, sure, so if you look at it, we had a year-over-year decline in D&G of about 2.5 points.

As I mentioned not related to divisions such as optical where we had very stable performance in terms of margin and very much what we expected.

The two biggest factors there as I did mention, about almost half of it was the impact of the FSTech acquisition.

And the other piece was more related to these startup costs which I mentioned that impacted the Company overall.

And we had a little bit of product mix, but I would say one-third of the factors if you line them in terms of significance.

Okay.

Great.

Thanks a lot.

Yes.

Steven Winoker, Sanford Bernstein.

Thanks and good morning.

First question on your pricing, so you had pricing up -- the pricing spread 1.40 on back of two quarters at 1.60, which is great performance.

But how much of that is -- or how do you think about that relative to commodities giving you any kind of tailwind there and your ability to price on the commodity discussion and your ability to price going forward?

How much is a function of that versus new product intros?

And what's giving you, do you think, the pricing power across your businesses?

And what's your ability to maintain that given how critical that's been to the margin performance quarter-on-quarter?

Sure.

Yes, so you've got the figures.

We tried to lay those out quite clearly.

The trend as you know is, while we did have 0.7% price performance in the fourth quarter that's primarily the impact of price increases that were taken earlier in the year.

And with the situation on raw materials, as I've said I think in November, we expect the pricing impact in 2013 to moderate further.

As to our ability to hold price and avoid commoditization of course, as you know the business model is exactly geared towards offering innovative solutions that differentiate our products for our customers and provide value that they're willing to pay for.

So no difference in that model next year versus any time in the past.

In terms of raw materials, we do expect the tailwind of raw material price declines that we experienced in '12 to substantially moderate.

That's why we said in our guidance for '13 that we think that impact will be pretty neutral.

So how do we feel?

We think it will be less of a contributor, the combination in 2013, than we experienced in '12, but also not the kind of headwind we had the prior couple of years and we feel good about our ability to deliver on that.

And the pricing part of that, though, you think that 70 basis point, as you look forward you think you can maintain that kind of pricing alone?

In our plan for 2013 we do not expect to see price increases for the year as high as that 0.7%.

Okay.

And then what kind of inventory restocking impacts or destocking did you see across the portfolio over the last quarter?

And do you see that, has that been trending differently?

Yes; we don't, other than a couple of specific areas that we've tried to talk about today in specific businesses, the general trend we've seen, we would say if you look at the sales trend pretty stable for the Company through the quarter.

And I would say we didn't observe anything notable in terms of unusual inventory patterns.

Okay.

And just sneaking one more in, the guidance you've got 2% to 5%, you just did 4% on organic growth.

So presumably expecting certainly a sequential move the other way.

Is that fair?

Or how are you thinking about that?

Well, yes; the overall guidance, 2% to 5% for the Company in 2013 we still think is the right way to think about it.

If you look at the Q4 performance in terms of sales, which obviously we were quite pleased with, moving from 2% on average during the first nine months up to 4%.

If you parse that out, about half of it was related to the performance in the Consumer segment which as I think we've talked about or we've inferred, we think that that was related to some fairly specific factors in Q4.

And we continue to think 2% to 5% growth for Consumer in 2013 is the right way to think about that segment.

And then the other contributor, most significant one, to that tick up in Q4, was the performance in Asia, most significantly the base business in China.

And as Inge said we've taken some reasons for some optimism that we're seeing a recovery as I think others are talking about.

Are we getting -- we're cautious to start running away with that as something that's going to continue to trend more strongly; but again we are encouraged by the indications.

I think you can.

First of all, we stick to our guidance we gave you in December, we are of course pleased with the outcome of Q4 in terms of our growth.

We are just cautious as we move into the year here and operate in the same way that we moved into 2012 very successfully.

Thank you.

Thanks, Steve.

Ajay Kejriwal, FBR Capital Markets.

Thank you, good morning.

Could you maybe provide a little color on how the quarter progressed?

Obviously very good organic growth quarter.

Did you see any pickup in December?

And then maybe any early read into what you're seeing in Jan -- have the trends that you saw in the fourth quarter, have they continued?

Have you seen any pickup?

Any thoughts there would be helpful.

Sure Ajay.

I would say again -- and not to repeat, but we saw -- if you look at the selling rates more on a daily basis, we didn't see anything changing in Q4.

