Ladies and gentlemen, thank you for standing by. Welcome to the 3M Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Thank you, and good morning, everyone. Welcome to our Fourth Quarter Business Review. It was good to see many of you at our Annual Outlook Meeting last month in New York City. On the morning of March 17, we are hosting another meeting, this time at our headquarters in St. Paul. We may tweak the agenda a bit between now and then, but you can expect to hear from several emerging 3M leaders that run big and important divisions, such as Food Safety, Renewable Energy, Industrial Tapes and Adhesives, Electronic Markets, Orthodontics, Automotive OEM and Personal Protection, along with the leaders of our operations in China, India and Brazil. The senior leadership team will be there as well, including George, Pat and the heads of our six businesses and international operations, and it promises to be a great day. I make no promises, but will do my best to keep away the snow and frigid cold. If you're on our e-mail distribution list, you will receive an invitation later this week. So please join us, and RSVP as soon as you can. For those not on our list but wish to go, just drop a note or call, and we'll be glad to take care of you. If you would take a moment to read the forward-looking statement on Slide 2 in today's slide deck. During today's conference call, we'll make certain predictive statements that reflect our current views about our future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks 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. So let's begin today's review, and I'll turn the program over to George Buckley. Please turn to Slide #3.

Thank you very much, Matt, and good morning, everybody. Thanks for joining us today, and a belated Happy New Year to all of you. Today, my remarks will focus mainly on the year and the future, and Pat will go over most of the details of the quarter. Five years ago, we set out to move 3M gradually but permanently to a higher growth regimen. We knew it would require a step change in our attitude towards growth and especially in our attitude to investments in growth. That challenge was made a lot tougher by our concurrent goal of maintaining superior margins and returns that you've come to expect from 3M. Looking at 2010 as a milestone toward these goals, it was a very good year. Organic volumes rose 13.7% in the year versus estimated worldwide IPI growth of 8%, and we posted record sales of $26.7 billion, an increase of 15.3%. We achieved record operating profit of $5.9 billion, putting aside historical onetime items, with margins of 22.2%, which are up 140 basis points year-over-year. And we've posted another all-time annual record with earnings per share of $5.75, an increase of 25% year-on-year. Free cash flow was $4.1 billion, with a conversion rate of 100%. It was not a long time ago when growth at 3M was limited to a handful of divisions. Last year, four of our six business segments turned in double-digit sales growth. And every single one of our businesses were up year-on-year. Sales exceeded 2008 levels by $1.4 billion, meaning the 2009 recession is well and truly behind us, if not perhaps for all Western economies as a whole. Exceeding [ph] IPI by 570 basis points mean we took over a half of point of share organically across the company in 2010, and we've accomplished…

Thanks, George, and good morning. Let us look at our full year P&L, so please turn to Slide #4. Sales for the full year rose 15%, driven almost entirely by organic volume improvement. We grew organically about 1.7x the rate of industrial production, so it is evident that we gained significant share in the year. It was encouraging to see how many of our businesses grew their top line in 2010. Sales rose in every region of the world, with Asia-Pacific up 35%, Latin America up 18%, Canada up 16%, United States up 8% and Europe up 5%. Similarly, all six of our business segments expanded sales during the year, led by Electro Communications at 28%, Display and Graphics at 24%, Industrial and Transportation at 19% and Consumer and Office at 11%. Even if we dig one level deeper at the subsegment or the divisional level, 2010 sales rose across the board. A number of factors are contributing to the growth. George mentioned that our New Product Vitality Index was 31% in 2010, up two full points year-on-year. Investments in innovation, sales and marketing capability and localized manufacturing are creating new growth opportunities in adjacent spaces, and our new product launches are getting better and better. As CFO, I look for that -- how does innovation translate to the financial results as sustainable, profitable growth. Our performance in 2010 certainly suggests that it's working very well. Gross margins rose by 0.5% during the year, half a point as ongoing Lean Six Sigma and other productivity efforts delivered the needed factory savings to offset a 2% increase in raw materials. Sales and marketing investments increased in line with sales, including a 20%-plus increase in advertising and merchandising to develop our brands and drive higher growth. And R&D investment rose at a…

Thank you very much, Pat. And let me first spend a few moments now on how we see 2010 playing out. A lot of the economic indicators are showing mild improvements lately. U.S. retail sales were up about 2% over the holidays. Growth in China remained strong at about 10%. And based on recent reports from GE and IBM, factory orders for capital goods and projects seem to have been increasing. We've also seen mild improvements in U.S. unemployment data. But I think in summary, there's still a lot of smoke without fire and that we should all remain cautious. We need to be sure it's really a dawn and not a forest fire coming our way. We will be increasing our capital spending in 2011 to about $1.3 billion, maybe $1.4 billion, but it's mostly being dedicated to o U.S. growth, hence our strengthening the manufacturing leadership overseas. I think that 3M's growth and that of the U.S. economy is still going to be strongly led by emerging markets. I don't expect to see big improvements in the U.S. until employment takes a material turn for the better, and any gains here are likely to be export-oriented. The [Audio Gap] Bush [Audio Gap] is the best news we've had, and we think that will make an incremental, measurable improvement in our outlook for the U.S. We're also bound to see some improvements in the U.S. in 2011, mainly because the base in a number industries has been so miserable. In some sectors such as existing housing, the stock of existing homes remains high and new housing starts continue to fall. Spring will probably see some improvements, but simply because it is spring, and we always see improvements there. Nevertheless, it will help. I think housing prices will continue to fall this year. And ultimately at some point, that will attract [Audio Gap] Thank you for your attention, and we're now happy to take your questions.

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

Guys, I know it's still early in the year, so I don't want to nitpick too much on guidance. But I'm struggling a little bit to reconcile if I kind of look at the numbers apples-to-apples, looks like you're targeting roughly 10% to 12% top line at the midpoint, roughly, let's say, x pension and vaca [ph] roughly 11%, 12% at the midpoint for EPS. And I guess my question is this, if your incremental expenses aren't going to go up substantially, as it relates to some of the comments, things like advertising, R&D, some of the past investments that you made that you don't expect the same ramp, why wouldn't incremental margins and the pull-through be a little bit better and allow you to get a little bit more leverage off of that? Is it just solely just Display and Graphics or is there some -- or just conservativeness on your part?

Well, it's probably not conservatism, Scott. If you look at the margin expectation in our guidance, that's really where we're targeting. It's gone to -- it's 21.5% to 23%. But as George says, the 21.5% is really kind of reflecting some potential acquisitions that may play out towards the back half of the year that really don't add much in the way of income. So think of it as 22% range. So that's kind of about where we're targeting to run the business. If you think of it, though, from an EPS perspective, you got tax rates going up. We were 27.7% this year, even at the 29.5%. So that's a piece, you obviously got -- you got pension going up. We had some vacation benefit this year that obviously, we have to kind of offset as we go into next year. Our assumption is that basically our pricing material cost will be kind of flattish, that we'll be able to offset materials. So effectively, it's going to be whatever the kind of the volume pull-through is, and as we showed at the meeting, if you kind of look of that in kind of a 35% incremental margin or so forth, that's where that leads you.

Well, we can kind of agree to disagree, because when I do the math, I get something like more 640, 650 on a 30% incremental. But let's move on to my second question. If you look at LCD TV, the commentary you made at the December meeting was fairly cautious. And can you give us a sense of kind of a State of the Union, incrementally January, now that we're towards the end of January, versus mid-December, have things stabilized? You mentioned that you brought inventories down, but how about the sell-through, we can we talk about that?

From my knowledge, of course, this is a very fast-moving space, Scott. So what I tell you today could be wrong next month. But to our knowledge right now, we've got good design of current models that are in production. Inventories are still a little bit on the higher side than I think the industry would like. But they've done a nice job of bringing them down. Early indications are in the quarter that activity seems to be very good. I'm very thankful we kind of adjusted our inventories here in the fourth quarter. So I think early in the year, if the sell-through works, which thus far, they're expecting that. Of course, there's a big Lunar New Year's in Asia in the first part of the year. Japan's going to go through a digital change, I believe, on June 1, so the first half the year is going to be quite important relative to sell-through in Asia. And we, of course, won't know that until probably into the second quarter how well that's going. But thus far, it seems to be progressing reasonably well.

Scott, I think it was a little better than we thought in the early part of the year. Attachment rates have also been a little bit better than we thought. The real key here is going to be how good are we at retaining that attachment rate. And typically, the profile that you see historically is that attachment rates are good in the early part of the year, because model change obviously take place later in the year. So really, we're probably going to do fairly well is my guess in the first part of the year, at least on the tax rates. Pricing, of course, Pat went over that in New York. It's still a tough issue in that marketplace, and that will be the thing that puts pressure on earnings and on leverage in the way that Pat described it earlier. So I think that whether we cross the finish line as successfully as we hope or better than we hope, is all really going to be determined by later in the year, perhaps in the last four months of the year of 2011.

