Ladies and gentlemen, thank you for standing by and welcome to the 3M Third Quarter 2008 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After which, you will be invited to participate in the question and answer session. [Operator Instructions]. As a reminder, this conference is being recorded, Tuesday, October 21, 2008. We would now like to turn the call over to 3M.

Good morning, this is Matt Ginter, Head of Investor Relations for 3M and I would like to welcome to all investors and analysts to our third quarter 2008 business review. As a quick reminder, please mark your calendars for the morning of December 8th. We will host a meeting in New York City, the primary purpose of which will be to discuss our 2009 business outlook. Stay tuned for full details and of course this event will be webcast. As always, 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 1A of our most recent forms 10-K and 10-Q lists 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 be speaking today and then we will get to your questions. During Q&A, please limit yourself to one question and one follow up. We'd appreciate it. So now please go to slide number 3, and I'd like to turn the program over to Pat.

Good morning everyone and thank you for joining us this morning. All information that I will present today will exclude special items, so allow me to summarize our special items quickly to get them out of the way. Last year's third quarter results included a net gain of $0.03 per share from special items. GAAP reported earnings per share was $1.41, which included a net $0.01 per share charge in 2008. While I recognize this charge is small on a net basis, it is important that you understand the pieces. First, as disclosed in our first and second quarter 10-Qs, in March, we entered into a sale-leaseback agreement related to our existing outdated office building in Italy. This was a lucrative transaction for us as the real estate was in a very desirable location and allows us to reinvest in a new, very modern right sized facility over the next year. We recorded a $41 million gain in Q3 as a result of this transaction. This gain was more than offset by nearly $50 million of severance and exit activities in several of our businesses and corporate headquarters as we are aggressively balancing our business structure to a slower growth environment. Excluding these special items, Q3 2008 per share earnings were $1.42 as compared to $1.29 per share in last year's third quarter. Please refer to the attachment in today's press release for a complete discussion of special items. We delivered record third quarter sales and all-time quarterly records for both operating income and earnings per share in the third quarter even in an increasingly challenging and more uncertain global economy. Sales for the third quarter increased 6.2% to $6.6 billion as five of our six business segments posted positive sales growth, led by double-digit growth in Safety, Security and…

Thank you very much Pat and good morning again everybody to our third quarter call. As it turns out, our earnings were well ahead of expectations and delivered operating EPS of $1.42 despite a significant reversal of currency and softer demand in some sectors and locations. The global financial crisis, which happened right towards the end of the quarter, caused a number of last minute cancelled orders from distributors and retailers in their own understandable just in case attempts to preserve cash. But for that, earnings would have been even a little bit better. An obvious reality of being a short cycle company is that we see the effect of demand reductions more or less immediately right across 3M's product portfolio. We live right on the edge of that razorblade. When they are just temporary blips rather than trends, they also pass through the system quickly. 3M is a company that can be impacted by downturns quickly, but it's also one which usually recovers quickly also. Housing and consumer durables have come to the forefront of people's minds again. I must say, though, that because of the nature of our business, apart from the financial crisis, there is really little new market news in this for us, or in what's going on in the broader world economy today. We've been experiencing and dealing with the impacts of a slow U.S. housing market, a tough retail environment, a slow U.S. automotive market and softer industrial manufacturing for a long time, about two years in fact. When you add to this the impact of the reinvestment burden we carried and the commoditization taking place in the LCD TV market, it has been a very challenging operating environment for us and one which I think has been well handled by 3M's management team.…

[Operator Instructions]. Our first question comes from the line of Scott Davis with Morgan Stanley. Please proceed with your question.

Good morning guys.

Good morning.

I applaud the actions... restructuring actions. What was not entirely clear in your comments George is that the guidance for 4Q looks a little bit lighter than what we had in our models. And is that an indication that you're being extra conservative given the macro or has October really... you said September finished off a little weak. Did that continue into October, which is driving your conservativeness right now?

Scott, it was weak at the end of Q3. We saw it as kind of a temporary blend. Orders popped back in the early part of the quarter, but then perhaps a little softer than we would hope. So we're being a little cautious here. I think it's a prudent thing to do in this time. There is no medals for any heroes at this time. So we're taking a very prudent view I think of what's likely to happen in the fourth quarter.

Hey Scott, Pat here. The other thing that has kind of changed quite a bit of course is exchange rates. Exchange rates have moved quite a bit from last time we talked to you, even really since the end of the quarter here. So if the exchange rates stayed where they are at, specifically thinking more the dollar-euro combination and some of the other currencies that have weakened quite a bit, that's kind of what has impacted our thinking for the fourth quarter.

Right. Just to dig in a little bit to your organic volumes and your price changes in the quarter, pricing up 2.9% in the U.S., but down 0.7 in international. I assume that's because of optical, but maybe you could put some clarity behind that and then same with organic volumes down 2.5%, but up 1% international. It's a real slowdown international obviously, but still positive. Just a little bit surprised you are able to get such good... but I guess my question is your prices are going up in the U.S. and volumes are going down. Was it the price actions that drove the weak volumes in the U.S.? And am I correct to assume that the weaker pricing international was optical?

I guess kind of deal with it a little bit reverse. The optical, the answer is right, will be positive price excluding optical on the international side. So it was heavily impacted by optical. On the U.S. side, we don't believe at this point in time that our pricing actions have materially affected our volume performance in the marketplace. We think the strength of our products and brands in the marketplace gives us the opportunity to price. It's obviously something you prefer not to have to do for a customer, or a customer's sake, but with the raw material situation the way it is, we really had no other choice.

And then, just lastly, Health Care margins have been just great all year and growth also. Is there anything... I know you don't want to give '09 guidance per se, but is there anything that would lead us to believe that that would slow down in '09? I mean was there a flurry of new product introduction or something that really drove that growth in '08 that may not repeat in '09?

No, I don't know there is anything that is unique, Scott, in Health Care. We have a fantastic healthcare business. I think if you lined our healthcare business up against any other healthcare company out there, you would see that our positions in the marketplace are in the top two or three spots in many cases. And the margins really are a sustainable position. A lot of it's about leveraging the strength of the whole company is the reason those margins can stay there. And we're already most innovative product company in most of those healthcare categories which provides room for price as well as our product positioning as well.

Super. Thanks guys.

Thanks Scott.

Our next question comes from the line of Jeff Sprague with Citi Investment Research. Please proceed with your question.

Thank you very much. George, for starters, could you give us a little color. It sounded like the BRICPs were in fact pretty decent in Q3. But is there some signs that kind of the leading edge of some of the short cycle businesses in those end markets are starting to soften up also?

No Jeff, not really. You could pick on any one market, any one country and express some concerns about it. But broadly speaking, the BRICP countries remain solid as does Middle East, as does Latin America more generally and even China remains strong. There has been just one or two points erosion of growth in China, but generally speaking, those countries where you'd expect growth, Jeff, are good. And that of course is the place that we want to make sure that we continue to invest next year. It would be easy to sort of pull back in those places where we can accelerate growth. And I think the temptation across this is to avoid that.

Great. And then just a question for Pat on the liquidity. George actually mentioned an embargo on U.S. deals and no share repurchase. I mean obviously you need cash for the U.S. deals and U.S. share repurchases. So you look real liquid, but I guess the question is, is most the cash offshore and what is your flexibility to bring it back home if you'd want to?

WellJeff, I think as in the past, most of our reported cash does remain outside of the U.S. We did do a... the bond offering here in August, which gave us some cash here in the U.S. So we actually have a little more cash sitting in the U.S. than we normally have at the end of a quarter. But I think you understand the dynamics pretty well is that we are... our cash in the U.S. we usually for dividend repurchase as well as on CapEx and acquisitions. And to the degree when you bring cash back internationally, we do do that. We do repatriate a fair amount of cash every year. And of course at the end of the day it ends up being an economic choice. We probably have right now, I guess would be fair to say, probably about $3 billion of cash outside the U.S., probably $2.8 billion I guess is probably the more appropriate number. We can probably bring a billion of that or so back in a reasonable timeframe; the other requires a little more planning.

Great. And if I could just sneak one more in. Pat, can you give us any early read on how to think about pension for '09, whether you make more '08 contributions as you exit the year, or just some early thoughts on kind of the sensitivity around returns and where discount rates are and things like that?

Well, Jeff, I think it's a fair, fair question with the state of the markets. We were fully funded in our U.S. plan going into the year as we took a look at it at the end of the third quarter depending upon your set of assumptions. We think we're still in reasonably good shape from a funding standpoint in the plan. We'll continue to assess the performance here through the end of the quarter and obviously make decisions based upon where we see a BRIC [ph]. Kind of the tradeoffs is right now of course most people's asset returns are below water, especially against any assumptions they would have made. But on the flipside, the interest rate market, especially in today's credit market, actually has a tendency to increase your discount rate. So when you look at it on a kind of a funding standpoint, we're really not in that bad a shape as we stand today.

All right. Thanks.

Our next question comes from the line of Deane Dray with Goldman Sachs. Please proceed with your question.

Thank you. Good morning.

Good morning, Deane.

If I could also ask a question on the liquidities update, and that was a terrific slide in terms of showing the position. And Pat the best indicator there to us was that you were issuing CP with a 2009 maturity. So can you give us a sense of what the average maturity has been in the commercial paper?

I'm going to turn it... Janet Yeomans is our Treasurer. I'll just ask Janet to kind of respond to that question, Deane.

Right. Deane, that varies over time. But what I will say is that in the last couple of weeks, we found the markets much more conducive to business as usual. So it's been with that in mind that we've been showing paper out into 2009 at what we consider to be very advantageous rates. And we've had an increasing interest in people buying that paper. So at this point, we're feeling very, very comfortable about being able to access the commercial paper market. So no significant change to any of our profiles there.

Great, thanks Janet. And then on the consumer and office side, versus expectations, that was a positive surprise this quarter. Can you take us through some of the dynamics, how much of it was back-to-school, better, was it new products driven? But just take us through those details if you could.

Yes, Deane. I think the simple answer to the question is that's really the new products and the relationships that we have with the key accounts in the U.S. that are driving our additional business in the U.S. I would say that back-to-school was not better than it has been. So it's not a back-to-school rush by any sense. It's really around a better flow... continuous flow of new products, including what we brought up last quarter was our Filtrete program continues to expand. We actually had a very good program with Command Adhesive [ph] this quarter in the construction home improvement business. So it's really across the board. We had good scaling products sales and so forth. So it's really across the board. And as you expect, the one business have probably is a little more impacted right now would be more on the office product side. But the flow of new products continues in that business and we continue to stay ahead of the pack.

And Deane, another piece of this is along with that, along with what Pat said, we've won a lot of new planogram... a lot of new shelf space. Some of the programs like the Filtrete program that Pat mentioned are continuing to gather momentum. The end customers are seeing the value of the product and of course our products are very successful for the retailers, so they like to sell them. They're attractive. We've been in good industrial design, we are always trying to add new technology and new features for the product. And perhaps, this was one of those cases where quality is the right mission. In the words of my old grandmother. I think we all had grandmothers that said this [indiscernible]. So people are buying, people are buying quality, buying things that they trust.

Deane, this is Matt. The last thing I would add would be service. In terms of service to the customer, this is one of the strongest areas of the company as you could imagine given the very demanding customer base. But we serve them very well, are on time and full rates are... is high in this business as they already one of the company and that's very, very important to these particular customers. So when they want the product they get it, that's important part of the equation.

Thank you.

Thanks Dave.

Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Good morning. It's actually Jason Minor [ph] speaking for David.

Good morning.

Hi there. Industrial and transportation, solid performance, but the sequential declines surprised us a little bit. So I wonder, George, if you could maybe illuminate for us some of the underlying details of what might be happening there, driving a little... maybe a decline in trajectory of growth.

WellI don't know that there's anything to be concerned about in this business at all. Obviously, U.S. automotive has slowed. But I don't think there's anything to apologize for these results. And a lot of good work going on behind the scenes to drive growth here further into new markets such as alternative energy. So I don't think there's anything to... for you to be concerned about in these numbers. Pat, you want to add anything?

Jason, I would echo the same thing. There really isn't anything that I would call material. You look at FX rates have kind of weakened a little bit. So if you look at top line reported numbers, that may be getting in the way a little bit, Jason. But if you look at the underlying growth rates in that business, nothing to worry about from our side.

And of course, Jason, the margins sequentially were spot on, so.

Okay, that's helpful. I just wanted to go back to George, your comments on CapEx.

Yes.

I know you said the transformation is largely complete, but we have been looking forward to some possible benefits from supply chain improvements. And just if we are having to pull back, I wonder if there is any of that at risk or if you could kind of outline what we have to tighten our belts on.

Well, there is always, in companies like ours, there is always a great appetite for capital. Obviously, more things you can do. So it's a question of prioritizing properly. We will continue to fix the balance of the supply chains that the most important that carry the high volume. And we've probably in some cases where we might have been a bit more optimistic about volume, we'll dial back on those things until we see where obviously these economies lie. But I am actually pretty pleased with the way that whole program has gone; in reality, it's probably going to be incremental additions in that program for the next two or three years, yet until we got the whole program done. If the whole program's ever done, if you get... if you continue to get growth, there's always going to be capacity you need to add. So I'm pretty pleased with the way that has gone. There is a sort of an invisible piece in this Jason, which is what's been going on inside the United States. People have homed in on the plant construction because a lot of supply chains have been straightening out inside the United States. So it will eventually as time goes on will deliver some working capital and cost improvements for us. So I'm not looking at the moment for any sort of great economy program. I think it's just prudent watching of the numbers, a little bit of tweaking and dialing back here and there, but no great crisis.

Excellent, that's very helpful. I'm going to try and sneak one more into. I can't let optical films go unmentioned. And I'm just wondering if we've talked about that the transformational year, if market conditions are making you suspect that the transition lasts a little longer, or how the shape of the plateauing, if you will, looks into Q4 and Q1. Thank you.

Yes, we forecasted at the beginning of the year that the vast majority of the transition was going to be completed in 2008. And there's nothing there that... nothing... there's no new news that we've seen. It could bleed over as we said. In earlier calls into the first quarter, I think there's likely a little bit of that possible. But absent the end market contraction, I'm talking about now, we'll... where the markets continue to soften a little bit. Absent that, we're doing very well. It seems that attachment rates have stabilized and it also seems that here and there, there's quite a bit more interest now in the energy play using films as a means of reducing energy by, in some cases, 50%. So that's a possibility for growth in the future. But we don't want to celebrate that right now. It's too early to celebrate any victories on that. But we're pleased that the trends are headed in the right direction.

Very helpful, thank you.

Our next question comes from the line of Shannon O'Callaghan with Barclays Capital. Please proceed with your question.

Good morning guys.

Good morning Shannon.

Good morning.

Aquestion on price. It's been ramping up here. It was a strong contributor in the quarter. Pat, you mentioned the raw material pressures that have contributed to that. With raws coming down sharply and economy slowing, it seems reasonable that's not going to be the contributor it was this quarter. I mean, is that the way you look at it or do you think it's still going to be a positive contributor for you guys?

Well, Shannon, it will continue to be a contributor on a carry over basis. So, the prices that we increased in the marketplace, we planned all those, so they will continue on for a period. We'll of course monitor the material position, not all raw materials have necessarily come down inline was some of the underlying commodities so we have keep a very close eye on that, so it's a balancing act and we're trying to manage obviously our growth rate and profitability at same time in places and element of that.

Are you hearing your customers push back and you'd all yet?

Customers push back all the time, let's say its kind of a...

Specifically on the raw and P&L given the headline raw numbers coming down I mean have you heard that comment coming back yet?

Well of course we do, we've got all the time and then conditions like this you would expect to have it. And this is where I think having a strong product, strong brands, strong relationships really carry the day. So we'll... I'm not worried about that.

Okay. And how should we think about this R&D percent of sales I mean it was down last quarter down again in this quarter, and George you mentioned not wanting to fill R&D and that's one of the things you're going to stay committed through the cycle. And so if we could think about a dollar amount here more than a percentage of sales or is that kind of there as a percentage of sales going forward kind of I went through this a little at the Investor Day but its picked down again here this quarter?

Yes Shannon, we don't manage to a particular percent of sales is not that for the targets been in that area. And not always spend as in people, there are sort of lumpy spends quarter-to-quarter in equipment we buy, in small investments we made that we take to expense and so, again there is not story to be seen already in to that trend. We still remain committed to use R&D as a sort of aggressive competitive weapon. And so I don't think you should draw too many conclusions from that sequence of numbers.

Shannon, the other thing that you'll run into is that depending upon the mix of business in any given quarter, and I think about this quarter as an example. Consumer is heavier in the third quarter, their R&D spending is lower... it was lower than the average. So you get some mix effects as well on a quarter-over-quarter basis. So that's why we don't get concerned about the consolidated number. We look at it business-by-business.

Okay. Thanks guys.

Thanks.

Our next question comes from the line of Steve Tusa with J.P. Morgan. Please proceed with you question.

Hi, good morning.

Good morning, Steve.

Good morning, Steve.

So you gave us a little bit color on the ForEx impact in the fourth quarter on the sales line. What would that be? How does that translate to the bottom line on an EPS basis?

Well for the fourth quarter, the numbers today Steve would imply probably about $0.10 hit in the fourth quarter from what we previously were thinking going... if you would kind of go back to last call and so fourth. So that's about the impact that it's going to have on us.

So that's a swing from I guess a modestly positive to a negative 3% to 4%.

Probably on an EPS basis slightly negative in the fourth quarter.

And does that change... does that kind of I guess margin on ForEx change at all into next year, or is that kind of the way we should think about it as we look at the negative ForEx comps as we think about '09? That's not really '09 guidance, that's just the way your... the model works there.

It will obviously carry into the '09 expectations and we'll give you some more color on that when we meet here in December.

Okay, great. And then one last question just on the fourth quarter. To get to your operating margin target, you're going to need a pretty good fourth quarter margin number. And since you really aren't giving us sales guidance, how can you be so confident in that margin when I guess you're not confident enough to give us a volume target?

Well I think a little bit, Steve, it's kind of our historical operating performance that gives me the confidence we can run in that range. The other day, we try to balance the top line, bottom line, a mix of the company. The wildcard as we just kind of talked about a little bit is the foreign exchange side. But... so I guess I'm not overly concerned about a specific number at 22.5 for the year. It obviously implies that the fourth quarter will be below that, so.

Right. But I mean you did 20.8 in the fourth quarter last year, and maybe I'm just not remembering some negative issues in the last quarter, the last year's fourth quarter. I'm just curious, is there something outside of sales that we should be thinking about? Maybe you guys have a little more costs that you've taken out or something that contributes to that sound fourth quarter. Somewhat important as far as our thinking into next year in a weak volume environment.

Yes, I guess... thanks Steve. I guess what we're implying is that on a year-over-year basis, we probably will end up with a slight margin improvement. So think of it as probably being more costs oriented. We talked about the severance actions that we've been taking in Q2, Q3, likely here in Q4. So we are definitely squeezing on the costs side to make sure that we can deliver the earnings to you.

Is that something that's sustainable into next year?

Definitely. It probably will have to be more.

Okay. Great, thanks a lot. [Call ends abruptly] .