Now, there were some issues around how many selling days there were as between October, November, December.

So you get some different outcomes if you looked at it on a monthly basis because December was -- actually had a lesser number of days than last year.

But as we look at it on a very granular basis, we didn't observe any trends that were implying some new level of inflection in our overall business in total.

And again, obviously some pluses and minuses which we've tried to call out here today.

If I then roll forward into where we're sitting today, in late January, we see relative stability in terms of the overall business.

And again I don't see anything that I would point to that would indicate some new information for us here.

Good.

And then on the Consumer business, I know there were a couple things that helped the quarter, but even ex that, it looks like you had a really good top line.

So does that change how you're thinking about the business, how that business does this year?

I mean, your guidance is 2% to 5% for that segment.

Based on just that performance, do you think you could be conservative?

Any thoughts there?

Well, first of all, we're very pleased with our performance from Consumer.

And it's probably the business during this year that really put a very good plan together and were able to execute it very successfully.

And as David laid out, there were some specifics in Q4 that boost the growth for us.

But however, it was very good growth in both businesses there and in all geographical areas.

And as you recall, while we eventually can see a little bit of uptick as we go further out, it's our relatively low penetration in the international.

So we will keep the guidance for now.

But we can say very clearly that we are making headwinds both in international and in the United States.

And that both very good growth in United States as David called out in our Q4 in a highly penetrated market.

And then we have still a lot of opportunities in international.

And I think the thing what is happening is that business have improved Consumer insights.

They have added design as a big element to the business on top of the innovation that we can provide from the Company to them, and then the very strong category management capabilities that we have in that business.

So you look upon Consumer for us, long-term is very, very good business for us with good upside.

And both that business and Health Care as you know for us is what we call very much local domestic businesses that we are able to grow.

And both of them have still big opportunities in international.

So we're very encouraged as we move ahead but we are not changing the guidance in terms of growth as we speak here today.

Excellent.

Thank you.

Thanks Ajay.

Nigel Coe, Morgan Stanley.

Thanks, good morning.

I think most of the issues have been addressed but just quickly, you scaled the size of the security systems business; but traffic systems, I have got my model at $0.9 billion.

Is that about right?

Yes.

It's just under a $1 billion business.

Yes.

Right.

Okay.

Good.

Then just a couple of quick ones.

Since you gave 2013 guidance, the yen has been on a bit of a tear.

Does that change in any way?

You've got quite a bit exposure to Japan, it's about 8% of your sales I believe.

Does that change anything in terms of FX impact or perhaps margin?

No.

It's not sufficiently material to us right now, Nigel, that we would feel that we need to call out a change.

Obviously we're monitoring because the yen has weakened already and there's obviously a lot of talk about a further weakening.

If you recall we hedge about 50% of all of our exposures, so that gives us certainly the ability to navigate and adjust the business if we see something more structural happening, but not material right now that we need to talk about.

Nigel, I would add too, we have -- it's 8% of sales but we do have a 25% minority partner in Japan so a quarter of the profits belong to the minority.

So from a sensitivity standpoint, the move in the yen is going to be less pronounced than it would be with the likes of the euro.

Okay.

Great.

And then staying on FX, there is some linkage between US dollar movements and pricing particularly in regions like Lat Am.

Has the stronger dollar over the last couple of quarters had an impact, albeit at the margin, on pricing in those regions?

In some of our contracts we do price peg to the dollar, so in fact, to the extent that the currencies weaken, we saw in local currency terms prices increased and likewise you would see some reductions in pricing which would be reflected in the overall 0.7% that we mentioned.

Okay.

Great.

Then just finally, we finally saw a renewal of the R&D tax credits.

You've got a pretty big R&D investment.

Has that changed at all your tax view for 2013?

I know you maintained the line at 25% to 30% but does that mean you put a downward bias on the tax rate in '13?

Yes, what I would say is first of all we came in for the year at 29%, which is right in the range of 29% to 29.5% that we had indicated for 2012.

It is true that if I look out there is a modest effect for us of the carryover impact of the deferral of these extenders into 2013.

But as we look at it, the number of different factors that impacts the tax rate during the year lead us to conclude at this time that we think the 29.5% to 30% outlook for the Company is good.

