3M Company Q4 2009 Earnings Call Transcript

| About: 3M Company (MMM)

3M Company (NYSE:MMM)

Q4 2009 Earnings Call

January 28, 2010 09:30 am ET


Matt Ginter - VP, IR

George Buckley - President, Chairman & CEO

Pat Campbell - SVP and CFO


Scott Davis - Morgan Stanley

Deane Dray - FBR Capital Markets

Jeff Sprague - Citi Investment Research

Terry Darling - Goldman Sachs

Steve Winoker - Sanford Bernstein



Ladies and gentlemen, thank you for standing by. Welcome to the 3M fourth quarter earnings conference call. During the presentation, all participants will in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Thursday, January 28, 2010. I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Matt Ginter

Thank you. Good morning, everyone and welcome to our fourth quarter business review. It was great to see many of you in New York last month for our 2010 outlook meeting. I know it's early here in 2010, but we have set a date for next year's event. So please mark your calendars for the morning of Tuesday, December 7. Complete details regarding timing and location will be available later this year.

Joining me on today's call is George Buckley, 3M Chairman, President and Chief Executive Officer; and Pat Campbell, Senior Vice President and Chief Financial Officer. Today's call will summarize our financial results for the fourth quarter and full year 2009 along with our outlook for 2010.

A power point presentation accompanies today's conference call. It's available on our Investor Relations website at 3M.com. Today's presentation and the audio replay will be archived on our website for be an extended period of time. If I could ask when we get to Q&A today you ask you that you limit yourself to one question and one follow-up.

We have plenty of material to cover today and I'm sure we will have plenty of questions so we do want to be fair to everybody. So, thank you for honoring that. And before we begin please take a moment to read the forward-looking statements on slide two. During today's conference call, we'll make certain predictive statements that reflect our current views about out future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent 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. Turn to slide number three. And I will hand it over to George.

George Buckley

Thank you very much, Matt. Happy New Year everybody and thank you for joining us on our fourth quarter call. As the results indicate by staying on plan we are able to deliver another excellent quarter. One that came in a nice little bit stronger than we forecast. You all know the fundamentals of our plan, tight control of spending at factories while retaining a focus on generating cash and using innovation to ethically drive sales as (pure) market share and customer excitement everywhere.

We worked very hard these past few years doing a lot of heavy (spade) work but it's paying off. Much of what we did back then prepared us very well for this economic downturn. That's notwithstanding a superb execution by 3M's people in 2009.

Like were always offering surprises but we are increasing the confident in both the design and implementation of our plan, especially because our business gains strength and momentum in 2009 went on culminating in the quarter that we reported today. So, in the context of the economic environment in which we operate, Q4 was a successful quarter in a very difficult but ultimately rewarding year for 3M. To me a hugely important distinguishing factor of 2009 was our resolve to maintain investments in our future. And that is going to be paying off.

We maintained a significant investment of more than a billion dollars in R&D at a time when many companies were forced to drastically cut back in this area. And we still pulled off great free cash flow conversion even with $900 million investments in CapEx last year. Those investments are clear and present signal of our confidence in the future of 3M. In fact I have personally never been more confident during my tenure here. We have demonstrated our ability to not only weather the storm but to emerge from it as an even stronger company.

2009 was also a year that certainly tested mental of the people at 3M and in many other companies too. I would roughly say the communications sections here that after our experiences in 2009 our team will never be afraid of another business challenge in their lives ever again.

In many ways my confidence that of our leadership team is a reflection of the confidence our people now have in themselves. That said we need to be mindful of the economic challenges that still remain. After all sales for the 2009 year was still down 8.5% and there is still no real sign of sustained demand in some key market segments such as automotive, housing and commercial construction.

Across the abroad there was a very strong quarter of each of our businesses posting impressive sales growth accompanied by even more impressive operating income growth. As you can see on the chart we turned in a record Q4 on several metrics and I’m especially pleased that our full year EPS came in at 469 well within our original expected range from a year ago, quite remarkable really when you think about it.

(Inaudible) we earned in Q4 was itself a record high for that particular quarter at 3M. Among the highlights in the quarter was continued strength in respiratory protection and largely because of H1N1 related demand. But before you know what, before we go off and attribute this wholly to serendipity, the fact is that we put the capacity in place early falling a thorough and balanced assessment of the opportunities to growth in that area and it paid off. And when demand our strip capacity in the middle of the crisis we responded superbly and quickly with new capacity. With our new line of low cost respirators about to hit the market, I'm glad that we did it. We are going to need that capacity even if H1N1 demand falls off soon.

There is a similar story in optical systems where sales rose by 53% year on year driven by new product for eco-friendly LCD displays. You recall that we saw the same growth pattern in Q3 as well. Again, even after some terrible pressure from commoditization of optical a couple of years ago we created the marketing ideas and energy saving and battery life extension and the product to go along with it, we never gave up. We stuck to our mantra of new product development, worked our factory costs hard and worked closely with customers on the value proposition that we developed and it paid off.

Great results and certainly not an accident. Congratulations to those folks in OSD that made it happen. You should know that we are taking similar quarters in new generation of braces, adhesive levels, renewable energy, adhesives, special dirt proofing super (hub) referred coatings and many others and we look forward to similar although perhaps not as dramatic results as these new products and derivatives come on stream.

Moving on to some other health highlights. Health care was again a star in the quarter. But all our businesses delivered increases year-over-year. Of note, infection prediction turned in a superb quarter with 14% local currency growth. Industrial and transportation sales grew 10% in dollars led by renewable energy which posted again at more than 40% and the capacity for renewable energy film is just coming on stream in Singapore. (inaudible) and his management team had an extraordinary tough year in the industrial spaces but they dealt with the challenges superbly. It was a joy to see them do it.

Consumer offense held its own on organic volume and let’s face it, that was really hard to do last year. But a real story here is acquisitions especially Futuro and ACE and how they establish strengthening our position in the drugstore channel. Our target this coming year is to accelerate our consumer activity overseas with the acquisition of new local brands and some new product adjacencies.

Asia Pacific led the way internationally with gains in our electronics related businesses and more importantly in our established core businesses too. Our localization efforts are really paying off. The lab in China in particular is delivering great new products with their new product vitality next already in the mid to late 30s and growing faster than anywhere else in the company. You know, it's funny, but in the year when the chips were down for just about everybody, everywhere that so often happens people rally around the cause and delivered super results and although it sounds a bit sloppy but I'm really proud of them and I think that they should be proud of themselves too. Pat will now give you the details and I will come back to discuss the year ahead in due course. Pat?

Pat Campbell

Thanks George and good morning. Please turn to slide number four. For the fourth quarter, earnings were $1.30 per share on both the GAAP reported and on adjusted basis an increase of 69% and 34% respectively, on an adjusted bases this would be a record result for the fourth quarter. Our business is getting stronger quarter by quarter and of course we all recall how tough things were in last year's fourth quarter. Therefore the year on year growth rates will be very good. The $1.30 was ahead of expectations driven by strong sales growth and by relentless commitment to managing our costs. I will cover these details in a few charts.

Full year earnings per share were $4.52 on a reported basis and $4.69 adjusted for special items which are largely related to restructuring actions undertake it in the first nine months of this year. To pick up on something that George alluded to, our original expected range of earnings for 2009 was $4.50 to $4.95. But we had a few ups and downs then and now in the end we posted a $4.69 per share right near the midpoint of our original range. Very few industrial companies can make that claim.

So, my hat is off to our leadership team for once again getting the job done. Please be aware that in 2010 borrowing any very large or unusual items we will be presenting our numbers to you each quarter primarily on a GAAP reported basis. Likewise our estimates of future earnings are on a GAAP reported basis as well.

Please turn to slide five for a deeper look at sales. Sales increased over 11% year on year and the growth was very broad based. Every geographic region expand the sales with notable performances in Asia Pacific at 22% and Latin America and Canada each at 19%. We experienced double digit sales increases in nearly all business segments led by displaying graphics at 19% and safety security and protection at 13.5%. Organic volumes grew 4.4% in the fourth quarter driven by strong demand for optical films and respiratory protection products.

This result should be significantly better than worldwide IPI which is currently estimated at a negative 1.7% by global insight. Organic volumes rose nearly 19% in Asia Pacific. As Korea, China and Taiwan posted the most dramatic increases driven by a combination of improved local demand along with the pick up in global electronics.

Selling prices rose 1.1%, so we effectively held on to price increases enacted one year ago. Asia post the selling price declines in the quarter which is of course skewed by our strong electronics oriented businesses were priced down as a given but net-net we grow through higher volumes. Acquisitions added a point to growth in Q4 and currency impacts turn favorable at plus 4.8%.

Now please turn to slide number six where I will review key elements of the fourth quarter income statement. By any measure, Q4 performance was a very good one. Sales grew to. 11.1% to $6.1 billion, net income rose by 38% and operating margins were 21.9%. This is a remarkable performance by our global teams and a testament to the resiliency of our very unique business model.

Gross profit improved 18% year-on-year and gross margins improve by almost three whole points to 47.9%. Factory utilization accounted for half of the improvement as fourth quarter production volumes improved. Customer downtime was certainly much better than the in the fourth quarter of 2008, when many of our customers chose to shutdown for much of December.

Selling prices were again positive which boosted gross margin by 50 basis points. Raw materials were down slightly versus Q4 of last year adding approximately 30 basis points to our margin. Fourth quarter gross margins also benefitted from cost reduction actions which frankly began in early 2008, and continued throughout 2009. Looking forward, the challenge now is to only add cost to the extent that they drive additional growth.

SG&A costs increased 7%, driven by a higher advertising and merchandising investments along with higher compensation costs related to improved year-on-year company performance. As a percent of sales SG&A declined by 60 basis points. R&D spending was down just slightly versus the fourth quarter last year, impacted by company-wide cost reduction efforts.

We did however; maintain investments in our key growth programs. Operating income rose 38% to $1.3 billion. And operating margins were robust 21.9%. The fourth quarter tax rate was 26.8%, down 80 basis points versus Q4 last year; due to a lower international tax rate and a completion of certain tax audits. This result is inline with our expectations and a strategy of bringing our tax rate down over time.

Sequential P&L highlights were shown on slide number seven. Fourth quarter sales were down just slightly versus the third which is a better result than we would have expected to see in a normal year. Typically, the third quarter stronger than the fourth as customers build inventory for the holidays and consumer offers and electronics.

In addition, Q4 sales in construction related businesses like traffic safety and roofing granules tend to decline due to colder weather. 2009 was different in that fourth quarter sales improved sequentially in both industrial and transportation and electro and communications which suggest some underlying improvement. Of course, these businesses were hardest hit by the global recession so they have some ground to recover.

Health care improved sequentially as well. Gross margins declined 1.3% sequentially, largely driven by lower factory utilization and mix. The mix impact is likely to continue in the 2010, as businesses like Industrial and Transportation and Electro and communications are likely to pickup as the economy improves and they have slightly lower than average gross margins.

Fourth quarter SG&A spending was up $56 million. Largely sales and marketing related including a 30% increase in advertising and promotional investments. R&D was down just slightly. Operating income was off 10.8% and net income declined 3.7%. Please turn to slide number eight. Its certainly is easier to get overly focused on quarterly results these days given what has happened to the economy in the past year.

But we managed our company for a long term success. So it seems appropriate that quickly review a full year highlights. Although 2009 sales declined 8.5% with volumes down 9.5%, the decline was right inline with the overall economy. Our new product vitality index which major sales for products introduced in the last five years was 29% in 2009, up four points year-on-year.

So, we are continuing to gain momentum on the innovation front. We managed our expenses very carefully in 2009. For example, we restructured a number of businesses during the past two years resulting in calendar year savings of almost $400 million. In addition, we amended our policy regarding bankification which added $100 million plus to the bottom line. We also enacted temporary furloughs, froze merit pay and reduced in direct spending by 14%.

All things considered our business teams did a tremendous job in a very tough environment. Finally in the midst of this economic storm, we invested $1.3 billion in R&D up slightly as percent of sales. We continue to support our key larger programs but overall spending was impacted by our company-wide cost initiatives such as in direct spending reduction and obligation policy change.

So on aggregate, we delivered 21.7% operating margins equal to 2008. I believe this was truly an outstanding performance for the organization. Please turn to slide number nine. Even more impressive than our earnings results in 2009 was our free cash flow conversion and balance sheet performance, which was one of our primary objectives going into these tough economic times.

We intensified efforts in late 2008 to drive our working capital and improve our capital discipline. These efforts paid off as we delivered record free cash flow of $4 billion, up $1 billion or 32% over 2008. Full year free cash flow conversion was 126%. For the fourth quarter, free cash flow was $770 million up 16% year-on-year.

Free cash flow conversion was 82% in the quarter, impacted by discretionary pension contributions of more than $400 million in the fourth quarter. Although, not shown on the chart, our global pension plans at year end were 90% funded with the U.S. qualified plan at 96% and our international plans at 83%. Asset returns in the U.S. qualified plan were 12.6% and the discount rates finished at 5.77% down 37 basis points from 2008.

But the actual asset return performance and discount rates are better than what we assumed in December at our outlook meeting. Looking ahead, we expect to contribute between $500 million and $700 million to our global pension plans in 2010. Pension expense will increase by approximately $130 million pre-tax or $0.12 per share. For your modeling purposes, the additional pension costs increase will be booked almost entirely incorporate and unallocated. Since we incurred a 2009 GAAP reported loss of a $100 million incorporate and unallocated, 2010 will be a loss closer to $200 million.

Improved working capital performances was a big driver of our free cash flow. Inventories declined by $374 million and turns improved from 3.8 to 4.6 for the year. (inaudible) turns improved from 6.9 to 7.5 at the end of 2009. This is a record result for 3M and the fact that we did this during a difficult economy makes it even more impressive.

Capital expenditures for the year came in at $903 million right inline with our expectations. We expect 2010 CapEx to be approximately $1 billion. The strong capital discipline resulted in net debt of $1.1 billion, down $3 billion from one year ago. As cash and marketable securities increased by $2 billion and debt was actually reduced by $1 billion.

Dividends paid to common shareholders was $361 million in the fourth quarter and $1.4 billion for the year. Now let's review the performance of our business units. Please turn to slide number 10. The health care business is an absolute jewel in our portfolio, which we highlighted in our December meeting in Europe. With nicely growing end markets that are highly stable. Fourth quarter sales in health care were $1.1 billion up nearly 11% in dollars and up 6% in local currency.

Foreign exchange impacts at nearly 5% of fourth quarter sales. Sales increased in every business within health care, most notably in the infection prevention, skin and wound care and health information systems. Looking at sales by geography, sales grew in all major areas led by Canada, Latin America and Asia Pacific.

Fourth quarter operating income rose 26% to $375 million, driven by favorable product mix, good cost control and continued productivity efforts across the portfolio. Looking at a few highlights, orthodontic products rebounded nicely after weathering economic storms of late. And in our infection prevention business Popular Science magazine awarded 3M the grand award in the health care category along with a 2009 "Innovation of the Year" across all categories for a recently launched 3M Littmann 3200 Electronic Stethoscope.

Health care is once again driving innovation in a big way. For the full year sales worth $4.3 billion up 3.6% in local currencies and again broad base infection prevention and skin and wound care led the way with a multitude of products that improved patient treatment outcomes and an increased efficiency for health care providers.

We also drove positive local currency sales growth in the oral care business. A great result considering the poor economy. On a regional basis, growth rates were the highest in Asia Pacific, Latin America and Canada. Full year profits in health care grew 11% to $1.4 billion as team continues to drive operational excellence and outstanding productivity day in and day out. Operating margins were 31.9% in 2009 and as we have mentioned before, our longer term plan is to keep reinvesting in this business to drive higher growth even if margins at some point compress perhaps the high 20s.

We made several such investments in 2009. For example, our drug delivery systems business entered the large and growing (white) powdered inhalation segment. In wound care we strengthened our market leadership in clear wound dressings with new products for IV sites and chronic wound care.

Dental launch a number of new products including new decay preventive (excellence) curing wise and impression material systems. In health information systems we continue to launch solutions for the new ICD-10 coding, in-patient and outpatient medical record coding, reimbursement and data connectivity. And finally, we opened or expanded major new R&D and manufacturing facilities around the world including China, Singapore, India and Brazil.

Please turn to slide number 11 where I will discuss the consumer and office business. Fourth quarter sales in this business were $887 million, up 11.4% in dollar terms and up 7.1% in local currencies. A number of businesses posted positive local currency growth including double digit gains and home care products and retail health care and single digit growth and do it yourself and mass retail.

The consumer office team has executed a successful bolt on acquisition strategy over the past couple of years and acquisitions contributed 3.7% to this quarter's growth. Two recent deals drove the growth mainly Futuro, a leading supplier of braces supports and compression hosiery along with Ace products one of the great consumer health care brands. These investments combined with their own successful brands, give us important critical mass and the retail drug channel. This leadership team has a long and very successful history of growth in the United States. Be a strong category defining brands and outstanding customer relationships and we are leveraging this success outside the U.S. as well. In fact, in the fourth quarter, sales rose 20% in Latin America, 14% in Asia Pacific, and 8% in Europe. Profits rose in all geographic regions as well.

Fourth quarter profits and consumer office were up 31% to $159 million with margins of 17.9%. Full year 2009 sales were $3.5 billion down 3% which was largely currency driven. Margins were a solid 21.9% for the year, up over two points versus 2008. This business does a fabulous job of creating new products and designing new programs with customers who drive growth and profitability. Most recently we won a number of 2009 good design awards including the Scotch easy grip tape dispenser, Post-it Flag pens and highlighters and Scotch Pop-Up Tape Dispensers among others.

Product design is often is important to the customer as functionality or price in value. Which is why many years ago we invested in a product design center in Italy to ensure that our products have the look and feel the customers demand. Finally, as George mentioned at our December meeting in New York, we recently launched a complete line of adhesive back labels for the office market. Early indications are favorable and their business is beginning to gain good traction with our customers.

Now let's turn to slide 12. Displaying graphics was a bright spot in the fourth quarter, as sales increased nearly 19% to $817 million. Sales grew 15.7% of local currency and foreign exchange impacts added just over 3 points to growth. Operating profits more than doubled to $141 million. Optical films continue grow nicely in Q4 with sales up over 50% year on year. Innovation was the key driver as our recent film technology break through effectively improves the energy efficiency of an LCD panel went over 30% and can greatly simplify its design.

Sales of these films accelerated in the second and third quarter of this year and although fourth quarter sales declined sequentially due to normal seasonal patterns year on year growth rates were very impressive. Optical is a great business for 3M, but there is no doubt that will remain intensively competitive going forward. Our OEM customers continue to drive price reductions and we will need to respond with continued aggressive cost reduction and productivity in order to fund needed new products. Our customers want technical solutions to solve their problems and we will be there to help them when they do.

Fourth quarter local currency sales were up slightly in traffic safety systems driven by the December of 2008 acquisition of a French license plate provider. Sales in the commercial graphics business were flat sequentially and down year-over-year as advertising spending remains soft. However the business did stabilize around year end indicating some potential positive momentum. For the full year sales declined 4% to $3.1 billion and our profit declined 2% to $612 million. Operating margins were nearly 20%. The business here continues to work aggressively to accelerate long-term growth. For example, we recently formed a new architectural market business to expand our footprint in film solutions for interior surfaces and for energy efficient lighting solutions. We also formed a new mobile interactive solutions business to develop products that will improve projection, personalization and privacy for mobile device users. In addition, the business recently announced a unique optical film that enables 3-D viewing on handheld devices without need for 3-D glasses.

Finally we are preparing to launch this third and then in a family of pocket projectors. The MPro 150 which projects high quality images up to 50 inches. This projector is 50% brighter than the MPro 100 launched a year ago and 25% brighter than the 120 launched in September.

We are pitching this new product as the ultimate tool for mobile professionals with a number of compatible applications including PowerPoint, excel and word. The projector also handles multiple video formats. It really is the ultimate all in one entertainment and business tool. We got few minutes feedback on the MPro of 150 of the most recent CES show in Las Vegas and it will be available for purchase in just a few weeks.

Please turn to slide 13. And safety, security and protection services sales grew 13.5% in the fourth quarter largely driven by a personal protection business. 3M is the global leader in the safety market especially in respiratory protection products. In May of 2009 we began to see a surge in orders for respirators approved for use and defending against the H1N1 virus. Since that time demand has continued to exceeded available supply. We estimate that this added about $80 million to the fourth quarter sales in this business and about $95 million for 3M in total. Last quarter we approved respiratory manufacturing investments in Singapore and the U.S. with capacity ramping up in January and targeted for completion by the end of the second quarter.

Elsewhere within this segment local currency sales growth was slightly positive in our building and commercial business driven by a number of new product introductions but all other businesses posted lower sales. We saw a double digit currency declines in our industrial oriented corrosion protection business and in the businesses linked to residential construction namely roofing (granules).

Fourth quarter operating profit increased over 50% and margins were healthy 24.3%. Sales and local currency rose 7.9%. And foreign exchange impacts added 5.6% to fourth quarter sales. Full year 2009 safety and securities sales totaled $3.2 billion down 7.8% in dollar terms and 2.7% in local currencies. We drove positive local currency growth and personal protection products but all other businesses were down. The global recession took a toll on our industrial and construction related businesses within this segment. Despite the sales decline, operating profits remain flat versus 2008 and margins rose by almost two points to 23.5%.

Please turn to slide 14 for looking at our largest segments industrial and transportation. This is a very large and diversified set of businesses that in aggregate correlate well with the broad industrial economy. Sales declines early in 2009 led to swift and aggressive restructuring and cost reduction plans to offset lower volumes, on top of that where large inventory reductions in the whole sale distribution channel. Inventories began to stabilize around mid-year and it now appears that inventory and point of sale levels are in reasonably good balance.

Sales and industrial transportation rose 10% to $1.9 billion in the fourth quarter. Year on year local currency growth was 4.6% which included organic volume growth of 3%. This is a great result considering industrial production is expected to be in negative in the fourth quarter. Fourth quarter local currency growth was led by a renewable energy business at 40% and our automotive OEM business which grew almost 19%. We also drove positive local currency sales growth in Industrial adhesives and tapes. Automotive aftermarket and our businesses supplies (inaudible) into the oil and gas and transportation industries. Other businesses in the segment posted mid-single digit, local currency sales declines in Q4. On a regional basis, growth was strongest in Latin America and Asia, where our China business grew at three times the rate of industrial production.

The combination of better sales volumes higher year-on-year production levels and a best in class cost structure resulted in outstanding Q4 profit growth of 59%. Margins improved by 6.4% to 20.8%. I doubt you'll see better numbers this quarter from any of our industrial peers.

Full year 2009 sales were $7.1 billion down 12.9% in dollars and down 10.2% in local currency. Foreign currency impacts hurt sales by 2.7%. Operating profits were $1.3 billion and operating margins were 18.6%. In addition to driving outstanding results this past year, industrial transportation business continued to invest aggressively to accelerate its growth capability. For example, our renewable energy business recently opened a large scale high-tech manufacturing site in Singapore and industrial bases opened new state of the art manufacturing site in North America.

Recently 3M purification systems launched a high quality disposable filtration system for the biopharmaceutical industry. And finally, our automotive aftermarket business introduced 3M Dirt Trap Protection System which increases paint booth productivity and reduces daily maintenance costs in auto body repair shops.

I cannot say enough about the incredible job this team has done to fundamentally reinvent its business. Innovation and growth are once again top of mind. And this business knows how to drive out cost. Prioritize the best opportunities and execute their plans.

Please turn to slide 15 where I'll summarize results for the electro and communications business. This business continues to get to gather momentum in the fourth quarter with sales up 1.7% sequentially, bucking our normal trend of sequential fourth quarter decline. The growth was led by our businesses that supply the consumer electronics and the semiconductor industries.

On the flip side, our infrastructure related businesses and telecommunications and commercial construction remains soft in Q4. Fourth quarter sales increased 4.6% to $628 million. Local currency sales were up 1.4%, again led by electronics and semiconductor related businesses.

We saw a number of value added and highly innovative materials and solutions into these large and important end markets. Electro and communications relentlessly drove productivity again in the fourth quarter posting nearly 14% operating margins. This margin was nearly four times that of the first quarter. The team deserves tremendous credit in driving efficiencies to offset what has been an extremely challenging global business environment.

At the same time the team has recently developed and introduced a number of new products including solutions for touch enabled mobile handheld devices and smartphones. Other recent launches include electrically conductive optically clear adhesives, wafer handling systems for semiconductor manufacturing, a new line of high voltage terminations and splices for new 3G closures and cross connect blocks for telecommunications applications.

Sales for the full year 2009 were $2.3 billion down 19.7%, the local currency sales declining 17.8% and foreign currency reducing sales by 1.7%. Operating income for the year was $3 million and margins were 14.6 %. All things considered, our electro communications business had a very successful year. We are encouraged by the steady sales improvement and by the great progress and streamline of cost structure.

We look for continued improvement throughout 2010. That concludes my review of the fourth quarter numbers and the full year. Now I'll return it back to George who will describe our outlook for 2010. Please turn to slide 16.

George Buckley

Before we get to your questions, I would like to address our outlook for the rest of year. Frankly, not a great deal has materially changed since our December outlook meeting. But I'm pleased to say that here and there things have hedged to little more positive than we saw in early December.

Of course, as you expect from us, we will maintain our typical conservative stands on these things. You think over the years our increasing experience would teach us how to forecast the next year ever better. But it seems that each of these past few ones have been as deeply mysterious and clouded as its predecessor. Therefore, context recognizing that I'm an engineer and anything I can't forecast exactly is considered by me to be mysterious anyway.

In all seriousness, there are lots of moving parts again in the world economy with a complex mix of factors driving different parts of the world economy up, down or sideways. We try to sort them out in a balanced way in arriving at our consensus view. As I said to you in New York in December, the challenge of forecasting is always hardest around turning points or if you like whether it changes ingredients such as peaks, valleys or points of inflection.

That's what we have here in 2010. Let's not be fooled by the arithmetic magic of year-over-year comparisons. For most companies if we index to 2007 major economies and companies still have a lot of digging out to do.

I mentioned in New York, there are five things which affect our sales in any one year. First, performance of the end markets. Second, supply chain filling and emptying. Three, X-factors. Four, creation of new markets, via product releases and five, share gains.

Some of these are going to be positive in 2010 and some a little negative or perhaps at least uncertain. For example, I think share gains and new product growth should be positive. X-factors of course remain X-factors. Supply chain (filling) should be neutral or positive and blended end market neutral or marginally positive.

As Pat mentioned, there are headwinds in pension and possibly price and labor costs. Stimulus packages to the extent that they made much difference outside of China will be negative. But taken all-in-all this paints us slightly more positive picture than heretofore. But (inaudible) anywhere could afford to take their eye off this bouncing economic ball.

In terms of specific markets, health care will remain positive. As will renewable energy, occupational health, security and LCD TVs. I don't expect much positive news in residential housing, commercial construction or automotive. Consumer markets will likely to grow slightly for us, but by new product innovations in air filtration and labels and perhaps water, too.

So, we have a split of positives and still negative market news but with the positives nudging out the negatives overall. The only market that might get remarkably worse in the United States is commercial construction and our presence there is not that large. Let's remind ourselves again of (inaudible) view there will be no sustainable recovery without lateral improvements in aggregate end market demand, longer term that’s what must happen.

And clearly we have not seen those improvements yet in the United States or Europe to any significant degree. Asia on the other hand has improved nicely with China and India growing rapidly again so absent any economic retrenchment in those areas we will get some additional lift internationally. As I said the December meeting, unemployment seems to be the key determinative of what happens next in the United States.

The danger is being deceived by the potential illusion of falling unemployment rates which might occur only because people losing benefits faster than new entrance of joining the unemployment roles. So, while we might be through the worst of the tempest, we are still sailing in some very choppy economic waters.

As we demonstrated in the recent quarters, this past one included. This kind of overall economic picture is by no mean is bad news for 3M. With great cash flow, high margins and powerful balance sheet with some choices some of the companies don't. So the current conditions present as an opportunity to continue and even to accelerate key investments and to press forward aggressively to gain market share from our competitors.

We can finance our growth internally and we are not dependent on external resources that might get tighter, rarer or more expensive. Of course, we still stay consistent with our core plan of controlling costs, generating cash, and ethically driving sales. I think 3M business leaders and managers have done a wonderful job this year and proven their ability to navigate the worst of the turbulence well.

We are moving more forcefully to drive growth again through new products by managing the full spread of the market pyramid through new acquisitions and of course pushing ourselves forward internationally. The excellent news is that our sales growth momentum continues. End markets internationally are part of this and we are getting some lift from translation tool.

Organic growth is still higher than one might expect from these factors. So it does appear that the new product push is paying dividends that we are gaining some share on new markets are being created. So given this recent performance and our growth trajectory, we are now working with an improved planning frame for 2010 of EPS of $4.90 to $5.10 which is an increase over 2009 of eight to 13%. This improvement over our December 8 numbers is held by a lower pension head wind.

Our 2010 planning framework includes an organic sales volume of plus 5% to plus 7% with faster growth naturally occurring in the first half of the year due to some easier year-over-year comparisons. We expect currency effects to be positive bringing about another 1% to 2% point in sales lift compared with our previous estimate in December of plus 2% to plus 3%. We have been successful in holding operating margins in the 21% to 22% range. And we expect that pattern to continue in 2010. But the great news here is that within these figures we will be accelerating our investments in new business ventures overseas growth and R&D are over $100 million.

This new economic fuel is going to (stove) the growth fires if not all of this seen in 2010 it should be felt in 2011. Assuming there are no changes in tax policy by the U.S. federal government, we anticipate an effective tax rate of 28% to 29% for 2010. And finally we expect shares outstanding to fall somewhere in the range of $721 million to $725 million. We shall most certainly be doing our best to make 2010 a banner year where the previous heavy (inaudible) in investments pay off for us all. And with that I would like to turn the call over to you for questions. Thank you very much for listening.

Question-and-Answer Session


(Operator Instructions). And our first question comes from the line of Scott Davis of Morgan Stanley. Please proceed with your question.

Scott Davis - Morgan Stanley

Hi, good morning guys.

Pat Campbell

Good morning Scott.

Scott Davis - Morgan Stanley

Can we talk a little bit about guidance and the timing of some of the cost that may come back, it looks like you are expecting a pretty good leverage off of that sales volume. But you did cut advertising expense a little bit in 2010 and had some benefit from vacation policy changes. Are there costs or timing or sequential timing issues that we should think about?

Pat Campbell

Yes, Scott, I can't think of anything major, on the vacation front, we will have a little less benefit in 10 than we had in 9 but nothing too significant. I wasn't exactly clear on your comment of book cutting at advertising merchandise. If anything we are going the other way. We are actually increasing our adverse spending. We ramped it up in the back half of this year. I think you saw it in the fourth quarter a big piece of that is in the consumer business both domestically and internationally. So those increases will continue into our 10 plan.

Scott Davis - Morgan Stanley

Okay. That's good clarification. Can we talk a little bit about China? You are throwing up some pretty big growth rates there and maybe it will be helpful for background to understand your business mix. I know this is your folks out there but it's my understanding that big chunk of that is auto and auto has been strong in China so it helps explain. Maybe start with the business mix then talk to us about whether you are gaining share in China or have more product selling into the region you have establish yourself more or weather there is a restock, just a little bit of color please on China?

Pat Campbell

Yes, I will and I kind of anticipated that a number of people are concerned about kind of recent news coming out of China relative trying to slow things down. George and we just happen to be there last week so we kind of have a fresh view on things, I must say the business there is performing very, very well and even into the first part of this year. Our China business, so paying by how you define it if you took kind of the mainland China probably through Hong Kong and it’s about 5% to 6% of our revenue base. As you would expect in China, our business is heavily focused around industrial and infrastructure related businesses at this point in time. So, our consumer business and our health care business would be smaller pieces of the portfolio (inaudible) be the companywide average which is only natural for a country like China as it continues to grow economically.

So most of our businesses there, our larger businesses are around industrial related, automotive is a big market for us as well. But think of it heavily around the infrastructure as well as there is a lot of electronics businesses that are migrating to China as well. A lot of the optical systems business is migrating to China as well, not necessarily for local consumption but for export purposes. And generally speaking our strategy in China, Scott, to remind you is very much a China for China strategy. We, other than the optical systems business where we are effectively following our customers, most of our business there is really been developed for local needs. And as George pointed out in his presentation, the lab that we have in China is just absolutely phenomenal and on fire relative to new product development relative to really developing local products for the local market.

My sense is that still in China we are under penetrated where we need to be. So we can we still have very significant growth opportunities and for those of you who attended New York's meeting in December, (inaudible) you talk about our strategy for China which was kind of a very much an accelerated ramp up there.

George Buckley

You can imagine we pursued at this point when Pat and I were in China last week. And the opinion of people on the ground there is the Chinese government is dealing with this very thoughtfully. Yes, they are trying to call demand and for some people to get concerned about asset bubbles and then of course you Cascade that into worrying whether same sort of thing could happen there that happened here. But the profile of the consumer is very different than it is here. People put very large deposits down on houses. They are much more conservative with their spending and their savings ratios and much, much higher than what you see in the United States. So I think the consumer end of the equation, we are unlikely to see much in the way of any real trouble. On commercial construction, there is some concern that maybe some of those assets have gotten inflated. Chinese government is successful in the actions that they are taking, and nearly these guys so far have proven time and time again whether it's in growth, whether it’s in restocking their economy, that they are very, very smart. We meet a lot of the community leaders, and industrial leaders and government leaders there and what is beginning to happen progressively is they are staffing those positions with superbly well educated people, extremely able folks. And certainly heretofore I think they have proven that they know how to manage this particular situation and I think at this juncture our assessment is that the risk is not that great.

Scott Davis Scott Davis - Morgan Stanley

Okay. Thanks guys. I will jump in or I will call afterwards and let other people jump in.

Pat Campbell

Okay, thanks Scott.


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

Deane Dray - FBR Capital Markets

Thank you, good morning everyone.

Pat Campbell

Good morning Deane.

Deane Dray - FBR Capital Markets

And George, it was nice to hear that you're still somewhat in the economic forecasting business here, I do appreciate your thoughts about the recovery path. Now you mentioned this twice, so, I wanted to follow up on it is you grouped 3M markets, residential, auto and commercial construction, I see you weren't expecting much in the way of a lift. Now I wouldn't think you would say that I would agree that you would say that about commercial construction, that's a small piece by maybe 2% our estimates. But both residential and auto had that element of early cycle and you do have some sizable exposure to auto OE and aftermarket, maybe its split 12% total, 6 each. So, why would you not be seeing a bit of a lift maybe some restocking, higher auto production. Why would those not be seeing that benefit as well?

George Buckley

Well, my logic Deane was really tied off the unemployment. Obviously I'm speaking specifically about the United States when I make those references. China and India are seeing sort of rocket shift growth in some of those segments. So, I'm really speaking about the United States. I think, I don't know if I should say pessimism but caution at the very least is tied there to the unemployment rates. And I'm just of the mind that until I see some here and there minor improvements in the unemployment picture, I'm going to be cautious on those two segments.

I think you are right Deane that given where inventories are and I track those and Pat does, we all do, it does appear that some of the inventory drawdown in the United States in a number of different segments is kind of reaching bottom. We were seeing a little bit of pickup here and there. So, maybe in the coming quarter or two quarters we might see some restocking.

But in terms of end market demand, I am kind of taking a cautious view on those market segments in particular. I don't expect them to get worse by the way Deane. So, I'm not in any way forecasting that they are going to go down. I'm expecting them to go side ways or they may get lifted through restocking. But generally speaking kind of a sideways motion maybe some benefit from restocking but not any sort of appreciable change in the overall pattern in those marketplaces in the United States.

Deane Dray - FBR Capital Markets

And then just as a follow-up, where would you expect to see the restocking occur for those? And before we were thinking electronics in Asia perhaps but has your thinking changed there?

George Buckley

No. I think electronics some people were forecasting Armageddon a year ago. But what's happened when you look at fab utilization rates they just shot back up from numbers in the 30s to numbers in the 80s. So that looks all very good and I think the overall just a general industrial spaces in the United States will probably begin to restock a little bit here, Deane. I kind of made some comments on that in my remarks.

Obviously, I'm bound to think that Asia is going to be in front. The United States a little bit behind, Western Europe a little bit behind that, and Eastern Europe a little bit behind them. Latin America though probably and certainly we saw really good growth in the fourth quarter, we will probably pop back more quickly simply because their economy is more internal.

Pat mentioned the kind of China for China. Well, in a sense we are following the Latin America for Latin America, China for China, India for India kind of strategy. We are not really dependent in those markets being of a lot of exports. And as they naturally improve through their own sort of efforts. We remain quite positive about those markets.

And of course, we had just wonderful improvements in the renewable energy area. You always wonder how long those social things can last, how many years will that go on for? But nevertheless it's really bringing us some very, very nice growth right now. As are the other sort of energy sensitive energy related kind of markets in films both the Windows as well as LCD.

So, the health care is not going to do really anything that different than this year. It may actually begin to pickup a little bit with some restocking there, because there was some destocking that took place in that market, too Deane. So, in overall despite my caution in residential construction and automotive, there are more positive signs in these other areas and we test very, very hard amongst ourselves about this issue of gaining share.

Of course it's what you want to happen and you want to believe it but you have to prove it, too. So, these early numbers do suggest that we are gaining some share. And if you think about this in pure arithmetic numbers, we have about 9% market share, and markets around the world even 1% market share gain is a 20% growth. So share gain is going to be a big factor I think this year.

Obviously, it will start off with lower numbers and we hope to accelerate the higher ones. But all-in-all, I think we were far better equipped, Deane. The economy isn't going to get worse. It is naturally going to gradually improve in this cyclic way these things do. So, I'm not predicting any sort of great resurgence. But I think we are going to see steady improvements and as the year goes forward we will be all over this to take advantage of it.

Pat Campbell

Yeah, Dean. Just one thing I would add on the automotive side is I would expect that probably the first quarter this year-on-year comps are so easy. Okay, that they more will be bad. I think the wild card here is number of governments spend a fair amount of money on stimulus around cash for clunkers last year. Its unclear okay, if that will continue. So that actually could be a okay, a significant headwind on a global basis.

But I think from a timing standpoint earlier in the year because the comps are easy we will be probably okay. I think it should be the question is later in the year where will the demand kind of rise? And obviously the cost we have on both autos and housing is to make sure people don't think that this going to return to where it was. That we believe there is going to be a permanent reset in both of those markets.

George Buckley

On automotive aftermarket, Deane that business has really done quite well this year. I don't suggest it's in anyway impervious to the economy but it certainly less sensitive to the economy than the automotive OEM business. So, we are kind of encouraged by that one and expect quite a bit of growth here in the U.S. but particularly in Asia we expect that. And so I think in that area in particular the news is mostly good.


Our next question comes from the line of Jeff Sprague of Citi Investment Research. Please proceed.

Jeff Sprague - Citi Investment Research

We have done a lot of macro. Let me kind of drill down into a couple of businesses if you don't mind. First on optical, George or Pat, could you just give a sense of kind of the state of play on the evolution of competition if we think about trying to guard against ultimate (communization) of DBEF given what will happen with DBEF? Do you see the forces marshaling against there may be some comment on your lead? And this 3D technology that you are talking about sounds very interesting. Is there a reason why it only applies to handheld devices? Or is that something that can apply to flat screen televisions and things like that with some more work?

George Buckley

Let me have a poke at that if I can, please. On the sustainability of that model, our patents are pretty solid for the next couple of years. So, we get some insulation from that. But in any market we both know, we all know who were on this call that the competition is always going to try to follow markets which appear to be growing faster or have a decent earnings capability. But I think when you think about what's going on in the LCD TV market in particular, prices have gone down of units, I think the high grey (inaudible) days are gone. Doesn't mean you can't make design money.

So I think this sort of incentive to be drawn to this market is a little lower today than it was say four or even five years ago. On the BEF versus DBEF comparisons, the manufacturing challenges that DBEF is far greater, orders of magnitude more difficult than it would be for DBEF. On the other hand, there are some great manufacturers around. I'm sure would try to have a bite at that business. But I don't see the sort of everybody coming out of the woodworks kind of competitive response in DBEF that we saw in BEF.

So I think it’s a little more insulated Jeff than that was. On the other hand, let's also be realistic. You never seem to be more than a year or a year and a half from de-contenting in this business. So the kind of reports that we have taken strategically is to work genuinely, really hard to get ever more close to the customers to work on specific innovation for them.

And even during the toughest of times these folks always remarked if ever we want innovation the only people we really can turn to is 3M. We have a value proposition for there people that are very sustainable long term. Nevertheless, all-in-all I think you can't keep on taking content out to televisions until they cost nothing. And the approach that we have taken is basically to take a look at building material of monitors, of laptops or LCD TVs and basically say, okay, what do we got in our portfolio of ideas and products that we can apply to these products to take out content? So, we are part and parcel of the charge to take out cost and make these businesses successful. All-in-all in summary I'm less concerned about DBEF than I was about BEF. I just hope that my forecast here turns out to be right.

Jeff Sprague - Citi Investment Research

Great. And on the 3D technology?

George Buckley

Sorry, Jeff I forgot about that. On the 3D technology we started off in cameras. That was our sort of first launch with one of the Japanese camera manufacturers. There is now interest in this for gaming and even for televisions. It's early to predict exactly where this market will go, but it's a unique technology and I think it's got some legs for sometime. Although probably not I mean, I think it will, to be honest with Jeff probably will be and I’m guessing that this is a guesstimate, little bit more that sort of a 10% piece of that TV puzzle that will be my educated guess.

Jeff Sprague - Citi Investment Research


Pat Campbell

Jeff, the other thing I was going to add on the kind of the LCD story is of course there has been quite a movement here on LED at the same time. And we have a very, very good value proposition on the LED side. So, as George points out that you kind of take this design by design. You never take anything for granted but we think we were in reasonably good position here for the near term.

Jeff Sprague - Citi Investment Research

And then just one on health care and I will pass for the time. Pat, I think it was your phrase in Q1 I was running hot at 31.2% margins and every quarter in '09 has actually been higher. I assume some of that is mixed, but can you just kind of address the dynamics in health care margins and kind of what we should expect going forward?

Pat Campbell

Jeff, good question. Brad and his team have a kind of an amazing portfolio there that it kind of reviewed in the December meeting. The way of course you bring margins down in that business is obviously our level of investment in the business and so what we are staging here is looking at what kind of product pipeline they have and then looking at the degree that we want to fund new investment options that we have accelerated that over this past year. Interesting model though because Brad and his team have done just such a marvelous job on ongoing productivity work as well that it would be more profitable business over time. But there is a little bit of a mix advantage kind of going on in the business right now some of the businesses that have held up our stronger than the others from a profit margin standpoint.

Jeff Sprague - Citi Investment Research

Okay, thank you.


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

Terry Darling - Goldman Sachs

Thanks. Good morning.

Pat Campbell

Good morning Terry.

Terry Darling of Goldman Sachs

Pat, I’m wondering recognizing you don't give first quarter guidance but I just thought that it might be helpful for all parties here to pickup qualitatively about any big sequential movers. Obviously the corporate line is going up for all of the reasons that you have talked about tax goes up a little bit. But any other kind of seasonal items in the businesses or things like your advertising spending rate? Things like that you want to call out for us?

Pat Campbell

I guess Terry, the only thing I want to remind everybody is that the way our stock optioning expense flows through the year because our grant is in February, we get a much heavier hit in the first quarter and I think we scale that probably $40 million, $50 million higher in the first quarter. So, as people are thinking of their first quarter estimates they are I make sure that they dial that in. That’s not a change from last year, it's a change from a couple years ago. But that's only thing that I see, we will be seeing commodity prices are starting to rise. So, I think maybe I will get through the first quarter a little bit or maybe part way through the first quarter but we will start to see some pressure on material costs. Now of course our purchasing guys are trying to find new offsets to that but we could see a little pressure in the first quarter.

Terry Darling of Goldman Sachs

Okay and then coming back to the earlier question on optical. I think your comps are very easy in the first quarter. Does that drive display and graphic organic up a lot sequentially?

Pat Campbell

Yes. Well, yes. Probably it maybe a little bit sequentially but definitely on a year-over-year basis Terry optical will be a lot higher because the first quarter was a terrible period for us last year in that business. So, we saw on a year-over-year basis it will be up and actually that industry has maintained a fair amount of discipline in this past year. So, probably see more of a normal trend there.

Terry Darling of Goldman Sachs

You know, I think you called out optical up 50% year-over-year in the fourth quarter. I missed weather that was local currency. Can you calibrate us as to where that ended up on the full year and maybe within the context of 2010 what you are assuming there?

Pat Campbell

I’ll be honest, I think for the full year, I think our business is just up slightly for the full year because we had the first half of the year was a difficult period and then of course that business came on strong starting in Q2. But on an all in basis the sales of that business are just up slightly for the whole year.

Terry Darling of Goldman Sachs

And for ten, should we be thinking kind of moderate to low double digits or something better than that?

Pat Campbell

It actually, we are expecting that business will perform very well. Now if I look at the D&G business in total, which optical is imbedded in, that was one of our higher growth rate businesses that we reviewed in December primarily as we expect that there should be some recovery in the traffic signs and commercial graphics has kind of in a difficult period that maybe they have got a little bit of a momentum as well.

Terry Darling of Goldman Sachs

Okay and then just coming back to the second half organic indications on the outlook slide for the whole company, I'm just trying to think 2% to 4% second half organic recognizing your commentary about being conservative, but trying to map that back to the December meeting with you are talking about taking organic for the whole company up 7 to 8. Is that comps are getting tougher timing of new products, can you just flush out why we decelerate below that kind of longer term organic growth target that you are talking about in the second half?

Pat Campbell

Terry it's like three quarters away, okay. So, that's probably as much as anything reflection we think in the first part of this year the one for comp purposes and two the momentum we got we feel pretty good about it. Let's face it, I only gave us as a crystal ball okay, so how the back half of this year is going to play out. Some of the pundits basically are concerned about the back half may not be as strong. So as we put our plan together, what we are basically indicating is we need to get off to a very, very rapid start here in Q1 and Q2. And position us for whatever happens in the back half of the year. I think it will be probably fair to say Terry, that we probably have a more conservative view in the back half of the year.

George Buckley

I also think Terry, just let me chip in. This year is the year of transition where you got kind of easy comps at the beginning year and other comps at the end of the year. Your net-net, I don't think the numbers probably going to be a lot different than what you suggested. And honestly that normal run rate that number that we quoted you is what we expect. You are bound to see quarter over quarter bumpiness when you got to hear of transition lot this one is from a terrible year last year.

Terry Darling of Goldman Sachs

I understood. And then I guess lastly just wondering talking about things are a little bit better since December you have raised guidance. It doesn't seem like the guidance is really assuming a step up in sort of balance sheet deployment 6% net debt to cap in the fourth quarter. I guess the question is just what are you waiting for to maybe get a little more aggressive with the balance sheet and maybe talk about the M&A pipeline in that context, too?

Pat Campbell

And you kind of raised one of them okay, one of them is we have started to I’ll call it stimulate the M&A process. So, we will have a better read here as we go through the first half of the year as to what properties we are interested in, what’s available. We did run a little bit stronger than we thought from a cash flow perspective. Realistically I think it’s going to probably be more by mid-year or so before we feel comfortable trying to address a different solution.

George Buckley

There is a nice pipeline developing in the consumer and office basis. Nice pipeline developing in the safety and securities spaces with dominance in the way these things are coming up overseas where we have a lot of cash. So, I think it won't be too long before you see that sort of rolls back in the bloom so to speak.

Terry Darling of Goldman Sachs

Great. Thank you very much. Appreciate it.

George Buckley

Thanks, Terry.


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

Steve Winoker - Sanford Bernstein

I'm trying to just get a better sense. I know it's hard to do but look at core growth attributable to new product sales versus the footprint, the geographic footprint in the end market overall. So, just product vitality index in terms of where that's running now and in any sense for this?

George Buckley

It's running Steve, it's just a teeny weenie bit under 29% for last year, and moving at about for the company as a whole moving about two points a year. Now we also have the other thing we have been trying to do which is as we sort of managed the breadth of the pyramid a little bit better we are trying as best we can reduce some of the sort of leaky bucket (cannibalization). So, hopefully as a consequence of that we might get a little bit more lift in the growth as we try to plug the bucket as-well-as fill it with new products if you forgive my sort of analogy there.

So, I think this by the way we said this in New York, this is a number that's dominated by the core of 3M. Whereas if you gone back to 2005 and a number in the low teens it's more than doubled since that time. So, we are very enthusiastic. You are in a company like 3M it's like some technological candy store. But let me tell you the candy store is going to a super store from what we can tell right now. And the ideas are coming out all over the place.

Now, if we can just make sure that our colleagues in the R&D and the marketing areas get this stuff launched in a timely fashion, it's extremely encouraging what we see with the deliver of these R&D numbers. So, I just am becoming increasingly positive about the model we got and the way that the technology folks at 3M have just lifted their game and absolutely done everything that we asked of them. So, I'm really pleased and very optimistic for the future.

Steve Winoker - Sanford Bernstein

Even if you look at just 2010 and you have been running at this two points per year, you actually see the slope of this steepening significantly the trajectory increasing?

George Buckley

Well, it's all about the definition of the word significantly. I don't want to get so it sound (inaudible) or anything like that. But it is going to move a little faster. And I think we made our targets clear. We want to be before 2014 we want to be at that 40% number. We know if we could drive it passed that's great. But given the kind of erosion (cannibalization) that you see in the company that 40% is really going to help us drive toward those higher growth numbers that we spoken about several times now.

So it's so nice to see in the company many of these longer standing issues that we dealt with fixed supply chain running very nicely, the R&D start picking up. The pyramid management thing seems to be an absolute godsend in the way we handled it for this time. So, there is so much positive news and Pat and I are sort of keepers of the gate on capital. And it almost doesn't seem that as day goes by where people seem to be one getting a new order for this and a new big launch for that. We might be tight on capacity. So, it just feels a lot, lot better than heretofore, Steve.

Steve Winoker - Sanford Bernstein

And since you mentioned capacity, I remember that I think the December 2008 guidance for CapEx was down something like 10% down. You ended up the year down closer to 40% and you're guiding to this year up mid-11% to 22% so that sort of billion dollar level. How should I think about that, what happened versus what was expected and as you look forward ramping up capacity?

Pat Campbell

Well, again Steve. We kind of executed what we said we would do for '09. We had invested in some capacity and so forth over the last couple of years so we consciously pull that back. We aren't going to let CapEx hamstring our growth here. Our guidance is a billion dollars here for 2010. We thank a billion to a billion two as it is kind of a good run rate for the company.

I will tell you I would love to comeback to you mid-year and say that we have so many other good growth ideas that we want to take our CapEx number up even higher. But that's our current thinking as (inaudible) says just in the last probably couple of weeks, months there has been a number of good breakthroughs where some customers in spots that we have some capacity issues. George and I will be facing okay, what we thought we had is a little bit of a (kitty) for the year has been used up by the business people very rapidly for good growth program. So if that number creeps up a little bit, I guess I wouldn't be surprised these will be for absolutely the right reason.

George Buckley

Wouldn't be bad news.

Pat Campbell

But I think that’s kind of order of magnitude for you, Steve.

Steve Winoker - Sanford Bernstein

Okay and can you give us some idea from where some of those businesses are, where you are getting these nicer surprises?

Pat Campbell

I will tell you, it is literally almost all over the portfolio. I can think of someone in health care. I can see some industrial and see some in safety and security in the electronics group okay. So is it literally across the board.

George Buckley

And I really do think, Steve, it's a response to the commitment that we had to reinvent the technological core of the company. I really do think that's happening and the customers are seeing it. The customers love it. The scientists are just totally committed to it. So, it just feels so much better now. And hopefully that 2010 unfolds we will see more of this accelerating and then you guys will be able to accuse Pat and myself of being overly conservative as you usually do. But let’s hope that's the case.

Pat Campbell

Steve, I think there is another element of this. And as we just said, as we just got back from the trip to China and in India and few other spots. I think the other thing that's happening is our local lab capability gets better and better we are getting more and more local pride development done and they are also realizing that they need more and more local manufacturing as well. So, I think that's also going to as our new product development for local markets continues to accelerate we are going to have to deal with some of the local manufacturing issues as well.

George Buckley

I mentioned it briefly earlier Steve that abrasives thing that I showed you in New York, I mean, it looks like it's an absolute game changer. Changes the basis of competition dramatically and I can point to many others like that. I'm so enthusiastic by what's happening. And so let's hope that this year tends to be kind of the start of something big. Sounds like a cue for a song.

Steve Winoker - Sanford Bernstein

And just as a last follow-up. It sounds like when you talk about this growth, a lot of your decision about where to guide to and operating margins of that 21% to 22% was a decision about how much to quote reinvest in the new business ventures and some of the other items you mentioned about $100 million increase. Is that decision to invest more, is it really 100 million incremental? Or is there more there that I'm not seeing?

Pat Campbell

Well, Steve, it's at least a 100 okay. And it's going to appear in a number of cases. As there are some cases its R&D investment. Other cases it's that had much investment okay, in some international markets and the life source. Its going to be a kind of as a broad base kind of category relative to investments. And by the way, there is a number of people that are still in the queue that would like to invest and we have to make a judgment. One where the organizational capability to pull off and then two, how well is the business running. I think you are spot on when you kind of look at the way I think of running the business in this margin range is what I want to do is make sure that we were investing in all of the great growth opportunities we have.

So, as we do that obviously, you'll have the tendency to may be trend towards the lower end of that margin range. And I like nothing better than to actually have the business be running stronger here on a top line basis and our ability to reinvest back in additional growth ideas.


And our last question comes from the line of David Begleiter of Deutsche Bank.

Unidentified Analyst

Thanks, Jason (inaudible) sitting in for David this morning. For a moment I thought Pat said you had a new line of pocket protectors? I guess sort of excited.

Pat Campbell

I probably did. You want me to send you a new pocket protector.

Unidentified Analyst

Please do. But I will pay full price. The commodity inflations mentioned, Pat, are there any segments in particular you to highlight where you are raising prices to offset raw materials at this point?

Pat Campbell

Not specifically. We take very close look at that on a business by business. The business people have to lead that forward, not as close to that. But it is spotty okay, those that are kind of impacted by I will call it oil derived commodity increases and it is a little more spotty on a business by business basis. They know what they have to do from managing that. And in some cases they have raised prices. But I say its going to be on a much more select basis as we go into 2000, 2010. It’s the way I would see it right now.

Unidentified Analyst

Okay. That's helpful. And then just a double back on the respirators. George, you mentioned this sort of handoff of H1N1 were to slow and new products pick up, on balance for the year, do you guys at this point anticipate any sort of head wind from respirator sales?

George Buckley

Not materially. You know, you obviously don't know exactly when the H1N1 demand is going to fall off. Certainly its going to be some tied to the seasonality of all around the world for that matter. So demand at the moment still seems to be robust. I think you have to be realistic about it that it will come to an end eventually. But I kind of mentioned the connected point that we have been working on obviously on approved N95 respirators that can reach down into parts of the market that we could never touch previously. And obviously that’s going to demand some capacity, those things are very close to being released.

We are not going to make as much money, its kind of the speaking on those products as we would have done on some of the others. So, we will probably see sales okay. So we see a little bit of margin compression depending on what kind of mix we get out of that. But all in all again it's another great business. And we prove ourselves to be I think the folks in that business masters of managing this kind of crisis and I think it's one of those business we remain positive about and I think with the products coming out all in all its going to be okay.

Unidentified Analyst

Excellent. Thanks very much.


There are no further questions. I will now turn the call back over to 3M for some closing comments.

George Buckley

Well, Thanks for joining us today, everybody. We had a lot of material to cover. We did have some very good questions. I know we did have a couple we could not get to in the interest of time. So we will be back in touch this morning with you. Thanks for coming. Looking forward to talking to you next quarter and in between as well, thanks.

Pat Campbell

Thanks everyone.

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