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3M Co. (NYSE:MMM)

Q4 FY07 Earnings Call

January 29, 2008, 09:00 AM ET

Executives

Matt Ginter - VP, IR and Financial Planning & Analysis

Patrick D. Campbell - Sr. VP and CFO

George W. Buckley - Chairman, President and CEO

Analysts

Stephen Tusa - J.P. Morgan Securities

John Inch - Merrill Lynch

Mark Gulley - Soleil Securities

David Bleustein - UBS

John McNulty - Credit Suisse

Deane Dray - Goldman Sachs

David Begleiter - Deutsche Bank

Jeff Sprague - Citigroup

Scott Davis - Morgan Stanley

Shannon O'Callaghan - Lehman Brothers

Operator

Ladies and gentlemen, thank you for standing by and welcome to the 3M Fourth Quarter 2007 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards you will be invited to participate in the question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded Tuesday, January 29, 2008.

We would now like to turn the call over to 3M.

Matt Ginter - Vice President, Investor Relations and Financial Planning & Analysis

Good morning, I am Matt Ginter, Head of Investor Relations for 3M, and I would like to welcome all investors and analysts to our fourth quarter 2007 business review. You will find this morning's presentation on our website at 3m.com. These slides will remain on the site, along with an audio replay of today's call for an extended period of time.

If you would, please take a moment to read the forward-looking statements on slide 2. During today's conference call we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties.

Item number 1A of our most recent Forms 10-K and 10-Q list some of the most important risk factors that could cause actual results to differ from our predictions. George Buckley, our CEO; and Pat Campbell, our CFO will both make some formal comments today and then we will get to your questions. We know how busy you all are during the earning season so we will do everything we can to keep the call to about one hour today. You could help us during the Q&A again by limiting yourself to one question and one follow-up so that we can address all our questions adequately; if you'd like, get back in the queue and if we have time we'll take your follow-up... your question beyond too.

So, now go please go to slide number three and I'd like to turn the program over to Pat.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Thanks Matt, and good morning everyone, and thank you for joining us today. We manage 3M to drive sustainable long-term shareholder value. And while are certainly critical, that we regularly assess our interim quarterly progress against our objectives, it is equally if not more important, that we examine our results over the longer term. So, today I'll begin with the summary of a few critical full year metrics before I get into the fourth quarter results.

While our accounts, 2007 was a very good year for 3M, the numbers I will quote on this slide exclude the impact of divested businesses, primarily pharmaceuticals and special items in all periods. Sales were up 10.5% for the year, with a record 63% of our sales coming from our international operations which is a testament to the strength of our unparallel international capabilities.

Earnings per share rose nearly 17%, driven primarily by 12% operating profit improvement. Operating margins stayed flat year-on-year at 22.5%. Capital efficiency is another critical and major for us. And we strive to balance investments to accelerate growth, with the necessary operating discipline in order to sustain 20% plus ROIC. In 2007, we return on invested capital was 21.4%, about equal to last year, again excluding impact of divested businesses.

Finally, we returned over $4.6 billion to shareholders in 2007, via combination of dividends and share repurchases. This was an all time annual record and a healthy 24% increase over the prior year.

So all in all, 2007 was a very successful year for 3M. We continued to execute our investment strategy to accelerate future growth, while maintaining premium returns and double digit earnings growth. And at the same time, we rewarded our shareholders handsomely. As with any long term strategy, there is still much to be done, most notably in accelerating our sustainable top-line growth rate, but our plans remain on track and I am very pleased with our progress today.

Please go to slide number four, and let's turn our attention now to the fourth quarter. This was another very good quarter for 3M. With healthy sales and profit increases, despite some tough end markets in United States. We maintained... we managed to maintain and post another record sales quarter of $6.2 billion, an increase of 11% adjusted for the divested businesses and helped by favorable currency of 4.7%. The rest of this discussion on the slide excludes the impact of divested businesses.

One of 3M's indelible strengths is its breadth of its portfolio and the fourth quarter was another shining example of this. In dollar terms all six of our businesses grew sales year-on-year led by healthcare at a whopping 22.4%.

We also saw a strong double digit growth in both industrial and transportation and in safety, security and protection services. And on a local currency basis, five of these same six businesses posted positive growth. So there is no doubt that our portfolio is stronger today than it was just a short while ago as more businesses are contributing to growth each and everyday. This certainly gives me confidence looking into the future.

Looking at the company geographically we then drove broad-based growth, with double digit dollar sales growth in Europe, Latin America and Canada, excluding divestitures. Even after excluding positive currency impacts, local currency growth was positive in every major region of the world.

Fourth quarter earnings were $1.19 per share. This figure excludes approximately $0.02 of cost related to restructuring actions due to the creation of a new projection systems organization and selective restructurings in our U.S. organizations of Display & Graphics and industrial and transportation. While certainly not everything went right in the quarter and we could always perform better we didn't manage to increase sales and EPS by 7% and 8% respectively excluding special items or 11% and 14% further excluding divestitures which I am very pleased with in this tough economic environment.

Now, let's dig a little deeper into the quarter. Please turn to slide no. 5. All information in this slide excludes special items. Fourth quarter gross margins were 46.9% and operating margins were 20.8%. Both were in line with last year's fourth quarter after adjusting for the impact of divestitures.

SG&A expense was up 5.7% year-on-year to $1.3 billion or up 11.7% adjusted for divestitures. This increase is somewhat higher than is typical for us for remember that a weak dollar inflates our cost just as it does our sales. So the 11.7% increase when compared with our 11% sales increase ex-Pharma is more than reasonable.

So let's break down SG&A just a little further. Administrative costs adjusted for the pharma divestiture and currency were above flat year-on-year. So we continue to leverage G&A. Selling expenses which include sales reps, marketing, advertising and the like were up 9% excluding divestitures in currency impacts. We invested most heavily in two businesses. One of which was healthcare and areas such as oral care, medical and through recent acquisitions such as Biotrace, EcoLITE and SoftMed where we are investing today for growth tomorrow and in Consumer and Office we have stepped our investment in brands to support the longer impel for this business and to drive sales with our customers.

Research and development and related expenditures were up nearly 13% year-over-year, excluding divestures driven by healthcare and industrial and transportation to support our underlying strategy to reinvigorate our core businesses.

Operating income was up... was $1.3 billion, an increase of 5.2%, or 11.2% excluding divestitures. Non-operating expense was $33 million, up $11 million year-on-year. $8 million of this increase was due to an impaired auction option rate of security that we wrote off during the quarter. The fourth quarter tax rate was 30.7%, up slightly from last year's 30.3% rate.

And finally, earnings per share were $1.19 a year-on-year increase of 8.2%; again adjusting for divestitures EPS increased 14.4%.

Now let's peel the onion back a little further by looking at the components over fourth quarter sales improvement. Please turn to slide 6. In U.S. dollar terms, global sales increased 7 3% or 11% adjusting for divestitures, primarily the pharma business. International sales growth ex-divestitures was 13.5%, while the US operations expanded sales by 6.7%. We continue to benefit from favorable currency comps, primarily the stronger Euro. Currency impacts added 4.7% to worldwide sales growth, so on an ex-currency basis total currency growth was 6.3% globally.

In the United States, total growth was 6.7%, led by strong performance in three of our segments; health care, industrial and transportation and Electro and Communications businesses. Sales were down slightly in our other three businesses due to a slowdown in a handful of divisions tied to residential construction, consumer spending, highway construction and consumer electronic devices that have come to end of life.

Acquisitions and industrial and transportation and healthcare, accounted for most of the 3.8% acquisition growth in the U.S. Organic volume added 1.9% and selling price changes added a full percent to growth in the quarter. International total local currency growth in the fourth quarter was 6.1%. Latin America lead the way with 16.2% growth as 5 to 6 businesses within their region posted strong double digit growth rates. Europe grew up to 6.4% lead by healthcare at 18.4%.

Rounding at international, Asia-Pacific and Canada, all drove local currency growth rates of approximately 4%. Excluding optical films, the Asia-Pacific region had the strongest quarterly local currency growth of the year. Organic volumes increased 5% in international with double digit volume growth from emerging markets. Acquisitions added 1.3% and selling prices were down just slightly in the fourth quarter.

Let me turn to our business segment results now, this discussion excludes special items in all periods. Please turn to slide seven for assembly of our results of our largest segment, the industrial and transportation business.

Industrial and transportation had another strong quarter, with sales up 13.7% to $1.9 billion. Local currency sales increased 7.8%, including 4% from acquisitions. Operating income increased 13.5% to 360 million with margins right in line with last year at 19.1%.

Full year sales increased 9.6% to $7.3 billion while profits increased 11.3% to $1.5 billion. The industrial and transportation team's strong operational discipline drove an all time record full-year operating margin of 20.8%, up 40 basis points versus last year. Over the past four years this business has improved operating margins by nearly 500 basis points.

The contribution to sales growth in the fourth quarter were similar to previous quarters as the largest divisions within industrial and transportation continue to lead the way, most notably industrial adhesives and tapes abrasives, automotive after-market and our automotive OEM division.

Energy and advanced materials division showed strong performance due to strong market focus programs in the oil and gas and so were industries.

3M's proprietary Glass Bubbles is widely used in weight reduction applications such as construction of deep oil wells, aerospace and automotive industries. Internationally, full year sales growth was strong across all regions. Significant manufacturing investment was made in emerging markets such as India, China and Poland to simplify our supply chains and get closer to local customers. As a result industrial and transportation business continues to generate over 20% of this growth in emerging economies resulting in roughly $1.2 billion of business coming from the emerging economies.

The increased focus and technical investment in our core adhesives, abrasives, and tape platforms continues to drive growth in this segment across the many markets we serve, notably industrial, automotive, aerospace, energy and filtration just to name a few. 3M is clearly recognized as the number one brand of choice in adhesive and tapes categories globally.

In addition, during the fourth quarter, the industrial and transportation business added four more GAAP during acquisitions bringing the total to seven for the year. In combination with our focus investments in R&D, these acquisitions will help to strengthen our core tapes, adhesives and abrasive platforms for many years to come.

Please turn to slide 8, where we will discuss the fourth quarter and 2007 highlights for our healthcare business. Healthcare completed an outstanding 2007 with a very strong fourth quarter. Excluding pharma quarterly sales rose more than 22% year-on-year. Local currency sales were up 70% versus last year, driven primarily by organic growth but also boosted 3.5 points by acquisitions. Much of the acquisition growth came from two deals that closed in late 2006; Biotrace International PLC, a UK-based provider of Microbiology products, and SoftMed, a Maryland-based provider of health information software solutions. In total, healthcare added five acquisitions in 2007, to strengthen the portfolio and accelerate growth into the future.

Also including in this quarter's results was 3.7 points of growth due to supply agreements related to the sales of our branded pharmaceutical business, in which our drug delivery systems division became a supplier to the acquiring companies.

Excluding pharma, fourth quarter profits were up 18.7% to $286 million. Healthcare's full year results were equally impressive. Sales rose nearly 23% and operating income surged 19% both excluding the impact of pharma. Full-year local currency sales growth was 18.3% largely organic and including 4.5% from the pharma supply agreements.

Acquisitions added 4.4 points of full year growth in healthcare. The healthcare portfolio really hit on all cylinders in 2007 as every division posted double-digit sales growth for both the fourth quarter and the year, led by medical supplies, drug delivery and health and... drug delivery as well as health information systems.

Our portfolio of market leading products in medical includes infection prevention solutions; skin and wound care therapy including surgical preps and drapes, Tegaderm brand transparent dressings, medical tapes, Littmann brand stethoscopes and cardiac monitoring electrodes.

In the drug delivery systems, we drove strong growth in HFA based components for drug inhalers. HFA is an environmentally friendly propellant pioneered by 3M that is superior to the traditional ozone depleting CFCs. We also saw a strong growth in health and information systems where 3M is the worldwide expert in healthcare funding and performance management solutions for the hospital market.

In oral care, we continue to drive core growth in the areas of dental restoratives and cavity prevention along with aesthetic products in both dental and orthodontic channels.

Looking geographically, healthcare ex-pharma achieved double digit growth rates in all major regions.

Please turn to slide 9 for a review of the fourth quarter and full year results for the display and graphic segment. Display and graphic sales were just shy of $1billion in the fourth quarter up slightly year-over-year and profits were hefty 252 million although down a few points year-on-year. Sales growth was negatively impacted by nearly 1%, due to the third quarter divestiture of our Opticom and Canoga Loop businesses both of which were good businesses, but no longer considered strategic to our portfolio.

Fourth quarter local currency declined slightly in Display & Graphics. On the positive side commercial graphics division posted another solid quarter to finish the year on a positive note. Throughout 2007 we saw a strong performance in the vehicle wrapping market where we provide films, inks and other products for this rolling billboard industry.

Full year sales grew solid single-digits on a local currency basis and this, one of our largest divisions. In Traffic Safety Systems which is also one of our largest divisions, local currency sales were down slightly in the fourth quarter and grew at a slow single-digit clip for the full year. Not surprisingly we grew faster outside the United States throughout 2007, because our market leading reflective solutions for highway construction projects are perfect match in developing economies that are adding infrastructure.

In the United States real construction market continues to be a burden by significant inflation on road service materials such as asphalt and concrete with diverse spending from other construction products such as our reflective sign sheeting. Both commercial graphics and traffic safety solutions are absolutely fabulous 3M franchises that often get overlooked. Both command leading market positions, are highly profitable, and may set the pace for innovation, quality and service in their respective markets.

All segments throughout [ph] was a low single-digit decline in our optical film business. Profit margins for the quarter were 26.4% or down 1.1 percentage points year-on-year driven by optical film business which we anticipated and described at our December investor meeting in New York.

We remain keenly focused on the market segmentation in the optical business with strong penetration in handhelds, computer displays and LCD televisions. We continue to face attachment rate pressure in the computer monitor and LCD TV segments although in the fourth quarter we did see a mixed impact to 1080p TVs. This is good for our business as 3M optical films are used more heavily in 1080p sets. We believe over longer term that 1080p LCD TVs will gain an increasing share of the overall LCD TV market.

We remain optimistic about the longer-term prospects for our optical film business. Though we will face continuing price down and attachment rate pressure in 2008, as we address our prices to meet our customer needs. Our continuing investment in this business has led to a solid stream of new products that our customers are really excited about and will allow us to maintain our market leadership in brightness enhancement.

Our films are also unique environmental solution, through rapidly reduced energy consumption and increasing the important requirement for both retail customers and government agencies. Full-year sales in Display & Graphics grew 3.2% and profits rose 3.7% to $1.1 billion. Operating margins were 29% for the year, up 20 basis points over 2006.

Please now turn to slide 10, for details on the Consumer and Office business. Based on the business conditions of our US customers, this business turned in very, very good results. Sales in this segment increased 6.6% to $859 million in the fourth quarter with the local currency sales up 2.6%. While this is below our long term run rate in this business, there's truly an outstanding result considering the difficult sales environment in the U.S. retail and office markets.

Fourth quarter worldwide sales growth was led by our Construction and Home Improvement business where we are driving penetration in the DIY retail channel with market leading products such as Scotch-Blue Painter's Tape, Filtrete home furnace filters, and the Command mounting and fastening products, just to name a few. We also drove good growth in the home cleaning category with our family of scouring and cleaning products. And finally, we saw a niche re-bound [ph] in the office supply area with low single digit local currency growth in the quarter.

Looking across geographies our internal operations had an outstanding fourth quarter. Sales and dollars grew at a double digit rates in Europe, Asia-Pacific and Latin America as we are committed to expanding our international penetration. Operating profit was up slightly in the fourth quarter to 155 million and margins were a solid 18.1%. For the full year consumer-office sales grew at a healthy 7.6% clip and operating profits rose 9.3%. Operating margin increased 30 basis point year-on-year exceeding 20%.

Please turn to slide 11 for a review of our Safety, Security and Protections Services segment. Sales in this business grew 11.3% in the fourth quarter led by our respiratory protection, corrosion protection and building and commercial services businesses. Local currency growth was 5.3% including 2.4% from acquisitions primarily E Wood, a UK based provider for erosion protection products. For the first time this year we saw a year-on-year growth albeit small in our Roofing Granules business which supplies mineral use on asphalt shingles for the residential housing market.

While this is a positive result it is still too early to note that this business is turning the corner as the US housing market continues to remain weak going into 2008. Geographically, we drove a strong double digit growth in the quarter led by Europe, and to a lesser extent Asia Pacific and Latin America.

Fourth quarter operating income rose 10.3% to 133 million and margins were almost 18%. For the full year, sales increased 15.3% and local currency sales of 10.8%. Acquisition contributed to 7.4 percentage points to local currency growth primarily Security Printing Systems Limited and E Wood.

Full year sales growth was led by respiratory protection business followed by security systems, corrosion protection and building commercial services. 2007 growth was held back by market softness in the U.S. residential and construction market which negatively impacted our roofing granule business. This softness reduced full year growth and safety security protection by about 1.5%. Worldwide operating income for 2007 was 614 million up almost 15% versus 2006, and full year margins were a robust 21%.

Finally, during the year we added a couple of small but strategic gap-fill [ph] acquisitions in E Wood and Rochford Thompson. We also announced a more sizeable acquisition on November 15th, Aearo Technologies, a global leader in the personal protection industry. Aearo will significantly broaden our safety solutions beyond our existing industry leading respiratory protection products line up. We continue to expect the Aearo acquisition to close towards the end of the first quarter.

Please turn to slide number 12. Electro and Communication sales grew 7.3% in the fourth quarter. The local currency growth was 2.4% about-half of which was acquisitions. Growth in the quarter continued to be led by electrical markets business, a leading provider of insulating, protecting and sensing solutions for the electrical trades and power producers, along with the electronics markets materials business that serves the consumer electronics industry with high value specialty tapes, adhesives, and fluids.

Fourth quarter operating profit increased almost 17% to $120 million. Our Flexible Circuits business which supplies components primarily to the inkjet printer market continues to weight on overall segment results as the inkjet market becomes commoditized in a number of applications till end of life. Softness in this business helped back overall Electro and Communications sales and profit growth by like 3% and 13% respectively in the quarter.

For 2007 in total, Electro and Communications had a truly outstanding year, especially considering that flex circuits throughout total segment sales and profit growth by 2.5% and 9.3% respectively.

Total sales growth was 5.5%, with a 2.3% local currency growth including 1.5% growth [ph] from acquisitions. Growth was led by Communications and Electrical markets divisions as they both excelled in delivering double-digit percent increase in sales and profits in 2007. Geographically, growth was consistent across all regions led by Europe and the U.S.

The Electro team has done a remarkable job over the years driving productivity and taking aggressive actions to improve its competitiveness and 2007 was no exception. Full year profits increased 14.2% and margins were almost 19%.

Please turn to slide 13 where I will review a few balance sheet and cash flow metrics. Free cash flow in the fourth quarter was just shy of $1.3 billion versus $900 million in last year's fourth quarter adjusting pro forma, gains and taxes. And why you don't see it on the chart full year free cash flow was $3.5 billion up 30% versus last year's $2.7 billion. The timing of income tax payments can swing our free cash flow in any given period as was the case in both 2006 and 2007.

Working capital turns improved sequentially by 0.3 turns and were about in line with last year's fourth quarter. Capital expenditures in the fourth quarter totaled $391 million not too dissimilar from both year-on-year and sequentially.

For 2007, we invested a little over $1.4 billion of capital expenditures which was near the low end of our expected range of $1.4 billion to $1.5 billion.

Dividend payments to our shareholders were $341 million and we continue to buy back stock during the quarter with gross share repurchase of $483 million. For the total year we returned $4.6 million of cash to our shareholders via accommodation of dividends or share repurchases which is the most of any year in our history.

Weighted average diluted shares outstanding were down 3.1% year-on-year and down slightly on a sequential basis. And finally our debt-to-cap ratio was 30% at the end of the year.

This concludes my formal business review and I would like to hand it over to George for a recap of 2007 and our outlook for 2008.

George W. Buckley - Chairman, President and Chief Executive Officer

Thank you very much Pat, well done, and a sincere welcome to all of our listeners this morning. I will make a few brief comments about the quarter and then the year, our 2008 outlook and then we will be happy to address your questions.

Needless to say this was a very good quarter for 3M with operating earnings a couple of pennies above consolidated expectations excluding a couple of pennies also and special item that we had in the quarter. Pat has already outlined the growth numbers but just for emphasis we achieved over 7% sales growth and 11% in the quarter after correcting for pharma which I think is pretty good in this kind of environment.

Obviously we are pleased with the good Q4 performance but the real issue here is not what we did in the fourth quarter but our outlook for 2008 and importantly how that outlook may or may not impact our longer-term strategic plan.

I can imagine a question that you are asking yourself right now is how immune or otherwise is a company like 3M to slowing economic trends. So before going into 2008 guidance I want to outline to you how 3M sales might be affected by our presence in various kinds of markets. We've been asked by investors if we lead, follow or are concurrent with market trends. Essentially the root question there is are the current earnings trends an indicator of what is to come, what is here now or what is over the past? Before beginning to answer that question I want to stress again that 63% of 3M sales were outside the United States in 2007, and this will increase to about 65% in 2008. When you look at it this way 3M is in fact a broad based international company that seems to be masquerading as a U.S. company.

I'd also like to get an accurate set of numbers by geographic region out on the table. In 2007, sales in Latin America rose 7% of the total for 3M, in APAC they were 27%, in Europe, Middle-East and Africa they were also 27%, in Canada 6% and in the U.S. they were 33%. In 2008 U.S. will be about 31% of total sales. It's also important to note that about $7 billion of our global sales or nearly 30% of the total are generated in emerging economies such as Central and East Europe, developing Asia and Latin America. These sales have been growing at almost 20% annually over the past five years. Allow me to stress please that there is no company that I know of even amongst much larger than us that can match 3M's capability with respect to international distribution.

I'd like to spend a few minutes discussing our four principle channels of distribution and their relationship to economic trends. These are, first, the mass retail market channel; second, industrial distribution; third, our OEM channel; and fourth, healthcare. In our Consumer and Office business, our method of distribution is mostly through mass channel retailers. To get the size of this business in perspective, in 2008, 58% of the total sales of this segment were US based equal to only 8% of total 3M sales.

This consumer channel is the one which is the closest day-to-day to the day-to-day economic cycles in the U.S., and living in that space could feel like you are taking the pulse of the economy on a real time basis everyday and that is how sales vary. We may pull signals today, ship them to a retailer tomorrow, and they are sold to a consumer on Monday.

Industrial Distribution is a channel which as you see it's a bit further back up the supply chain like the economy a little perhaps a by a month or so. This channel amounts to 30% of 3M sales. We supply hundreds of large and thousands of small distributors around the world via this channel.

The third channel on my list, the OEM channel is one where it will positively make us spec [ph] into another product that they are making. Through this channel we service such industries as telecom with products such as infrastructure build-out, upgrade and refurbishment, electronics through TVs, handheld devices, phones or testing measurement equipment, and the automotive industry among others. We are also service the oil and gas, mining and aerospace industry through this channel as well as through general distribution.

Of course these sales while locked by specification follow the cycles of the markets they serve, all the success of the products they eventually become part of.

Lastly, we have some large strong cycle resistance businesses. For example, our sizable healthcare business here in the U.S. which is $4 billion in total and $1.8 billion in the United States, which is 20% of U.S. sales. It's largely immune to economic cycles, as is the automotive aftermarket. The same can be said about our larger part of our safety and security business, which is another $3 billion which will reach $4 billion annualized run rate by the end of 2008.

In addition, we are driving some good growth platforms such as oil and gas, alternative energy, minerals extraction and aerospace. These elements help offset the impact of channels or businesses which may erode a little in economic downturns. On balance, the sales mix we have means we are somewhere between concurrent with the market or a few weeks of life. Those parts of our business which was close to the consumer would tend to go into decline first and faster in some of our peers will have long cycle product streams, but they come out a lot faster.

Sales can also be temporarily distorted by inventory corrections, both on the way down as well as on the way up and also sometimes in between. So, all in all cyclic downturns when they occur tend to be much less persistent and pervasive for 3M than other companies with long cycle portfolios, and much more attenuated because of the huge regional and business market diversity that we have.

For the many challenges that companies like 3M face, the two of the biggest are to resist the temptation, specifically the temptation to add the cost when times are good and to cut R&D and other growth investments when times are more challenging. We look courageously these past two years in taking our large list of restructuring, reinvestment, rebuilding and reinvention activities as a means of assuring a strong future for 3M.

In 2007, we invested heavily in the future. We exceeded our external growth commitments even as we were investing to reinvent sizeable products of 3M for the long-term. We made enormous strides in getting our manufacturing footprint right. We are opening new plants in Korea, 3 in China, one each in Russia, India, Canada, Mexico and Turkey for several plant extensions in the US.

In Canada we also closed inefficient plants in the U.S., in Italy, Japan, Canada and New Zealand and downsized others in the U.S. and U.K. We have closed over 50 inefficient plants around the world in the last 5 years.

In 2007, you will note that we also increased R&D spending, ex-divestures by 11.4% yet carried that increase in our earnings numbers. We invested 20 million on plant start-ups and we also invested tens of million of dollars on a number of American business opportunities again all to accelerate growth momentum. All of these investments were washed into operating earnings.

One of the real benefits of this extra R&D is that we are now able to recycle somewhere around 20% and increasing a waste material on that [ph] production that was formally disposed off in landfills. We are also now able to recycle somewhat smaller percentage amounts on de-buck [ph].

The other signs too are that our optical system penetration strategy is beginning to get traction and with encouraging signs on volume wins. We opened up new markets in Kazakhstan and North Africa, investing and spending in the here and now to get a little benefit of growth and penetration in these very attractive markets.

On the capital front, we spend hundreds of millions of dollars adding capacity close to our customers and getting our supply chain straightened out. While much was achieved much remains to be done in this area. We continued on course with strategic M&A activities with 16 acquisitions that built new competences in products and markets where we need it. As much as anything here acquisition has brought us speed in reducing time to market. All of these actions are helping us build an incredibly powerful company for the future even as we deliver in the short term.

In 2008, we expect that we will generally continue this investment pattern. And that assumption is baked into our forecasted earnings. That said we will always use prudence and circumstance to guide the size and timing of our actions. In 2008 we will make appropriate real time adjustments on investments with constant attention to economic circumstances. Our approach to investing in the future is a practical approach and not blindly ideological.

In 2007, we drove $1.5 billion of growth or $2.3 billion of growth ex-divestitures. To put this in perspective this is almost as big as our Electro and Communication business is today. All business segments contributed to this growth and the growth came in many different ways. There was simple penetration with existing products such as filtrate, planned home filters and the consumer office segment that which by the way I will point out is rapidly becoming the next enduring 3M franchise and there were many new product launches, R&D revitalization, localization such as our acquisitions of dental and medical companies in Brazil, Chile and Thailand or entirely new product to service segments such as passport production in the U.K. An awful lot was done here in this Company last year.

We made great progress on the cost of the aluminum composite conductor program we spoken about before which has the potential to significantly change the way in which electricity is distributed. And anybody who went to the recent CES show in Las Vegas perhaps saw our new market projector that will fit in the palm of your hand. Several companies expressed key interest in this product and we are going all out to commercialize and capitalize on this as soon as possible.

Innovation is again alive and well at 3M. One of 3Ms greatest strength is there is no one single source of growth. We are very diverse marketwise and geography-wise and therefore growth patterns are likely to be repeatable and extendable. In my view this makes us the right kind of investment back in times like these and also for the long time... term.

I would be remiss if I didn't continue to stress the long-term health of 3M. Within 10 years of your life... within 10 years, your life will change significantly and 3M will be driving a lot of that change. Your personal life will be impacted most by technology and innovations. Hospitals would be safer because of 3Ms infection detection platforms. You will use less energy in part driven by 3M products, solar will become a bigger piece of your life in part due to 3M. Your security fears will ease again because of 3M. Your life will be impacted everywhere by digital information display and electronics. We will have a piece of that change also. In many places precious water will become more drinkable and usable and fluid more pure because of 3M. The future looks very bright for our company.

Let me speak now briefly about 2008 guidance. From our perspective, nothing has materially changed since our December 12th meeting in New York. Some things have worsened a little, for example, the US economy in general, but other factors have stabilized, they are improved, such as the performance of our core businesses like abrasives and industrial tapes. International continues to grow very strong.

Despite what we read and hear in the press, not everything in the garden is glooming. A few more tailwinds have appeared. For example, we expect commodity prices to ease during the year particularly some metals; wood pulp and paper that will help gross margin pressure. It will specifically help consumer and office, industrial minerals and our Electro and Communications businesses. Foreign exchange will still also be a very positive factor in our case.

Going forward we expect M&A pricing to moderate, brining new opportunities for growth at 3M that we might otherwise have passed offline. We have proven ability to execute on cost reductions to our great... due to our great lean Six Sigma capability, and have low risk business activities in security, medical and fluid treatment. Our positive outlook on oil and gas, mining and aerospace is unchanged. So together with international we think these elements offset the increased risks in the U.S. consumer, U.S. automotive and U.S. housing. But even on housing we believe that we will see the bottom of the U.S. housing market and comparison will get easier from that time on.

So it is a time when we intend to get ever stronger to take market share from our competitors and lot of that is available to us. I can tell you that we intent to make our competition feel the heat a lot more than we do in this coming year.

So where does all of this take us. We stress-tested our earnings number against various economic circumstances, and we believe that we can deliver the 10% EPS growth even in these confused and occasionally trying circumstances, but we need to keep a proper sense of perspective. The rebuilding of capability we have done on many fronts in the last two years will serve us well in this venture.

As far as the first quarter is concerned, because of the fabulous first quarter we had in 2007 the year-over-year financial comparisons will be a little challenging and the period in and around the Easter holiday which impacts business activity in both Europe and Latin America falls in the first quarter of this year, but it was in the second quarter in 2007. It is also a slightly longer Chinese New Year holiday this year that will reduce sales in Asia a little. These factors will result in some shifting of sales from the first quarter to the second quarter. Nothing fundamentally flawed here, just timing.

Year-on-year comparisons get a little easier in the quarters farther out particularly in the second half. So, we are pleased to affirm again that we will deliver 10% EPS growth in 2008. Investors should not presume we have or implying here that we have exact position on the EPS number growth either but that the 10% is what we say it is, the minimum. From my perspective this forecast shows the resilience and strength of 3M. We will continue to manage investments and overall cost prudently in the next year.

And with that said we welcome any questions that you might have on our conference call. Thank you very much everybody.

Question And Answer

Operator

[Operator Instructions]. Our first question will come from the line of Steve Tusa with J.P. Morgan.

Stephen Tusa - J.P. Morgan Securities

Hi, good morning.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Good morning, Steve.

George W. Buckley - Chairman, President and Chief Executive Officer

Good morning, Steve.

Stephen Tusa - J.P. Morgan Securities

Just a question on healthcare, I might have missed it, but the margins there, they bounced around little bit, what happened in the margin there this quarter, anything specific going on?

George W. Buckley - Chairman, President and Chief Executive Officer

No, I won't say there is anything specific at all, we were in, I think, 27 in the quarter, we were at 27.5 for the year, so really nothing unusual there, Steve, at all.

Stephen Tusa - J.P. Morgan Securities

Okay. So you would... there is nothing in the... I know there is some moving parts like the supply agreement and things like that might be scaring the incremental margin this year. Is there anything next year that we should be thinking about with regards to the incremental profitability at healthcare?

George W. Buckley - Chairman, President and Chief Executive Officer

No, I think it would be very much like this year Steve.

Stephen Tusa - J.P. Morgan Securities

Okay, great. Thanks a lot.

Operator

Your next question will come from the line of John Inch with Merrill Lynch. Please proceed.

John Inch - Merrill Lynch

Yeah, thank you. Good morning.

George W. Buckley - Chairman, President and Chief Executive Officer

Good morning.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Good morning, John.

John Inch - Merrill Lynch

Hey, I wanted to ask about growth and so there are couple of parts to the question. It looks like Asia Pacific organic was 3.2, but that obviously assumes the drag from optical and D&G and then I guess 3.8 for the year, I mean how does that ducktail George with what I think is somewhere around the 5% to 8% organic growth target for 2008. Does that still seem to be based on everything that's going on, does that still seem to be the goods number issued for?

George W. Buckley - Chairman, President and Chief Executive Officer

Well we... thanks, John. We are still shooting for this longer term twice IPI growth, IPI may be a little bit slower this year, so we don't feel perturbed that that number seems to be consistent with the overall goal as we are looking at long term. I don't think there is any real cause of concern there, John.

John Inch - Merrill Lynch

I mean was there anything going on at Asia, ex-optical film? It just seemed to have decelerated.

George W. Buckley - Chairman, President and Chief Executive Officer

The optical was the principal factor, John. We saw... as you can imagine we saw some sort of easing, we saw some accelerating different markets, a little bit of softer Japan; it was a factory in Asia, we saw some softer business in Korea. But other than that it was fine and again I stress John mostly driven by optical.

John Inch - Merrill Lynch

Okay.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Hey John, Pat here. Just wanted to... in my comments, Asia, if you strip out optical actually had their best growth of the year. So it was heavily impacted by optical in the fourth quarter.

George W. Buckley - Chairman, President and Chief Executive Officer

Almost all dominated by that one.

John Inch - Merrill Lynch

Okay. And then just as a follow-up. I think the $0.02 of special items included about $4 million or $5 million of restructuring charges. I don't think if they... that didn't round to a penny but my question is George in fact are you planning... presuming there's more restructuring to come at 3M, are you planning to run these charges, these... whatever through the numbers, are you planning to call them out every quarter because I think it just has a perspective on how people going to be at the quality of your earnings. So just how... what's the philosophy and what's baked into the forecast.

George W. Buckley - Chairman, President and Chief Executive Officer

Well John, I guess, you have to kind of take... kind of put them in context in first of all materiality and are they just kind of routine in nature that we would generally run through our businesses is normally what we do. We specifically... you had two this time, one in... around in that... around Display & Graphics and industrial, both of that accumulated to $20 million, okay. So we thought that was sizeable to call that out separately.

John Inch - Merrill Lynch

Last Pat, minority interest, it's sort of been running as a $16 million drag and then it... it all of a sudden dropped. Did I miss something... was there something going on with... did you sell a component of that business or what happened again?

George W. Buckley - Chairman, President and Chief Executive Officer

No, most of that minority interest shows up in our 75% ownership of Sumitomo 3M and in the fourth quarter we actually had a true-up of some of our inner company pricing agreements between the parent and Sumitomo.

John Inch - Merrill Lynch

So, minus 16 is still the run rate, kind of per quarter?

George W. Buckley - Chairman, President and Chief Executive Officer

Prior would be... maybe a little bit less on a going forward basis, but not too far off.

John Inch - Merrill Lynch

Okay, thank you.

Operator

Your next question will come from the line of Mark Gulley with Soleil Securities.

Mark Gulley - Soleil Securities

Good morning.

George W. Buckley - Chairman, President and Chief Executive Officer

Good morning.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Good morning.

Mark Gulley - Soleil Securities

If you look at the portfolio, it certainly looks like healthcare is kind of reassuming its leadership role and BMG is... it looks like it's receding a bit. Can you drill down a little bit more for us and talk about... can healthcare maintain it's current excellent pace and what do you do... what you need to do make that happen?

George W. Buckley - Chairman, President and Chief Executive Officer

Well in the healthcare, it's a great question, Mark. In the healthcare, that business just had just a fabulous set of results all through the year and they have done just incredibly well. And we have brought a lot more focus to that business. You saw it through the acquisitions, you saw it through some of the plant builds that we have been doing and we are seeing it in internal investments trying to get new product streams back in the fold. And a few long plays on some of these sort of mega trends like infection detection that we are playing some cards there. So, I think, generally speaking healthcare is going to have a lot of good news associated with it and so it would be one of the primary focuses. It may end up being the primary focus, Mark, of investments in the near term for us. So, I don't think there's any reason to conclude that that healthcare can't enjoy a lot of growth again.

On Display & Graphics, Display & Graphics as we have said many times is going through a transition. Of the three businesses in that area, traffic safety, commercial graphics, and optical, the traffic safety and commercial graphics businesses, Mark, are doing extraordinary well. We will live this year and this transition year as we are building up volume in these little bit further down the market. So we will see that business probably slide sideways during the years as we are making that transitions but with a clear desire longer term to re-invigorate growth in that business.

If I can just sort of canter on, on the rest of our businesses, E&C seems to be certainly toward the back of the year undergoing a resurgence, more strongly manned [ph] on electronics, there's some areas of that business which just struggled. A consistent performance in the electrical markets, sort of utility based business there, so... and also pretty good performance in communications market. So, there's no reason to believe Mark that we won't see good results from that business as well.

In the Industrial and Transportation business, of course we could be impacted by an industrial slowdown in the United States. But what it seems to happen is many of those big businesses like industrial tapes, abrasives, automotive, personal care are doing extraordinarily well and making really good jobs of penetrating the marketplace. So this seemed really solid and so again at this moment in time we don't expect much to change with them and so we are very encouraged.

Consumer and office, the good news in that business is exploring much-much stronger now internationally. Yes it will be impacted by the US economy, but even drilling down in their numbers, the consumer and Home Improvement business still did very, very well in the fourth quarter there. So we are going to see some impact there in Consumer and Office, I think from US, Mark, but beyond that I don't think that it's going to be a big issue. And we expect still to have strong international growth.

So all in all the re-look is mostly in Display & Graphics and the vast majority of the rest of our business is running pretty well.

Mark Gulley - Soleil Securities

As a follow-up if I had a chance to talk to the R&D people in Austin Texas, is there any replacement for Microflex coming down the pipe or is that something that you have to fight through?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

You know, one product that George hit on is the composite conductor, okay. Now it's not a direct replacement, but if you talk about Austin as a business unit, the composite conductor is down in Austin, Mark. So it won't be in the same... let's say the same field, but that would be whether high growth projects that we continue to work on down there.

Mark Gulley - Soleil Securities

Thank you.

George W. Buckley - Chairman, President and Chief Executive Officer

Thanks Mark.

Operator

Your next question will come from the line of David Bleustein with UBS.

David Bleustein - UBS

In the... your closing remarks you mentioned material prices and some expectations of positive experience. Can you walk through which commodity prices you are referring to and give us some sensitivity for instance a penny a pound or some metrics to help... to help guide us?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Well, David, it was... it's a general feel from our procurement people that we are seeing some investment in product and prices more generally. We are seeing easing of copper; some easing of a little copper is a big component for us. We found better uses, better ways to be more efficient shall we say with the uses of gold, we are seeing some of the... some of, not all of the chemical components easing in price. We are seeing some easing... early signs of easing in wood pulp although its counted by up to some degree by increased cost in steel. So... but all in all the... when we mix it up in our blend of components David, we see more tailwinds now in commodity purchasing than we do headwinds.

David Bleustein - UBS

George, what I am looking for is how many pounds of copper do you use, how many ounces of gold, just some measures of that if we see a $100 move, we can figure out what that means for you?

George W. Buckley - Chairman, President and Chief Executive Officer

I think we will have to give you that offline, David, because I don't know the... I know the prices of gold material [ph] but I don't know how many we use. It's not at the top of my head. So we can get you those offline David.

David Bleustein - UBS

Thanks.

Operator

Our next question will come from the line of John McNulty with Credit Suisse.

John McNulty - Credit Suisse

Yeah, good morning.

George W. Buckley - Chairman, President and Chief Executive Officer

Good morning.

John McNulty - Credit Suisse

Just a quick question. With regard to the growth revitalization, the ramp up, all the new plants that you brought up over the past couple of years. Have we passed in your mind kind of the tipping point there where the incremental number of new facilities that necessarily need to be ramped up or build up are going to be smaller going forward and maybe some of the ramp up cost tied to that will start to wane off a little bit as well?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Yeah I think it's close now, John. I think we are at the cusp of that and probably just going down the other of that. So I think we'll see some betterment from here going on.

John McNulty - Credit Suisse

How many roughly do you expect to ramp up in 2008 just so we have a rough idea on that too?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

There's what... about seven.

George W. Buckley - Chairman, President and Chief Executive Officer

Yes, six or seven.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Six or seven, John.

George W. Buckley - Chairman, President and Chief Executive Officer

Yeah.

John McNulty - Credit Suisse

Okay, great. Thanks a lot.

Operator

Your next question will come from the line of Deane Dray with Goldman Sachs.

Deane Dray - Goldman Sachs

Thank you, good morning.

George W. Buckley - Chairman, President and Chief Executive Officer

Good morning.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Good morning Deane.

Deane Dray - Goldman Sachs

I was hoping we get some additional color on the pricing volume dynamics and optical films and was also interested in hearing in the quarter you commented at the mix... you saw more of a mix shift back at 1080p. You think that is more of a fourth quarter event or is that something more sustainable?

George W. Buckley - Chairman, President and Chief Executive Officer

Well we think that is a more sustainable long-term... kind of the question is what's going to happen on a quarter-by-quarter basis, Deane? Obviously let's see how that plays out. But we do think that's kind of a longer term trend. Really nothing has changed significantly from the presentation that Mike Kelly gave in New Oregon in December relative to the pricing action. That plan is still in place and the scope of the change that we laid out for D&G and for the optical business at that meeting is still our best estimate.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

What's happening, Deane, is we are seeing some very positive moves in the industry. I do think we've sort of along a few of our competitors with our willingness to go and fight in some of these other areas, because obviously they know that we have the manufacturing capability, the capacity and the technological innovation capability to be able to win these contracts.

In the end some of this is still about price. But Mike is very encouraged; I was speaking to him yesterday about it, Mike is very encouraged with the contract progress he has been making, with the contracts he is winning, he is expecting to see... still a lot to be done yet, Deane, but he is expecting to see some significant pickup in debt volume. We have the debt volume stabilized and we have made some quite significant, I mentioned in my call, Deane, significant steps forward in using recycle products. The yield coming out of these manufacturing processes is not as high as some people might imagine.

So the ability to recycle material and get it back and still make optically clear product is a very important step forward for us in controlling gross margin. So, early signs are cost reductions in the plants are going very, very well. Some of them are ahead of plan. So at least the early news, and it is early news, we have to be careful that we don't sort of get people too optimistic but the early news is very encouraging.

Deane Dray - Goldman Sachs

Can you provide any specifics regarding what actually went on in the quarter regarding pricing and volume?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Well there were a number of contract that were let, Deane, with... and obviously I am not going to go through those contracts, I don't even know the detail of all those contracts and it would be commercially insensitive to talk about different kinds of contracts that the people had with different kinds of pricing structures. But nevertheless there were incentives on price in these contracts to secure volume and secure longer-term volume and if we did get the volume and the prices weren't offered. So it was typical sort of end volume discount type structures that you would see in cases like these that we offered and we won contracts with most of the large players in the industry; not all, but most of the large players and some strong going in negotiation.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

But Deane, Pat here. I think it's fair to say that you will start to see more of that play out as we get into 2008. You didn't see much of that really at the tail-end of 2007; this will be more in the 2008 results.

George W. Buckley - Chairman, President and Chief Executive Officer

Some of these products Deane don't launch until February or even March. So pass outs will be right.

Deane Dray - Goldman Sachs

Okay, thank you.

Operator

Your next question will come from the line of David Begleiter with Deutsche Bank.

David Begleiter - Deutsche Bank

Thank you, good morning,

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Good morning Dave.

George W. Buckley - Chairman, President and Chief Executive Officer

Hi David.

David Begleiter - Deutsche Bank

George, back in December, I believe, you said that you expected D&G EBIT to fall just $80 million in '08 and in response to an earlier question I believe you said you expect D&G to move sideways in '08. Are you raising your forecast for D&G EBIT and is that all looking to optical films?

George W. Buckley - Chairman, President and Chief Executive Officer

No, I am not, Dave. The move sideways is a... it was a non-scientific observation and non-financially acted. There was nothing that we know in that business, David, that would tell you anything different than what we forecast back in December. When I say sideways it's a sort of general... we don't see margins improving significantly or sales growth improving significantly. It was just a sort of general observation, David, but thank you for asking the question.

David Begleiter - Deutsche Bank

My pleasure. One more item on optical. What's your expectation for optical profits to decline in 2008 versus 2007?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Well, Dave, Pat here. We haven't given optical numbers, we've kind of scoped the D&G business in the December meeting. We kind of gave you a kind of a margin range for D&G as a total business and that is still our best expectation for 2008.

David Begleiter - Deutsche Bank

Thank you very much.

George W. Buckley - Chairman, President and Chief Executive Officer

Thank you, David.

Operator

Your next question will come from the line of Jeff Sprague from Citigroup.

Jeff Sprague - Citigroup

Thank you, good morning everyone.

George W. Buckley - Chairman, President and Chief Executive Officer

Good morning, Jeff.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Good morning.

Jeff Sprague - Citigroup

Could we just go back, actually, I think it was the first question on the healthcare margins, I would assume that the supply agreements did impact the margins on the comparison basis '06 versus '07 but now that we move '07 to '08, wouldn't we expect to see some more incremental leverage on that strong revenue growth that you are getting in the business or there's some R&D or other thing going on in that business that holds back the margin?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Well no, I guess, Dave, let's just think about that just for a second make sure I am on the same page. We rolled those supply agreements and so they are part of the base business in '07 effectively; they will carry forward into '08. So on year-on-year basis there's usually not a significant change relative to the supply agreements. The only thing obviously that will impact is to the degree that the volume changes there. So that doesn't significantly change So if you look at the margins of healthcare in total, we think that if they can continue to grow the top-line the way we expect they probably should get a little bit of a margin expansion. But the 27% margins they had for the share are really stellar, okay, and we would continue to hold those and if everything goes well we might be able to expand them little bit. It's also critical that is one of our key investment areas, okay, for the future as well. And especially with the economy looking the way it is we want to make sure that healthcare gets the combination of resources they need to keep the growth going as well as get the sales rate up in 2008.

Jeff Sprague - Citigroup

I meant that the supply agreements awarded in '06 we had '06 versus '07 comp, and now '07 versus --?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Yeah, that's true. But it also have to share with you that the supply agreements are less than what the healthcare average margins are, okay. So they would be kind of dilutive to that number. But now that's only the base going forward; the base rate that healthcare has is a good stepping off point.

Jeff Sprague - Citigroup

That is my point though that it diluted the '06 versus '07 -- we can follow up, right. So it's now on the base, so it should be less dilutive on an incremental basis, I guess.

George W. Buckley - Chairman, President and Chief Executive Officer

That's correct.

Jeff Sprague - Citigroup

And is there anyway to think Pat about the fall-through to earnings on currency? The conversion rate on margin or some other metric just kind of get our arms around what that might mean in '08.

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Well, it's... we try to scope this at the meeting, Jeff, on the upside. If you look at the current upside, if rates hold where they are at kind of at the end of the year, you could be $0.15, $0.20 positive for us in 2008.

Jeff Sprague - Citigroup

Okay. And can I just take one in for George.

George W. Buckley - Chairman, President and Chief Executive Officer

Go ahead Jeff.

Jeff Sprague - Citigroup

George, just kind of thinking about the spend on the new versus kind of the end of the life, and I guess that kind of goes a little bit to that tripping point question on the plan. So when you are always going to have end of life given your tens of thousands of products, but do you see a point where rarely you feel compelled to call it out, because you've now got kind of enough momentum on the front end that really is not of consequences. Is there is some of kind of visible pipeline momentum that would get us to that point?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Yeah, I think one more year, the flex stuff, Jeff, has about another year to go. Then the... there's some price adjustments where we lack and we probably then won't see that in year-over-year works [ph], but we wouldn't see year-over-year works [ph] between '08 and '09. So I think this is the last year, Jeff, where we like to have to call those things out.

Jeff Sprague - Citigroup

Great, thank you very much.

Operator

Your next question will come from the line of Scott Davis with Morgan Stanley.

Scott Davis - Morgan Stanley

Good morning everyone.

George W. Buckley - Chairman, President and Chief Executive Officer

Good morning.

Scott Davis - Morgan Stanley

How does... I mean one thing that's changed I guess since December your stock price has gone down a bit. I mean how does a sub and $80 stock change your view at the margin on kind of buybacks or buy backs versus M&A. I know before you weren't planning on substantial buybacks in '08 but has that changed at all?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Scott, and kind of referring back to some of George's comments. It's an interesting world because as far as the M&A market, we think will be a more attracted market for the quality products that are out there. So obviously we want to keep a close eye on those. If you go back to the October meeting, we had talked about a share repurchase program that would probably extend another two years, and that's probably still our best view today, it obviously will move around a little bit on a quarter-by-quarter basis. We brought back about $500 million... we spend about $500 million here in the fourth quarter and I would say that's probably will be about the run rate we have here in the first quarter.

Scott Davis - Morgan Stanley

Okay. And going back to the comments on CapEx, I mean, maybe George you can share with us your vision, your longer-term vision. I mean certainly 3M was may be under-investing for a period of time and now adjusting to that, I mean, when you think about kind of spending in the range now of almost 120% in D&A. I mean does this trail off in '09, are the majority of projects over with, and we can start to think about more 100%, 105% of D&A, more historical 3M levels?

George W. Buckley - Chairman, President and Chief Executive Officer

Yeah. In fact the early numbers... sure the traffic will slowly come down a little bit this year, not by a lot, maybe by a 100 million, and we suspect that that will probably ease as the next few years go on dropping from the peak that we had at $1.4 billion, $1.5 billion probably $100 million a year for the next couple of years, bringing it back down to levels more consistent with historical spend that 3M has had. So, we are already beginning to see some easing to that now.

Scott Davis - Morgan Stanley

Okay. And last, just a clean up for you, Pat. I mean I don't think in December you were able to give as much guidance on pension. I think you said it was somewhat neutral-ish. Has that changed at all since then for '08?

Patrick D. Campbell - Senior Vice President and Chief Financial Officer

Yes, yes it has, and that's another tail-win for us. Right now we are prior looking at about $100 million reduction in expense; we are looking at '08 versus '07 for pension expense.

Scott Davis - Morgan Stanley

Okay. Super. Thanks guys.

George W. Buckley - Chairman, President and Chief Executive Officer

Thanks a lot Scott.

Operator

Your next question will come from the line of Shannon O'Callaghan with Lehman Brothers.

Shannon O'Callaghan - Lehman Brothers

Good morning guys.

George W. Buckley - Chairman, President and Chief Executive Officer

Good morning Shannon.

Shannon O'Callaghan - Lehman Brothers

So looking across the different businesses now. We talked a little bit about healthcare and display but as you are thinking about trying to drive the organic growth up 4% into the 5% to 8% range where do you really see it coming from. The Healthcare has already been growing pretty strong, what gets better from here as you look out?

George W. Buckley - Chairman, President and Chief Executive Officer

Well, I think Shannon, obviously the increasing preponderance of sales that occurred overseas tend to lift our growth rates. The increasing investments we are making in security tend to lift our growth rates. Healthcare, Pat already pointed out tend to lift our growth rates. We are actually beginning to see better growth rates in the industrial heartland of 3M also. We have to be fair that these are slow moving indications and take some years to roll forward. And we actually are in the position hopefully in both Display & Graphics and in some of the flex circuits that in optical's case it'll begin to turnaround and flex will lack it and it will no longer be a factor. So generally speaking the investments in higher gross spaces in water, in security, in track and trace are all adding to our overall growth rate. So gradually I think you are going to see Shannon this movement tick up gradually over the next couple of years.

Shannon O'Callaghan - Lehman Brothers

And, I mean, are you seeing the new capacity that you are putting on, is it contributing the way you expected it to in terms of filling up those plants, the demand; there as you envisioned, is it going on as you expected?

George W. Buckley - Chairman, President and Chief Executive Officer

It is in most cases, obviously in one case like our occupational health business. A piece of our demand is on... is pure random. It's tenders, it's ex-factors, but very, very difficult to know how to forecast in advance. And that scenario, I think, that is a little more uncertain. But generally speaking the capacity is being used. Certainly medical is being used, certainly in blue tape that we put on, capacity we put on is being used certainly in the Filtrete areas. That's actually probably... we are even still literally [ph] short of capacity there. That's becoming a real rocket ship in terms of growth. So for the most part, I think, the observation is that it's working out pretty well.

Shannon O'Callaghan - Lehman Brothers

Okay, great. Thanks a lot.

George W. Buckley - Chairman, President and Chief Executive Officer

Thanks a lot.

Operator

That concludes the question and answer portion of our conference. At this time we will turn the call back over to 3M for some closing comments.

George W. Buckley - Chairman, President and Chief Executive Officer

Well, thank you very much everybody for listening. We appreciate your questions and comments and look forward to talking to some of you a little bit later in the day. So thanks everybody, take care. Bye, bye.

Operator

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

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