And quite honestly the information I have in front of me, I don't see any reason why quarter-to-quarter that that rate is going to be vastly different from the full-year rate guidance I've got out there.

Understood.

Thanks very much.

Yes.

Steve Tusa, JPMorgan.

Good morning.

You mentioned a couple of the moving parts on the first quarter.

I think the normal seasonality is up, I don't know, double-digit, 10% to 15%; but you mentioned, I guess, $30 million of incremental restructuring.

Are there any other moving parts into the first quarter?

Or should we just expect normal seasonality here on an earnings basis?

Yes, I would say what we see right now is pretty normal seasonality, Steve.

The one area that we're cautious about, which Inge mentioned, is in the Electronics space.

We do see some ups and downs there and we think that we may have some lower level of demand in some of those sectors.

For example as I mentioned, semiconductor utilization has been running a bit lower.

I think that will impact us in Q1.

But overall, we think it's fairly normal.

So like low 1.60s kind of numbers if that's just a 10% to 15% increase from the fourth quarter, just the math?

Yes.

We don't do guidance on a quarterly basis.

(laughter) We'll probably keep that at least for the time being.

Okay.

Then one last question just on inventory dynamics.

I guess, looking back there, your portfolio is like Electronics, Health Care and then some Industrial businesses.

Just looking back over the past year, do you think you have seen an impact from inventory dynamics outside of Electronics, mostly in the Industrial businesses?

And maybe just in the postmortem of the last 1.5 years of volatile economy, is there any way to quantify how much that might have been if you had any?

Or was it even material?

I would say -- good question, Steve, in the past we spent a fair amount of time talking about inventory dynamics and the effect on sales.

If you look at the sales through the year, pretty stable.

Obviously at the low end of what we were looking for, as the economy was basically downgraded through the year.

If I look at our growth performance overall, as compared to the overall industrial economy it was a little bit towards the low end of that range.

And I could infer from that that there was probably either neutral or some level of destocking through the year that might have affected us.

Okay.

So no material destocking that would lead to any significant benefits on a restock?

Clearly looking at some of the more OEM component guys like a Kennametal or somebody like that, sales down 15%, you guys didn't really see that?

Not anything dramatic like that, no.

Okay.

Thanks a lot.

Yes.

Thank you.

Andrew Obin, Bank of America Merrill Lynch.

Yes, good morning.

Yes, just a couple of cleanup questions.

In terms of this 1 percentage point drag that you, and sort of -- seems to have indicated that most of it comes from -- a lot of it comes from the startup costs.

Should we expect those to moderate throughout the year?

Yes.

I think that's fair to assume -- well, we'll always have startups.

We had certainly record levels of capital investment here in 2012.

So that -- and as we told you we expect our CapEx to rise in '13.

And what I would say is there's ups and downs in terms of both the startup costs -- so we happen to have some startups in the fourth quarter.

Sometimes coincidence with both the lower production requirements seasonally in the fourth quarter, sometimes we'll take advantage of a holiday shutdown to plan around those startups.

So, if I looked quarter-by-quarter, it may be -- quite honestly I haven't done the deep analysis.

It may be true that you see seasonally a bit more startup costs in the fourth quarter.

But we will have, throughout the year we'll have that type of activity certainly.

But the drag should be the highest in Q4, in theory?

I think that's a fair way to think about it, yes.

Another question, I have just an observation; if I look at your organic growth, it's the best since Q1 2011.

And if I look at the pricing, interestingly enough, it's been on a downward slope and it's now probably the weakest since Q1 of 2011.

How should I think about dialing up pricing up and down to drive to organic growth?

Is there a linear function here?

I would say not on a quarter-to-quarter basis.

I think the facts we're staring at here in Q4 are a perfect example of that, which is there's not a short-term and direct correlation, i.e.

we'd taken quite a significant amount of pricing earlier in the year.

The decline in that is more of a function of the fact that we had a lot of earlier price adjustments, which now mathematically result in the lowest price increase in Q4.

And if you look at the sales growth as we've talked about, some specific factors around what's going on with some improvement in the base business in China as well as the Consumer business.

So, I think it's a good observation.

I wouldn't draw a direct cause and effect in the short term from that.

So I should be thinking that NPVI continues -- the NPVI strategy continues to be successful and you can get both, in theory, top line and pricing long-term?

We believe that's true.

Yes.

Thank you.

Laurence Alexander, Jefferies & Company.

Good morning.

This is Rob Walker in for Laurence.

Can you provide an update on your supply chain initiatives?

Yes.

We continue to build that out.

As you recall, we started out maybe four, five years ago.

And one thing that is important is for us to build what we call those super hubs where we are coming closer to the markets and the customers around the world due to the fact that that is where we see the big growth.

So it's an ongoing process.

I don't think we will ever be ready with it, because we will be ready, I think the market is stagnating at that point in time.

But we make very, very good progress and even now in last quarter, we started a new investment in Turkey where we're building out a good hub for both Central/East Europe, and Middle East/Africa.

So it will be the bridge in terms of our initiatives for that part of the world from a supply chain perspective.

We also have a big initiative going on in Europe where we try to consolidate our supply chain in West Europe, specifically, in order to be more efficient and coordinate that in a better way.

So it's an ongoing process.

We're making very good progress in the process there, but there's still more to do.

As I said I think it's one of those that you will never be ready.

Thanks.

And then what are the prospects for market share gains this year across your portfolio?

Well, our plan is aggressive in terms of what we need to do in order to take market share specifically in the developed economy.

As you know there's not much growth in the market, so we have very aggressive market share plans in that part of the world.

So you should look upon it like a 50-50 base.

We say you need to take 50% of your growth from market share and 50% based on penetration.

So I think in most businesses we still have good upside relative to market share.

But the other thing you have to think about our business model is that we are working in different categories.

Right?

So we have type of consumables that is going into Health Care and the Consumer market.

And some consumables that is going into manufacturing product that is used in order to help them to improve productivity and efficiency.

That's one piece of it.

The other piece is where we are specced-in on big platforms.

So the point is for us, it's growth in total.

In some businesses we can go right down and calculate the market share.

Other thing, we create new solutions on platforms that is running for long time.

But if you go into specific on consumables, in both Consumer, Health Care and the Industrial, we have aggressive market share plans.

And we still believe we can deliver on that.

Thanks, Rob.

Thank you very much.

Adam Fleck, Morningstar.

Hello, good morning.

Thanks for staying on guys, I appreciate it.

Quick question on inventory.

Your Company inventory came down sequentially.

Of course, that's typical for the fourth quarter but it finished a little higher than we've seen in previous years.

Are you comfortable with this level here or how do you think about that?

Yes.

So I would say as you exactly observed, we typically have seasonally here, Adam, a decline in inventory in Q4.

If we look at our turnover metrics, they look very comparable to other years, other fourth quarter type performance areas.

We did mention that we do expect here in the near-term to have some specific areas where we might have some further reduction in activity in the first quarter, specifically in some of the Consumer Electronics area, but overall I would not say there's anything fundamentally different going on.

Okay.

Great.

Thanks.

That's helpful.

Sure.

Then shifting to Europe, a bigger picture question, you mentioned that you're seeing a bottom but the region isn't really growing in Western Europe; and of course, you're forecasting, I think, a negative 3% to a positive 1% growth for this year.

Right.

How do the development that you've seen, that bottoming, how does that fit into your expectation?

Is that kind of right in line with it or is it on the top or bottom of that?

Yes.

Not sure exactly if I'll answer your question as you're trying to pose it, but if we look at Europe right now, we've had a couple years now where -- or about 1.5 years where we've printed negative growth performance.

It has moderated obviously.

And as you pointed out we are calling out a range that centers on minus 1% next year.

So everything we can see we are running pretty stable there.

There are some ups and downs as between north and south, but overall when you look at the portfolio pretty stable.

And what we've been really been focusing on with the business is to make sure that we're as competitive as we can be as a Company in Western Europe.

So we are looking at how we can take advantage of opportunities to leverage our business across the entire region.

We're looking at areas of growth because inevitably there are opportunities to grow in the region.

So in areas like Health Care we've seen some growth opportunities.

And we're also looking at how we can optimize and make sure we're making as a reasonable return, so we were pleased this year that we did see our margins improve despite weaker sales performance.

Okay.

Great.

That's it for me.

Thanks.

Yes.

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.

I'd like to thank everybody for spending the hour.

I appreciate your questions.

I appreciate your attention and your ongoing support of 3M.

So we'll talk real soon.

Thanks.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.