Ladies and gentlemen, thank you for standing by. Welcome to the 3M First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, April 26, 2011. I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Hello, everyone, and welcome to our first quarter 2011 business review. With me today are George Buckley, 3M Chairman, President and Chief Executive Officer; and David Meline, our recently appointed Senior Vice President of Finance and Chief Financial Officer. Today, we will review our first quarter results, along with an updated outlook for the rest of this year. A PowerPoint presentation accompanies today's conference call, which you can access on 3M's Investor Relations website at 3m.com. Today's slide presentation and the audio replay will be archived on our website for an extended period of time. Take a moment, if you would, to read the forward-looking statements on Slide 2. During today's conference call, we will make certain predictive statements that reflect our current views 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 lists some of our most important risk factors that could cause actual results to differ from our predictions. So let's begin today's review. I'll turn the program over to George, and please turn to Slide #3.

Thank you very much, Matt, and good morning, everybody. Thanks for joining us today. From the numbers, you'll clearly see that first quarter was again a very good one for 3M. We posted over 15% top line growth, and if we correct for Japan and H1N1 effects, organic growth was running at about 10.5%. So we continue to post growth rates which are among the highest in the company's long history. We delivered $1.49 EPS in Q1, which is an all-time high for the company in the first quarter, and all of this was done at a time when Japan's troubles cost us about $0.03 per share or about 70 bps net of sales growth, all of which was organic, plus of course the additional challenges that we saw in the Middle East. The unrest there cost us a little under $10 million in sales but nothing significant. The growth rates were high across the board, with E&C, Electro and Communications, leading the way at 21% growth; and Industrial transportation almost equaling it at 20% growth. I&TB will be about $10 billion segment for us in 2011, and to see a unit grow this fast in industrial space is quite remarkable. 5 of our 6 reporting segments reported double-digit sales increases in the quarter, with Display and Graphics also very close to double digits at 9% total growth. Currency clearly helped us to be sure, but even without that, 4 of the 6 reporting segments reported double-digit local currency growth. Emerging markets were again stellar, with sales up 24% led by developing Asia. We saw double-digit sales growth in all geographic regions, including 10.2% in the United States. We had 47 countries in our portfolio, including the United States that reported double-digit sales growth. And can you believe that Germany's…

Thanks, George, and good morning, everyone. I'm glad I had the chance to meet many of you at our meeting here in March in St. Paul, and I look forward to meeting more of you in the future. Meanwhile, thanks for joining today, and please turn to Chart #5. On a GAAP reported basis, first quarter earnings were $1.49 per share. This is an all-time record for any first quarter, adjusting for the onetime pharma gain in 2007 and a healthy 16% increase over last year's $1.29 per share. As a reminder, last year's results included a onetime noncash income tax charge of $84 million or $0.11 a share resulting from Medicare Part D changes in the U.S. Patient Protection Act. We exceeded our own earnings expectations in the quarter, a good result considering that Japan was an unanticipated headwind. We estimate that earthquake-related disruptions hurt our earnings by approximately $0.03 per share, which represents lost business in Japan plus our best estimate of impact in other countries. The earnings impact included in lost profit on reduced sales plus some onetime write-offs of inventory and fixed assets. We expect additional Japan-related headwinds in Q2, which are factored into our outlook, of course. We assume that these headwinds will wane during the second half of 2011 and we could see additional sales opportunities in businesses such as protective respirators, traffic safety solutions and commercial graphics to name a few. George will have more to say about Japan in our forward outlook in just a bit. Overall, this was a very good quarter for 3M, and we are off to a strong start in 2011. Let me walk you through the details, please turn to Slide #6. If you have followed 3M for a while, you know that our financial objectives call…

Thank you very much, David. I'd now like to give you some flavor on the outlook for the coming quarters, as best we can see it at this stage. Let's first speak for a moment about the Japan situation. Last year, Japan was about 25 -- $2.5 billion in sales for us, so it was around 9% of our total. It will interest you to know that Japan had been clocking around 9% sales growth prior to the earthquake. While we finished down 3% in organic local currency sales for the month of March, sales was still up 5% in local currency for the first quarter, fully showing you both the underlying sales momentum there and the impact of the earthquake. The human cost to us was blessedly small, with no employees or family members losing their lives and only about 10 families losing their homes. We've done everything possible to help these people. Thankfully, few of them, without forgetting the scale and the tragedy to them as individuals or to their families. The earthquake and its tragic aftermath ended up costing us about $27 million in the quarter or $0.03 per share, and we estimate that it will cost us about $140 million for the year or somewhere between $0.10 and $0.13 per share depending on the geographic and end market mix of sales. These are worldwide impact numbers, with only about half of the direct impact being in Japan. Industries which are affected around the globe are obviously those with Japan as part of their supply chain. But on a positive note, the Northeastern Japan ports are now open, and there appears to be some basis for optimism about a gradual bettering situation in TEPCO's Fukushima Power Plant, with cold shutdown at the reactors forecast by year's end.…

[Operator Instructions] Our first question comes from the line of Laurence Alexander of Jefferies & Co.

I guess 2-part question. First, on raw materials. What's your inflation assumption is for the year? And are you seeing any end markets or regions where you're starting to get concerned about demand disruption because of inflationary cost pressures?

Yes. On RM [raw materials] inflation for the year, we're expecting around 4%, which is what we experienced in the first quarter, and we expect that will continue. In terms of end market impacts, we have not seen the impact -- even though we have varying levels of inflation going on, we haven't seen that curtailing the strength of demand for us at this time.

So, so far, so good, Laurence.

Thank you.

Thank you.

Our next question comes from the line of Scott Davis from Morgan Stanley.

George, one of your last comments of the presentation just related to need to add capacity, and I want to dig in to that a little bit. If we think about the last upcycle, you did spend a fair amount and added a fair amount of capacity in areas that were tight at the time. How do you balance adding additional capacity with some of the other options out there, and maybe those options include just: a, raising prices or capturing a little bit margin; or b, just putting more emphasis on fixing some of the supply chain issues that you've had on a legacy basis and freeingd up some capacity that way? Is there some granularity you can provide for us there, please?

I think investments our growth, Scott, has always proven to be the best return. We're getting 23% returns or thereabouts on -- and maybe even higher than that incrementally. So to walk away from growth and let somebody else take some share strategically is probably not a great idea. So usually, when that kind of demand comes along, we're obviously going to ask ourselves the question, is it sustainable? Is it real? And if it proves to us that both of those questions are answered yes, we'll make the investment. And some of the stuff that we're speaking about, Scott, is in Optically Clear Adhesives and the stuff that's getting put into tablets and displays, touch-enabled technologies which are just taking off like rockets. I mean, you've seen the demand reports on some the electronic guys, and we're servicing those people. And you even saw I think in our meeting here, Scott, some of the quite wonderful new technologies that will enable completely clear touch, both side touch, we showed you those kind of gizmos on watches and games that are going to be enabled by this. So we think it's the right thing to do versus some of the other choices we have. And we think, ultimately, it provides us stronger company and a better return for our shareholders.

I understand. George, can you try ring-fence to that? I mean, are we talking about $200 million, $300 million of additional possibly? Or are we talking more in the range of $1 billion?

No. We're talking about only -- we work on the basis, Scott, of no surprises. We always think that's better for our investors and actually for our Board of Directors and even for ourselves. We're talking about probably only another maybe $50 million or $100 million on top of what David already outlined to you. That's the kind of the order of the scale we're speaking about.

Okay. It's pretty material.

Just easement, not some rapid sort of back of the truck kind of scenarios.

No. I understand. And just a quick follow-up. I mentioned supply chain improvements just because I haven't heard you talk about it in a while as a driver, and I know you're 5, 6 years into the -- at this point...

We are. We did everything that we said we were going to do, Scott, and it still hasn't beaned off. I think we've moved up in our regional sources of prior target, maybe 2 or 3 points from sort of the early to the middle 60s. And so there's just huge amount still to be had in terms of benefit to the company. But we are building these plants as fast as we can, and the demand is coming almost even faster. So our ability to catch up while the strategy is right, our ability to catch up is limited. So it's really going very, very well for us. So we don't see this as a failure but rather as a success.

Yes. If I could, the other point I would add is, what you see this year in 2011 is the first time the company is now having more than 50% of its capital deployed internationally. So as we see the recovery in demand, we are adding capacity and where we are adding it is internationally close to where the growth is. So you're seeing that shift happening as we speak.

We think this is a good problem, Scott..

Thank you. Yes, I understand. Thank you, guys.

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

You guys made these comments about exceeded your own expectations in the quarter and you took the organic growth up x Japan to 7% to 8.5%. Maybe expand on where in fact the quarter did exceed your expectations by business, by geography, whatever.

Yes. Okay. What I would say is, first of all, we saw geographically pretty broad-based over-performance to our plan. We saw that happen, I would say, modestly over plan in the emerging markets. As you know, we've got very strong aspirations for emerging market growth. But from me, most encouragingly, we saw good performance in Western Europe in our mature economies, as George mentioned in Japan, before the earthquake hit, and also in the U.S. So geographically, it's quite broad-based. In terms of sector-wise, we continue, obviously, to have very good momentum in the Industrial and Electronics space. They were modestly higher than what we'd expected. And importantly, we saw healthcare for the first quarter after several quarters where they really struggled with growth we saw what perhaps is an inflection point on their growth rate as well.

Maybe it's a little too early to ask, I mean, would you -- I heard a comment about Germany doing especially better. Is it do you think a function of the feet on the street there, the labs in those countries, the product vitality, and at this point, is there anyway to assess which are the various 3M initiatives are driving that strength?

I don't know that I know the exact answer to that question, Bob. We could certainly find it out and give it to you afterwards, but we're seeing very strong penetration. With the new creativity we've put into automotive, we're seeing strong growth in those areas. Obviously, the things that we're providing for general industrial production is also benefiting the -- there was good growth in dental. It was almost in fact toward the end of the quarter, Bob, also listing telecoms, it really has been right across the board. And David is right, we tend to be optimistic about our ability to create growth. We tend to be more pessimistic about the ability of Western Europe and the United States to create growth. But they were very, very strong this time, and we're hoping that, that means it wasn't a flash in the pan, but it means we've actually made some -- turned some real corner on those things. So just across the board, Bob.

Thanks. Again, on Japan, though, you guys have put out some numbers here that looks fairly specific given the magnitude of problems there. I mean, how have you've been able to dig down and be this specific you think with regard to the impact both on sales and earnings over the next 3, 6 months, whatever?

Well, the folks in Japan led the initiatives, Bob. This quite wonderful, sometimes unhelpful, but quite wonderful matrix system that we have here. So they took it from Japan, ran down all of the threads of the various businesses. How they run into different countries, the very supply chain, to kind of knock-on inventory type of analysis that you would imagine. And is the best number that we could come up with. We're not going to bet our pensions on the absolute accuracy of this number, Bob, but you can well imagine we thought it was -- instead of sort of doing some handwaving and giving you some foo-foo dust, we said we want to try our level best to give you a size of it. Make sure -- bigger than a cup and smaller than a bushel basket or maybe smaller than a bushel basket or bigger than a container. So that's what we tried to do. I think, ultimately, the number will be wrong to some degree or another. And I'm hoping that we're being pessimistic in the overall impact that this has. Because I do think there's some self-correcting influences going on in other businesses around the world, Bob. I mean, both in Japan, nearly all suppliers have -- they don't have a single source of supply. So may have to do some requalification as we've done, but there'll be sort of things that fill the gap. So ultimately, I'm hoping it will turn out to be a bit pessimistic on this, a bit conservative.

Yes, fine. Final question for me. Did you exit the first quarter with the price cost parity, or are you still on the ramp towards price cost parity?

Well, as you saw, we exited the quarter with 0.1 positive price, which is the first positive price we've seen for I think 6 quarters. And in March, we were at a half point. So as I said earlier, we were ramping up, which obviously to get to parity for the calendar year, we're going to need to continue to ramp from there, and we see that happening across the businesses and around the world.

Good. Thanks, you guys.

[Operator Instructions] Our next question comes from the line of Steven Winoker of Sanford Bernstein.

So let me just keep this to the 2. The first one is on that 48% gross margin number. And that you mentioned 4% raws up, you mentioned the 1% or 90 basis point impact negative on price to raw. So that to me implies about 310 basis points of positive pricing including optical in the quarter. Am I thinking about that number the right way? And if so, can you talk a little bit on pricing, particularly maybe as it affects some of the units like consumer and office, how are you managing to drive that pricing with regards to that's a separate impact from mix, I take it? And are you seeing consumers trading down? Sort of talk if you could just expand on the pricing dynamic to give us a sense and comfort level that you're going to be able to continue to offset raws during the year.

Yes. And I guess as you might guess, we have a variety of situations in terms of the price patterns across our businesses and across the world. Certainly, first of all, what we see is that where we have the most significant cost pressure is in businesses including industrial. And so what they've been doing is they actually went in and in the first quarter implemented price changes. And now as we see continued raw material pressure, we're expecting to have some more in the second quarter. Other businesses, which have a pricing cycle that might be tied to, for example, an annual pricing round such as in areas like consumer and healthcare, we haven't yet seen the full impact of price changes. And that's a process that's going on in a number of cases, either as we speak or going to take place in the future. But generally, 3M enjoys a very strong position as a price leader in many of the markets we participate in, so we typically have very good pricing capability more so than many of our competitors in a particular space, and we don't view this task as being something that we won't be able to accomplish.

There's another thing behind the scene, Steve. And that is that the higher the rate of new products, the more ability we have to sidestep price. Because prices, any calculations of price, the better pricing on new products is not included. Secondly, you can imagine, we also have behind the scenes very, very strong and powerful relentless operational focus on driving out costs. So the first thing we do when we see this source of price increases coming is what can we substitute, what can we requalify, where can we go with resourcing or substitution. So that takes place. We have yield issues that we constantly are driving at. So using our Six Sigma capabilities and the plants to drive out costs, so it's not only about price. We don't sit back and sort of let the prices come back and just say, can we overcome it with price, because oddly enough, this is a chance to become more competitive. If you can wipe the cost, the underlying cost, you don't need to chase as much price. And in some markets, of course, you can't even get it, but what it ultimately does, it just makes you more competitive. So there's all this kind of activity, a sea of activity behind the scenes, Steve, that helps us chisel awareness.

So maybe as a follow-up. If you can dive into the consumer and office business case of the quarter then, you said that some of the pricing hadn't come through there. I mean but still, we're seeing OI down despite volumes up. And I know there's a lot of dynamics there. Maybe you can just use that as an example in what you're describing.

Well, I'll get Matt to sort of call you back with the details, Steve. But you've got the cost tackifiers and polypropylene, which are oil derivative products. Polypropylene is used in most of the sort of the Scotch-Brite and also in our respirators, those sorts of products. Pricing on polypropylene, obviously, is part and parcel of prices on oil. Price of paper, of course, is another issue in consumer and office. And price of plastics more generally of which they sell a lot. So that's what you see, and on top of that, as we said in the notes of the call, we've been investing a lot of money in growing Asia. This is a real big opportunity for us, Steve, for the future. It's going to cost us some money for now, and we see also -- but you got to speculate to accumulate, and we see this massive opportunity in Latin America and Asia, and are pumping more money into those areas. Happy to figure the details later if you want, Steve.

Okay. Thanks.

Thanks a lot.

Our next question comes from the line of Jeff Sprague of Vertical Research Partners.

For David or George, but David in your preamble, you kind of mentioned that classic balance between growth and margin at 3M, and the R&D numbers are obviously directly apparent in the P&L. But wondering if there's anything else that kind of stands out in the margins in the quarter in terms of marketing, other product development actions or things like that. You perhaps took an opportunity in the quarter given what was going on in the top line.

Well, if you look at R&D and SG&A, what you would have observed sequentially is that the absolute spend level is roughly comparable to Q4. And what I would infer from that is the fact we said that we had a number of heavy investment programs that we were undertaking in 2010. And those are now in the base. So what you would expect or what you should expect is that we wouldn't see the absolute spend go down. But now we're running with those businesses in our base business, and they're starting to pay off. We're starting to see growth from those incremental investments. They're not fully delivering the kinds of income and margin that we expect, but it's the kind of thing that we have to stay with. So what I would take from it is that the investment plans that we put in place are continuing, and we're starting to see the kinds of initial indications that that's going to support our growth and we can still deliver the margins that we aspire to.

And if we could perhaps take that and just drill it into a business, perhaps healthcare, you mentioned that growth is finally showing some signs of life. The margin is back down into the high-20s. Again, using that business as an example, is that where the margins in healthcare need to be to drive satisfactory growth in that business? Are margins actually even want to kind of go lower as you're pushing growth? Obviously, there's some deal impact in there also but...

Yes. Well, we've been pretty consistent in indicating that margins in the high-20s for healthcare is the right kind of place for the company to be. That reflects the fact that we are investing in the business for new products and new innovation to grow, and we think that, that can continue. As I mentioned, we saw an inflection in the growth for the first time in some time. Is that the trend? Well, actually, not. It's 1 quarter, right? But we think we're moving in the right direction on that.

And just a quick follow-up, if I could. You mentioned the international investment, but given the tight capacity situation overseas which you are, I guess, it's fair to say chasing to some degree, although in a good way, to what extent have [indiscernible] and to what extent are you kind of leveraging weak dollar? And thanks, I'll pass it on.

Well, I think it's almost opportunistic. We were doing it when there was a strong dollar, Jeff. So we're not ramping it up because of that. And I think ultimately, that will reverse itself. So the strategy to go to the markets that are growing fast regardless of the exchange rate is clearly there. We'll capitalize on some benefit while it washes into our P&L account in the short term, but it won't alter our strategy 1 bit. It's where the growth is. It's where the opportunities lie. Of course, we're hoping, as we were just saying, that healthcare is now back on a little stronger track. We're hoping the United States, perhaps it's beginning to yield to the innovation pressure. And we don't see ourselves -- when you think about all of the currency's that are involved, Jeff, across the world, there's almost a sort of self-leveling, some are gaining on us, some are weakening against us. So I don't think we're doing that or even getting that just because of pricing. I suspect that would be more a case, Jeff, in capital equipment is what I think.

Thank you very much.

Thanks, Jeff.

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

I was hoping to get some more color on the automotive exposure for 3M. Based on our estimate, it's around 11% of total revenues, but it's got a nice split between OE and aftermarket almost evenly. But what are you baking in for production? You called out Japan impact for auto, but this is – it has other global implications. So what are you baking in over the near term on these production disruptions?

What we're assuming is that in Japan, in Q2, that production will be down about 50%. So that obviously impacts us in Japan, and there's also some knock-on effects externally. The data that we refer to most commonly is CSM, if you're familiar with them, as a kind of a leading indicator or economist in the auto space.

And what -- in terms of the ripple effect, I mean, there's some level loading going on where other production should benefit, have you factored that in as well?

No, we have not. So we don't -- we have the best visibility on the direct impact with the Japanese suppliers, and we have not factored in sort of the secondary effect of potential market share gains, which I think you see on a delayed basis, because if for example, the Americans or the Germans are gaining share, they can draw on their inventories, so you wouldn't expect to see an impact of that until you get out of the second quarter into the third and fourth.

Great. And then just last one for me would be related to M&A. And it's clear that 3M has the balance sheet capacity for more transaction. I'm interested in hearing any commentary about the capacity on deal integration. Is there -- could there be any bottlenecks within the organization that have multiple integrations going on simultaneously? And are there any pinch points there? Or do you feel very comfortable with the ability to add more deals over the near term?

It seems to work out okay, Deane. Obviously, it's a big company, and while we do a lot of acquisitions they're spread right across the company. So it tends to be different people doing the integration. There are maybe here and there some pinch points in finance and IT that you get some of the same people having to deal with these issues, but it does not seem to have been an impediment to us so far, and the biggest acquisition we've ever done, which was the Aearo acquisition has run like absolutely clockwork. So I think we continue to get better at them. I think we continue to be more realistic about forecasting, about pricing, and I think we've done a pretty good job of executing deals recently without too many times overpaying for them. I'm pretty pleased with the way it's going so far, Deane. And we do have a lot of capacity and there's stuff down the pipeline as you can well imagine, but it's all sort of front and central, bolt-ons, stuff in the core or near to the core that you'd expect of 3M, and while we always hope for something more significant, we tend to be pretty balanced in our attitudes toward risk and not wanting to do something that might in some way damage the company.

Great. Thank you, and I like the 3 Dog Night reference too.

Thanks, Deane.

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

George, in Optical, given the price down and lower attachment rates, can you still grow earnings in this business in 2011?

My guess is it will be about flat, Dave. I mean, 1 point up, 1 point down, that kind of spread. So I think for now, probably a flat income stream is about the best we can probably hope for. Maybe not the best, but that's probably the most likely we could hope for.

And would you expect resumed growth next year in this business?

Well, you always hope for those sorts of things. But it's a constant battle of bringing more for less to the end customer, and some of these end customers are pretty tough. They've got their own set of issues that they're wrestling with. But this has been a remarkable business in many ways, Dave, and you have to give great testament to the creativity of these people who -- when you think about what it's like in a $2 billion business to take a 12% price down year after year after year, 3 years in, that means $400 million coming out of the cost. It's just vast. And I think it's a testament to the capability of the people at 3M. And I really mean this. This is not some sort of slop off thing. These guys have done absolutely marvelous, and I imagine that they will continue to do the same, Dave, and it's where I think ultimately the capability of company like 3M with its scientific capability, it's magnificent world-class manufacturing, will ultimately be the last man standing and many of the smaller competitors that don't have this kind of capability that can only sell on price that they can only sell on low-margin...we'll ultimately, we'll win that battle. I'll bet on 3M.

Thank you very much.

Thanks, David.

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

So on Display and Graphics, good to see the nice performance, and this is without any sizable boost from Optical. Used to be that when Optical sneezed the segment caught a cold. So looks like the other businesses are kind of picking up the slack here. So maybe talk about what you are seeing commercial graphics, what's driving the growth, it looks like very nice double digit in the quarter. So talk about initiatives and what are you seeing in end market spending there?

Well, you see, it's a number of different things. We're obviously seeing great growth in the core of that business. What we've done, Ajay, is to roll out over the last few years, Bob and his guys have rolled out a range of new products at more attractive pricing but good margins. So we've been able to appeal to a wider swath of the marketplace. We've got some nice little fledgling activities in various parts of that in projectors, in some stuff we're doing for fast food retail, that if it works well, could become an actual blockbuster. But I'm not at liberty to tell you too much about that right now. So there's a lot of great great undercurrent -- groundswell shall we say of initiatives in that business. And of course, let's not sort of -- let's not sidestep the wonderful presence in the market that our Traffic Safety business has. We are the most competent, the most able, the most competitive company in this space. The most innovative, our signs are the best, they last longer. Here and there they maybe cost a little bit more, but we are the kings of this particular castle. And so this is a great segment, although over the years has been buffeted around by Optical. That doesn't mean that the core, the base of this business is not great, and that's what you're seeing.

Good. And then just 1 more on your guidance, the 4% to 6% sales contribution from acquisitions, what is the earnings accretion that's implied this year? And then what do you expect for '12?

We have small but positive earnings accretion in 2011 in the plan. Generally, from a planning perspective, as a portion of those acquisitions that are in that number have not occurred yet, we assume either those would be neutral or slightly negative within the year. It depends a bit on the timing as to when they occur. But overall, slightly positive. And obviously, in 2012 and beyond, we intend to ramp up those results, which is why we're doing these acquisitions in part.

So net-net, maybe flat past acquisitions, and what do you expect to do this year just in terms of the earnings impact and then for next year positive?

Ajay, for 2011, it would be a few cents accretive based on the deals that we have. The important point though, which is the one David brought out, is for the additional 1% to 2% that we haven't yet executed but are sort of in our thinking, depending on the timing of that, could influence that number. So in other words, if those deals happen later in the year and we have purchase accounting that happens later in the year, there could be some impact there. But right now, our thinking is a few cents favorable in '11.

Got it. Thank you.

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

And, David, I want to thank you for the kind of the bridge on Page 7 on the operating margin walk. I'm wondering if you can talk us through those buckets as it relates to the second quarter year-over-year perspective and kind of how those pieces change. You have talked about price raw materials getting a little bit better. Presumably, you're still assuming that's a little bit net negative. Maybe we start with that one.

Yes. So what we expect is in the second quarter that as you have just said, we exited Q1 with better price performance, and we expect that to continue. But I believe that in Q2 we'll still be somewhat negative. Obviously, as we laid out here, the Japan earthquake will become more significant in Q2 on the negative side before the second half basically trending towards 0. The pension OPEB expense is a constant through the year, so you can expect that to be similar. And then, obviously, our organic growth in holding the guidance at 6% to 7.5%, this 8.9% is slightly above what we expect to be the case for the year. And obviously, Q2 will be pulled down a bit by Japan and could be to the extent that we see some inventory correction in the Optical space.

Okay. So Dave, the $0.10 or so, I guess, that equates about 120 basis points negative just to your point there, is that about right? Or is there something in the tax calisthenics that make that a little different?

Terry, could you repeat the question? It wasn't clear.

So on the Japan earthquake impact in the second quarter, you've quantified that from an EPS perspective, and I think $0.10 at the high end. If you just work your way back up, unless there's something funny with the tax calisthenics for just Japan relative to the company total, that would be about 120 basis points impact in the second quarter, is that sound right or is that too strong?

We've showed you $0.07 to $0.08 on Japan on Chart 9 in the second quarter.

So it's $0.07 to $0.08?

Yes. So that would translate -- I don't know the exact number, Terry, but it wouldn't be the 120. It would be something a little less than that.

Okay. And then on the organic volume leverage, I mean, the Q1 bridge kind of implies 10% incrementals. Presumably, that's the kind of the dampening effect of the year-over-year strong growth in SG&A and R&D. And so that would moderate in the second quarter to where the base volume incrementals would go higher. Is that fair?

Yes. If you that year-over-year Q1, the leverage we got on our growth, it actually ex-factors looks pretty typical of what we expect from organic volume leverage. The ex-factors, of course, are those captured on the page, plus another one, which is on a sequential basis, of course, we had option expense that's more heavily weighted in Q1, and that's going to come off in the subsequent quarters. So that, all other things being equal, you can expect an improvement in our margin just due to the reduction in terms of option expense.

Terry, that number in Q1 is about $60 million higher than it will be in Q2, 3 and 4. They are front loading the Option expense.

Okay. So it sounds like wrapping all that up, down year-over-year but less significantly than Q1?

Correct.

Okay. Great. Thanks very much.

And our last question comes from the line of John Roberts of Buckingham Research.

Maybe I'll finish with one on LCDs since that's where you didn't want us to focus. The full year '11 guidance previously had been flat to down 5%, I thought. And I thought that first quarter might be one of the tougher, worst comps, but it was actually up mid-single digits there. As we go to the second quarter and third, are we still going down? I guess I'm just trying the trajectory of the year as we progress here through the next couple of quarters.

Yes. So the trajectory for the year, what's true is we think that, first of all, at D&G level, the kinds of margins and growth we showed at the total Big B we think is still pretty good guidance for the year. We've got, as we talked about, very good performance in terms of traffic safety. Seasonally, that will get better. C&G, the Consumer and Graphics, is continuing to perform well. So if you look at the whole package, we think that D&G guidance is pretty good for the year. If you look at Optical specifically, yes, Q1 came in well as we recovered off of the very weak performance in Q4. If you look out for the year, what we expect to happen is that in Q2, it wouldn't surprise us if there is an inventory correction in the channel. And then secondly, if you look at the half year, the second half of the year, certainly end market demand is forecast to be improving. But we do foresee the likelihood of some lower level of attach rate for us for TV to the tune of down to 25% attachment rate. So as I said, when you add it all up, we think D&G guidance is quite good, but you might get some level of remixing, both across the quarters and between businesses to get there.

The flip side of this coin, John, is that tablet demand and pad demand, which you know is just going up like a rocket ship, and we're the suppliers to those folks. So you've got this, kind of, pools and eddies shall we say across that display business in the Optical Systems business where you've got some parts are really just rocket ship strong. Others, which you go in through the typical torture cycle like LCD, where it's every sort of -- it's a micro cent per square light year are -- at issue. And that's why people make switches. So this is a battle that we've fought and lived in, sometimes won, and I don't think we've lost it very often, but we certainly got our nose bloodied once or twice. I don't think this is going to stop. But it's why we pointed out that as we are growing in so many of these other spaces so quite wonderfully with so much innovations across the company, that ultimately less and less and less, over a period of time, this business becomes a smaller piece of our puzzle. And obviously then, it makes it less important to you and more easily manageable for us. But I still think ultimately we will be the last man standing in this business, and this will then mature to a nice steady business with reasonable margins and maybe GDP plus growth rates. That's where I think this ultimately goes in, say, 3 or 4 years time from now.

Thank you.

Thanks, John.

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, everybody, for joining us. Had great discussion. Appreciate the questions, and we look forward to talking to you very soon. Bye bye.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation.