Ladies and gentlemen, thank you for standing by and welcome to the 3M Fourth Quarter 2007 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards you will be invited to participate in the question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded Tuesday, January 29, 2008. We would now like to turn the call over to 3M. Matt Ginter - Vice President, Investor Relations and Financial Planning & Analysis: Good morning, I am Matt Ginter, Head of Investor Relations for 3M, and I would like to welcome all investors and analysts to our fourth quarter 2007 business review. You will find this morning's presentation on our website at 3m.com. These slides will remain on the site, along with an audio replay of today's call for an extended period of time. If you would, please take a moment to read the forward-looking statements on slide 2. During today's conference call we will make certain predictive statements that reflect our current views and estimates about our 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 number 1A of our most recent Forms 10-K and 10-Q list some of the most important risk factors that could cause actual results to differ from our predictions. George Buckley, our CEO; and Pat Campbell, our CFO will both make some formal comments today and then we will get to your questions. We know how busy you all are during the earning season so we will do everything we can to keep the call to about one hour today. You could help us during the Q&A again by limiting yourself to one question and one follow-up so that we can address all our questions adequately; if you'd like, get back in the queue and if we have time we'll take your follow-up... your question beyond too. So, now go please go to slide number three and I'd like to turn the program over to Pat.

Thanks Matt, and good morning everyone, and thank you for joining us today. We manage 3M to drive sustainable long-term shareholder value. And while are certainly critical, that we regularly assess our interim quarterly progress against our objectives, it is equally if not more important, that we examine our results over the longer term. So, today I'll begin with the summary of a few critical full year metrics before I get into the fourth quarter results. While our accounts, 2007 was a very good year for 3M, the numbers I will quote on this slide exclude the impact of divested businesses, primarily pharmaceuticals and special items in all periods. Sales were up 10.5% for the year, with a record 63% of our sales coming from our international operations which is a testament to the strength of our unparallel international capabilities. Earnings per share rose nearly 17%, driven primarily by 12% operating profit improvement. Operating margins stayed flat year-on-year at 22.5%. Capital efficiency is another critical and major for us. And we strive to balance investments to accelerate growth, with the necessary operating discipline in order to sustain 20% plus ROIC. In 2007, we return on invested capital was 21.4%, about equal to last year, again excluding impact of divested businesses. Finally, we returned over $4.6 billion to shareholders in 2007, via combination of dividends and share repurchases. This was an all time annual record and a healthy 24% increase over the prior year. So all in all, 2007 was a very successful year for 3M. We continued to execute our investment strategy to accelerate future growth, while maintaining premium returns and double digit earnings growth. And at the same time, we rewarded our shareholders handsomely. As with any long term strategy, there is still much to be done, most notably…

Thank you very much Pat, well done, and a sincere welcome to all of our listeners this morning. I will make a few brief comments about the quarter and then the year, our 2008 outlook and then we will be happy to address your questions. Needless to say this was a very good quarter for 3M with operating earnings a couple of pennies above consolidated expectations excluding a couple of pennies also and special item that we had in the quarter. Pat has already outlined the growth numbers but just for emphasis we achieved over 7% sales growth and 11% in the quarter after correcting for pharma which I think is pretty good in this kind of environment. Obviously we are pleased with the good Q4 performance but the real issue here is not what we did in the fourth quarter but our outlook for 2008 and importantly how that outlook may or may not impact our longer-term strategic plan. I can imagine a question that you are asking yourself right now is how immune or otherwise is a company like 3M to slowing economic trends. So before going into 2008 guidance I want to outline to you how 3M sales might be affected by our presence in various kinds of markets. We've been asked by investors if we lead, follow or are concurrent with market trends. Essentially the root question there is are the current earnings trends an indicator of what is to come, what is here now or what is over the past? Before beginning to answer that question I want to stress again that 63% of 3M sales were outside the United States in 2007, and this will increase to about 65% in 2008. When you look at it this way 3M is in fact a broad…

[Operator Instructions]. Our first question will come from the line of Steve Tusa with J.P. Morgan.

Hi, good morning.

Good morning, Steve.

Good morning, Steve.

Just a question on healthcare, I might have missed it, but the margins there, they bounced around little bit, what happened in the margin there this quarter, anything specific going on?

No, I won't say there is anything specific at all, we were in, I think, 27 in the quarter, we were at 27.5 for the year, so really nothing unusual there, Steve, at all.

