Ladies and gentlemen, thank you for standing by, and welcome to the 3M Fourth Quarter 2008 Earnings Call. (Operator Instructions). We would now like to turn the call over to 3M.

Good morning. This is Matt Ginter, Head of Investor Relations for 3M, and thanks for joining us today. As we've been doing the last several quarters, both our CEO, George Buckley, and our CFO, Pat Campbell, will be addressing you today, and of course we'll have plenty of time for your questions. Before we begin, please take a moment to read the Safe Harbor statement on slide two. During today's conference call, we will make certain predictive statements that reflect our current views and estimates of 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 list some of the most important risk factors that could cause actual results to differ from our predictions. So with that, let's begin by turning to slide number three, and I will turn the program over to George.

Thank you very much, Matt, and good morning, everybody. The most important contribution I think that we can make this morning is to give you some understanding of what we see happening out there in the market. I think it's important to tell you, to the best of our knowledge and belief, what we think might come next. Our explanation will tell you how we are thinking about the business conditions and how we are managing the company through the [tempus]. Pat will, of course, detail the quarter and year for you, and I will return with our outlook and more specifics about what we're doing to combat the effects of the market downturn, which almost every company in the world sees today. First, let's speak about the big picture. Ordinarily, the world's economies are partially out of phase and some are even out of synchronism. In normal times we might see Germany's economy growing, while the US economy shrinking, or perhaps Japan is contracting, while the US economy is expanding. The fourth quarter, however, was different from any pattern we've ever seen before; that is the near synchronization of the world's economy and simultaneous contraction. We did have one reporting segment with a positive organic sales growth in quarter four, and that was our Health Care business and Safety and Security was relatively close. During times like these, it's great to have businesses like this in our portfolio. The most rapid slowdowns that we saw were in the consumer electronics business, supplying components and consumables for phones, TVs and computers, all located in Asia. You've all seen what's been happening to suppliers and OEMs in that market. Automotive and telecoms also continued to weaken, as did residential housing. Overall, we saw all the classic signs one would expect at…

Thanks, George, and good morning everyone. Please turn to slide number five. These days it's easy to get caught up in the short term given the current economic and credit market difficulties. But it is important to remember that we manage our business for long-term success. Therefore, I will begin to gauge this discussion with a quick review over full year 2008 results before I cover the fourth quarter. All information that I will present today will exclude special items, which are fully described in the attachment in today's press release. The strength and consistency of our global portfolio delivered record annual sales of $25.3 billion or up 3.3% over last year. Excluding Optical Systems, which most of you know is going through a substantial business transition, sales increased 6.5%. 2008 gross margins declined 70 basis points versus last year and were flat year-on-year, excluding Optical. This is a good result for the year considering the many challenges we faced, including record high commodity prices, and of course, revenue volume declines in Q4. Full year operating income was $5.5 billion, about flat versus last year or up a solid 9.2%, excluding Optical. Our 2008 tax rate for the year was just under 31%, down almost a full point from 2007 and in line with our full year expectations. We have, in fact, reduced our tax rate for four consecutive years from 32.5% in 2004 to now just below 31%, and there is more room to improve. Per share earnings for 2008 were $5.17, up 3.8% year-on-year or up over 14%, excluding Optical. Overall, 2008 was a very good, but challenging year for 3M. We had many successes throughout the year, but we also were negatively impacted by the secular transition of our optical film business and the rapid economic decline…

