Ladies and gentlemen, thank you for standing by, and welcome to the 3M second quarter 2009 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, July 23, 2009. We would now like to turn the call over to Matt Ginter, Vice President of Investor Relations for 3M.

Thank you, and good morning everyone. Joining me on today’s call is George Buckley, 3M Chairman, President and Chief Executive Officer, and Pat Campbell, 3M Senior Vice President and Chief Financial Officer. Today’s call will summarize our financial results for the second quarter. A power point presentation accompanies today’s conference call, which you can access on 3M’s Investor Relations website at 3M.com. All elements of today’s call, the slide presentation and the audio replay will be archived on our website for an extended period of time. Please take a moment to read the forward-looking statement on slide two. 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 risk and uncertainties. Item 1A of our most recent Form 10-K and 10-Q lists some of the most important risk factors that could cause actual results to differ from our predictions. Lastly, please mark your calendars for our next investor meeting, which is scheduled for December 8. We are tentatively planning to have the meeting in New York City. I will let you know when the complete details are available. So, let’s begin today’s review. Please turn to slide number three. And I will turn things over to George.

Thank you very much, Matt. Good morning everybody, and thank you very much for listening to our second quarter call. For 3M, the second quarter was a very interesting one. It marked a course of continued execution of our plan, tight control of our spending, effective management of our restructuring efforts and sharp focus on cash generation as we simultaneously worked hard to drive sales and market share everywhere that we could. A few positive sales surprises also got put into the mix. While we significantly overachieved relative to external expectations with organic volumes still down about 13% year-over-year. There is no question, but it was another very challenging quarter and particularly so early on. But compared to shrinkage of 19.5% in the first quarter, the second quarter was an impressive improvement, and there is no doubt that the second derivative of sales with respect to time certainly appears to be improving. But as tough as the economy remains, we are again encouraged by our ability to operate well in these times and maintain good margins and to generate huge amounts of cash. We achieved a free cash flow conversion of 160% this quarter, which is now 131% year-to-date. Overall business conditions in our end markets this quarter were pretty much in line with what we anticipated. The sales were a little bit stronger than we had expected here and there. In fact, we achieved sequential sales and profit improvements in all businesses and all regions. The sequential quarterly sales improvement was 12.4%. In addition, Health Care and Consumer and Office each drew double-digit year-on-year profit improvements. Pat will detail the quarter for you in a moment including several factors, which helped us this quarter. For example increased demand for optical films, as consumer electronics experienced an uptick especially LCD…

Thanks, George and good morning everyone. Please turn to slide number four. On a GAAP reported basis, earnings were $1.12 per share versus last year’s $1.33. Excluding special items, this quarter’s earnings were $1.20 per share, which was a few cents above our internal plans. We announced a number of restructuring actions across various businesses and geographies again in the second quarter. Related pre-tax restructuring charges totaled $116 million in the quarter or about $0.09 per share. The majority of those costs relates to the permanent reduction of approximately 900 positions spanning many businesses and geographies, although the majority of the reductions were concentrated in the U.S., Western Europe and Japan. In the U.S. another 700 people accepted the voluntary early retirement option. We expect a small portion of those employees that accepted the voluntary separation will be replaced in some form. So on a net-net basis, we estimate that total employment levels will drop by approximately 1,400 to 1,500 due to restructuring actions taken during the second quarter. Partially offsetting this charge was a pre-tax gain of $15 million, or $0.01 per share related to the sale of a New Jersey roofing granule facility. This gain was recorded in cost of sales within the Safety, Security and Protection Services Business. You will likely see some additional restructuring actions in the third quarter, but I would anticipate something smaller than those in Q1 or Q2. Please turn to slide number five for a recap of second quarter sales. While many end markets remain challenging in the second quarter, we did see a few emerging bright spots, such as consumer electronics and respiratory protection as George mentioned earlier. On a worldwide basis, sales declined about 15%. Organic sales volumes declined 13.5% year-on-year, stronger than our previous expectation of a negative 15%…

Thank you very much, Pat. Before we get to your questions, I’d like to address our outlook for the rest of the year. As a start, I’ll take you back to what we said last quarter about how we view economic conditions and how we’re managing our business. End market demand has increased for LCD TVs clearly, particularly the lower energy versions, which use 3M’s multilayered optical films. This has resulted in an improved business conditions there. Just for your information by surface area, demand for these types of films has more than doubled in last few months, and our margin mix has also improved from the less profitable BEF to DBEF films. So we’re also getting attachment rate as well as end market volume. H1N1 face mass volume demand is huge and should continue robust throughout the year. We’re adding flexible capacity for this issue as Pat mentioned as fast as we can. We recently authorized $20 million in new capital for this activity. Automotive aftermarket, aerospace, renewable energy and [the appetite] demand remains good too. But apart from these few fireflies, the fact remains that we see no meaningful improvement in most major industries yet, automotive manufacturing, general industrial and housing for example. Slight ones, yes, but too soon to call any victories. You can see this betterment, a big challenge in our industrial segment results. In addition, we see no signs of improvements yet in Europe as their economies continue to lack the U.S. and in some cases marginally worsen. Keynes told us that the economic recoveries are only possible and sustainable when there is real improvement in end market demand. Despite the fact that, we all want to believe it, it isn’t happening robustly just yet. It’s hard to forecast the precise shape of the recovery…

(Operating Instructions) Our first question comes from David Begleiter with Deutsche Bank. Please proceed with your question.

Good morning.

Good morning, Dave.

Good morning, Dave.

George, what portion of the cost savings and reductions or structural and permanent, first what will come back once demand recovers?

Probably a substantial portion of the people downsizing David, are obviously any plant closures and sales of plants like the Belle Mead one are also permanent. So if I was making an educated guess right now, I would say probably 70% or 80% of the people reductions are permanent and locked in. On other sort of overall cost reductions obviously they will go back up Dave as a sales flex. Obviously that the benefits that we’ve got from vacation policy adjustments in a couple of years time, they will pop back, but again they’re small enough to be handled. Pat, have you got any other…

I’d say, I think it’s a good answer. The vacation accrual will pop back overtime because that’s kind of a one-time benefit we’ll get over ’09 and ’10. I think where we’ve frozen kind of our merit plan is so forth in 2009. We will have to decide what we want to do on a going forward basis. But to a large degree, what we’re putting in place are more structural changes. And I think as you know Dave, part of the challenges is as business improves, it’s how you control the cost structure on the upside. And I think in the past, you’ve seen as our margins grew from say 17% or so back in 2000 up to 22, 23. One of our focus areas is making sure that I’ll call our overhead costs and so forth doesn’t grow as volume returns. So I think it gives us a good opportunity in a very good leverage factor going forward.

And can you get back to those 22% plus margins perhaps in 2011, as a recovery occurs?

I guess Dave we just ran 22.6 in this quarter, okay. And I guess you can argue that, there is a slight benefit of vacation so forth. Again, volumes on 13.5% from last year. So our underlying margin capability is actually better than our previous peaks. The choice we have to make is the trade-off between the growth and margins as we go forward.

Thank you.

The answer to your question is a very clear yes, David.

Okay. Thank you very much.

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.

So on the price cost side of things; you mentioned the sequential benefit in the quarter. As you look at the costs coming into your pipeline now, and outlook for pricing I mean how do you expect that benefit to flow through the rest of the year?

I would say, it ought to remain somewhat constant through the year. We’re very obviously aware of what we see price pressure at the back half of the year. But I would also say, Shannon that I don’t think we’ve actually reached the low on our material costs yet. I think we have still a little ways to go there. So I think the spread that we had here in the second quarter, there is no reason to believe that won’t hold through Q3 and Q4 as we see it right now.

I think Shannon in stasis the way we think about this is managing the spread between price and material cost reduction. Obviously, it’s more likely if you have a environment of high commodity inflation, it’s an environment that you’re more likely to be able to get price and vice-versa. And so I think in large measure, if pricing got tough, it probably means that cost reductions got better. And they kind of run in synchronize maybe with a little bit of sort of lag and overlap at each end of the transition from one sort of phase to the other. So I think it bodes fairly well for the future on at least that element of our cost structure.

Shannon I guess to clarify, you have to be little bit careful as you think about this, because our price increase of course will wane through the year, okay. Because we are still kind of really reporting, I’ll call it, carryover price increases that we’ve already got in the marketplace. So as the year progresses, our reported price will continue to go down, but if you look at it more from the absolute level, our expectation is that, we’ll hang on to as much as that is possible. At the same time that we expect material prices to be a little more favorable.

So the gross margin you saw on this quarter isn’t unusual then?

I don’t think so. If you go back and look at our history, Q1 was way more of the aberration in our historical trend. Now the good part of that I think Shannon and I think of it and your back to Dave’s comments is, we are able to get to those gross margin levels at a lower volume level now, which tells me that fundamentally we’ve enhanced the overall profitability and margin capability of the company.

Okay, thanks. Just one more, George you mentioned, selectively adding to growth investments in the second half of the year. I mean how much have those been reined in and how much would do you like them to come back? Is it in the form of R&D ticking back up or what you do have in mind?

I don’t think they been reined in so much. We always at the beginning of the year Shannon, we kind of have a bucket of things that we can pick from to invest in. Obviously you can imagine with a tough economy and murky economy out there, a lot of them we just held. So it’s really a question of not so much what got canceled, but what we just slid to the right. And there is a whole host of those and some of we’ve actually activated internally just recently. One on oxidental components, one on sort of heavy industries, shipbuilding and railroads and those sorts of things. So we will sort of accelerate some of our investments in those today. But in terms of the question on big R&D programs, as Pat had mentioned earlier in his commentary, there really hasn't been any change in that. You would see some marginal movements in the R&D numbers simply because we followed the same kind of policies in the R&D staffing levels on vacation and on control of incidental and non-core expenses, we follow the same sort of pattern there that we have everywhere else. But I think the time maybe coming very soon and kind of Pat hinted this because of the margin structure where we can actually release some more money to these investments that will propagate growth. And we have a relatively long list of these things, Shannon. The nice thing is some years ago, we kind of had a lot of money and were short of ideas. Right now we are a little bit short of money. We have got lots of ideas. So I think it’s going to be fine as the year goes forward.

Shannon and I guess the other thing and probably to maybe anticipate a question that will come up is I’ve said on your previous calls that our Health Care margins as an example are probably running a little on the hot side right now. And realistically, we will probably put a little more investment in that business. Our long-term margin expectations in that business is more on the high 20s than it is the low 30s. So over time, but that’s not like, we’re going invest a huge amount of money. We’ll just gradually ease some spending. We talked about the investments we’re going to make here an additional respiratory capacity that we did. And then I’d say a little bit, we’ll probably look at some of our emerging market opportunities, places like China and the like and maybe start to accelerate some of the spending. And then, our traditional pattern is that we do increase our spending the back half of the year around our consumer business. Our OEM really on the ad and merch side. So those will probably be the ticket areas that you want to follow.

Okay. Great. I'll leave it there. Thanks, guys.

Thanks.

Our next question comes from the line of Steven Winoker with Sanford Bernstein. Please proceed with your question.

Good morning, guys.

Good morning.

Just a follow-up to Shannon’s question. What’s your product, what was your product vitality rate running, the index?

It’s running at 27. Is what it was at the end of the second quarter. It happened to be benefit a little bit, because of our very strong optical film sales in the second quarter. There is a number of new products that they hit there, but we’re running at mid to high 20s now.

Okay. And in terms of the restructuring activities, I know you’ve talked about sort of equal, equal action across the R&D function, but if you look at the early retirement and folks sort of walking out the door. Has it been in any way disproportional within R&D or less proportional?

No, I would say it’s probably more proportional and when I did indicate that we will be replacing people out of the early retirement program. We are being very cautious as it where we place those people back into the organization, but R&D obviously is at the top of the list there.

So you don’t feel like you’re losing sort of organizational knowledge in that key function?

No. No not at all.

I think if I remember Steve, the retirement number from R&D was a little over a 100 of the 700 and is also an opportunity to set at the sort of cherry pickers’ charter. There are a lot of absolutely superb Ph.D. doing post-doctoral work right now that we’d like to go out and get. And so as Pat had mentioned earlier, one portion of that replacement will come from executing that cherry pickers’ charter. It is one of the opportunities right now for us to get a lot of really, really talented staff that admittedly can replace some of the experienced staff, but it is not become a problem for us.

Okay. And then on supply chain restructuring again and I know you’ve talked about how your efforts on that front have changed over time. In light of this quarter’s strong result, how are you thinking about those efforts going forward now?

