Electrical and Communications

First quarter sales in this business were $668 million, up 3.6%, and profits increased 8.4% to record $130 million. There are three primarily takeaways from the electrical and communications performance this quarter. First on the revenue front, the firm drove outstanding growth in both the electrical and communications business. Electrical Markets division continues to deliver outstanding growth in a number of products and solution for insulating, testing, sensing and connecting for both power utilities and manufacturing OEMs. In the communications business, growth has been driven by the global deployment of enhanced broadband services, which requires significant upgrades to existing communications networks to improve performance and expand the bandwidth needed to deliver enhanced services. Second, the firm had a tough sales quarter in its electrical solutions business, due primarily to year-on-year declines in flexible connectors for ink jet printers and to a lesser extent semiconductor and interconnect customers reducing inventory in the channel. The business did a phenomenal job of managing this cost in the quarter as profit margins were record 19.5%.

Display and Graphics

Facing a tough year-on-year, sales were up slightly versus the first quarter of 2006 which was a record for any first quarter in the history. Commercial graphics posted outstanding first quarter with double-digit increases in both sales and profits. Growth was broad-based driven by the combination of new products including retail advertising, re-branding efforts related to merger and acquisition activity along with international penetration.

In optical films, the firm is very encouraged to see the LCD industry taking a more rational approach to better balancing supply with end market demand. In the quarter this resulted in optical film sales being down a few points year-on-year. Recorded last year’s first quarter reflected a sizable inventory build that subsequently was corrected during the second and third quarter of 2006. The firm has also cautiously made the decision to focus on markets where it has the most value. As a result, the firm has lost some penetration of optical films for low-end desktop monitors, but it continues to have a strong penetration in handhelds and notebooks along with the fastest growing segment LCD industry, TVs. Selling prices were down inline with recent experience. The company’s strategy here remains the same, that’s to carefully manage the price down requirements of the LCD industry while at the same time growing total sales and profitability. There is additional growth to come in this industry and the firm is investing profitably to support it. The firm hopes that this quarter’s margin performance of 32% in displaying graphics puts many of your concerns to rest. The firm’s business teams have proven successful over many years and relentlessly driving productivity, be a Six Sigma lean and this quarter was no exception.

Looking ahead, the firm expects strong seasonal demand in the LCD industry in the second half of the year, as LCD penetration starts approaching 40% of the overall global TV industry. It’s very apparent that LCD technology will be the leading technology in the global TV market. The firm is starting up its new optical film converting facility in Poland in the second quarter supporting panel manufacturers and OEM as they move operations to Eastern Europe. The company is also seeing continued improvement over its new DBEF manufacturing line in the United States. Both projects are tracking to their plans.

Healthcare Business

Healthcare had an absolutely outstanding quarter. Local currency growth including acquisitions was 20% in the quarter, 15% of which was organic and 5%, which was acquired. Of the organic growth, 4% was a result of the new supply agreements related to the sale of branded pharmaceutical business in which the firm’s Drug Delivery Systems division became a source of supply to the acquiring companies and the balance of the portfolio grew at double-digit rates. Sales growth was broad based across healthcare with the drug delivery business leading the way. The company is a technology provider of drug delivery solutions partnering in many cases with drug companies by providing highly innovative components for both innovation and transdermal delivery of medicine to patients.

During the quarter, the firm also saw solid sales in the clinical and hospital markets both in terms of traditional products such as consumables for infection prevention and wound care as well as innovative software solutions to enhance productivity and data accuracy in the hospital. Sales grew at double-digit rates in dental business, which was recently recognized as the most innovative company in the worldwide dental industry for the second consecutive year by the independent publication 2006 dental industry review. This award commended 3M track of record of innovation noting that the business let the industry with an average of 45 innovations per year over the past five years.

The company has added some key businesses and technologies that will bolster its leadership position in infection prevention and detection as well as digital dentistry. First quarter operating income was $269 million. Excluding the divested pharmaceutical business from the first quarter of last year, operating income increased by 4.7%.

Key questions and answers from the first quarter fiscal 2007 earnings call conducted by 3M Co on April 26, 2007.

Michael Judd (Greenwich Consultants): It looks like the low end of the range that you gave in terms of your earning outlook for the year looks very easily achievable. Why you did not increase at least the lower end of the range?

Patrick D. Campbell: That’s the very legitimate question based up on our first quarter performance. As we assess the situation, we didn’t want to adjust our total year outlook. Next quarter we’ll take another look at it. But don’t read anything into not adjusting it relative to future performance. We just want to get another piece of data before we look at it.

Shannon O’Callaghan (Lehman Brothers): You broke out a number of different items in the quarter and you talked a little bit about currency. Can you give us the currency and pension earnings impact in the quarter?

George Buckley: As the currency works out from an earning standpoint, it was about neutral for the quarter. You are aware we’ve got an active hedging program in place that covers about 50% of our exposures. For the quarter, the earnings impact was relatively bit minimum as a matter of fact that was neutral.

Jack Kelly (Goldman Sachs): On displaying graphics, it’s unusual to see D&G profit rise when LCD films sales declined. Could you comment on the sustainability of the pickup in the graphics and traffic safety system, which had a strong first quarter? Can you elaborate on your comments about LCD? Can we expect in the balance of the year unit volume to get back to that 20% plus growth rate?

George Buckley: We’ve seen a multi quarter trend of increased penetration. In traffic safety, we slipped some of the ways that we managed the contract at the municipality end of the pipeline. We are now taking charges of some of those projects and we are able to drive growth as a consequence of that change in our philosophy. In the old days, we supplied the contractors, they been out the municipalities, we’ve slipped that, we are doing the bidding and then taking the contractors under our wing. It’s seems to be working for us there. Also there has been a lot of new products released, the reflective tape markers, some upgraded diamond sheeting. We are just driving this grow, to do new products. It’s the same in commercial graphics and the viability and the use of graphics in retail, in automotive, in aerospace, in retail spaces, it just is doing very well. The underlying reason why we’re been successful is the ease of application, the firm’s relationships with distributors, the money they can make on our products versus those of our competitors and the quality over all as the service that we bring to those lines. It seems that is a sustainable model. Optical, last year went through some bouncing changes. What appears to be happening is much more stability in that marketplace, as it becomes a bigger piece of the overseas sales. In fact, as LCD TV is becoming a bigger piece of what these sales. We’re going to see this classic peaking in the late third, fourth, early first quarter and then some softening in the summer quarters when the people are out buying other things and LCD TV. We are going to see that pattern coming. We also expect that as this market matures and fewer and fewer big players coming into it as some of the smaller players consolidate, it’s getting a big boys game here. That will see increasing stability in the marketplace. We also fully expect over time that pricing pressure will decline and so all in all, this is a fabulous business. It’s in the, it is up in the 3 or 4 margin wise of any of the businesses that 3M has and it remains very strong and so we are pretty pleased with it.

Jack Kelly: You’ve referred to $1.2 billion buyback is significantly up from last year. The most you’ve spent is somewhere shy of $3 billion. Do you think this year could be a record year for buybacks if you use $3 billion as a benchmark?

Patrick Campbell: It surely could be of course one variable will be what the stock prices is so but it’s our intent okay to have a record buyback.

David Begleiter (Deutsche Bank): The industrial had the highest margins you’ve ever achieved. Are these sustainable and is this new going forward?