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3M Company (NYSE:MMM)

Sanford C. Bernstein Twenty-Ninth Annual Strategic Decisions Conference 2013 Call

May 29, 2013 8:00 am ET

Executives

Inge G. Thulin – Chairman, President and Chief Executive Officer

Analysts

Steven Winoker – Sanford C. Bernstein & Co.,

Steven Winoker – Sanford C. Bernstein & Co.,

Good morning and thank you all for joining us very early at the very start of our Strategic Decisions Conference. I am Steve Winoker, U.S. Multi-Industry and Electrical Equipment Analyst here. We are very fortunate again for I think the third year now. We were describing to be joined by Inge Thulin, now Chairman, President and CEO of 3M Company with $30 billion of sales, gross margin in excess of 47%, operating margins of almost 22% and return on capital north of 16% with a dividend payout ratio of about 37% or so and 2017 targets that call for 4% to 6% organic growth, 9% to 11% EPS growth, more than 20% ROIC and 100% free cash flow conversion.

Inge has been at 3M for more than 30 years, but took over the helm in February of 2012 had operational responsibility before that as well. And I am sure you would all like to know that the stock is up about 28%, 28% since that time almost 450 basis points of out performance. So with that I would like to remind all of you that we have those anonymous index cards to fill out questions, raise them, they will be brought up by runners to me for Inge.

And with that I will hand it over to Inge and then we will go to Q&A. Thank you.

Inge G. Thulin

Thank you, Steve, and good morning everyone. Thank you for coming in very early as Steve said and even [firstly] this is a little bit early to be on this, but it’s a pleasure to be here. And its one year since I was here last time at this conference and what I thought I would do today is to touch on the primary themes in the plan that we developed during the last year, a year that I will describe as planning, progress and performance. I will also in the end have a couple of slides on what we see now in the current year as our business.

So, first of all, the question is how do we create value for our company and what is our fundamental strength? And the fundamental strength for 3M is the technology platform that is on the center of the plan and then that in connection with very strong manufacturing and engineering processes and capabilities and geographical reach all over the world is the real strengths and fundamental platforms for the company. That in connection with world-class talent, which very much are local organization as of our US$30 billion, sales 65% in the international market. It’s very important for us to have a local organization that can execute the plan. And the outcome of that is, of course, a very strong financial position and performance over many years that I will comment on in a second.

What we started out a year ago was to layout new vision for 3M and it was important for us in order to make sure that we all knew internally but more importantly that our customer understood what we stood for the purpose and where we are going. And it embedded things that we are doing as a company everyday and have done for over 100 years, meaning advancing, enhancing and improving things for either companies, people or in homes and as you know, we are doing that through technologies, products and innovation. And I think when you look upon definition in terms of what the vision should be all about which is what you do, how you do, the way you do it and think about 3M. We think this vision is very powerful and something that we inspire to obtain over time.

What we also did, we laid out six new strategies for the company. And as you can see on this slide, they are all interdependent and the four first one are all around the growth. They are important for us because we believe that there is much more growth opportunities for us on a global basis when we move ahead. The first strategy is around where to play, the second one is how to win, and then you see the third one is the only strategy that starts with a statement invest in innovation, invest in research and development and I will make a comment on that later. So the four first one is around growth, the fifth is around people and the last one is around operational excellence. And of course for us operational excellence is a key element than that element that will pay for the growth as we move ahead.

What we did also during the year we started to prioritize our businesses and it was important for us as an organization to get the good understanding of the different divisions, where they stood and what we needed to do in terms of allocation as we move ahead. And as you can see on that slide here that we categorized them in something called Heartland, something called Push Forward, and then some in Strategic Review. It’s important not only for allocation of resources in terms of capital, but is also important relative to selection of leadership for different businesses. So at least for me portfolio price decision is essential for success of any company and that was one of the reason why we did it.

We also realigned organization. As you probably recall, we had six bigger businesses in the past and we looked upon it in terms of making sure that we off that we had a vision and strategy in place, we also look to the organization. So what type of an orderly way to go, strategy first, organization second. And as you can see here, we form them into five business groups with industrial which is almost US$10 billion and then you have health care, consumer, safety and graphics and electronics and energy. Very important for us in terms of coming closer to the customers in terms of faster speed in terms of the technology platforms back to the end markets. So that was an important realignment of the organization based on the market and opportunities we saw. We also recommitted through research and development. And as I said is the one strategy starting with a statement, invest in innovation.

We had a very strong history of research and development and innovation and historically we are standing between 5% to 5.5% of our revenue into research and development. I don’t believe that’s enough and I think we can do a much more and we have made a statement to come closer to 6% in the next five year period in the strategic plan. And it’s important for us in terms of making sure that we can continue to launch and commercialize new to the world products in order to by definition giving a very good return to our shareholders as we move forward.

When we look upon opportunities in terms of growth, you see on this chart that you go back to 2003, 21% of our business was in the developing economies and 79% in the developed. And you can see the evolution up to 2012 for that split is 34%, 66% and we believe in the next five years that’s going to 40% to 45% in developing and 55% to 60% in the developed world. And why this is encouraging for us and very important is when we look upon the evolution of a country, the way an evolution is happening is as all of us know but it is important to think about it in terms of our portfolio of 3M is its always starting by building out infrastructure in a country.

When that is done, the next thing that is happening is the manufacturing is moving in. As manufacturing is there, as people start to get money to spend, also safety is becoming important, and safety is often moved in through companies that have stock to put in manufacturing in place because in many cases those are companies that are coming from the developed world and they will make sure that they protect the workers in that part of the world in the same way and with the same standard as in the developed world. After that is consumer coming, you know, people start to spend money, so they go to retail and start to spend money. And the last portion that is coming is healthcare. There is always healthcare in a country, of course, but the most advanced healthcare is coming in the end of the evolution. It’s not going exactly in this way in all countries all the time, but basically this is what is happening.

If you think about 3M’s portfolio, we are in very early when infrastructure is created. We into traffic safety systems, we into telecom, et cetera. When manufacturing is moving in, we are there with all big business groups in industrial which is over 30% of the company, big utilization for us and big opportunity. When safety is moving up, our whole portfolio around safety is playing a very important role. And as I said earlier in many cases all would specified in the developed world. When consumer start to move and spend money, we are there with our product line in terms of Post-it, Scotch, Filtrete, Command et cetera.

And then finally, our most profitable business unit is health care that is coming in the end. So when we look upon it in terms of the evolution for us in portfolio as a country have the evolution going forward, our portfolio fits very well. And we have proven this by ourselves specifically in the most developed of developing economies for us which is Latin America. The Latin America for us today is over US$2 billion in sales, very profitable and a very balanced portfolio. So this is working for us through a vertically integration in terms of business model and that’s why we are very encouraged as we move ahead, how we can capitalize on that.

So organic growth is our prime strategy but we will also complement by acquisitions and we made a comment last year that we will continue to spend $1 billion to $2 billion per year relative to acquisitions that all will be complementary to the businesses. And again now as you think about it in terms of our portfolio prioritization that’s an important tool for us in order to make sure that we make the investments in the right area.

Now it’s important for us to make sure we can pay for the investments we are doing and operational excellence is a strong portion for us, a company that over years have had 20% operating income and a return of over 20% in return of invested capital by definition have a good model of operation excellence. However, we believe that we can become even stronger and have now reinforced again Lean Six Sigma specifically in manufacturing. So we have appointed a new organization that are now driving even more into the manufacturing side for us and that’s important. Also what we’re doing, we are implementing SAP system that we are in the third year of implementation that will have a good benefit for us as we move ahead relative to efficiency and operational excellence.

Now, we had a strong record of paying dividends, as you can see on this chart and we have had raised dividends for 55 years consecutively including an 8% increase this year. So it’s an important element for us. And for the future, the dividend increase is expected to grow in line with earnings over time. So very committed to it and had a good record of it. In terms of other means of return in cash to shareholders, stock repurchases and other way and here we indicate our plan that we expect to see in the next couple of years. And you can see on gross stock repurchases, the plan is $7.5 billion to $15 billion over time. And in this program, we estimate, we will add 1% to 2% of EPS growth annually, as we move ahead.

We laid out, during the year, our new targets for the five year plan. We did that on November 8, 2012. And as you can see here, we’re looking for an EPS growth of 9% to 11% in the plan. We’re looking for organic revenue growth of 4% to 6%. Return of invested capital continues to be above 20% and then the free cash flow conversion of 100%.

Now, when you look upon this current year, Q1 for us was a year that was very strong and very good. And as you look upon it here, you can see that we generated a 2% organic growth with four of our five businesses. They grew in the range that we expect them to do for the year of 2013. And in terms of operating income that was 21.6% with four of our five businesses above 21%, only exception was the electronic and energy that came in, in the mid teens. So what do we see for the rest of the year? First of all, we anticipate that it will be tougher in Q2. And as we said as we move into the year that Q1 and Q2 beginning of the year will be slower and the pickup will come in at second part of the year. And that’s what we continue to see. And specifically, the consumer electronic markets that remained weak in the first half and then that we will see the pickup in the second half of the year. As we all know the Japanese Yen continues to weaken and for us that had around 9% of our business in Japan does have an impact.

And you can see we have changed the sales in terms of currency impact of now at being 1.5% negative versus flat in the plan and most of the effect we will see in Q2. But we have then to continue to focus on operational excellence, which we will do in order to offset as much of that headwind as possible and we will continue to invest in research and development as we move ahead and also on capital because as we know capital is type of what we see longer-term, so we are committed to the (inaudible) building in the plan. And then in terms of gross share repurchases, we’re tracking to the high end of the $2 billion to $3 billion range that we laid out in the plan. So we set $2 billion to $3 billion and we are ranging now to the higher part of that one.

So with that I thank you and then I think we go into some questions that you have right.

Question-and-Answer Session

Steven Winoker – Sanford C. Bernstein & Co.,

So if I could ask again everybody to fill out those index cards and while we’re – while I’m waiting for those, Inge. So now here again third year, but more than a year specifically into this role, as you think about it, what’s gone better than you expected at a high level? What hasn’t gone as well? And what have you learned that’s effecting how you read the company today?

Inge G. Thulin

Well, I think, first of all, I am even more impressed of our capabilities in research and development that’s been a big learning for me and I have spent a lot of time in the last two years. As you know, I had nine months of COO, which was maybe a little bit of preparation in order to layout the new strategies or the fine strategies as we move ahead. And I spent a lot of time outside of my own comfort zone, which was to go very much into research and development into laboratories and into manufacturing. And I would say that I’m even more impressed of our capabilities in engineering and in research and development. So I think that’s on the positive side.

I’ve also learned in that process that we needed to prioritize all our businesses. And I will say that I’m very pleased with the way that took hold in the company, the way we looked upon it as a team and the way that all businesses in fact understood the position, which was in combination of strategic importance and financial performance. So I think those are things that have gone well. We have done very good progress in the commercialization exercises, we have still some work to do there, but we are making very, very good progress. And so I’m happy with that as well.

Steven Winoker – Sanford C. Bernstein & Co.,

Great, let me move to our old alternate as we get more cards up here which means to move to audiences and to my questions. 3M is uniquely positioned in the global economy, what are you seeing in terms of recovery in growth in the U.S., Europe and emerging countries?

Inge G. Thulin

Well, we have had a good time in U.S. the last couple of years and one of the reasons for that is that we have refocused on organization. And so we are pleased with the growth we have had here. We had a little bit of slower growth in the beginning of this year, but as we rollout for the rest of the year, we think that we will continue to have the same growth rate as we had in the first quarter. So we are not overly positive, but more positive in the U.S. West Europe I would say that in my view have stabilized on the lower level. And our view on West Europe is, yeah, there is not much growth as we speak, but we should not forget West Europe is 25% of the global GDP. This is a big portion of the economy, is very well developed by definition, well educate the people and there is some very big global companies there.

So even if there is not much of a growth as we speak, it’s stabilized on the lower level and there is still market share to be gained over there which we are going after. And we have also for quite some years looked into our structure in West Europe and consolidated quite a bit. So it’s for us we think we can capitalize big time on that when it turnaround, which will come probably late, I don’t think we see anything during this year.

In terms of developing economies that’s certain portion that are doing well. Specifically, I would say if you go over to some part in Central East Europe is doing well for us, Latin America is doing extremely well and we have done very well for many, many years. And then it’s a little bit mixed in Asia and we saw I think they roll down the gross outlook for China recently again, still its 7% to 8% growth rate there. And if you can on the targets of putting down some gross targets of 1.5 to 2x IPI, you will grow pretty well in a good economy. So I think that when China is coming back and growing even faster, you will also see a big pickup at South East Asia. Now, again, I don’t think we would see China growing as much in the future as I’ve seen in the past, but the economy is so much bigger now and we have a very big business and good platform.

Steven Winoker – Sanford C. Bernstein & Co.,

Okay. So I have at least three questions, maybe four, basically all asking the same thing which is why do you think the second half will be better specifically? Do you see real economic improvement or is it just easier comparisons? And I’ve got about five variations on that thing.

Inge G. Thulin

Yeah, well, I think it’s a combination. I think, first of all, external data have showed us from the beginning of the year that specifically in consumer electronic that that will come back in the second part of the year. So when we roll in our plan for the year that’s what we looked upon as well. We were very cautious as we role into the year and have this type of layout and is based on external data from that perspective. And when that is coming, you will have a lift in many economies around the world. So I think that’s one of the elements and then the comparison is slightly easier for us as well.

Steven Winoker – Sanford C. Bernstein & Co.,

Are there is some specific business units when you think about this that where you see in most of the lift?

Inge G. Thulin

Well, yeah, we would see in specifically electronics, the electronic business that’s what we would see. And then you think about well that business has done, you will see it in electronic and you will see it in Asia specifically. I think that’s what you will see and that’s our plan. Again, we’re very cautious as we continue into the year, right, but that is what we plan for…

Steven Winoker – Sanford C. Bernstein & Co.,

What do you see on the inventory stocking levels in terms of destocking or restocking pattern is going on? Are you kind of neutral at this point?

Inge G. Thulin

Yeah, that’s neutral at this point in time. So I think we said on our last earnings call that we have not seen any changes and there is no change from the earnings call until today.

Steven Winoker – Sanford C. Bernstein & Co.,

One of these questions is just more broadly asking about is the U.S. looking more attractive as a place to build manufacturing capacity and if so, why? Or I mean I remember you and David have talked about where you’re spending your incremental CapEx and things like that?

Inge G. Thulin

Yeah, first of all, yes, the capital requirement on the United States from my perspective. United States is the biggest economy in the world. 3M is the U.S. Company. We have an incredible base here. We have very strong brand equity. We have strong market positions. We have the center of research and development here and we have manufacturing capabilities in this country.

So I personally in 3M we believe in United States, there is still a big opportunity for us to grow, which will be a combination of more penetration and to take market share. Our strategy for 3M has always been a local strategy meaning we invest for the domestic business where will we go. So if it is United States we invest here for production for the domestic markets, when we go through China is China for China, we go through India is India for India and we go through Russia is Russia for Russia. So we never move around in order to capitalize on lower label cost and then export. So it’s always a domestic play. So if you think about that for United States, when it make sense for us, we will invest here for the domestic market, but we will invest overseas for those markets where we capitalize on the local opportunities there which is important of us in terms of long-term also be thinking about exchange et cetera.

Steven Winoker – Sanford C. Bernstein & Co.,

So a related question is from another audience member I mean I get any mind…

Inge G. Thulin

It’s yours day…

Steven Winoker – Sanford C. Bernstein & Co.,

For instance this is not one. When you look out over the next two to three years, what your is your geographies could surprise to the upside or downside relative to your plan?

Inge G. Thulin

I think for us still a big lever for us is Latin America, so I still believe there is much more for us to go in Latin America based on a very, very strong fundamental organization that we have in place. So for us Latin America, which by the way for us is as big as China and its growing slightly faster than China at this point in time. So I would say from 3M’s perspective, Latin America is an upside. In terms of any negative surprises, I don’t know if there is – I think we have been very cautious in the way we laid out the plan. So I cannot really talk to that to say if there will be one specific place that we’ll have a really big impact negatively for 3M. I think if there is a negative impact, it will be for all of us right, but I cannot talk to that specifically for 3M.

Steven Winoker – Sanford C. Bernstein & Co.,

Okay. Other questions here. Are your operating margins and ROIC lower or higher in developing markets?

Inge G. Thulin

All our margins in developing economies are higher than in developed world and that’s based on the business model we are operating and the way we build out businesses. And we have a very vertical model in 3M, which is allowing us to build out businesses and capitalize on investment down different places before you start to make the big investments in terms of manufacturing, research and development as you commercialize. So the answer is our margin is higher there. That’s also why we are very, very optimistic in terms of the build out as I showed on that chart of how economies are developing over time.

And you look upon that it look maybe a little bit terrifically laid out, but reality is like I have lived in many different countries and one place I lived for some years was in Russia and when you live in Russia which I did in, around 1995 you get an appreciation for the build out of a country and an economy what is happening overtime right and I have also across the connection, the time and I can see exactly how the evolution is happening for companies and for people in that country that’s why I’m a very strong believer in that model and you if you think about things now start to move around the world, we had done right, we had our portfolio 3M that will be a good upside for us.

Steven Winoker – Sanford C. Bernstein & Co.,

Yeah, it raises a couple of questions for me, one is, is health care penetration, your health care business at the highest margin is most highly penetrated in developed market and 30% plus margin…

Inge G. Thulin

Yeah

Steven Winoker – Sanford C. Bernstein & Co.,

The other businesses are in the 20s, how do you I get my, how do I reconcile that statement around the developing markets being that much more profitable, is it allocation or the cost base is different or...

Inge G. Thulin

Yeah, varies is in allocation of cost, but its also the portfolio by definition will get a better margin for us in developing economy as we launch the products.

Steven Winoker – Sanford C. Bernstein & Co.,

So even in those other business unit, they are running at higher margin levels, right.

Inge G. Thulin

Yeah, one average they do that, the other thing is we have you think about operation we have much lean organization in the developing economies. So one way to think about it the way most enterprises were building the businesses when they started 50, 60, 70 years ago in United States and West Europe at that time you built a different infrastructure than you need to do today in the developing world right, so you have another benefit then, you have just to learn from the past and I think for a company like 3M and other companies that built our businesses in West Europe in early 50s I think they have to make sure that they and we learn from what’s happened from an evolution of the economy and the business as you move forward. So make sure that you’re very lean in your structure as you build out your business in Central East Europe, Middle East Africa, Latin America and developing Asia.

Steven Winoker – Sanford C. Bernstein & Co.,

Just before I get off this topic, there was one other comment that was made at one point by 3M executive, which was that over a very long period of time that those, the margins in those developing markets would gravitate towards developed market margins naturally. Is that still true or do you think about it differently?

Inge G. Thulin

Yeah, I don’t think that’s true by definition, right. That’s coming back to, if you continue with so called older model that you used at the time when you build business in West Europe maybe it will happen. It will not happen as we are building out our businesses now. And I think it’s interesting for us as individuals and as companies, you have to go through certain cycles in order to learn. I personally went through restructuring of West Europe 2002, where I was after being part of building a centralized organization in West Europe starting in the middle of 90s when every, the theory then was that Europe will be one European Union with free flow of labor and products and there will be one currency. So centralized organization made sense at that point in time from a vision perspective.

It didn’t really worked relative to execution, meaning that you have to restructure that which we did 2002. when you have done that once that I had to do right, which took us seven quarter and we took out 4000 people of total 20,000, when you have done that one time yourself, I can tell you one thing, you are very careful to build infrastructure again, because would not like to do it again personally and you wouldn’t like that to anyone to go an layoff that many people based and that you had built a structure that you couldn’t afford. So that’s what I’m saying that at least if you ask me and my management team, there is no way that we would build an infrastructure in that way that by definition will draw down margins overtime.

Steven Winoker – Sanford C. Bernstein & Co.,

Okay can, another audience question on the same topic. Can you maintain you high operating margins in a low growth environment?

Inge G. Thulin

Yes, we can that’s, yeah. We can and I think that’s the other thing in terms of our efficiency of operational excellence and a vertical business model that we are using as I showed on the first shot relatively to the strengths of 3M which is basically around five platforms. So we will avail it to the…

Steven Winoker – Sanford C. Bernstein & Co.,

So productivity new product mix and pricing?

Inge G. Thulin

Exactly

Steven Winoker – Sanford C. Bernstein & Co.,

Okay. So let me move to a different topic and this is all around basically portfolio management and capital allocation, let me begin with my high level one, which is whether a CEO and Chairman now, what are your most important levers that you are pulling as CEO?

Inge G. Thulin

Well, I think there was an important element to do this portfolio rationalization and prioritization, because that will also make sure that we get an allocation of resources in a different way and everywhere I have been in the past, had been, one of the first things I have done is to look upon portfolio and prioritizing. So I think that’s an important element as move a head, because we can allocate to capital, but we can also look upon the leadership capabilities for each and individual businesses and that is where you have the level by definition to make sure that everyone understand their role, everyone understand their level we will give them in terms of financial targets and they know the objectives, so that’s an important element for me.

Steven Winoker – Sanford C. Bernstein & Co.,

I noticed on that slide that you put up the bubble chart.

Inge G. Thulin

Yeah.

Steven Winoker – Sanford C. Bernstein & Co.,

I think it might have been, quite several around there, you had eight bubbles or eight businesses in these under strategic review roughly and then you had all right well of the 34, but – so right so when we have the size of businesses and all of that, but it’s very helpful. So as you sort of think about those to what extent are you really looking to restructure those versus exit? Or how are you thinking about that? And there is a whole bunch of businesses in the middle of the chart that are not classified as Heartland growth or strategic review, right.

Inge G. Thulin

All right, well first of all…

Steven Winoker – Sanford C. Bernstein & Co.,

And I commend you on the fishing rod decision.

Inge G. Thulin

Okay, well thank you, yeah. Well that’s an example of that. We’re taking action based on the plan. So I think that’s an important element that was one business that we exit that we sold and we are – and that’s a direct outcome of the product decision work we did. First of all the business is under strategic review that we will make money or it should in many cases be very good businesses with other companies. I think one of the issues for them is that they are competing with some incredible strong businesses in 3M, meaning that they are they of lagging our performance that is why we have been there, that’s why we would like to talk to them that’s why we would like to assist what should we do. So some of them we have already combined whether the safety division became a combined with traffic safety systems because it made more sense and we rationalize, we reduced the number of people and drop productivity, et cetera.

So they are all in the process of or going to if we should harvest them or if we should combine them or if we have eventually would exit them. The objective is not by definition to stop and exit, the objective is to start to have a plan well you improve each businesses as you go. And I think the other thing is the businesses that on Heartland that we like, they are big, they are very profitable, they have a very strong brand equity, they are scalable and they are global. We like that, if you are on strategic review of those five things I just mentioned that we like, those business down though are missing maybe two or three of those elements. And then you have to ask yourself the question okay what do you do in order to improve them, but we start by the objective to improve them, now as you saw, we saw one small one that’s, it was very clear early in the work that it couldn’t be really successful with 3M, will be more successful with someone else.

Steven Winoker – Sanford C. Bernstein & Co.,

Okay, I have a number of questions to work through quickly here on the portfolio.

Inge G. Thulin

Yeah.

Steven Winoker – Sanford C. Bernstein & Co.,

In our remaining time here. Let me start with how, what are your financial metrics for acquisitions and why haven’t explicit annual targets beside that you do only $2 billion.

Inge G. Thulin

Yeah, first of all we look upon acquisitions from a strategic perspective and we did the last five, six, seven years, I think we did 60 to 70 acquisitions, many of them were smaller and one of the thing you will see as we move ahead is that they will be slightly bigger than the in the past and then also fewer and they will be really based on our strategic imperatives as we move ahead. So I think that’s where you have to look and I said, as we said $1 billion to $2 billion per year, probably this year is closer to a $1 billion or something like that, right, because its difficult from the timing perspective to lay it out and it should be attractive for U.S. as we move ahead. But I think it’s we evaluate on the whole time as they come up into pipeline and we try to see where it will make sense for us to move forward.

Steven Winoker – Sanford C. Bernstein & Co.,

So this related question is, why aren’t given interest rates are so low, why aren’t 3M and other large cap as you look them not doing more M&A right now?

Inge G. Thulin

Yeah, well as interest at the low, the prices is also high right and so that’s the interesting element of it. And our prime spread is organic growth, right. So we will do it as a complimentary strategy to our growth rate but up at this point in time there has been many in the pipeline but in our view have been too expensive to execute them at this point in time. So I don’t think it’s a metric by definition that you just have to do because you are assisting with money unable to do it. And in my view is not, objective for me is not to do acquisitions, the objective for me is to do the right acquisition, so I think that’s more important than take my time on it. And then if we’re not able to do it, we will invest in organic growth and eventually give back some money to shareholders, which is then better than to do a wrong acquisitions, right.

Steven Winoker – Sanford C. Bernstein & Co.,

Right and so three related questions on buybacks and on your balance sheet. One comment here I think is interesting, cash generation is so strong in good times and bad. Why not you share repurchases as an ongoing means of achieving 2% to 3% EPS growth annually rather than on an ad hoc basis or at least say repurchase will be used in a down trend to support 9% EPS growth when the economy is weak, which is the low end of your 9% to 11% range.

Inge G. Thulin

Yeah, well, we would like to add the flexibilities as we go ahead. And as I laid out the plan as we go ahead which is a step-up in fact right. We would like to keep the flexibility as we move ahead and still have a strong balance sheet and see if we can do something that is interesting for all of us in terms of growth as well. But I think we have a major step-up this year, we are coming closer to $3 billion versus the $2 billion to $3 billion we laid out. So I think we’re on the right track. And we have a history of done it well I think and we would like to continue our plan as we have laid it out.

Steven Winoker – Sanford C. Bernstein & Co.,

And you also made the decision this year to take dividend growth to inline with your EPS growth…

Inge G. Thulin

Yeah

Steven Winoker – Sanford C. Bernstein & Co.,

…rather than slightly below I am not sure that gets fully out there.

Inge G. Thulin

Yeah

Steven Winoker – Sanford C. Bernstein & Co.,

What that decision to increase your dividend payout?

Inge G. Thulin

Well we just thought it was a fair way to do it, I think it I should be a ratio relative to our shareholders that they can look upon and we just thought that, we have a good history of dividends, we just thought there was time for us to step-up a little bit, which I think was very much appreciated.

Steven Winoker – Sanford C. Bernstein & Co.,

It is part of the multi step plan or…

Inge G. Thulin

No, is not part of a multi step plan.

Steven Winoker – Sanford C. Bernstein & Co.,

Okay

Inge G. Thulin

It’s just something we decided this year.

Steven Winoker – Sanford C. Bernstein & Co.,

I had to ask great. How do you think about the framework for your correct leverage in capital structure in the company?

Inge G. Thulin

Sorry…

Steven Winoker – Sanford C. Bernstein & Co.,

Your framework for leverage your operate – your sorry financial leverage in your capital structure.

Inge G. Thulin

Yeah

Steven Winoker – Sanford C. Bernstein & Co.,

I think this question is alluding to why not increase the debt level.

Inge G. Thulin

Yeah, well I think first of all we have a history in the company in terms of how we have used the model of capital allocation and we laid that out on November 8th in the Shareholder Meeting or in the Investor Meeting in St. Paul, we are sticking to that plan. So I think is important that we have the element in terms of make sure that we first of all focus on having resources for organic growth, which is a key element for us so that’s why were working the plan on.

Steven Winoker – Sanford C. Bernstein & Co.,

Okay and then this question is interesting, do you target, it’s basically do you target growth, share buybacks or net. So will you adjust the size of the share repurchases if you see okay…

Inge G. Thulin

But I assure here with gross.

Steven Winoker – Sanford C. Bernstein & Co.,

So you won’t adjust it if you receive more than expected options exercises?

Inge G. Thulin

No we won’t.

Steven Winoker – Sanford C. Bernstein & Co.,

Okay our executives, I don’t like this word, but do you motivate executive with incentives with, on ROIC to use ROIC all the way down and if you do how do you flow it down?

Inge G. Thulin

Yeah. Well we have a couple of different compensation systems in place and some of our executive management which is the top 100 leaders in our company that are basically measured on the objective that we’re showing for our shareholders. So its part of the compensation system and one of my compensation systems is on the four metrics that I showed which is earnings per share, organic growth, return of invested capital and then cash dividends.

Steven Winoker – Sanford C. Bernstein & Co.,

I want to hit some of these other questions, we have a quite a diverse set here. So maybe in a very short answer that’s one. What are some of the disruptive new products that you are excited about in the future? And this is about another follow on question in R&D, but what it means for that first one?

Inge G. Thulin

Yeah, we have, yes, put in place new innovation board that is working on currently 15 different new ideas in terms of disruptive technologies and as a capital of them that’s a very interesting in fact it’s a little bit early to talk about, but they are very, very interesting and we hopefully can show that some time next year hopefully but I’m not really sure. There is a couple of them that are very, very interesting. The other thing that is a big effort in terms of research and development is what we’re doing around sustainability and we have had a couple of breakthrough specifically around adhesive activities, which is based on plant based adhesive steps that are reusable and renewable. So that has now been commercialized in our consumer business group in icon brands like Post-it and Scotch and now that platform is available for the rest of the company to use. So I think those type of things are very, very interesting as we move ahead.

Steven Winoker – Sanford C. Bernstein & Co.,

So if I ignore the disruptive stuff you can’t talk about and we just look at the existing portfolio that the – that’s one, is there a second most product that’s already out there, but not widely been distributed yet that you are more excited about it?

Inge G. Thulin

Yeah. I think one thing I would talk about is the way we build out a ceramic platform, which we did actually through an acquisition with Ceradyne. So if you think about that we had a very good capability, already in ceramics but we expanded it and that’s one of our 45 technology platforms. So that acquisition in Ceradyne is very, very promising long-term for us and I think its 15 different divisions that can use the technology into aerospace, to automotive et cetera. So I think from building our platforms that is what is very exciting for us and I think its important to look upon not from specific product perspective but to look into the markets and see what we can do in terms of solution based on the platforms that we have.

Steven Winoker – Sanford C. Bernstein & Co.,

Two related R&D questions. R&D spend increased from 5% to 5% plus, how will they measure the ROI and that investment three to five years are now, how do you know that standard efficient spends.

Inge G. Thulin

Yeah, well first of all the way we measure it is NPVI, New Product Vitality Index and that for us have gone in the last five years from 19% to 32% the objective is to move towards 40. So NPVI which is stands for new products so today that was not commercialized five years ago, it’s like 32% for the company. So that’s an important element.

Now the increase we are shooting for in terms of research and development we’ll go very much versus new products to new, new products, meaning new products to new markets. So we have three categories we have Class III, Class IV and Class V. Class III is product where we replace ourselves, so we cannibalize ourselves, we are doing very well Class III. Class IV is new product to current customers or current markets, we do okay. Class V is disruptive technologies new products for new markets? More risky, take longer time that is why we make this investment for the company in order to make sure that we make some investment where we would see the result may be five to 10 years from now and its more difficult for the business units and the division to do the investment, because we are so focused on the next quarter. So we put money aside and step up in research and development, we go to Class V everything that’s where that is, that’s also with these new innovation what was put in place in order to measure that.

Steven Winoker – Sanford C. Bernstein & Co.,

And related R&D question from the audience was, how does that – what could accomplish that R&D spend is going to drive higher margins giving your already high margins?

Inge G. Thulin

Well, by definition, when you introduce a new solution based on higher element into the marketplace you will by definition be able to take out the higher price point and you have to efficient in a manufacturing capabilities as well in order to drive down cost. So history for us is that we are able to drive higher margins by introducing new products at the whole time, that is why research and development is in the [center] of plan, its a key element for 3M in the past, it was in the past and will be in the future to make investments in research and development, if not after a while you would be (inaudible) then you run into real big problems in terms of your cost structure and price point meaning less margin.

Steven Winoker – Sanford C. Bernstein & Co.,

Are you being more selective about the prior pyramid strategy approach that was discussed?

Inge G. Thulin

We don’t talk so much about the pyramid strategy; the pyramid was basically the marketplace. So I would say that you look upon it, there is a marketplace that’s where you go into the strategy in terms of look upon your penetration level, your market share levels on a bigger scale then you have to work inside that’s market in order to both take market share and improve your penetration.

Steven Winoker – Sanford C. Bernstein & Co.,

Okay I want to get to a couple questions from the audience or few questions on the Yen Japanese Yen exposure and the steps 3M is taking to mitigate that impact in the business and hedge, towards of your hedging et cetera...

Inge G. Thulin

Yeah, yeah. Well a couple of things relative to Japan. We start through reset the Japanese organization probably four years ago and we in that time invested $51 million in order to reset the manufacturing equipment in Japan at that time. We also start to move and shift the resources versus more domestic businesses because one of the thing that is big thing in terms of the business in Japan is consumer electronic and automotive industry but a lot of them are export businesses out of Japan. So you think about the new agenda for Japan is more domestic. And we started in that time to focus more on our consumer business and more in healthcare business in order to build them out. And what we saw here in the first quarter, we had 7% growth in Japan for consumer and healthcare businesses. So that basically what we have to make sure that you look upon structure, you look upon your portfolio, but I think the good thing for us is we started four, five years ago as we did with West Europe by the way when did our restructuring and realignment in West Europe started long time ago, right. So you have to be ahead of it in terms of but we don’t change anything relative to hedging based on the current situation, and we laid out the impact it will have for the year I mean in Q2.

Steven Winoker – Sanford C. Bernstein & Co.,

Okay, and let me at least get to a couple of international questions, what changes are you seeing in the competitive environment with regard to Chinese competition? Any pricing pressure in particular areas?

Inge G. Thulin

Yeah, in terms of, and we talked about this earlier here this morning Steve. Relative to, you see more competition of local competitors in China and that type of natural big companies and they are competing there. Up to this point in time we have not, we have at least not seen significant Chinese competitors on a big scale and the rest of world, but they are coming in type of smaller companies start to build out the capabilities. So I think its one of those things that you cannot be complaisant then you need to make sure that you have your eyes opened the whole time relative to how to build out around the world, but I would say for the Chinese competitor specifically I think the biggest push you have is in China by definition at this point in time.

Steven Winoker – Sanford C. Bernstein & Co.,

And pricing pressure in any particularly spot globally?

Inge G. Thulin

No, I would not say so in terms of specifically coming from the Chinese companies, no.

Steven Winoker – Sanford C. Bernstein & Co.,

Okay. And we are out of time. I would end with a question and give you some closing comments. This is a very positive question, why is Latin America the shining light in developing markets? Is it the team or is it how your products are positioned within Latin America versus other emerging markets?

Inge G. Thulin

Yeah. I think it’s a combination of us being in very early, we had been in Brazil since 1946, so think about that people start to talk about brick a couple of years ago, eight years ago 3M was there in 1946. And then the way they have positioned the products all over Latin America is broad based, so if Brazil and Mexico are the big portions but all the smaller countries are doing very, very well. And then I would say for us in Latin America, we have a very string team and it’s a combination of entrepreneurship and process orientation, which is a fantastic combination when you think about it. So is this can do attitude and able to mix the two of them in a very, very nice way. And as most of us know, American brands are playing very, very well in Latin America. And if you’re in early, you would build a good base and that’s what we have done. And I would say have had over years a super team that have cannibalized on the opportunity.

Steven Winoker – Sanford C. Bernstein & Co.,

I’m sorry I didn’t get to everybody’s questions. We have a lot, but any closing comments.

Inge G. Thulin

No. Thank you very much. It was pleasure to be here for the third time.

Steven Winoker – Sanford C. Bernstein & Co.,

Thanks very much Inge.

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