I guess Steve I don’t think they’re significantly different than we talked last quarter. There is a couple of elements of that strategy part of it was kind of unpicking the hairball that we had. That continues on as a day-to-day effort. And I think if you look at our inventory performance and our gross margin improvement, nothing being to attributed to our supply chain moves, but obviously as a enabler of making that happen. Some of the longer-term investments we are making, we did pull back on a little bit just because of the growth rates not there right now. So we’ve pushed those off a little bit and we call some of the over super hub sites, but our supply chain initiative remains going very well in this quarter part of a restructuring relates to cleaning up part of our supply chains in a few of our businesses. So we just keep working at it on a quarter-by-quarter basis.

On that super hub and other part of it. Can you sort of quantify how much you are planning on spending in that area then, I mean versus what you are thinking about historically?

It’s not a huge number, Steve I would say the reality as we’ve probably pulled back a couple $100 million of spending is we kind of give you the order of magnitude.

Okay, great. And then last question on the $700 million that you’ve been talking about for cost savings for the year, and I know you’ve talked about temporary versus permanent et cetera but how of that do you think you realize so far?

I mean 700 people you are talking about?

No, this is the original when you started talking about your brief ’09 savings?

This goes back to your supply chain question.

Yeah. Well that and all the restructuring, this was a gross number you put out there?

Yeah.

Before.

I guess, offhand I don’t have a kind of an up-to-date number on that Steve.

But I would say that we’ve probably taken on more restructuring since we did that number.

Okay.

So the reality is the numbers probably, if I was probably give you a new updated long-term number probably would be higher that.

Okay. All right. Thanks very much.

Okay.

Our next question comes from the line of Jeffrey Sprague with Citigroup. Please proceed with your question.

Thank you. Good morning everyone.

Good morning Jeff.

George, your comments about restocking are interesting, I'm not really hearing that anywhere else yet and I just wonder first, do you actually see customers stocking out in certain places, late in Q1 or early in Q2 driving that, or what do you think really is behind it?

Yeah, Jeff. This is Pat, here. I’ll just try to deal with that kind of first part. As we talk about destocking it’s kind of an interesting I guess concept as to where to put, of course as an example consumer electronics. Okay, consumer electronics had basically run completely to inventory to the bottom in the first quarter, basically at shutdown production almost maybe 25% utilization or so. So the reality is there is, what’s happening is, there is a number of these industries like LCD that is now starting to ramp back up. There is a piece of that, okay, that of course is replenishment of the system in that effectively they were down here in the first quarter altogether. To some degree those industries are segments that basically took drastic actions here in the first quarter around production. There is no doubt in Q2 here, okay. One thing just going on is there’s some rebuild of that. Now, we also honestly believe that there will not be a inventories and stocking levels will not go back to where they were when we went into the situation. So, one of the challenges are of course going forward is, we think that the overall demand level including inventory replenishment will be in a lower level than where it was and say the ’07, ’08 period before the industries started collapse on us.

I don’t thing the destocking issue is a serious one, but I think in those industries we should have persistent slumps in sales, automotive, housing I think there is still a little bit of bleed off. But I don’t want you to think that we’re exaggerating that, as a feature, still it’s just kind of bleed drip-drip stuff. Certainly I think we are at the point where we’re turning more toward either to restocking or an expectation of restocking.

And then just, to drill into a couple of businesses, dental, I think you characterized as flat, but it sounds like maybe that had some acquisition benefit in it…

Yeah.

How was dental organic?

I’d say it’s in about down five. The dental portion was a little more favorable than the orthodontic piece. The orthodontic piece was hit a little harder, that’s probably down more of a low double-digit number. But the dental, the dental piece was a little bit stronger than that.

In sort of one of the things have surprised us that robustness of our dental business. I think has pleasantly surprised us. We expect it to perform well, but it has seems to done better than many of our contemporaries.

And just on cash deployment, we’ve kind of tap danced around it a little bit on this call, but I mean clearly the economy is bad, but also you look to be in pretty good shape from a liquidity and cash standpoint. Why not go out a little bit farther on the limb on share repurchase or something here. Is there an inflection point later in the year or early next year where we see something change?