Thank you very much, Pat. Let me now answer the question I posed earlier, which was how long and deep would the recession be and what are the implications for 3M? It would be very easy for me right now to evade the question of what's going to happen in the economy and hide behind the curtain of uncertainty and volatility. But I'm not going to do that because I don't think it's helpful. While I'll try to stay out of the business of being an economist, I think I have an obligation to give you the best forward-looking view I can at this time, balancing all of the factors that we know about today, but please recognize that this is a forward view and not everything is known. If we believe the economy is deterministic, in the absence of clear visibility from the more complex econometric models that we are all familiar with, a simple cyclic analysis reveals quite a lot about what's happening. The answers it gives may not be precise but we think it can bring a directionally correct answer for our planning purposes. In the interest of time, I'll pass over the details of how and give you the 30,000-foot level answers. The analysis suggests that the US economy will continue to contract through the end of the second quarter of 2009, possibly marginally later. If our methodology holds true, we will see sequential quarter-on-quarter economic growth in the third quarter of 2009 onwards, with the US returning to year-over-year growth at the end of the fourth quarter. So how will this summary economic picture affect 3M? The models we're using predict a worse global economy in the first quarter of '09 than the fourth of '08. It suggests underlying organic sales volume will be lower…

(Operator Instructions). Our first question comes from the line of Scott Davis with Morgan Stanley.

Good morning, everyone.

Good morning, Scott.

D&G margins were obviously weak and you addressed it in your commentary. Rather than looking backwards, maybe it makes some sense to talk a little bit about the end game in that business and how you're seeing it playing out in 2009. I believe in your last Investor Meeting it felt like you were coming close to bottoming out there on the profit side, but clearly things got worse. Are there certain components to this business that it's better off in the long-term you just exit and write-off the investment or is it something where you just need some more time to work its way out?

Thanks, Scott, for the question. I think it is a very interesting question. You can imagine it's one that we thought about inside our company quite a lot. If you separate TVs from the balance of the other segments, the four segments, take out TVs that was the one that did the worst in the fourth quarter. By the way, every part of that business is holding share. So that's a piece of good news. Clearly, what was going on in the economy, obviously, affected those guys you saw. You saw what happened to some of our competitors, some of our contemporaries, some of the suppliers, how their results were just equally reflective of the ones that we saw too. We were just part of that same puzzle. So I think that our conclusions this has, absent the fourth quarter, Scott, shall we say in the fourth quarter, and of course nobody can guarantee it won't run over into the first, but absent that aberration, I think the value proposition is still strong. This is a business that ends up around $1 billion or thereabouts, at lower margins clearly than it was in the past. The difficulty has always been, when we thought about how do you separate one of these businesses, one of the challenges really is the structure of 3M where everything is integrated, plants are shared, lines are shared, technology is shared, patents are used in one place and used in another? These are very big challenges, trying to figure out how to peel a piece off if you so wished. For the moment I think the best thing for us to do is to continue as we are going. We are doing extraordinarily well oddly enough, in capturing business now which is energy-driven. So using instead of the old days where our films were used for brightness enhancement, they are now used to dim the brightness a little bit and take out bulbs and reduce energy cost. That does seem to be gathering momentum. I think what we have to do is just wait here until this current economic malaise passes, and then make an assessment as whether that strategy continues to be an executable one and then make a final decision on what's best to do.

Okay. As a different follow-up, can you talk a little bit about the M&A environment of your plans. I mean, you stopped buying back stock and that's understandable. But you have a double AA rating that you arguably have the best balance sheet in Industrials right now. How do you think about the environment for M&A in '09 and how you can really capitalize on other weaknesses that maybe weaker competitors or peers have?

I'll offer a comment and I'll let Pat in if he wants on the end of this, Scott. I think, generally speaking, the observations you make are correct. There ought to be finally some opportunities coming up. We are seeing pricing down, people becoming more realistic about pricing. Of course, getting their signature on the seller purchase agreements is another matter, but nevertheless we are seeing something like that kind of stuff. Pat and I took the decision to call acquisitions in the United States simply as a means of preserving cash here. We've been less minded to do that overseas. So we will probably continue to do some overseas. I think that we'll sort of lie in the weeds and wait for some good opportunities. Obviously, we're studying many people, you can imagine trying to make sure that we're properly prepared because you know how these things have been going. It's the call that comes on Friday and the acquisition is agreed by Sunday. So you have to be prepared and you have to be prepared to move swiftly. So, I think that we will keep our powder dry on that subject. We certainly are not going to go out and waste any money. But I do think from what I'm seeing, there are some decent opportunities that might come up, and assuming that we can finance it without in any way injuring our company, we will certainly take a long and hard look at that. So, it's not off the table, Scott, but we will be selective in what we do.

Scott, Pat here. We are very mindful that we are in a premier class as the industrial companies and we do plan to stay there. So, obviously, we are much more of a buy at our price, okay, then there will be at our terms, not necessarily what they sell or want to sell that. So, from that standpoint, we are doing everything we need to from a cash to management standpoint to ensure that we remain a very premium grade credit.

Got you. Thank you, guys.

Thanks, Scott.

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

Good morning.

Good morning, David.

George, on Health Care, can Health Care be up next year in either sales or profits and how much of Health Care is either discretionary or, in your view, economically sensitive?

I don't think there is any real reason to believe it can't, David. The stuff that supplies the operating theater, the vast majority of that is happenstance. It will be what it will be. I'm only teasing you here, David. You're not going to decide when you get appendicitis or not. So, forgive me there for teasing you little bit, David. I understand where you're going. In the dental business, there are clearly some procedures which are discretionary, whether that's orthodontics or even getting a new crown may well be discretionary at some level. So, I think that the principal core of the Medical business is going to be fine. HIS, for example, is still growing very strongly, the Health Information System business is growing very well. As Pat outlined, the vast majority of our Health Care business was also doing quite well. So, I think the only unknown is, which doesn't mean I'm trying to avoid answering your question, is how people will respond to the discretionary portion of dental. I will, though, just remind you that we continue to innovate some absolutely fabulous stuff on digital dentistry, some wonderful acquisitions and new technologies out there on lingual care, real breakthrough ideas that are coming. In the end some people will buy that stuff because it is more effective, not just because it is new technology but because it is more effective in treating certain conditions. So, I think that we have to put up a probable question mark alongside dental, but on the balance of the business, probably being pretty optimistic. Would you agree, Pat?

I would agree. I guess dental probably is the one that's probably most exposed to some level of discretionary activity. Our drug delivery business is a little bit lumpy at times, but on a long-term basis it is a very solid business. '09, it probably will be a little more difficult year for them relative to some of their contracts and so forth. But as I look at Health Care, and look at it against some other industrials, Health Care being just under, say, 20% of the portfolio, and if Health Care can remain flat and actually they've got some acquisitions that ought to add some growth next year, that's good. That's worth a good 2 points or so of growth rate for us on a composite basis. So, we feel very good about the Health Care business.

George, that's helpful. Just on China, can you give us your perspective on just how bad China is overall?

It's a question of that. Our sales in the fourth quarter, David, were about flat with last year. There is not any kind of cataclysmic problem in China, but clearly they've cooled and they reflect the balance of the world economy. They supply to the world economy. I think there probably will be a move in China. China has a lot of infrastructure programs it wants to get completed. I suspect given the economic power of China that will go forward. That's certainly all the indications we are receiving. So, I think China probably after a dip in the fourth and maybe the first probably begins to come back a little bit, maybe to growth rates at half or two thirds of what they were before, reflecting what's going on in the world economy. That would be my guess. So I think China is going to be okay, David. We got huge penetration opportunities in China, huge with many of the businesses that we are. So we have decided that we're going to advance some investments in China to make sure that where these growth opportunities exist, to the extent we can do it prudently, we're going to try and take advantage of those opportunities.

Thank you.

Thank you, David.

Our next question comes from line of Shannon O'Callaghan with Barclays Capital.

Good morning.

Good morning, Shannon.

Couple of margin questions. In terms of the assumption, are you still looking for flat margins year-over-year. And if so, can you give us kind of a walk of how we get there from here?

Shannon, it's not too dissimilar from what we presented in December. Now, as George outlined, we've slid the volume curve over by about 2 points. If I recall the comments I made in December, it was at in about a 5% volume decline we thought we could be relatively close to holding margins. As you slide a little more to 7% to 9% it becomes a little more difficult to do that on the margin. So I'd say at the upper end of the volume range, our margins hold reasonably close, but then you probably slide them a little bit. On the bottom end, we may have a point of risk off of '08 levels.

I guess one of the things that change then relative to this quarter, I mean organically you were down at the high end of what you are looking for in '09, and we had 310 basis points of contraction.

I think you have to be a little cautious, Shannon. When you have an abrupt change, okay, in volumes, your margins aren't going to perform as well as on a more steady-state basis. As George outlined, Q1, at least as we see it today, will be by far the most difficult quarter we have both probably top and bottom-line.., As we work through the inventory correction and as manufacturers regain production and so forth, later in the year, we'll see the recovery. It is the way that we would see it. So Q4 margins, obviously, we're under pressure. Q1, you'll see a very similar trait and then through the backend of 2009, you'll see a recovery.

Okay. Just kind of a follow-up to that, I mean, George, talking about Optical, kind of an aberration in 4Q, which in a more extreme way getting to what Pat is talking about with sharp corrections, impacting margins unusually strongly, what do you mean by aberration? I mean, what do we think about for the normal margins of that business? I mean, you said it's not losing share anymore, so it's mainly it's this sharp correction in the quarter. What do you think is normal for that now?

Obviously, Shannon, it's going to be an interesting question as to how long this particular starvation diet that people are on lasts. It certainly is going to last, I think, through this quarter. It may last a little longer. But if I take that out, Shannon, and think about where this business is going to go in stasis, there is nothing that I know that will convince me yet or suggest it to me yet that this is nothing other than about a billion dollar business in late teen margins of that order. Now, if this continued decline and this continued commoditization, Shannon, those margins may come into pressure, but I think that's the sort of range. If you can look past the next quarter or even the next two quarters as they recover and some of the volume in the energy areas begins to pick back up, then I think it's probably going to settle down in that range. You've got any other opinion, Pat?

No, I think that would be fair.

Okay. Thanks a lot.

Thanks, Shannon.

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

Yes, good morning.

Good morning, John.

George, at the beginning you talked about how you've seen the inventories or inventory reductions pretty dramatically across all of your customer base, but you expect that at some point it gets overdone and you start to see a snapback. Do you have any color based on conversations that you've had and what you've seen with some of your customers as to when that snapback actually might really come back?

I think the direct answer to your question is no. Some of us are still working through these inventories, John. But I think if you looked at just the pure dynamics of the system, as I've mentioned when I was making my remarks, in a wholly efficient correction process you think about one inventory turn for the correction to take place. So we are running four turns per year roughly speaking. You'd think it would take a full quarter. But in reality there are no such things as 100% position channel correction. So I think this thing is going to run through all or most all of the first quarter. I can't swear that it won't even bleed over a little bit into the second. But I think it's at that point, John, where you see the sort of settling down of the transients in the supply chain that would come back closer to what the real end market actually did. Of course, we have a very complex business, very, very extensive, different national, different markets that are performing differently. But when you put all that in a pot and stir it, I'm thinking that the vast majority of this gets finished by the end of the first quarter, maybe a little bit into the second. It's at that point, John, that we probably get a better sighting shot of what the real end market run rates really are. When all of that clutter and all of that confusion clears, and obviously, we hope and I expect also that we'll see significant recoveries in sales some time in the second quarter.

Okay, great. As just as a quick follow-up, with regard to selling price, I know, Pat, you had indicated the 1.7% real price increase that you saw in the fourth quarter were some of the largest that you've seen in number of quarters out there. I'm wondering when you expect to see or if you expect to see any pushback on the price given that the whole raw material environments dropped down as well as clearly the economy is under a lot of pressure as well.

John, of course, you get pushed back. I'd say we've already seen it, okay, and you would expect it. First of all in our plans, what we're thinking about is we don't really have price increases built into our '09 plans, if that's what we're thinking about, it's how do we hold what we've already gone after reflecting our own cost inputs and so forth. I think with the strength of our brands, the strength of our customer relationships in many cases, gives me more confidence where we're positioned in the market than if I was at much more the bottom end of the market. But that doesn't mean that we won't have it. We see it in our businesses all the time. If we have to give back price, that just means we have to go after more the way of other kind of productivity programs. So, our businesses are managing that very closely.

I think there is one other point that I would like to make, John. If the environment is such that people can put pressure on us for price, the environment is such that we can put pressure on other people for price. So I don't expect that the gap, the increment is going to alter much in terms of the overall margin of the company. So I think you've got the fact what Pat mentioned about brand, the strength of our distribution channels, the wonderful reputation of our products, coupled with the fact that if we get pressured, we have clearly got an environment where we can pressure others. So I don't expect that the gap is going to alter our financials all that much, John.

Great. Thanks for the color.

Thank you.

Our next question comes from the line of Mike Judd with Greenwich Consultant.

Just a couple of quick things. The tax rate for '09, do you have any guesstimate there?

First of all, we ended up the '08 year at 30.9% on a kind of exclude basis. For our planning purposes for '09, we assume to sticking about a 31% range. That doesn't mean we're giving up, that's from a planning standpoint. We'll keep working at it.

Okay. Fair enough. I guess the book stockholders equity was down around 19% sequentially.

Yes.

That was no doubt due to the some of the, I guess, pension issues, right?

Right.

If you could just kind of help us understand what that trend could look like. There is also a significant amount of goodwill amortization on the balance sheet, is there a chance that some of that will be written down as we go through the next year?

First of all, to answer your equity kind of question, in the press release we go through the biggest description, of course, was the change in the pension funded status, which I described in my comments. I think it's in a footnote. If the pension markets remain relatively consistent overtime, you won't see big movements. As a matter of fact, you are going to see equity continuing to grow as our earnings increase. So a lot of it is dependent upon what happens relative to some of our pension and post-retirement obligations, that's what will swing that around. But I don't see that that as being big movements necessarily going forward. This was a very unusual period, I think, for that to kind of play out. On goodwill, we look at our goodwill on a reported basis against all of our business units on an ongoing basis from an impairment perspective. I don't see anything. We've completed our '08 assessments and there is nothing impaired.

Okay. I realize that the absolute level of pension expense is going up as it runs through the income statement, but are you anticipating making an additional voluntary pension contribution?. If you're cutting back on CapEx and share repurchases, will you be putting additional cash into the pension?

In one of the slides we show a number that from a planning standpoint on a global basis, it was between maybe $600 million and $850 million that we notionally are planning now for '09. We'll make those decisions as we go through the year. So, yes, there is an increased pension. Now, none of those are mandatory. We're not in the situation where we are in any kind of a mandatory contribution in the US. In several of our international plans, we have little more of that, but those are much smaller in nature.

Fair enough. Thank you.

Thank you.

Our next question comes from the line of Stephen Whitaker with Sanford Bernstein.

Good morning.

Good morning, Steven.

I just had first a couple of questions in terms of the strategic programs that you've talked about in the last Investor Day, the deferment of CapEx and all the discretionary programs, what's the impact of that and supply chain changes? Also on the R&D mix you're maintaining funding and increasing funding, but is there anything dramatic in terms of shifting R&D to product cost redesigns for '09 versus the longer term programs? Also, on the down market strategy, are you accelerating the lower priced entry programs as well?

Let me have a crack at that question and Pat can chip in if he wants. The supply chain restructuring, Steve, had three elements. It had an element that was concerned with placing capacity close to customers as a means of shortening the supply chain and in some cases as a byproduct in that improving the tax rates. There was a parallel activity, which was mostly in the United States, but not only in the United States, that was dedicated to what we called unpicking the hairball. In other words, it was a long supply chain, multiple hubs that went through a range of existing plans all of which were going to remain open. So that program we'd be trying to cut seven hubs down to five and three hubs down to one, that kind of stuff. Lastly, the third program here was the building of these super hubs that were in place where we could take an advantage of great customer service, low cost and low taxes, all in one location. So the three things were running in parallel. The first of those, the addition of capacity in place is where we needed it. That is the program really that we've deferred at the moment because we don't need the capacity. Of course, it does slide our supply chain restructuring program a little bit to the right, but it is nevertheless the right thing to do. We will, however, still spend money on unpicking the hairball, as we call it, trying to take the seven stops to three, the three stops to one, the four stops to two and so on and so forth. In a limited number of cases that we'll invest in those super hubs, the third piece of the puzzle. That's what really brought our ability to drive the number down to where we are today. There's been little big change, Steve, in moving off longer term programs to short term programs. Almost by the time we would get such a thing mobilized and it would deliver effect, hopefully, the economy will have recovered to the point where it's not needed anyway. So there is not very much of that going on. What is, however, going on is quite a bit of insourcing, where we are using some of our scientists to re-qualify materials, where we can do it inside or we can resource it to a second vendor at lower cost. It's all part and parcel of the inherent strengthening of the company. Those sorts of things are happening. But there's no real material policy change in our reports to R&D that might cause you concern for the long-term.

Okay. And on the strategy of moving down market in products?

Seems to have worked in the places where we have done it, Steve. It seems to have worked absolutely brilliantly. I mean, I'll give you one or two quick examples. I think if you were there at our last Investor Meeting, we actually talked about a couple of them. One was in our air filters, and I'll try to make this story short. We used to have air filters, the Filtrete filters just in the top of the market. I was in the impression it was a relatively new product. It turns out we had that stuff in the market for about eight years. It was in limited distribution in TrueValue Hardware stores and Ace and places like that, and was a specialist product, very high performing and relatively expensive. When we invented a product that was suitable for the middle of the market, all of a sudden that opened the doors of getting mass distribution in the mass channel with the big retailers, the big ones that you know about. In fact, what actually happened there, is we got growth in the middle and the top simultaneously, and we're actually working on things that will try to fill in the bottom now. I could tell you a parallel story to that in a number of different businesses in a number of different parts of the world. It seems to be working very well. As long as we're careful about making sure we get growth in the top of the market, and we make sure that we properly use secondary brands and in some cases private labeling, it seems to be working extraordinarily well. It does not seem to be damaging margins. It seems actually to be getting us more share, making us more influential with our customers, and overall, driving our factory absorption.

Great. Thank you. One quick follow-up. If I compare, just looking at history, the last recession as different as they were, even in '93 when you had volume or revenue down, I don't know, about 20% EBITDA and about 10% in '01, revenue and EBITDA down 4%. What are you doing differently this time in a much worse situation? How do you see this 3M different now than in history?

Yes, Steve, Pat here. This is probably a little difficult for either George or I because neither one of us were here. Okay?

Yes.

But if you look at kind of what we're doing, George have outlined a number of actions we're doing, I think the company is far different than it was in the most recent downturn, post 9/11. The strength of the portfolio, the company across our businesses are a lot stronger. Coming out of 2001 and 2002, we only had a couple of businesses that we were counting on for growth. The reality is we're really counting on the broader portfolio to get us there. On the cost side, we continue to work on all the avenues. George outlined a couple of things that we're doing on a more temporary basis around freezing pay, some of our vacation accrual plans and so forth. So, we effectively get to an acceptable near term performance, but also make sure that we ensure that we keep investing in those things that are going to make us successful once the economy recovers. So I think we're doing the right kind of things. I'm very thankful for the margin structure that we have going into a recession. It gives us degrees of freedom I think that others may not have. So I feel very good about where we're positioned.

Thank you.

Okay.

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.

I'd like to thank everybody for joining us this morning. We look forward to talking to you or speaking in person very soon. Have a great day.

Thank you very much.

Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating.