3M Company (MMM) Q1 2008 Earnings Report, Transcript and Summary

Ladies and Gentlemen, thank you for standing by. And welcome to the 3M first quarter 2008 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, Thursday, April 24th, 2008. We would now like to turn the call over to 3M.

Good morning. This is Matt Ginter, head of Investor Relations for 3M. I'd like to welcome all investors and analysts to our first quarter 2008 business review. You will find this morning's presentation on our investor relations 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. Please take a moment to read the forward-looking-statements on Slide two. During this 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 1A, of our most recent forms 10-K, lists some of the most important risk factors that could cause actual results to differ from our predictions. I also wanted to mention that our annual investor debt meeting, which will be here in St. Paul, will take place on September 9th. Please hold the date and more details will follow. George Buckley, our CEO and Pat Campbell, our CFO will both make some formal comments today and then we will get to your questions. Today is a very busy day as many companies are reporting earnings, and I know you're all very busy. So we'll do our best to keep the call to about an hour. And you can help during the Q&A, by limiting yourself to one question and one follow-up, we'd appreciate it. This way our questions can be fully addressed. So we'd now go to slide number 3 and I will turn it over to George.

Thank you, very much, Matt. Good morning, everybody. Today I'll give you my views on the quarter, along with some comments on rest of the year. In an uncertain economic environment like the one that we are experiencing today, we are particularly blessed by the global presence in strong diverse portfolio that 3M has developed over the years. The investment we'd be making in new products, in acquisitions, and particularly in strengthening the core of 3M is paying off handsomely and its these factors which would allows us to do so well, even as we deal with the weak U.S. economy and face the challenges of our LCD based optical film business. So, and at the front, I should like to affirm our 2008 goal of EPS growth at 10% or more. The quarter was a tale of four principal factors. First, excellent performance in four of our six reporting segments; second, slowing U.S. growth as evidenced by slower performance in our consumer and office business; third, superb international performance; and fourth, continued slowing of and margin compression in the optical films business. Overall, we had good results, with sales up 9%, bolstered somewhat by high foreign exchange, and EPS up 8%. We maintain margins at or about 20% or better in all of our businesses, even as we can continue to invest in R&D, additional sales presence, and more efficient supply chain, and in acquisitions. It will surprise nobody that we saw consumer office segments slow in the first quarter and it finally mirrored the experiences seen by U.S. retailers and other suppliers into that market. But we've clearly been taking market share in many product categories. As companies in the U.S. cut back in banking, in airlines, in brokerages, and with the contraction in residential construction, people are naturally buying less of these kinds of products. U.S, economy as we see it from our consumer office perspective, continues to be slow in the end markets. Net sales in the consumer office business were up 2.6%, while local currency sales were down 2.5%. Margins held in at about 20%, but we must expect that the consumer office market would continue to be weak in the second quarter and likely it will persist throughout the balance of 2008. Performance was helped by continuing improvements internationally and I think that given the tough U.S market challenges that this was still a great performance by the consumer and office team. We may see some improvement as the current inventory corrections in the United States finish but we don't expect this to be transformational. Our industrial and transportation business saw nothing less than stellar performance. Sales were up 17% and profits were up about 15% with the margins coming in at 22.6%. This great performance went right across the entire industrial and transportation sector. Like many of the parts of our business it has underscored the wisdom of our investing and extend the core strategy. Along with international growth and our localization initiatives there this focus on the core has been the primary reason we've been able to do so well in this tough market conditions. Pat will give you more details in a few minutes. Health Care performance was also strong. Sales were up 12%. Operating income was up nearly 20% and margins approached 30%. New products continue to reinvigorate the product portfolio of Health Care. For example, we plan to release our digital dentistry system in high volumes as the year progresses. Health Care will continue to be one of those segments that receives targeted investments. In Safety, Security and Protection services, the focus on the core business is also paying off there. For the quarter we saw broad based growth in respiratory products, window films, corrosion protection, and track and trace solutions. Sales were up over 13% in the first quarter and profits were up 12%. We've been building this business steadily over the past two or three years and even with the contraction in the industrial minerals business and no ex-factors to drive sales. We've still done remarkably well. The future looks very bright in the Safety and Security business and the acquisition of Aearo, which will significantly expand our occupational health and personal safety lines received final European regulatory clearance and closed on April 1st. Our support of security agencies around the world also gathers good strength. Our Electronic Communications business continues to do well also. Sales were up more than 9% and profits were up over 13%. Overall E&C showed great growth all around the world. New products both those developed in house and the acquisitions are driving that growth. We are seeing increasingly strong demand now for our ceramic core reinforced high voltage overhead wire product and it is swinging into profit now all be it small for the time being. We achieved this performance despite significant end of live contraction in flex circuits for inkjet printers. Display and Graphics was clearly our biggest challenge in the first quarter. Sales fell by 6% and earnings fell by 37% largely because of significant weaker dollar volume in the optical films business, which over shadowed solid performance by commercial graphics and traffic safety. As we outlined to you in December last year, our mission in optical films is very straight forward. First, we are establishing stronger working relationship with our customers, such as we did when we first built this business over a decade ago. By reconnecting with them we will more clearly understand their needs as we provide them the solutions they need in a fast changing technologically driven marketplace. Second, we are vigorously driving our costs introducing new cost competitive films to deliver better value to our customers. And third, we continue to strive towards a profitable and sustainable business in a market with explosive growth potential. To drive this mission we've installed new leadership in the Optical Systems division. The division is now managed by Jim Bauman, who formally led the improved performance in our automotive OEM business. In addition, we have in place new technical and manufacturing leadership. Importantly, we moved the division headquarters to Asia to be closer to our customers and close to the rapid innovation and change that is talking place in the set and panel manufactures, in this incredibly fast moving industry. Over the last year or two, we have talked a great deal about the rapid rate of change in this market. The first quarter was no exception, and if anything it was surprising how quickly the market moved towards monetization in the quarter. These challenges will likely extend throughout 2008, as the flat-panel TV market continues to transition to commodity products. We enjoyed the growth in this business and now we are managing it as a transition to our business much more like the rest of 3M. So please keep in mind that this is still an enormous market, with enormous potential, those who can get the cost and product structure right, just as we are doing. We are in the field sampling many new lower costs products that should win new contracts. So despite being in transition optical films remains a good business for 3M, a business with both good growth potential and operating margins comparable to those with the rest of the company. A piece of good news in this general optical area is the strong interest we're getting for our new mini projector with applications in many new areas. Because of the rapid movement of these markets in a break from tradition is our intention to license this technology openly, widely and quickly. It's in its very early days of this product and we hope it will quickly become a fine contributor to 3M's overall product portfolio. So to keep things in perspective we have very positive performance across our portfolio. four of our six businesses are achieving double digit profit growth and one is a little softer as expected, a true testament to the power of 3M's diversity and it's recent investments. As I mentioned earlier we're especially grateful for 3M business model in times like these. Like all manufacturers we are combating significant upward pressure on commodity prices, transportation charges and energy costs. This has put pressure on gross margins which we are fighting hard to resist. However as you see from Pats charts a reduction in gross margin this quarter is all attributable to Optical. As you can well imagine we're designing products to substitute lower cost alternatives, which takes time to do and we're taking price increases wherever we can. So continued operational excellence is vital in these environments and our focus on lean manufacturing, faster web speeds, better sourcing and yield improvements are keys to success. Our balance sheet remains very strong and we just posted our 50th consecutive annual dividend increase and our pension plans remain well funded at around 100%. This gives us enormous flexibility on where to deploy resources. The supply chain initiatives continue at a steady pace with no hiccups in the transition. Just as our diverse portfolio contributed to our success this quarter, so to did our international strength. In the first quarter, two-thirds of our sales were from international and grew by 13%. China, Russia, India, the Middle East and Eastern Europe are all growing between 15% and 30% annually. And we very encouraged by the acceleration of growth in Latin America over the past year. We see this Latin American region as a major opportunity for growth. It's politically and economically stable, friendly for the U.S. and right in our figurative backyard. In 2007, sales were $1.7 billion, which is larger than China for now and growing in the teens of percent with margins well over 20%. So as to the impact of declines in optical, the base business in all international markets remains surprisingly stronger across the world. We have an unequaled global team, and the presence, and they are hitting it on all cylinders. So in summary, challenges in optical and in the United States will be offset by other areas, which were performing even better than expected. We staying on the course of growth, prudently investing in our core and near adjacencies and in acquisitions. International would continue to be a positive factor overall for us. And as always should the need arise, we will cut off also according to the size required. So now I'll end where I began. Our geographic and market diversity enables us to reaffirm the 2008 EPS target of 10% or more, despite the challenge we face. So now, I'll hand the call over to Pat for more, first quarter detail.

Thanks George and good morning everyone. Please turn to Slide number five. All information in today's presentation will exclude special items. Recall that last year first quarter earnings per share of the $1.85 include net gains of $422 million or $0.57 per share from the sale of the company's branded pharmaceutical business in Europe, net of various other special items. Excluding special items in Q1 of 2007 earnings per share was $1.28. There were no special items in the first quarter of 2008. As George pointed out, we continued our trend of quarterly records for sales, operating income, and earnings per share in the first quarter. Sales were up 8.9% to $6.5 billion led by Industrial and Transportation, Safety, Security and Protection services, Health Care, and Electro and Communications. Local currency sales were up 3% in the quarter. Looking at the company geographically; internationally we drove broad-based growth, with double-digit sales growth in Europe, Latin America, Canada and Asia Pacific, excluding optical. Operating income was $1.5 billion, an increase of 3.6% over the same quarter last year, with four of the six business segments achieving double-digit operating income increases. Operating income margin was 23.2% as all six businesses delivered 20% or so plus margins in the quarter. First quarter earnings were $1.38 per share or an increase of 8%. Currency has gone in our favor for sometime now and in the first quarter it was no exception. We benefit perhaps more than your typical multinational because of our significant international footprint. Two thirds of our first quarter sales incurred outside of the U.S. with even larger percent of our profits. Currency added about six points to sales growth in the quarter and an estimated $0.07 to earnings per share. The earnings impact is indeed in estimate as it picks up the positive elements of the weak dollar but it does not comprehend the higher commodity prices we are feeling related to dollar denominated commodities. So the true net earnings impact would be muted somewhat. In addition, as we have previously explained, we proactively managed currency gains to the extent we can. We have committed to deliver 10% plus EPS growth in good and bad times and when currency has a tailwind we were to invest the excess to ensure a predictable stream of future earnings, thus improving long-term shareholder value. Overall, I am pleased that we are able to deliver these results despite a very U.S. consumer, housing and auto marketplace, the softening Optical business and record level commodity prices. As we pointed out to you previously, we expect the Q1 to be our toughest comparison for the year, due to our outstanding performance in last year's first quarter. Please turn to Slide 6, for an in-depth review of the first quarter performance versus the same quarter last year. All information on this slide excludes special items. The story around the P&L this quarter needs to be separated into two pieces, Optical and the rest of the company. As you can see at the far right of the chart, excluding the impact of Optical gross margins and operating income margins would have been better than last year. So our broad based portfolio continues to perform as anticipated. Sales would have been up 11% and operating income would have been up 12.2%. Optical on the other hand saw their operating income halved from last year with the sales reduction of 16%, which results in the decline of margins, but still well within our guided margin range for the year. As I previously mentioned, we delivered all-time record sales, operating income and earnings in the first quarter. Now including Optical, first quarter sales increased 9%, boosted by currency translation effects were now bringing income up 3.6% and earnings-per-share up nearly 8%. Net interest expense was $25 million, up $15 million year-on-year, primarily due to higher debt balances. And finally, the first quarter tax rate was 31.8%, a decline of 1.4 percentage points versus the same quarter last year. This decline in tax rate is consistent with our goal of reducing our tax rate by 1% per year. The P&L on a sequential basis is found on slide number seven and reflects solid performances in several categories. Sales were up 4.1% versus the fourth quarter. We kept SG&A relatively flat versus last quarter and SG&A spending declined by 1.7%. With four of our six businesses delivering positive sequential growth we leveraged this into 16.3% operating income improvement. Operating margins improved by 240 basis points sequentially driven by a combination of strong sales in our emerging markets and developed international markets an outstanding operational discipline. On a sequential basis net income and earnings per share increased 14.5% and 16% respectively. Now let's breakdown the components of sales growth for the quarter, please turn to slide number eight. On a worldwide sales basis, we grew 8.9% in US dollar terms with international up 13% and the US up 1.6%. First quarter organic volumes were up 1.6%, our selling prices declined by 30 basis points and acquisitions added 1.7% of growth. Selling prices were negatively impacted by 1.1% due to price reductions in our optical film business in the quarter. Globally, we are aggressively pursuing price increases where we can to help offset record level commodity price inflation. Global revenue growth was boosted by foreign exchange to the tune of 6% in the quarter. Internationally local currency sales were up 3.4% versus the same quarter last year. Organic volumes increased 3.9% as five or six business segments posted positive local currency growth. Selling prices declined 1.4% driven by a 14% decline in the optical pricing. Excluding the impact of optical international selling prices increased 30 basis points. Acquisitions added an additional 90 basis points of growth in the quarter. Regionally, local currency growth was led by Latin America at 15%, while by Canada at 7% and Europe at 3%. The Asia Pacific region delivered 0.8% local currency growth in the first quarter, which was negatively impacted by an 18% decline in the optical film business. Excluding optical, local currency growth in Asia Pacific was 8% versus last year. As many others have already reported, growth in the US is more difficult due to the slow economic conditions with local currency growth 2%. Organic volumes declined 2.8%, while selling prices and acquisitions added 1.7% and 3.1% respectively. First quarter business segment performance was a tale of two stories; on the positive side we saw a strong growth of 13% in our Industrial Transportation business, 7% growth in the Electro and Communications and 3% growth in Health Care. This growth was offset by sales declines of 9% in the Consumer and Office, 5% Display and Graphics and 4% in the Safety Security and Protection services. Please turn to slide nine for a review of Industrial Transportation business. This is our largest segment representing about a third of our sales. And in the last quarter its revenues grew faster than any other business, was truly a remarkable quarter for this team. First quarter sales in the segment grew 17.1% to $2.1 billion. In local currency terms sales increased 9.6% including a four point boost from the acquisitions. Our efforts to reinvigorate 3M's core is paying off in spades here. In fact all of our largest core industrial businesses including abrasives, industrial adhesives and tapes, automotive aftermarket and automotive OEM each drove double digit sales growth in the quarter, along with personal care product, aerospace and our oil and gas market initiative. Throughout 2007 we stepped up our investment in this business to strengthen our already unrivaled portfolio of core technologies. Through increased R&D and a number of bolt-on and complimentary acquisitions, we have begun to transform our tapes, abrasives and adhesives businesses into a legitimate growth engine for the company. And we're extending the core by expanding in the fast growing adjacencies such as professional abrasive power tools and solar energy solutions. In our market leading automotive aftermarket division, which supplies technology based solutions to auto body shop repair around the world. Growth was driven largely by abrasives, masking and refinishing products. We also have effectively re-invented our Abrasives division in the past year driven by special application products for a dozen of industries including marine, aerospace, wood and metal working and automotive OEM's. Geographically we saw a sale in double digit growth in every region worldwide, including the United States with growth led by Europe. We're driving added market penetration in emerging markets as our industrial business continues to make significant investments in China, India, Poland and Brazil. Fourth quarter operating ... first quarter operating income in Industrial Transportation was $472 million up 15.2% with operating margins of 22.6%. Please turn to slide 10, where you will find the first quarter highlights for our Health Care business which is a leading provider of medical, dental and orthodontic products along with drug delivery and health information systems. Heath Care extended its stellar 2007 performance into the first quarter of 2008. Local currency growth including acquisitions was 5.9% in the quarter, virtually all organic. Three of our Health Care divisions drove double digit sales growth namely medical, dental and orthodontics, with medical leading the way. International sales growth was outstanding in Q1 as we drove double-digit growth in all regions outside United States. Our dental business was recently recognized as the most innovative company in the worldwide dental industry for the third consecutive year by an independent publication 2007 Dental Industry Review. The award commended 3Ms track record of innovation is based on achievement in three categories. The number of new products clearances in the U.S. market. The number of U.S. patents and the number of European and worldwide international patents. We also drove strong double-digit sales and profit growth for the quarter in the medical division. Another of 3Ms critical core businesses. Recently we extended our core offering in this business by introducing a transparent antimicrobial dressing to cover and protect patients catheter sites. And of course we are leveraging the 3M Tegaderm brand in order to highlight its value in the eyes of Health Care practitioners around the world. We continue investing in our core Health Care businesses, while pursuing strategic, synergistic acquisitions. In fact, we've added more than ten acquisitions in the past two years. The team is working hard to bring new products and solutions that will enhance the patient experience and drive productivity for the Health Care professional. First quarter operating income in Health Care increased 19.6% to $321 million and margins of 29.8%. Please turn to Slide 11, for a recap of first quarter performance for the Display and Graphics business. Since George covered Optical systems with a fair amount of detail, I'll try to be brief here. Sales for Display and Graphics were down 5.9% in the first quarter. And operating profits were down 37%. Operating margins came in a 21.5%. Positive sales growth in Traffic and Safety Systems and Commercial Graphics were more than offset by more than expected sales in Optical Systems. Display and Graphics face a traditional seasonal slowdown in our Traffic Safety Systems business, as the highway construction season obviously slows during the first quarter during the colder climates. We also experienced some softness in the re-branding aspects of the Commercial Graphics business which is not unusual to see when the economy slows. We continue to see strong demand for our on-premise graphics, services and fleet graphics in Commercial Graphics. In Projection Systems, we've introduced some unique Super Close Projection products and are scaling up production of 3Ms Mobile Projection technology and also compact LED-illuminated projection engine designed for personal electronic devices. George mentioned this before to you in his comments. Traffic Safety and Commercial Graphics are highly stable long-term winning businesses for 3M. So although slower growth in the first quarter these will rebound. And we have some exciting new technologies in microprojection as well. We obviously have challenges in optical in 2008, but rest assured we are addressing the aggressively and we feel very good about the D&G business longer term. Safety Security and Protections services also had an outstanding quarter as shown in Slide 12. Sales rose 13.4% to $859 million. Local currency sales growth was 6.4% with 1.9% from acquisitions. We posted a strong growth at three of the four businesses. Respiratory Protection, Protective Window films and Cleaning Solutions for commercial building, and Corrosion Protection. As a leading manufacture of occupational safety products, asset tracking solutions security systems and building safety solutions, we continue to see exceptional growth in both developed and emerging economies outside the U.S. International sales expanded at a double-digit clip in the quarter with equally strong contributions from Europe, Asia Pacific and Latin America. On April 1st, as George mentioned we completed the acquisition of Aearo Technologies, a global leader in the personal protection industry. Through significant acquisitions such as this, we've expanded our safety portfolio to offer customers a more complete personal protection solution and we continue to see strong demand in this area. We also have seen continued growth in our Corrosion Protection and our Security businesses, which were both supplemented with strategic acquisitions namely E Wood and Security Printing and Systems Limited. Based upon our advanced heat blocking technology by 3M window films were selected to be part of an initiative to lower energy cost across the globe. Roofing Granule business posted a sequential improvement versus the fourth quarter. However, the business was still down slightly year-on-year. We know sales in this business are predominantly U.S. based. We continue to expect the sales will remain soft through the year due to the weak U.S. housing market. Operating income was $204 million up12.4% versus last years comparable quarter and margins were a solid 23.7%. Please turn to slide number 13 for a recap of our Consumer and Office business. Year-on-year growth in this business was 2.6%, with sales and local currency down 2.5% for the quarter. Consumer Office feels the pain of the U.S. economic slowdown more quickly and directly than many of our other 3M business. Recall, we began feeling it in the second quarter of last year. In the first quarter 2008, business conditions were even more challenging driven by slower U.S. same-store sales and further inventory draw downs from our large US retail customers. One bright spot in Consumer Office was our homecare products division one of the leading brands such as Scotch-Brite, sponges and scrubbers, where sales increased over 10% in the quarter, doing equal cost to volume and currency. In geographic terms, international sales were up almost 20% following our focused investment strategy to grow this business. We saw a strong double digit growth in Asia Pacific, Europe and Latin America. While in the US where we derived over 50% of the revenues, sales declined year-on-year by 9%. Going forward, we expect growth in the consumer office business to continue to be lead by its international operations. As US growth will remain uncertain over the near term due to the challenging economic conditions. Showing the strength of our relationships with key customers, we did earn some accolades from a couple of our largest customers. Target recently awarded us the 'Partner of the Year' award and Staples recognized us ... recognized our Post-it team as the 'Best Category Manager' in the US, Canada and Europe, the first time that a supplier has won the award in all three regions in the same year. Internationally our team in Brazil won the 'Vendor of the Year' award from Sam's Club and 3M Mexico won the 'Vendor of the Year' from Wal-Mart. Operating income was $166 million down 7% year-on-year but profit margins remain in their 20% levels. Please turn to slide 14 for an overview of the first quarter performance in Electro and Communications. Our solutions in this business connect the world's power grid, enable global telecommunications and help to connect scores of high tech electronic devices. Electro Communications marked another solid performance with first quarter sales of $725 million up 9.2% and profits up $146 million or 13.6%. Sales growth was led by our electrical markets division, another critical core 3M platform. This serves the electrical utility, construction and maintenance OEM markets, along with our electronics markets materials business where we provided adhesives for chemicals and abrasives to a number of industries most notably semiconductor and electronic assembly. Electro Communications in total delivered 3.3% local currency growth in the quarter, despite another tough sales quarter in our flexible connectors business were a number of products solutions are going end of life. In geographic terms we saw solid double digit growth in Asia Pacific and Latin America and single digit growth in the United States and Europe. We have invested in a number of customer technology centers and manufacturing facilities in key regions around the world to serve our customers in this business. It is this kind of bench-to-bench intimacy that enables 3M to grow our competitors and become true partners with our customers. The first quarter balance sheet and cash flow metrics are found on number slide 15. Free cash flow for the quarter was $699 million versus $670 million in last year's first quarter. Income tax timing differences negatively impacted free cash flow in the first quarter versus last year to the tune of $200 million. Traditionally, our free cash flow conversion in the first quarter is the lowest of each year due to historically strong sales in March and softer sales in December which negatively impacts our working capital. Working capital turns were inline with the same quarter last year and down 0.4 point turns sequentially. Foreign currency translation increased account receivable year-on-year by $289 million and sequentially by $150 million and inventories by $200 million versus last year and $82 million sequentially. Capital expenditures were similar to last year's first quarter at $298 million, but down $93 million sequentially. Looking ahead for the entire year we are now expecting capital expenditures to be in range of $1.3 billion to $1.4 billion from our previous range of $1.4 billion to $1.5 billion. Dividend payments for the quarter were $353 million and share repurchases were $510 million both consistent with the recent quarters. Weighted average shares outstanding were 17.2 down 3% year-on-year and 1% sequentially. Our debt-to-cap ratio was 33% at the end of the quarter. Due the closing of the Aearo acquisition on April 1st we did carry excess cash on our balance sheet at quarter end. Now let me cover our full year guidance, so please turn to slide 16. As George mentioned we continue to expect 10% plus growth in earnings per share for 2008. While some elements of our portfolio have gotten more challenging since our last earnings call namely the US retail, housing and automotive markets along with optical. Others are performing as good or even better than expected and of course the dollar has remained weak which is helping our results as well. As previously expected operating margins for the year should be in the 22.5% to 23.5% range and our tax rate is expected to be in the range 31.5 to 32.5. We expect capital expenditures as I previously mentioned to be in the 1.3 to 1.4 range. Let me take a quick moment to remind you of a couple of items that will impact our per share earnings in the second quarter. As in past years we will have higher sequential stock option expense in Q2, than we did in Q1 as we grant our options in the second quarter of each year and must recognize the expense on the date of the grant related to those employees that are retirement eligible. Second quarter options expense will be $0.03 to $0.04 higher than in Q1. Second with the closing of Aearo on April 1st, we estimate we will $0.02 of acquisition related costs in the second quarter. That concludes our formal comments this morning. Now we will be happy to take your questions. Question And Answer

[Operator instructions]. Your first question will come from the line of John Inch with Merrill Lynch.

Question on organic growth. You know the US down 2.8%, George or Pat what do you think the growth would have been if you folks had not been over the past few quarters putting in place your growth spending initiatives. I'm just, just curious how much you think your initiatives have driven this numbers but still kind of be ... going to be something that's going to come in later '08 or in '09?

John, I mean it's difficult to give you a precise answer to that question. But the new product vitality index that we mentioned is moving upwards about two points each year. So I think it's fair to say that, I mean it would be the impacted I don't know that I can give you a number. Matt you got anything recorded there.

Well just a minute George.

So it has been positive John. Obviously, but very difficult to give you a precise number. Can we sort of make an estimate and get back to you?

Oh yeah, for sure. And then just as a follow-up. I know that at the December 12th meeting, we had thrown out currency contribution for '08 of $0.05 to $0.15 and I think by far as Pat's comments, you know the $0.07 time is 428, but there is higher raw material costs and so forth. So it maybe it's $0.25, I guess my question is, that's 5% of the EPS contribution, looks pretty good. But how are we thinking about or how are you guys thinking about currency potentially moving the other way. I mean is that, is that between that and pension are those headwinds something that we need to kind of factor in here as you begin to look to '09. But ... for instance you feel like you have an optimum flex spending or other things to potentially offset what could invariably turn into some headwinds next year?

John, Pat here. First of all we never bank on either a foreign exchange or pension returns from a long-term planning perspective. We view those being a little more short-term in nature. So we plan the business more around kind of steady state operational basis. So what we try to do is when we have the benefits of foreign exchange and just to be clear I… it is a difficult number to give you hands on, I can give you a technically foreign exchange number, but I think you all know and aware there is other more macroeconomic impacts that affect business results volume and so forth that make it a little harder to come up with a good net number. We are definitely seeing on the commodity side some significant increases that we're trying to off course address through price increases and the like. So, what we're trying to do is while the currency is favorable for us, is to continue to invest in our businesses, so as currency does move, which eventually it well at some point in time that what we've done is we've got a better growth base in the rest of our businesses. So that's been our strategy.

Great, thank you.

Hey, John, John you still there.

Yeah, I'm here Matt.

This is matt, I want to clarify one thing, we live in this world of instant information. So, I have seen your initial report. For the benefit of everybody we had a benefit in corporate miscellaneous versus the same quarter of last year and I want to make it clear what that is. This year our pension expense is lower as we've told you to tune of about $0.02 to $0.03 interest the first quarter of this year and what we did is that whole $0.02 to $0.03 essentially is affecting corporate miscellaneous. The amount of pension expense we're charging off to our businesses is essentially the same. So that really accounts for that difference.

So Matt, what should we model as then the corporate number for the rest of the year, do you think, for the other quarters?

Something pretty similar.

Okay, positive number then or flattish?

Flattish.

Okay, thanks very much.

Yeah, thanks John.

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

Good morning guys.

Good morning Shannon.

A couple of the targets we didn't get updates on, I mean the 5% to 8% of organic growth for the year, are you still thinking that's achievable and Display and Graphics, given the tougher first quarter here, I mean there we were looking for mid-single digit organic and 24.5 to 25.5 on the margin. Do you have an updated view of those different targets?

Well Shannon I think in the current economic situation getting to 5% to 8% is a nice aspiration but probably unlikely. We're not throwing that away from where we want to be but I just think it's probably unrealistic in today's economic world and on top of that with the situation that we're in with Optical, just probably doesn't make that a realistic assessment. So in a word, you can be guaranteed that we are fighting for every piece of volume that we possibly can in today's economy but importantly, I guess Shannon, I want to make sure that you don't connect, we're saying we're going to give you a 10% plus earnings growth. Don't tie that to necessarily a 5% to 8% volume growth. We'll get there without having that 5% to 8% but that is clearly in our sights as what our objective is on a more of a steady state economic environment world and if you get outside the U.S., our international performance remains very, very, very strong. So that piece of the business, ex-Optical for a second, I would say that we're still performing at the levels that are consistent with that 5% to 8% range. Its really the U.S. impact and that's the Optical piece that is dragging us down at this point in time.

Another thing that Shannon, we talked about in the past. This is George, its a multiple of IPI [ph] growth and we seem to be well in the hunt for that. So, we are not slowing faster than anybody else even with the kind of head wins that we've talked about already this morning.

Well. I mean on IPI I mean, I've seen… I don't know what the actual number will come in at a... I guess in the first quarter but its not going to be 0.5% right or I mean organic growth is like 1.3% with pricing being another and the volume is a little different. But I mean you are not going to be at 2X IPR right?

That probably 1.5 of that order.

Okay. And the Display and Graphics margin target, what's the updated view on that?

Yeah. I guess Shannon, you kind of have a very good question there. Its pretty hard to look at Q1 being 21.5. I'm saying that our objective of 24.5 - 25.5 is a realistic one. I think the best way to think about that business is to assume that Q1 would be probably indicative of where the year will run.

So just then the last one is, to help me to sort of then put to the no change to the annual guidance in terms of margin, I mean Health Care looks like, obviously its coming in better. I mean do you… where are the other big offsets given? You already got a decent drag from display and now its going look worse. What are offsets to keep the overall year kind of flat up on to basis points on margins?

Well, when you look at it, and we are… industrial is good. First of all let's go back to what our margin expectation is. Our margin expectation for the year is 22.5 to 23.5, we ran 232 [ph] in the first year ... in the first quarter with optical or D&G really at 215 [ph]. So I think they are very consistent, that we can continue to perform at the company level where we say we are and then continue to bring D&G down business is somewhat like we ran here in the first quarter.

Okay, I leave it at that, thanks guys.

Thanks.

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

Good morning, guys.

Good morning, Scott.

Good morning.

I wanted to approach the opposite of Shannon's questions in the outlier on the high side. I don't think it was a huge surprise at least for us, the rate of change in Display and Graphics was negative, but certainly a surprise that Health Care and Electro and Communications came in strong if they did. Are there any and lets just address maybe one at a time, but it wasn't clear in the presentation if there is any kind of timing issues that may have mix or some timing issues that may have benefited margins in the quarter. If there is something that's purely volume driven you know and you get any volume leverage maybe above and beyond what you had historically?

Scott, there is nothing in either segment that is unusual that you should take away that there was a common artificial impact on either one of those businesses. E&C just continues to perform very, very well. They've got a few businesses that are just absolutely doing gangbusters right now. They're actually at higher margins than what their average is, so that continues to hold them up and in really Health Care across the board ... I mean Health Care across the board is just performing very well, both geographically across all business segments. So there's really nothing, I would say is unusual in either one of those that Q1's would be an outlier of what the future is going to look like for us.

Hey, Scott its George here. We said very early in my tenure what we're going to do is take the old traditional core of 3M and invest it and make sure it was ... it remained strong, it became a base from which to build the rest of the growth platform. And what we're seeing now, certainly what we're seeing at this moment in time and is being progressively increasing and improving that in the past two years. We see ... and Pat actually mentioned two or three of these in his presentation. We've seen wonderful performance, improved performance from Abrasives, from the electrical markets division which is in the E&C segment that Pat just spoke about. We're seeing it in industrial tapes. We're seeing an improvement and resurgence in medical and the automotive aftermarket. And one of the businesses that was ... we were struggling with terribly, which was the personal care division which is the division that makes diaper tapes is another business which is turning around. So what I think is turning out to be true Scott, is the wisdom of investing in those businesses and bull walking those to make sure that we had a great platform to grow from. So there is no reason at this moment in time for us to believe unless end market conditions worsen dramatically. That we can't see continue to either improvements or at least steady performance from those businesses. And it's so broad based and in such a lot of the big businesses in the big divisions of 3M and that's why you end up with even dealing with this optical transition, why you end up with the good numbers that you do.

Got it and I want to go back and talk about Aearo a little bit. On the surface the acquisition looked a little expensive to us. It's tough to tell, it's a bit of a unique asset so it's hard to value from our perspective. But can you talk now that you've had a chance to close the deal and have a few weeks and you had a few months due diligence, I mean are there cost synergies, any other kind of strategic benefits above and beyond what you talked about on the last conference call?

Yes. I'll try to take and see if George has anything to add to it Scott. Based upon the feedback, the business team has had with them. I think they feel even better about the business, the opportunities, the very solid organization they have with there ... all the products they've got. Businesses continue to perform actually even above our short term expectations. So everything thus far has been very, very good. The integration planning has been just outstanding with them. So I can't say enough good about the relationship that we've had with the organization thus far and by all signals thus far its ... I would actually rate it probably a little bit better than we kind of thought when we first looked at it. And Scott I think the other thing is just keep, keep an eye on where others trade in that space. There has been another company sold, in that space that we ... just do your own assessment as to Aearo versus them.

They have been expensive enough.

So, you know

We actually saw both acquisitions were kind of expensive. We criticized the other company as well, so an equal opportunity critics here.

That's good for you. One last point that I felt, I've been traveling around internationally Scott. We tend to, when we do the modeling of these businesses. Pat and myself tend to be the very serious critics of synergies both in the cost area, but in particular in the sales area. In over many years of experience of these sorts of things, it's a place where company seems to consistently make mistakes. What seems to be transpiring though here in Aearo because they are relatively simpler products and they're so familiar and close to the kind of the OYGS [ph] core that we've had many, many years. There is a very high level comfort and being able to get those Aearo products into the international markets and drive sales in this. So and off course you can well imagine that Julie Bushman who runs that business, we have…Pat and I have set Julie some pretty tough targets and so I think that if this thing goes anywhere near as where we expect then we'll see better into the synergies, I'm not sure about back into the cost end yet, in the sales synergy, I mean.

Okay, thanks guys.

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

Thanks good morning to everyone.

Good morning, Jeff.

Just a couple of quick once, you covered a lot of ground already, I didn't catch you, could you just give us your all in organic read on Europe in the quarter ex-currency, ex-deals?

Why don't you go to your next quarter and I will comeback to it, if that's okay Jeff.

Sure.

I've got it, it's 1.7% will the organic in Europe for the quarter, which is somehow yields…slower growth rate for them versus last year's first quarter and from the trend standpoint, I didn't talk about Easter, okay. It does affect them in more than Mediterranean part of the Europe. So we do expect second quarter will be kind of a little bit better. So I didn't want to get into kind of excuse game but I still feel very good about Europe. I think we have a eyes wide open in Europe to make sure that we don't see a slowing trend there but I know George's been there more recently than I have and we still feel very, very good about the programs that we have in Europe, the Central East Europe, Africa and Mid East continue to grow at double-digit rates. The storage [ph] that will be Western Europe over time, so we did see it slowing but I used to tell you guys that any wealth in Western Europe I've always viewed as being a positive, and to some degree I still kind of view that from a plan perspective. In many of our countries they've kind of proven me…kind of proved me wrong there and I'm glad they have. So I feel that we've got a solid plan in place there. But we are watchful as to how the economic condition is going to play out in the West

And then George just a little further elaboration on your declaration if you will that Optical has gone commodity, was that kind of a depth versus deepest type comment or is that a all-in kind of consumer preference comment? Can you just give us a little more color on kind of attachment rates and where you're staying with the mix and how the composition is shaking out?

Yeah I can do that Jeff. You recall it's a four segment business. It's the LCD TVs, the handhelds, the notebooks and monitors and essentially this particular story is really about LCD TVs. The handheld, attachment rates, monitor and notebook CR [ph] monitors, while they jump around a little bit have largely remained okay. At least I should say it's stable. And there hasn't been the same intense pricing pressure in those markets simply because the value proposition for somebody is high brightness films, its very strong because it held battery life. And the… so the whole, the whole game really is essentially down for the LCD TV market, Jeff. And you know the way that the bottom of that market has exploded. And of course the market in many respects is still… is still trying to find bottom, its trying to find that where is this ball is, the bill of material that he can get to with an acceptable performance for the…from a set for a customer. And if other consumer electronics commoditization are… give you a lead, what might happen is once the bottom is found at the lower end of the market, if you think about it as a sort of good, better, best, once the bottom of the pricing is the lower end of the market. Jeff its been found the bottom of the pricing, the top end of the market will be found and I think that there's likely going to be some, some re-contenting. There are some positives in the energy area for example, 3Ms films can tuck in the small television. A third of the energy usage in the bigger television more, but in the end that maybe not be replaceable. It'll sell you more televisions. But you might get the customers to make choices left and right on a sort of low energy versus a high energy set. So these things I think in along the run will help us. What we are also doing Jeff is putting a sampling of lot of inexpensive but still relative high performing diffusive the films into the markets. So we can supply that bottom end of the market and get some more leverage there. And so I think that still during the 2008 in summary Jeff, we are going to see more turbulence in that market as the set manufacturers in particular scramble for share and they are prepared for digital switch over and I don't know if it's fully commoditized yet Jeff, I suspect not, but I think this first bumpers totally will be in the worst bump.

Just quickly, could you just tell us what your dental growth actually was in the quarter?

Just a sec. Dental growth Jeff, was going to be in dollar terms its north of 10% on a local basis probably mid single digits.

Okay, thanks a lot guys.

Yeah, if I could just and added of your question was oral care or dental itself. Dental is Dental, Matt's got greater than double-digit, the orthodontic business was quite a bit stronger there at almost 25% growth in the orthodontic business part of that due to an acquisition we had but.

Combined oral care on an ex-currency basis probably around 7.

Thank you very much.

Thanks Jeff.

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

Good morning.

Good morning David.

George and Pat, good performance in the industrial, but no operating leverage margins actually fell. Can you just comment or talk to that please?

Thanks Dave, because I actually thought they did…

Relatively well.

Very well, okay. Based upon ... having a low 20's margin in a mainstream industrial business I think is a very good performance. Our objective in that business is not to grow margins, as much as lets get to the top line growing. So they can keep the top line growing the way they have, keep margins the way they are I would be perfectly ... be totally happy with that model. Now I think you've heard from HC Shin, in the past that he's got a lot of focus on operational excellence to continue to drive productivity to get cost out reinvest back into the businesses. One of the things that does hurt industry a little bit from margin standpoint is we have made some acquisitions in that space that haven't been necessarily at the same margin level that some of our core businesses have so it takes a while to kind of build those profit rates up. So, but I'm not at all concerned with the level of margins within the industrial.

By the way also Dave, there one of the units suffers from commodity price increases more than anybody else. Consumer office is also ... everybody does but if you wanted to sort of pick on a couple that suffered most they are they are they.

Understood and thank you for the answer. One more thing George, you mentioned about optical films for being a good growth business. Referring to a new revised space not from last years base, correct?

Correct.

And what would that new revised base be do you think?

Well it's, as I jokingly say sometimes Dave prediction is very difficult especially when it concerns the future. The business is obviously shrinking Dave. It's mainly shrinking due to two things, some loss of attachment primarily in TV's and obviously price compression. So I think we're not fully through the transition yet Dave and if you've let me make that observation I made about a good growth business in the future let me make it from a new base that comes up in 2009.

Sounds good. Thank you very much

Thanks Dave

Your next question will come from the line of Deane Dray with Goldman Sachs. And Deane your line is open please go ahead.

Yes, can you hear me?

Yes.

Yes Deane.

Okay. I just want to go back to pension and FX for the quarter to make sure I have my math right and Pat you said $0.07 from FX this quarter and that was $0.02 to $0.03 from pension?

Yes. Deane, I do want to clarify. Okay, if I could. FX the way we calculate it, is if you just literally take rate differences on both transactions and translation and that's where you get the number. It does not pick up any of the other input related impacts of say a weaker dollar on commodity prices and alike. So it is probably an exaggerated example of what the real impact is on the bottom line.

And how about your assumptions for, for the year when we look at that 10% plus where would FX and pension combine represent of that 10%?

Yeah. I think…

Based what you know today?

I mean pension will be give or take $0.10, FX is probably in the 25, 30 range. Who knows depending on where rates end up? So that's purely just taking quarter end rates and then assuming they stay way for the rest of the year which I guess your crystal ball is probably as good as mine on that one.

What are you using for your Euro exchange?

I think its 158 at quarter end. So that's what we would have extrapolated in our last forecast.

Okay. And then just to recheck on optical, I have never kind of beaten this one. But the assumption for the absolute EBIT decline for the year as of last quarter would be down $50 million to $150 million. And you did, you were down $110 million this quarter. Are you going to set a new range for that or George I think you are saying you really want have a sense for this until 2009?

Correct.

Well, Deane, I guess let me try to get a year. I think where you come from is December we kind of gave you a range for Optical. I think that's where you are coming from. And in the quarter here profits kind of halved okay, in that business. So we would expect that, that trend from a year-over-year basis, will probably continue to play out for the rest of the year.

The same trend from the first quarter?

Yes.

Yes, so you can expect similar downtrends second quarter year-over-year is what that means Deane.

And I… if I was able to draw it for you Deane is, that business has been… of course profitability has been… being reduced okay, overtime so even during '07 if I look at Q1 to Q4 it kind of went down. But, so what we're saying is that, what went down here in the first quarter that delta will probably carry through most of the rest of year, year-over-year. It could be by the end of the year it starts to kind of tail off a little bit, but that's our best forecast.

Okay. And then capacity expansion this year, just a quick update on; there were 19 new plans, where does that stand and I see you're also cutting CapEx. Is that related at all?

That's not specifically I kind of view of that $100 million reduction kind of almost a little bit in the round, it does reflect kind of the economic situation we are in and so forth, as because if your growth rates do slow a little bit because of economic conditions, there are some things that we possibly were to looking at relative to capacity in these and so forth. I think just maybe push him off a little bit. So that's more a tinkering okay, at this point in time. But on the plans, if I recall the statistics right Deane, we… out of the 19, we are schedule to have about 13 of those up and running here by the end of the first quarter. The one that, I think we've talked to you about in the past, is Russia. Russia is the plant that we thought we'd have up and running right now. We still are struggling a little bit getting final occupancy permit for that facility.

Just that environment thing,

And that's just the environment of Russia. So that's nothing I would say from a operational execution standpoint that we're all concerned on. Everything appears to be on track.

In fact what's actually been happening Deane is the plants have been coming in generally faster and generally at a lower cost than we thought.

Great, thank you

Thanks Deane.

Your next question will come from the line of Stephen Tusa with JPMorgan

Hi Good Morning.

Just a quick one on the dental side, are you guys telling anything about worries about the economy and the impact on growth there?

I think it would be fair to say that there are some discretionary decisions that customers make about, when they have a dental work done and as people get more and more concerned about discretionary income, it could affect people's buying behavior. So I think it would be fare to say that there has been some feedback that may be dentists have started to see, some slowing in discretionary treatments and so forth. My comment a little bit is that it's hard to get into dentist's at times as well, especially orthodontist, okay. So does it really impact you that much but I think it would be fair to say that in a slowing economy, you will see some impact on discretionary dental care Steve.

Right, and just on the optical side, I'd hate to be this one, wish we could talk about something else but it was…

So do we.

But it was really bad in the quarter, and when you think about… you brought us out to the meeting in Minnesota and also in New York and you kind of walked through and I think, made people feel comfortable that you had, at least hands around… a fence around the situation to some degree and you basically hit your declined target in the first quarter only a few months after you did that kind of bottoms-up review. I mean, what's getting missed here between… I know it's a totally dynamic market and its a free fall, but what's getting missed here from the ground level up to the executive office, where you guys were just having such a hard time on visibility, totally acknowledging that this is a very unusual circumstance?

What was happening in the end mark is, Steve, the set managers have said this a little bit earlier, the set managers make us scrambling for share. That sort of there is a reordering of the powerbase in the marketplace, the leverage has swung more to the set manufacturers than it was previously in the panel manufacturers or even the upstream manufacturers and those dynamics are extraordinarily difficult to forecast accurately, Steve, they just are. All I'll say to you, I'll pull you back you to the other position which is, you have to look at 3M in its total context. In 3M's total context, the core of 3M has done so very, very well. It was able to overcome and surpass the challenges in Optical roundly. So does that make us feel better about how to predict accurately what's going in Optical world? No of course not. But what it does do is to make us feel a little bit happy about what we can predict in 3M in total. So when things begin to fall in a marketplace when they have these rapid changes Steve. It's very difficult to know is the trajectory down 25% a year, down 50% a year. The end game era can be significantly worse with one such set side of assumptions versus another. All you can do is, go to your customers try to get the lead information, try to bring products that they want to mitigate some of these changes, and bring value to the customer. I started also by saying this morning, this is a business that we enjoyed the upside and is now transitioning it appears to be a business very much more like the balance of 3M and that's what we currently expect.

Right, and then just lastly on the 4X [ph] contribution to get to your 10% growth, it was I guess $0.07 year-over-year. But doesn't the comp get a little bit tougher as you move in the half such as taking the $0.07 and multiplying that by four. I mean, that wouldn't seem to be the right math on that. And I'm just curios, because this is kind of a key aspect now if you guys are getting to your annual target. I mean, doesn't that EPS impact get a little bit lighter as you move through the year?

Yeah, Steve, you are right. Exchange rate started to move okay, more towards the back end of the year. So it's not as simple as its taking seven okay times four...

So there's something else in the 25 to 30 range?

No, it also is a, we also have to look at where our hedging situation is, okay. I'd remind you Steve that we hedged about half of our exposure. So you're kind of on a year lag for about half of it. So on some of our hedges, when you kind of look at the back half of the year or kind of on a year-over-year basis, we'll be probably better off on those than we were in '07. So that's kind of, what kind of probably evens it out a little bit.

Okay, that's great. Thanks a lot.

Well in the interest of time here we're going to have to close. So thank you very much everybody for listening and we appreciate it very much and we look forward to continued success through 2008. Cheers everybody. Thanks.

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