Yeah. I guess Jeff good question and I’ll keep taking that question for probably a couple of quarters going here. We’re going to manage our situation cautiously here as we look through the rest of the year. I’ve got to keep an eye on our pension plan to make sure that pension plan where it ends up the calendar year, what kind of funding level we need in it. We're going to put $600 million of stock in it here in the third quarter. So we’ll manage our cost, we’ll keep an eye on your repurchase as an option. But at this point in time it’s not….

The great thing Jeff, which is kind of what you’re hinting at is that the improving cash position gives us choices. We haven’t yet made those choices finally, but really nothing is off the table. So we'll deal with those appropriately as we as Pat and I, feel it’s timely to do so. So please don't worry.

Well, I don't follow the logic though of putting stock in the pension plan. Given the liquidity, what's the thought process there?

Well. We have a long-term need in the plan. We are continuing to manage our credit rating and the like. At this point in time, we think we’ve got a little some flexibility there. So we had decided a little bit earlier on to put stock, stock in the plan. We think it’s a good investment for the plan as well.

That will all hit in Q3?

It will hit in Q3. Yes.

Okay. Thank you.

Thanks, Jeff.

Our next question comes from the line of Deane Dray with FBR Capital Markets. Please proceed with your question.

Thank you. Good morning everyone.

Good morning, Deane.

Good morning.

I might have missed it, but George in your opening remarks you talked about the, you hinted at the progression of organic volume through the quarter April, May, June, how did that look?

Pat can get you the precise numbers. April was not that much different than March, Deane. It was still a slow month. And then the growth accelerated as the quarter went on and obviously we had a pretty good June. And it was pretty much as we’d expected. When we – I’m not sure if you were involved in these conversations, Deane. But when we were trying to figure out how to do our planning for the year. We kind of made some assumptions about how the channel would clear the excess inventory and when a little bit of refill was going to start and we actually calculated it was going to begin happening in June. And oddly enough it did. So, I’m not sure if that was pure luck or brilliance on the part of the financial people here. But we got that right. So I expect that is going to continue for a little while and I mentioned in my remarks, Deane, a sort of flat spot, where the whatever restocking might be taking place might sort of back off again as people feel they’re up to snuff on their inventory levels. And then it’s one of the reasons why Pat and I are little bit cautious, we want to see if that pans out in the way that we think it might. Or if it does to what, how serious it might be, how flat it might be or whether it inverts little bit and you have some kind of mild asymmetric [double U]. So it seems to be panning out, pretty much as we are forecast so far. And I expect that maybe towards the end of the third quarter, perhaps it is in the fourth quarter, we might see some moderation of that. And we will just have to see how that goes Deane. But that’s kind of how I'm thinking this inventory thing and restocking thing happens.

George, that’s very helpful. I think what’s interesting is when you talk about the planning process what distinguishes 3M here is that you’ve provided earnings guidance, but you’ve also provided conceptually the milestones that you expect and how to play out. And surprisingly or not you kind of hit each one of those very nicely, you’ve got to be careful, but they might be asking you to do some economic advising in Washington soon?

I actually Deane it’s a real quick thought. Joe Harlan said to me on Monday at our management meeting, he said "George you no longer qualify as an economist", I said "Why is that Joe", he said "Because you forecasted it before it happened", rather than after.

Very funny math. But if we also look at what you all talked about last quarter and Pat commented this as well in terms of the recovery path. So we’ve talked about some of the restocking and that flat spot, but last quarter you’ve talked about some of the obstacles being business credit and unemployment. And how do those two conditions look today versus your recovery path plan?

I think on the unemployment, the number continues to creep up Deane. And I hold a thesis, whether I'm right or not remain yet to be seen. But I hold the thesis that we won’t see any sustainable improvement in the housing market until unemployment, the rate of unemployment stabilizes. We can all make forecast here, but I think that’s likely to be in the 11% range and probably either late this year or the first quarter of next year. So I think that market is going to be slighting sideways, maybe even marginally getting worse. Of course there are going to be repos out there, bargain hunters out there that will drive some volume in certain segments. But I think the longer-term issue is this thing that I call the reset, I think Jeff [Ingle] called it something like that earlier although referring to other markets. When I was working for Emerson we had about $1.3 or $1.4 million housing starts a year. We peaked a couple of years ago at $2.2 million I don’t see any reason to believe that housing starts are going to be above $10.5 million in the long run, unless some other fundamental lubricant to the economy takes place. I think automotive, so that's probably Jeff is a year away before we see that kind of moment I think. In automotive, I’m a bit more optimistic, there is a certain sort of replenishment turnover is necessary in automotive and they may see a little bit of a ding, perhaps 10% down. But I don't expect them to see the kind of the real retrenchment, shall we say that you might see in housing. So those things, I think run into plan. They’ll probably take anywhere between another two quarters and another four quarters to work out. On general industrial, obviously in automotive that will pull through some of the general industrial manufacturing. That will probably respond a little bit faster in my mind. And obviously, we’re going to have the pull from consumer electronics for a little while, which is going to be helpful. And we’ll have some sustainable growth that comes from H1N1. So I think overall, clearly the landscape is better, Deane. But I think there is enough stuff out there still to what to sound a note of caution in our view, and just to make sure that we don't take our eye off the ball. In turn, one of the things you always worry about is you get a great quarter like this and everybody suddenly thinks the problem has passed, well it hasn't. Because sales are still down 15%, earnings are down 15%, even though we perform extraordinarily well this quarter. We need to just keep on doing the same old same old and make sure we do the next quarter and the quarter after, until we are all sure that this thing has passed us.

George it is very helpful. And our take on that is as that you’ve got enough conservative assumptions still within that forecast. And I know we’ve passed an hour now, but if I could sneak one last question in regarding the business for consumer products. Have you seen anything different about customer behavior in terms of wanting to trade down from that good, better, best array of products that maybe into more private label and what might the margin impact be and share changes here at this stage?

I have to tell you the truth Deane. We haven’t seen it, I know people have talked about it and I can certainly see the logic behind the thought, but in our case we haven’t seen it. And there are somethings in life that people want to buy, where they get reassurance either from the brand or historical performance and maybe they end up buying less, but I’m not sure that they would buy cheap. My grandmother used that line "I'm too poor to buy cheap." So it hasn’t been a factor of what we’ve seen Deane. And I'd just remind the listeners that in many of these markets where the consumer is buying directly, we have the good, the better and the best. So for us it's really just movement backward and forward between these categories, it’s not loss of volume. And the margins across these segments Deane are actually pretty good. So I’m not anticipating any cataclysmic make change in margin if that worry that you expressed visit 3M. Do you’ve got anything else you want to add, Pat?

No

Great, thank you very much.

Thanks Deane.

Our next question comes from the line of John Roberts with Buckingham Research. Please proceed with your question.

Back-to-school season here in the U.S., maybe the next test or sort of economic recovery? You said you had early actually ordering there? Do you think the retailers actually have enough stock to have up back-to-school sales or should we at least prepare for that to be flat or week, even with even with your early ordering?

Let’s say the retailers are trying to get consumers into the store. The other is a obviously, look a consumer sentiment data and so forth. And it’s in troubling in a source – troubling indicator. So obviously, we are trying to pull things forward. We think there is enough stock and I guess when we made that comment John, we are talking about weeks not months okay. So it's not a huge shift forward in the activity, but it is enough to indicate we had some business here in the second quarter versus the third quarter. So I don't want to mislead you that there was a huge shift in demand, demand pull ahead. But I think they’re trying to, obviously have adequate stock at least from our product standpoint. We’ve adequate inventory with them to pull through. Now what we have to do is of course we have to help them in the back half of the year here with our own promotional work as well.

Okay. Thank you.

Our next question comes from the line of Laurence Alexander with Jefferies & Company. Please proceed with your question.

Seeing regionally in terms of end markets in China and Japan. And also George you used the expression "false dawns" as being a potential concern later in the year and into next year. Are there end markets which you view with more skepticism or that you are more wary of a false dawn?

Well, I think in the same way that we outlined earlier, that the markets we expected to respond fastest were the fast inventory turn businesses, short development cycle businesses on the way down. We expected those guys to come back faster, I think they are the guys that can turn this stuff on and off a lot faster. So you have to just wonder in the end can those TV, monitor purchases be sustained. I’m not any kind of prophet of doom here, it’s just that I, having lived with that industry long enough, I know they have this superb ability to turn on and shut-off almost at a moment’s notice. And I think it’s just something that everybody ought to just keep in mind that that could happen. I’m not predicting a false dawn, I’m just watching to make sure it’s not one.

And then with respect to end market trends in Asia?

Market trends in Asia, if you’ve seen our results were actually very positive relatively speaking. But again, we’re led by those positive movements in electronics. Japan still is improving a little bit, but still seems to be more persistently slow than other parts of Asia. China is back to positive growth again, whether they’ll return to the sort of late 20’s growth that we had a couple years ago. We’re probably not going to see that I don’t think this year, but fundamentally the market dynamics in China, the demand profile in China is likely to be positive, and you may have heard us say in the past that our business there is China for China, although obviously some of it gets re-exported. So I think China for us will remain relatively robust, it will be pulled along or will pull along Taiwan. Korea’s actually doing quite well, so overall Asia, Asia is doing okay with the exception of possibly of Japan, so we remain quite positive about it.

Thank you.

Our next question comes from the line of Steve Tusa with JPMorgan. Please proceed with your question.

Hi, good morning.

Good morning Steve.

Hi, Steve.

Just a question on the capacity you guys put in place, just before the downturn here. How is the loading of those plants going? And should we think about some of this restructuring as part of that process of changing your geographic footprint and maybe just a quick follow on, on that one. Is there any kind of whether it safely stock or extra cost that you guys were carrying kind of into this downturn, because of all that heavy investment you guys put in place before we hit the skids on the economy?

You know Steve, in my comments around respiratory products, the times there has been a fair amount of question, okay, about the timings on these investments. But when I look at and I’ll just give you maybe three or four examples. Part of the investment was for a respiratory capacity in a number of different locations, both converting capacity and work in process. So that’s just played out, ideal for us right now. I look at our Filtrete Filter business as still remaining in a very, very strong capacity related to that. And I’m going to say optical film here for a second. Obviously there is a lot of worry about some of the investment that we are making in some of the multilayer capacity. And at the time, we probably we’re looking at a higher total growth rate there, but within the last quarter, we’ve needed every bit of that capacity and then plus more, okay, to actually meet the demand surge. So that piece was going very well. A number of our healthcare investments that we’ve made have been very, very solid. So I’m not going to try and tell you that everyone are most perfectly right. But the reality is played out even in this slower economy to a large degree, the capacity we put in place. If you go back, remember that, we are looking at specific situations where we were already short of capability, so it wasn’t like we are trying to look at a long-term forecast and then try to anticipate where the market was going to go. What we were trying to do is really fill a lot of the gaps that we had now. As I previously mentioned, there are some longer-term strategic investments that we are putting in place around super hubs and so forth that were a little bit longer range that if we’ve pulled back on. So the installed capacity we put in place though, at least in the second quarter here we’ve had a very good utilization rates up. But part of our restructuring continues to get at some supply chains that still need to be fixed. There is no doubt that we still have certain businesses that probably need to be shrunk down a little bit. All the capacity we added were in certain fields and obviously we have other businesses and other processes that need to be downsized. So we’ll continue to work on some of those restructuring actions, but it’s really played out well for us in the second quarter here.

And I guess that’s my point I mean I’m not thinking you guys are putting for making the investments that you made, it’s a good long-term plan I’m just saying that. The question is more around, is the restructuring you’re doing now some of that part of this long-term planning that I guess you could use the term accelerated as oppose to taking away some of the capacity that you could use in an up turn and therefore having to add that back. So I guess that’s more along the lines of the question and maybe we can…

Steve, let me try to gear, because first of all not all the restructuring of course is in supply chain. A fair amount what we’ve been doing of late is more I’ll call back office okay, type work. But specifically in the quarter, as an example, part of the quarter restructuring is a downsizing of our Japanese manufacturing operations.

Right.

We made a decision that Japan’s probably not going to return to its prior level of demand, so we needed to ratchet down our capacity in Japan. And our few selected businesses here in the U.S. where we’ve just consolidated operations, okay. So there are some supply chain moves that were a part of that, but it's just say a small piece of it.

Right, and then one more a quick one, I mean we’ve gone about an hour and 30 minutes without a question on D&G, and I just can’t let it go. So I’ll ask a very quick question on D&G. Is what we saw this quarter a dead cat bounce in some of the more commoditized products, or is this something that is kind of a reflection of what some of the newer products that are have the more sustainable attach rates can do for you going forward?

I think it’s the latter, Steve its not a dead cat bounce. In fact the some of the products that are now launching of course we’ve been sampling to manufacturers for more than a year and pressing the point about the energy efficiency into that credit, and obviously, you’re helped some sort of time and circumstance, they’ve responded to that. And that’s what you’re seeing now happen, Steve. So I think this is sustainable, it’s the electronic business, and those manufactures, again, are very, very able they’re always going to be looking to find ways to do without something. I think it’s stable for sometime who knows maybe it’s one to two years. But in the end the only way you can stay ahead this game is to continue to innovate, continue to engage with your customers and the challenges that they face, continue to drive out costs, and just make sure that you’re the absolute partner that they need in solving the problems that they have, most of which are concerned with improving performance and driving down cost. It is what it is, in that business. Tough industry.

Well, it’s good to know it’s stable. Thanks a lot.

Thanks a lot Steve.

Our next question comes from the line of John Mcnulty with Credit Suisse. Please proceed with your question.

Hi, good morning just two quick questions. With all the big moves that you made in terms of cost cutting in this or throughout the second quarter. Can you quantify what the improvement we should be thinking about should be for the third quarter relative to the second?

Third versus second, I guess is – oh, I guess probably a couple cents, okay. Is the way I would, is a way I think of it.

Okay, great. And then the other question with regard to your inventories they were down sequentially, your sales are up noticeably sequentially. So clearly there was a bit of destocking. Did that have any negative impact on your margins? It clearly helped your cash flow, but it did it hit your margins where when that destocking comes to an end, we may actually see even further improvement there?

I guess you could, if I understand your question right, John. It obviously could improve to the degree, obviously, our manufacturing rates and so forth improve as a result. Because you could say, if I understand your question right, because there still a little bit destocking going on? Once that turns around, obviously, our production rates should improve some more. And as if you looked at our sequential rate as we increased manufacturing utilization you can see that the pop we had on a leverage standpoint?

Okay.

The other point John, that’s in there is it depends on exactly where it is and I don’t purport to know how much it is. But there’s likely some material in the supply chain, which was produced with high cost materials that as it gets bled off and you fill that with lower cost materials, we may see some a little bit of margin help there. Of course, that’s hard to plan, and hard to predict, but it is a positive John in the overall trends you see.

Okay. Great, thanks a lot.

Our next question comes from the line of Jason Feldman with UBS. Please proceed with your question.

Thanks. The Industrial and Transportation segment, was one of kind of the weaker performing segments for the moment. How much of that lagging do you think is attributable so auto specifically rather than the rest of the business there?

Well, are you saying it from a growth rate perspective now, Jason or what?

Yes, either growth or margins?

Because if I recall the numbers right, local currency growth in automotive is down 28% that’s our OEM business. Our AED business actually was favorable for the quarter. So that’s slightly worse than the business as a whole. So it has, I don’t know probably maybe four to five points of impact on the big V as whole may be.

Okay.

And obviously as I think you’ve read is that auto production is starting to ramp back up. So it’s one of those things that is just will be more of a timing element that, that business should see an improvement hopefully as we go to the back half of the year.

Which is why I’m asking, right because it’s the part of the business, I think, that’s got cleanest visibility as a discrete portion.

Right.

Okay. And then also you mentioned that you hadn’t hit a low yet on raw material costs. But are there certain categories of raw materials that are becoming an issue again, it certainly looks like some commodity categories are beginning to tick up again in price. Is it just based on where you have inventory or is it just that price cost spread remains favorable?

I think Jason part of it is, of course we’re on a FIFO accounting basis. So it takes a while to work through the inventory layer. So even as prices do move up and we don’t have anything that I guess, I’m alarmed at this point in time, but as they do move up it just takes a while to work its way through the system. So we still have, I think a quarter so here to kind of play through the bottom of the market.

So it should remain relatively favorable through the end of the year?

I would think so for the near term.

Okay. Thank you very much.

Jason to clarify to the direct from automotive will be about three points for the total business in the quarter.

Okay.

Thank you, there you go.

Well. Thank you very much for listening ladies and gentlemen. We do appreciate it very much. We’ll wrap up our call and look forward to talking to you, afterwards those who have more questions. And we look forward again to talking to you next quarter. Thank you very much everyone.

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