Okay. So you would... there is nothing in the... I know there is some moving parts like the supply agreement and things like that might be scaring the incremental margin this year. Is there anything next year that we should be thinking about with regards to the incremental profitability at healthcare?

No, I think it would be very much like this year Steve.

Okay, great. Thanks a lot.

Your next question will come from the line of John Inch with Merrill Lynch. Please proceed.

Yeah, thank you. Good morning.

Good morning.

Good morning, John.

Hey, I wanted to ask about growth and so there are couple of parts to the question. It looks like Asia Pacific organic was 3.2, but that obviously assumes the drag from optical and D&G and then I guess 3.8 for the year, I mean how does that ducktail George with what I think is somewhere around the 5% to 8% organic growth target for 2008. Does that still seem to be based on everything that's going on, does that still seem to be the goods number issued for?

Well we... thanks, John. We are still shooting for this longer term twice IPI growth, IPI may be a little bit slower this year, so we don't feel perturbed that that number seems to be consistent with the overall goal as we are looking at long term. I don't think there is any real cause of concern there, John.

I mean was there anything going on at Asia, ex-optical film? It just seemed to have decelerated.

The optical was the principal factor, John. We saw... as you can imagine we saw some sort of easing, we saw some accelerating different markets, a little bit of softer Japan; it was a factory in Asia, we saw some softer business in Korea. But other than that it was fine and again I stress John mostly driven by optical.

Okay.

Hey John, Pat here. Just wanted to... in my comments, Asia, if you strip out optical actually had their best growth of the year. So it was heavily impacted by optical in the fourth quarter.

Almost all dominated by that one.

Okay. And then just as a follow-up. I think the $0.02 of special items included about $4 million or $5 million of restructuring charges. I don't think if they... that didn't round to a penny but my question is George in fact are you planning... presuming there's more restructuring to come at 3M, are you planning to run these charges, these... whatever through the numbers, are you planning to call them out every quarter because I think it just has a perspective on how people going to be at the quality of your earnings. So just how... what's the philosophy and what's baked into the forecast.

Well John, I guess, you have to kind of take... kind of put them in context in first of all materiality and are they just kind of routine in nature that we would generally run through our businesses is normally what we do. We specifically... you had two this time, one in... around in that... around Display & Graphics and industrial, both of that accumulated to $20 million, okay. So we thought that was sizeable to call that out separately.

Last Pat, minority interest, it's sort of been running as a $16 million drag and then it... it all of a sudden dropped. Did I miss something... was there something going on with... did you sell a component of that business or what happened again?

No, most of that minority interest shows up in our 75% ownership of Sumitomo 3M and in the fourth quarter we actually had a true-up of some of our inner company pricing agreements between the parent and Sumitomo.

So, minus 16 is still the run rate, kind of per quarter?

Prior would be... maybe a little bit less on a going forward basis, but not too far off.

Okay, thank you.

Your next question will come from the line of Mark Gulley with Soleil Securities.

Good morning.

Good morning.

Good morning.

If you look at the portfolio, it certainly looks like healthcare is kind of reassuming its leadership role and BMG is... it looks like it's receding a bit. Can you drill down a little bit more for us and talk about... can healthcare maintain it's current excellent pace and what do you do... what you need to do make that happen?

Well in the healthcare, it's a great question, Mark. In the healthcare, that business just had just a fabulous set of results all through the year and they have done just incredibly well. And we have brought a lot more focus to that business. You saw it through the acquisitions, you saw it through some of the plant builds that we have been doing and we are seeing it in internal investments trying to get new product streams back in the fold. And a few long plays on some of these sort of mega trends like infection detection that we are playing some cards there. So, I think, generally speaking healthcare is going to have a lot of good news associated with it and so it would be one of the primary focuses. It may end up being the primary focus, Mark, of investments in the near term for us. So, I don't think there's any reason to conclude that that healthcare can't enjoy a lot of growth again. On Display & Graphics, Display & Graphics as we have said many times is going through a transition. Of the three businesses in that area, traffic safety, commercial graphics, and optical, the traffic safety and commercial graphics businesses, Mark, are doing extraordinary well. We will live this year and this transition year as we are building up volume in these little bit further down the market. So we will see that business probably slide sideways during the years as we are making that transitions but with a clear desire longer term to re-invigorate growth in that business. If I can just sort of canter on, on the rest of our businesses, E&C seems to be certainly toward the back of the year undergoing a resurgence, more strongly manned [ph] on electronics,…

As a follow-up if I had a chance to talk to the R&D people in Austin Texas, is there any replacement for Microflex coming down the pipe or is that something that you have to fight through?

You know, one product that George hit on is the composite conductor, okay. Now it's not a direct replacement, but if you talk about Austin as a business unit, the composite conductor is down in Austin, Mark. So it won't be in the same... let's say the same field, but that would be whether high growth projects that we continue to work on down there.

Thank you.

Thanks Mark.

Your next question will come from the line of David Bleustein with UBS.

In the... your closing remarks you mentioned material prices and some expectations of positive experience. Can you walk through which commodity prices you are referring to and give us some sensitivity for instance a penny a pound or some metrics to help... to help guide us?

Well, David, it was... it's a general feel from our procurement people that we are seeing some investment in product and prices more generally. We are seeing easing of copper; some easing of a little copper is a big component for us. We found better uses, better ways to be more efficient shall we say with the uses of gold, we are seeing some of the... some of, not all of the chemical components easing in price. We are seeing some easing... early signs of easing in wood pulp although its counted by up to some degree by increased cost in steel. So... but all in all the... when we mix it up in our blend of components David, we see more tailwinds now in commodity purchasing than we do headwinds.

George, what I am looking for is how many pounds of copper do you use, how many ounces of gold, just some measures of that if we see a $100 move, we can figure out what that means for you?

I think we will have to give you that offline, David, because I don't know the... I know the prices of gold material [ph] but I don't know how many we use. It's not at the top of my head. So we can get you those offline David.

Thanks.

Our next question will come from the line of John McNulty with Credit Suisse.

Yeah, good morning.

Good morning.

Just a quick question. With regard to the growth revitalization, the ramp up, all the new plants that you brought up over the past couple of years. Have we passed in your mind kind of the tipping point there where the incremental number of new facilities that necessarily need to be ramped up or build up are going to be smaller going forward and maybe some of the ramp up cost tied to that will start to wane off a little bit as well?

Yeah I think it's close now, John. I think we are at the cusp of that and probably just going down the other of that. So I think we'll see some betterment from here going on.

How many roughly do you expect to ramp up in 2008 just so we have a rough idea on that too?

There's what... about seven.

Yes, six or seven.

Six or seven, John.

Yeah.

Okay, great. Thanks a lot.

Your next question will come from the line of Deane Dray with Goldman Sachs.

Thank you, good morning.

Good morning.

Good morning Deane.

I was hoping we get some additional color on the pricing volume dynamics and optical films and was also interested in hearing in the quarter you commented at the mix... you saw more of a mix shift back at 1080p. You think that is more of a fourth quarter event or is that something more sustainable?

Well we think that is a more sustainable long-term... kind of the question is what's going to happen on a quarter-by-quarter basis, Deane? Obviously let's see how that plays out. But we do think that's kind of a longer term trend. Really nothing has changed significantly from the presentation that Mike Kelly gave in New Oregon in December relative to the pricing action. That plan is still in place and the scope of the change that we laid out for D&G and for the optical business at that meeting is still our best estimate.

What's happening, Deane, is we are seeing some very positive moves in the industry. I do think we've sort of along a few of our competitors with our willingness to go and fight in some of these other areas, because obviously they know that we have the manufacturing capability, the capacity and the technological innovation capability to be able to win these contracts. In the end some of this is still about price. But Mike is very encouraged; I was speaking to him yesterday about it, Mike is very encouraged with the contract progress he has been making, with the contracts he is winning, he is expecting to see... still a lot to be done yet, Deane, but he is expecting to see some significant pickup in debt volume. We have the debt volume stabilized and we have made some quite significant, I mentioned in my call, Deane, significant steps forward in using recycle products. The yield coming out of these manufacturing processes is not as high as some people might imagine. So the ability to recycle material and get it back and still make optically clear product is a very important step forward for us in controlling gross margin. So, early signs are cost reductions in the plants are going very, very well. Some of them are ahead of plan. So at least the early news, and it is early news, we have to be careful that we don't sort of get people too optimistic but the early news is very encouraging.

Can you provide any specifics regarding what actually went on in the quarter regarding pricing and volume?

Well there were a number of contract that were let, Deane, with... and obviously I am not going to go through those contracts, I don't even know the detail of all those contracts and it would be commercially insensitive to talk about different kinds of contracts that the people had with different kinds of pricing structures. But nevertheless there were incentives on price in these contracts to secure volume and secure longer-term volume and if we did get the volume and the prices weren't offered. So it was typical sort of end volume discount type structures that you would see in cases like these that we offered and we won contracts with most of the large players in the industry; not all, but most of the large players and some strong going in negotiation.

But Deane, Pat here. I think it's fair to say that you will start to see more of that play out as we get into 2008. You didn't see much of that really at the tail-end of 2007; this will be more in the 2008 results.

Some of these products Deane don't launch until February or even March. So pass outs will be right.

Okay, thank you.

Your next question will come from the line of David Begleiter with Deutsche Bank.

Thank you, good morning,

Good morning Dave.

Hi David.

George, back in December, I believe, you said that you expected D&G EBIT to fall just $80 million in '08 and in response to an earlier question I believe you said you expect D&G to move sideways in '08. Are you raising your forecast for D&G EBIT and is that all looking to optical films?

No, I am not, Dave. The move sideways is a... it was a non-scientific observation and non-financially acted. There was nothing that we know in that business, David, that would tell you anything different than what we forecast back in December. When I say sideways it's a sort of general... we don't see margins improving significantly or sales growth improving significantly. It was just a sort of general observation, David, but thank you for asking the question.

My pleasure. One more item on optical. What's your expectation for optical profits to decline in 2008 versus 2007?

Well, Dave, Pat here. We haven't given optical numbers, we've kind of scoped the D&G business in the December meeting. We kind of gave you a kind of a margin range for D&G as a total business and that is still our best expectation for 2008.

Thank you very much.

Thank you, David.

Your next question will come from the line of Jeff Sprague from Citigroup.

Thank you, good morning everyone.

Good morning, Jeff.

Good morning.

Could we just go back, actually, I think it was the first question on the healthcare margins, I would assume that the supply agreements did impact the margins on the comparison basis '06 versus '07 but now that we move '07 to '08, wouldn't we expect to see some more incremental leverage on that strong revenue growth that you are getting in the business or there's some R&D or other thing going on in that business that holds back the margin?

Well no, I guess, Dave, let's just think about that just for a second make sure I am on the same page. We rolled those supply agreements and so they are part of the base business in '07 effectively; they will carry forward into '08. So on year-on-year basis there's usually not a significant change relative to the supply agreements. The only thing obviously that will impact is to the degree that the volume changes there. So that doesn't significantly change So if you look at the margins of healthcare in total, we think that if they can continue to grow the top-line the way we expect they probably should get a little bit of a margin expansion. But the 27% margins they had for the share are really stellar, okay, and we would continue to hold those and if everything goes well we might be able to expand them little bit. It's also critical that is one of our key investment areas, okay, for the future as well. And especially with the economy looking the way it is we want to make sure that healthcare gets the combination of resources they need to keep the growth going as well as get the sales rate up in 2008.

I meant that the supply agreements awarded in '06 we had '06 versus '07 comp, and now '07 versus --?

Yeah, that's true. But it also have to share with you that the supply agreements are less than what the healthcare average margins are, okay. So they would be kind of dilutive to that number. But now that's only the base going forward; the base rate that healthcare has is a good stepping off point.

That is my point though that it diluted the '06 versus '07 -- we can follow up, right. So it's now on the base, so it should be less dilutive on an incremental basis, I guess.

That's correct.

And is there anyway to think Pat about the fall-through to earnings on currency? The conversion rate on margin or some other metric just kind of get our arms around what that might mean in '08.

Well, it's... we try to scope this at the meeting, Jeff, on the upside. If you look at the current upside, if rates hold where they are at kind of at the end of the year, you could be $0.15, $0.20 positive for us in 2008.

Okay. And can I just take one in for George.

Go ahead Jeff.

George, just kind of thinking about the spend on the new versus kind of the end of the life, and I guess that kind of goes a little bit to that tripping point question on the plan. So when you are always going to have end of life given your tens of thousands of products, but do you see a point where rarely you feel compelled to call it out, because you've now got kind of enough momentum on the front end that really is not of consequences. Is there is some of kind of visible pipeline momentum that would get us to that point?

Yeah, I think one more year, the flex stuff, Jeff, has about another year to go. Then the... there's some price adjustments where we lack and we probably then won't see that in year-over-year works [ph], but we wouldn't see year-over-year works [ph] between '08 and '09. So I think this is the last year, Jeff, where we like to have to call those things out.

Great, thank you very much.

Your next question will come from the line of Scott Davis with Morgan Stanley.

Good morning everyone.

Good morning.

How does... I mean one thing that's changed I guess since December your stock price has gone down a bit. I mean how does a sub and $80 stock change your view at the margin on kind of buybacks or buy backs versus M&A. I know before you weren't planning on substantial buybacks in '08 but has that changed at all?

Scott, and kind of referring back to some of George's comments. It's an interesting world because as far as the M&A market, we think will be a more attracted market for the quality products that are out there. So obviously we want to keep a close eye on those. If you go back to the October meeting, we had talked about a share repurchase program that would probably extend another two years, and that's probably still our best view today, it obviously will move around a little bit on a quarter-by-quarter basis. We brought back about $500 million... we spend about $500 million here in the fourth quarter and I would say that's probably will be about the run rate we have here in the first quarter.

Okay. And going back to the comments on CapEx, I mean, maybe George you can share with us your vision, your longer-term vision. I mean certainly 3M was may be under-investing for a period of time and now adjusting to that, I mean, when you think about kind of spending in the range now of almost 120% in D&A. I mean does this trail off in '09, are the majority of projects over with, and we can start to think about more 100%, 105% of D&A, more historical 3M levels?

Yeah. In fact the early numbers... sure the traffic will slowly come down a little bit this year, not by a lot, maybe by a 100 million, and we suspect that that will probably ease as the next few years go on dropping from the peak that we had at $1.4 billion, $1.5 billion probably $100 million a year for the next couple of years, bringing it back down to levels more consistent with historical spend that 3M has had. So, we are already beginning to see some easing to that now.

Okay. And last, just a clean up for you, Pat. I mean I don't think in December you were able to give as much guidance on pension. I think you said it was somewhat neutral-ish. Has that changed at all since then for '08?

Yes, yes it has, and that's another tail-win for us. Right now we are prior looking at about $100 million reduction in expense; we are looking at '08 versus '07 for pension expense.

Okay. Super. Thanks guys.

Thanks a lot Scott.

Your next question will come from the line of Shannon O'Callaghan with Lehman Brothers.

Good morning guys.

Good morning Shannon.

So looking across the different businesses now. We talked a little bit about healthcare and display but as you are thinking about trying to drive the organic growth up 4% into the 5% to 8% range where do you really see it coming from. The Healthcare has already been growing pretty strong, what gets better from here as you look out?

Well, I think Shannon, obviously the increasing preponderance of sales that occurred overseas tend to lift our growth rates. The increasing investments we are making in security tend to lift our growth rates. Healthcare, Pat already pointed out tend to lift our growth rates. We are actually beginning to see better growth rates in the industrial heartland of 3M also. We have to be fair that these are slow moving indications and take some years to roll forward. And we actually are in the position hopefully in both Display & Graphics and in some of the flex circuits that in optical's case it'll begin to turnaround and flex will lack it and it will no longer be a factor. So generally speaking the investments in higher gross spaces in water, in security, in track and trace are all adding to our overall growth rate. So gradually I think you are going to see Shannon this movement tick up gradually over the next couple of years.

And, I mean, are you seeing the new capacity that you are putting on, is it contributing the way you expected it to in terms of filling up those plants, the demand; there as you envisioned, is it going on as you expected?

It is in most cases, obviously in one case like our occupational health business. A piece of our demand is on... is pure random. It's tenders, it's ex-factors, but very, very difficult to know how to forecast in advance. And that scenario, I think, that is a little more uncertain. But generally speaking the capacity is being used. Certainly medical is being used, certainly in blue tape that we put on, capacity we put on is being used certainly in the Filtrete areas. That's actually probably... we are even still literally [ph] short of capacity there. That's becoming a real rocket ship in terms of growth. So for the most part, I think, the observation is that it's working out pretty well.

Okay, great. Thanks a lot.

Thanks a lot.

That concludes the question and answer portion of our conference. At this time we will turn the call back over to 3M for some closing comments.

Well, thank you very much everybody for listening. We appreciate your questions and comments and look forward to talking to some of you a little bit later in the day. So thanks everybody, take care. Bye, bye.

Ladies and gentlemen, that does conclude our conference for today. You may all disconnect and thank you for participating.