Our next question comes from the line of Bob Cornell with Barclays Capital.

A couple of questions, again, going back to the top line growth guide, I mean, the 5.5% to 7.5%. I mean, are you still looking for the same 15% to 20% growth in the emerging markets, which would sort of imply the mid-range, 4.5% points of organic growth? I mean, so maybe because of the disaggregate that 5.5%, 7.5%, and maybe Pat can dial in the level of conservatism you've built in there.

No, it's really no different than we kind of shared in December. We had a chart in December that talked about the segregation of sales, that developed markets probably would be in the 3% to 5% range, and developing would be in 10% to 12% range. If you said, "Where is there any upside," I'd probably say it's more on the developing side than on the developed side, to kind of address your question.

You mean, I guess, the subtext there is, I mean, some people talked about China slowing in late in '10. Have you seen any of that?

We have not, thus far. We just had our entire leadership together last week. We spent some time obviously with the Asian group, and specifically Kenneth, who runs China. And thus far, we have not seen any alteration, okay, in our growth rate in China at all.

Bob, the more recent growth rates in China are being up -- in emerging markets have been up above 30%, 31% or so. And that's still about a third, as we've told you before about a third of our sales. So there's no question, we get a great lift from that. Whether in the end we get to the top end of that growth range [ph], is all dependent on how these, shall we say, the more traditional and slower markets in Japan, in the United States and in Western Europe behave.

Could you just give us some more color on the label initiative? I mean, consumer office didn't quite get there. You had some investment spending, I think, probably -- how much of that was in labels? Maybe just give us an idea of just how you're succeeding relative to plan there to push forward in that business broadly?

Yes, Bob. I'd say, you have to view this as being a long-term opportunity for us. This is not an initiative that you just necessarily win overnight. You've got a pretty well-entrenched competitor. We've made some very good inroads with certain of our SKUs. But it will take a while to really establish ourselves. It's also a relatively expensive conversion you have to go through, Bob, because one of the things that you have to do is, of course, you have to take the competitor's product off the shelf. A retailer is not going to just absorb that expense, so part of the conversion cost is to take somebody out effectively you've got to take over some of their inventory. So the transition is a little bit costly. But we're absolutely convinced it's the right long-term strategy. But it will be a couple of years before it really kind of, I think, you'll start to see big growth rates. But it's a very solid initiative, and we've got absolutely the right product. I think we have the right relationship with the retailers, so it's just a matter of time.

We've won one of them, Bob, completely over. Others we've won over in varying degrees. So I think, at this stage, so early in the transition, it's actually been quite successful.

Our next question comes from the line of Steve Winoker with Sanford Bernstein.

Just a growth and then a margin question. On the growth side, looking at Health Care coming in on core growth at 1.6%, last quarter it was 1.5%, then you kind of had four quarters of 4.5% to 7.5%. I mean, when you think about your core growth going forward, how do you think about Health Care? Are we in a long-term period of this? You mentioned a lot of double-digit and other growth in your presentation. Where was it weak?

In Health Care, specifically?

Yes.

I would say it was weak in -- our drug delivery systems business was a little weaker. Oral care is at more of a low single-digit rate at this point in time. Health Care is going through a pretty significant shift relative to, I'll call it the underlying market dynamics. We still see that obviously as a very good, very solid, solid business. But I think for a period of time, it's going to be kind of a more single-digit grower. But we've got some great efforts in places like Food Safety. We feel very good about this acquisition we just made in Arizant, okay, around patient warming and the like. And we've invested a fair amount in R&D and sales and marketing programs. And Brad and the team are aggressively going after international expansion as well. And that probably is where some of our best opportunities really are, in some of the developing market opportunities, to play as those markets develop.

And Steve, here's George. Just to give you kind of a little bit color. I don't think that long-term goals, that those Health Care markets are going to be struggling, because certainly there's going to be some reordering of the way that market behaves. People -- insurers are going to want you in the hospital and have the hospital equipped as you possibly can. So there are going to be growth in sort of secondary markets that we can and will address. So I think ultimately, in the end, unless the rate of accidents, the rate of illnesses begins to fall in a secular way, which is not reasonable to expect, I think with the kind of products that we supply, you'd expect, as long as we service each of those touch points, we're going to do okay. And as Pat rightly pointed, one of the great opportunities we just had the sort of first new regulations in 30 years in Food Safety, one of the great new opportunities there. And that's, roughly speaking, a couple of hundred million dollar business. It's already growing at double digits, and I expect that to accelerate. HES is another very good one. So all in all, I think we're going to be okay, although we will see the same kind of pressure that's being seen in other companies. I think we're going to see some of that for a while, and that probably won't change until unemployment begins to come back. And you ask yourself how long can people put this stuff off, but they actually do.

And then a second question on margin. If I look at the 250 basis points year-on-year delta and then within that, the non-pricing related COGS, so 90 basis points, and you mentioned 3% increase in raw materials. So of the 90 basis points, would you say that just raws was 50% of that or 70% by my calcs? Or is it something different? And what about wage inflation and productivity as an offset?

I would say your number is relatively close on the materials side. On the weight side, we have a tendency that, I'll call it, our people productivity will offset generally any kind of wage inflation we have.

So the other -- so it's mix. And can you comment...

The mix of materials, yes.

And then as part of that, the SG&A and R&D, I'm just trying get a sense for how much of this was people and advertising and other investment versus sort of wage inflation or other negative things? In other words, how much of that is going to help growth versus just a tough cost?

Think of it as the bulk of it should help growth, okay, as compared to underlying cost inflation.

Our next question comes from the line of Ajay Kejriwal with FBR Capital Markets.

Just following up on Optical Film, maybe you can provide some color on expectations for volume and then pricing this year. You talked about moving pieces in the first half, with China and then Japan. But if you could maybe provide us some color on what do you think both volume could be and what's baked into your numbers.

Well, guess I'll try to -- one of the more of the difficult ones, obviously, to try to forecast. If you think of it more from a, I guess, a planning basis, we anticipating that the Optical revenue will be relatively flat year-on-year. That would imply that obviously you get some more volume and you have the continuous price-down nature of the business. That business usually runs something in the order of magnitude of a double-digit price, price reduction. So that'd probably be kind of the order of magnitude as we think about kind of the top line for this year.

So just on that pricing, as inventory kind of stabilizes here, maybe end of first quarter into second, would you expect the pricing declines to kind of reverse back to the historical trend rate of 10%, 15%? Or any thoughts there?

As I said, it's a tough one to kind of deal with. In our planning, we are basically planning to be competitive in that marketplace. We have to, of course, negotiate every one of the new designs. So I would say that will be a more traditional price-down, would be kind of our expectations. The other thing that, of course, comes into play here is you're constantly innovating new designs. So getting to a pure price-to-price becomes a little more difficult in this business, just because the design is different, from one model to the next. But traditionally, what you'll see in high-tech, fast-growing markets, like, you see [ph] something in the order of a double-digit price reduction, so that's kind of what's our currently planning.

It all depends, Ajay, on the mix of sales. As Pat said, traditionally, this is a market that's got double-digit down-price. TV's parts has got double-digit down-price. Down-price obviously exists everywhere, but the mix of handhelds and monitors and laptops changes the overall mix a lot. And as Pat rightly pointed out, obviously, you're trying to innovate here, where price doesn't get sort of reflected in the overall model. So I mean, clearly what you've got is pressure on the one hand on price. But luckily with some increase in area volume. So you get absorption built into the equation. But it is a very, very fast-moving market. It is something that has these sort of aberrant times where these large corrections take place, where you've got shutdowns, fewer sales and pricing all combining in one set of pressures. So it is hard for us to predict any more really accurate than what we've told you already.

Maybe one more if I can squeeze in very quickly, on R&D, up 19% in the quarter and you're close to 6%, so maybe if you can talk about where you versus expectations. And then George, if you can share any thoughts on the metrics you use on the efficiency of the spend there?

Well, you saw the number, or heard the number, Ajay, at 31.4%. So obviously, our R&D efforts have been very, very successful. And ultimately, it's this that drives our top line. As long as we can protect cannibalization, it's what drives our top line. So it's very important to us. I don't really see any need to be increasing that dramatically beyond where it is today. So I think I'm quite happy where it stands. It might even back off a little bit in terms of total dollar volume. And we'll probably be holding the investments in our new business ventures and things like that at constant. But if you look at the numbers, I think we showed them in the December meeting, the productivity numbers have improved dramatically in R&D in the last few years. And I don't know ultimately where they can go. I suspect they're probably as far or close to being as far as we can go. But I'm happy with the number where it sits. And I don't want to increase it any more for now. We'll see how this stuff bears fruit.

[Operator Instructions] Our next question comes from the line of Jeff Sprague with Vertical Research Partners.

George, obviously, a little bit of a dust-up in the press, a month or two back, about the remainder of your tenure and how transition plays out. Can you just share some thoughts on what we should expect? Perhaps someone gets elevated to President or something midyear as a kind of a way to signal what's going on and kind of just in general what the timeline is?

Well, in the end, to me personally, I'm going to -- unless I drop dead first, I'm going to work here as long as the board wants me to work here. So I'm not anxious to be going fishing just yet, although when the time comes, I will. Obviously, the board has been looking at the issues of transition very closely. We've been doing it for years, by the way, Jeff. This isn't something that started last year. It started almost the day that I walked through the door. Because I, for one, was determined that the next CEO of 3M was going to be an internal candidate, not an external candidate. And I think we've got ourselves into the position where that is. You know that we've got a lot of awards on our people development, and our folks here do this extraordinarily well. So later in the year, the board will, assuming it sort of arrives at a consensus, will make its announcements on how that transition takes place. I suspect that it'll be sort of classic profile. We'll have a few others step in between now and me ultimately retiring. And I think it'll all be very orderly, people will know everybody. It won't be a great surprise, it won't be a great threat, like someone coming from the outside. So I think it'll be a fairly well-managed and fairly orderly transition. And I hope, obviously, it's going to be very successful. I have a lot of personal self-interest in, and it's going very, very well.

And also, just on really big picture stuff, and not to parse words, maybe it's a throwaway comment. But George, you kind of made the comment about, I don't know if we'll ever get proper recognition in your opening preamble, and I just wonder if you could elaborate on that thought. Obviously, you guys have made a lot of progress, and you've started to allocate capital a little bit differently. Maybe the jury's still out on how that all that works. But just what are your thoughts on overall strategy, capital allocation? Is there any change there?

Well, on driving the top line, Jeff, our long-range goal in 2015 is to have this NPVI number at 40%. So it's -- obviously a lot of money is still going to go into R&D. In terms of capital, I think increasingly, the proportion of spend will get made overseas, primarily in emerging markets, in low-tax areas, in low-cost areas, but not necessarily always in those places, because clearly, we've got good markets growing in the United States. And our model is near-to-market manufacturing. You can't with the kind of the supply chains we have always spend in low-cost markets. So we'll appropriately spend in these local markets. I think the pattern you're seeing on dividends will remain, that we'll keep dividends growing somewhere between the rate of inflation and the rate of earnings growth, depending on what other investment plans we have during the year. And I think you'll see us, as Pat already spoke about briefly, you'll see us picking up the pace of stock repurchase in the early part of this year as part and parcel of value return to the shareholders. So it's, I think, all in all, more emphasis on overseas investments in capital and probably, certainly this year, a little more emphasis on stock repurchases.

Pat, how much actual deal dilution/purchase accounting, et cetera, was absorbed in the quarter? And what should we think about for 2011?

Well, I think speaking about 2011, we've got most of it behind us, relative to obviously the deals we had here in the fourth quarter. In the first quarter, we'll have -- I guess first part of the year, we'll have maybe a couple of cents relative to Alpha Beta and Winterthur, assuming that obviously closes and so forth. It's not a significant number, Jeff. And fourth quarter was very similar to kind of what we had outlined going into the year.

Our next question comes from the line of Deane Dray with Citi Investment Research.

Just to follow up on Jeff's question on the capital allocation, specifically on M&A. Pat, I don't know if this was an intentional point, but you seemed to set expectations for that one to two percentage points of growth from deals being more of a back-half event. So maybe update us on the pipeline pricing, but is the back half -- because you did a flurry of deals at year end. Is there a pricing that is not appealing? Or why might it be pushed back to later part of the year?

I guess if I had a better crystal ball, I guess, we may have -- I mean, the reality is you never know exactly when these things are going to happen. Obviously, we've got a little more visibility as to what we have in the current pipeline that we're working at. So the ones we've announced will be the ones obviously in the first part of the year. So just realistically, by the time we act on them and by the time you get them closed, more than likely, they'll be more towards the mid to back half of the year, other than the ones that we've already talked about.

And any expectations or just observations on pricing and maybe geographies?

It's all too expensive for George [indiscernible] and me, but it's hard to generalize, okay? Sometimes you run into some small ones that we still feel that we get decent pricing, that we're a very good strategic fit with somebody. The more you try to play, and I'll call it, the public domain, sellers' expectations continue to rise as the market rises. So I don't think that's -- there's nothing secretive about that. So that's obviously something we have to just keep in our mind as to, I'll call it the relative -- our value versus their value. And just because the market goes up, doesn't always bring the shareholders any more value necessarily. So it's something we just have to keep a close eye on, which we have a very disciplined process to look at what we want to buy. You just kind can't always anticipate when something pops. We've got a strategic road map on what type of businesses we'd like to invest in. Obviously, we do a lot of prospecting ourselves as to businesses we'd like to go after. Sometimes you just don't know when things are going to show up on the radar screen. But pricing, to be honest with you, is kind of back to -- it was like the recession never happened.

I think in particular, Deane, the pricing in emerging markets are very high. If you look at some of the opportunities that are being purchased in India, they're well beyond the level of Pat and myself. So but there are other ways you can get at these by -- if you happen to come across a U.S. acquisition that's got one of those things already in place, they can add a nice little piece of the puzzle in India, say, for example, but at relatively modest prices. So I think ultimately, that market is going cool down. It just has to. The PEs that you see in that market are so stratospherically high. People just can't get the returns. So I think ultimately that will cool down, and we'll do a little bit of watching and waiting and probably opportunistic buying plus trying to buy by the backdoor in the way that I just outlined, at least in those markets, Deane.

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

Just wondered if you could sort of extend on your answer to the last question. As you think about M&A in some of the faster growth markets, I think you mentioned renewables were growing north of 70% this quarter. When you think back a year ago, the fact that you didn't do deals, was the issue the valuations? Or was the issue that you look at some of these fast growth markets and you're concerned about the sustainability? And I guess, the second question I have is a very quick one on gross margins. The lag that you're seeing between raw materials and pricing, is it fixable? Or do you think this will be structural at least for this cycle, given your business mix?

Well, Laurence, I think on pricing in these markets, if you go back and look at the question, did we or would we try to buy some things in these high-growth places, we did actually try to buy a number of businesses but in the end the prices were nosebleed, and we said, "Look, there's still a return on investment, even with a very, very high-growth businesses like this." So we have to be prudent and sensible about where we can. And we also have to think about the capabilities inside 3M. We can grow a lot of this stuff ourselves, candidly speaking. I mean, you see that example in the labels market that one of our colleagues was asking about earlier. We have that capability. Why pay for something we can do on our own and to some degree have for nothing? So it all depends on what technology we have, what market presence we're trying to build and try to chase. And Pat and I are, I suppose, legendarily conservative on those sorts of things. And I don't think that's going to change dramatically. Nevertheless, we are seeing here and there some opportunities that are more modest in price, and we will look at those carefully. And if we can get the deals done, we'll do it. But I don't think you should expect to see any headlong sort of rush into things which are high-priced even though they are high-growth. I mean, ultimately, I don't think any market can be sustained just on the basis of government subsidies. So you have to sort of think about how this market matures to a place where it's self-sustaining. And that then might result in more secure but perhaps less expensive opportunities coming up at time when the market is more mature. So we have to balance all of those things, sort of left and right, as we think about what to do now and what to do later.

And then just quickly on gross margins.

Yes, I think your original question on pricing material. George's comment, I think it'd be fair to say that we were a little slow, okay, to go after pricing. I don't see it being a structural change in this cycle. We've got pricing plans in place, and we'll go after these in this new year.

Our next question comes from the line of Terry Darling with Goldman Sachs.

Wondering if we might get a little bit more color on 2011 margin expectations by segment. And I guess, where I'm coming from is if we look x corporate, the segment operating income margin rolled up for all the segments at closer to higher end of your guidance, looks like up 75 or 100 basis points. And just wondering if you could talk through the segments, kind of what's above that? What's below that, for us? We danced around it a little bit, but maybe you can help put some more color there.

Realistically, when I look at, forget about quarters for a second, if you kind of look at the whole year is kind of the way it I have a tendency to more think of this. I don't really see a significant change in our margin structure that significantly. ECB's got some momentum behind it, okay? So maybe they'll be a little bit higher on a total year basis, on a year-on-year basis. But realistically, I think everybody else, okay, will be relatively close to where they were in 2010. Maybe industrial may have a little bit leverage in their business if they get some top line to them. But Health Care I think will be relatively similar. I think consumer relatively close to what it was this year. And again, all this is absent kind of any kind of new acquisition impact that may kind of be dilutive in a given business. But I don't really see a big change.

But I'm a little surprised with Optical flat, that maybe you wouldn't have said D&G down a little bit, which maybe suggest some greater strengths in the non-LCD part of Optical and/or the rest of D&G. Can you just comment on that?

I think, Terry, that would be a fair read, that Commercial Graphics has some good momentum behind it. We think TSS will do well in this side. We think the microprojector, okay, has some good legs to it. That team's done a greatish [ph] coming back. So I do see it as being -- some of the other businesses helping to offset maybe a little bit of a lower number in Optical.

And again, just to clarify, then, so the optical piece margins would be down, the rest up and you end up about where you were this year?

That would be the right way to read it as we see it right now.

And then, George, maybe one more on this capital allocation, because the separation of companies in multi-industry is something that's -- you've [ph] got a lot of people talking. You've mentioned in the past or you've questioned in the past whether the market's really recognizing the value in the very high and sustainable margins in Health Care. You mentioned at the analyst meeting that maybe the Optical business has got so much volatility for the business model in the long term. Should the company be considering in this environment more seriously how the pieces of the total might on their own add up to more than what we see the market assigning value right now as?

Yes. It's an excellent question Deane (sic) [Terry], and I'm asked the question often. And I really do, and I know people do try to do this. I try to sort of dissolve the notion that this is a conglomerate rather than a multi-technology company. Let's just sort of take Optical Films. These are shared between the -- I mean, the capabilities and patents are shared between Optical. They're shared between the Renewables Energy business. Some of the work leaks into Traffic Safety. It leaks, to a lesser extent, or will leak in, to a lesser extent depending on how we do on lighting, into Consumer Office. So the problem is, Terry, that the technologies are shared. The plants are shared. The patents are shared. And it's not that easy in 3M as a general rule to pull out pieces of the business because of the way they're interlocked on shared plants and shared technologies. So it isn't nearly as easy. And it also, by the way, proves the point that we're not a conglomerate in the classic sense. Now, it doesn't mean that there aren't bits and pieces of the company that you couldn't sort of pull out and try to capitalize on. On the other hand, we try to figure out -- let's say we sold a big piece of the business. By the time we paid the tax leakage, we might struggle to look for other opportunities that would drive growth anyway. So it isn't as easy in this particular company, Terry, as it is in pretty much any other company that I've seen. And so a lot of this stuff is very sticky in its interrelationships and its sharing. And the way, actually, we use some of these platforms, in curious ways from Automotive going into Health Care, from Dental going into Automotive in a way that most people would not see. So while I know the thing you're referring to, ITT's recent sort of dissolution, shall we say, it really isn't as easy an issue, nor as relevant an issue, in our particular company.

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

This is James Sheehan in for David this morning. Just on raw materials. Pat, you mentioned price in raw materials would be roughly balanced in 2011. And given that we had a 2% rise in raw materials this past year, could you just quantify for us your expectations as to what raw materials will increase this year?

I would say it would be similar at this point in time. At this juncture, I guess, I'd say I still have a little bit of a concern, could we see a little bit higher, a higher inflationary number this year play out. But kind of from a planning standpoint, it would probably be pretty similar.

And then just on the share count, can you just elaborate on the increase in the share count sequentially? And how do you see buybacks impacting the share count in 2011?

I guess we have to get back to you. Because I actually think sequentially share count, I think, probably comes down a little bit with our buyback activity. But we'll kind of talk to you offline on that. But generally speaking, what we've talked about in December was a gross repurchase program of maybe $2 billion or so in the 2011 period.

We'll come back to you on the shares.

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

I know that you don't give quarterly guidance. But given the unusual comps last year varying across the year, much harder on the first half, is there anything we need to keep in mind when thinking about the progression of earnings over the course of '11 that differs from normal seasonality?

Jason, offhand, I can't think of anything from a macro perspective or kind of a company strategy standpoint that would necessarily be a kind of a different mix during the year. I hate to bring up optical again, okay, but optical can have some pretty significant differences by quarter. But generally speaking, our seasonal patterns don't change all that much. So what we had last year, of course, is, in '10, we had a kind of a growth strategy that we wanted to get out of the first quarter and make sure we started solidly, but then we kind of had a series of growth programs ramping up through the year. So we knew going in that we'd have a kind of a, I'll call it a margin profile that was a little bit better the first half of the year than it was back half of the year. I don't see that same thing playing out this year. I think what you ought to see is more kind of a even margin structure going through the year but nothing different really from a top line perspective.

Early last year, you attributed some of the extremely strong organic growth to share gain, and for some competitors were weakened coming out of the downturn. As conditions have kind of normalized over the last couple of quarters, have you seen any change in competitive position, different competitive environment? I think, George, you alluded to greater strength from some of the smaller companies in emerging regions lately.

Let me pick that up, Jason. Certainly, the numbers last year show that we continue to gain share. We obviously gained share, so I expect in some businesses more than others. But net-net, probably around 0.5% if you do the mathematics. I really don't expect that to change a great deal. I'm hoping that we can continue that strategy. A piece of the growth comes from share, that we build the capability and the presence of our company in these markets step-by-step, gradually. But it was really a sort of a -- rather than a note of caution, so much, although it was a note of caution, is it explains why we have to be more local, because these small companies, Jason, many of them are growing very, very rapidly, and they're very able and very nimble. Unless you try to the extent that you can to be like them, they're going to go eat your lunch. So I think the strategy that we followed of more globalization, more localization of manufacturing, of leadership, of technology and increasingly, of manufacturing is a good sort of shield against that kind of pressure. But ultimately, it is going to be about our speed, our efficiency and our ability to be competitive in each of those markets, in every single segment that we compete in. If we do that, we have nothing to fear from them.

Our last question comes from the line of Steve Tusa with JPMorgan Securities.

Just a question on D&G. I'm sorry to bring this up again. I was having trouble reconciling the results. Revenues were up year-over-year, yet the margin was down. I understand the Optical business was weak. But it was still up year-over-year. And so I'm just curious as to how that -- is that a mix issue that the businesses that grew -- I know there's other businesses that are picking up the slack for Optical and that's kind of a dynamic you expect into 2011. But is there something with regard to the profitability of those businesses that's an incremental drag along with what's happening at D&G or at Optical? Or is this just like a horrendous Optical quarter that we're going to cut and climb out over the next several quarters?

And Steve, you're talking about fourth quarter by itself, not the year, right?

Yes, fourth quarter D&G, correct.

Yes, and what really the issue is, and really it's an Optical, it really primarily is an Optical issue. And what happened in that business is that even though the top line was relatively okay, our manufacturing output was way down in the fourth quarter. When we looked at inventories in the channel and kind of what the customers were saying, and kind of what we talked about in our December meeting, we took a decision to really significantly alter our production volumes in the fourth quarter. And I think the number I heard is that our output may have been about half of what it was last year for the fourth quarter. So you have some high-volume manufacturing assets that aren't making much in the quarter, and that has impact a pretty significant impact on your margins. So I think I kind of isolated it to be more [indiscernible] of that situation in the fourth quarter.

How did you guys get stuck with that much inventory? I mean, was that a -- because that's a pretty decent amount, that's a pretty big disconnect between sell-through and what you actually produce. I mean, I don't think the retail volumes were bad, but I mean, were they that bad, or is this just the visibility in the chain...?

Well, Steve, part of it was, okay, that obviously there continued to be build in the channel, okay, not only at the retail sector but all the way back through the manufacturing processes. We've been running 24 by 7 in that operation all year long. Customers kept demanding more and more product from us. And those were still the signals that we were getting going into the fourth quarter. But it becomes very clear that when you look at what the inventory channel looks like, that's including the backlight manufacturer okay, and so forth, that they had excess inventory. So it takes a while to get the entire supply chain cleansed, okay, of where you have the imbalances. So it is fair to say that there was a build-ahead that effectively led to excess inventory going into the fourth quarter. So we decided that it was the right time to get ourselves squared around in the fourth quarter. But if you look at it for a whole year, if you look at Optical on a total year basis, they really had a very nice business result across the year. It's just that the fourth quarter was weak.

Yes, certainly, and growth was good in the fourth quarter. And then just one follow-up on Health Care. What do we think, or what do we expect for the margin in Health Care next year? Is that kind of a flattish type of performance? Or will there be a little bit of pressure there, given volumes are still kind of trending a little bit weaker than the long-term growth rate there?

Well, it ended the year, I think, at 30.2%. I expect it'll be in that ballpark next year.

Steve, this is George. One last point before we ring off. I think just to sort of underscore what you said about the toughness of the fourth quarter in Optical, I think that business suffered something like 8% or so down price in the year. Maybe it was 9%. But about half of that was stuck, attributable to the fourth quarter. And that's why you heard Pat say that we expected double-digit down-price going forward in the current year. So it really was, as you said, it was a tough transition for that quarter, very, very low production and very, very high pricing pressure.

So that business had the below 10% margin? Or was that still -- saw a double digit?

No, no, it was still in double digit.

That concludes the question-and-answer portion of our conference call. I will now turn the call back over to 3M for some closing comments.

Well, thanks for joining us, everybody. Appreciate your patience. A lot of good questions. And thanks for your interest in our company, and we'll look forward to talking to you next quarter.

Thanks, everyone.

Well, ladies and gentlemen, that does conclude the [Audio Gap]