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MMM Conference Call Notes
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By JustPlainHokie
February 5, 2007

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I wanted to share my notes from the recent conference call. I think they are fairly accurate.

General Comments

For 2007, estimating EPS of $5.20-$5.45/share, including a $0.60/share one-time gain from the sale of the European-pharma division. The other parts of the pharma division (U.S., Canada, etc.) were sold in 2006. MMM considers getting these sales behind it to be a major accomplishment. Excluding discontinued ops and one-time gains, EPS should grow 8-12% (in other words, on an apples to apples basis, 8-12% earnings growth).

MMM continues to achieve a ROIC of 22.5%.

Administrative costs were flat year over year.

MMM invested 1.4 billion in R&D in 2006, an increase of 6% year over year. So, R&D as a percent of sales was slightly down year over year, but MMM stopped investing in R&D for the pharma division because the sale was imminent.

Gross margins down 3% year over year.

30.3% tax rate reflects the fact that the tax credit for R&D was reinstated in the United States.

Shares outstanding down 3% year over year.

First quarter of 2007 will be the most challenging for the year ahead. Difficult comparisons ahead, and it is still absorbing some restructuring costs. Things will pick up a bit in the second quarter, and then accelerate in the back half of the year. Estimating 22% margins for 2007, with a 32.75-33.75% tax rate (slightly higher due to loss of existing tax benefit in U.S. for exporters - this will eventually be replaced with a new manufacturers tax credit that will fade in over several years).

Reducing the tax rate by 1% a year starting in 2008 is one of its goals.

MMM is revamping its compensation program to align employee and SH interests. It will issue 1% in equity this year (I think this means in terms of stock options), rather than rather than 1.5% (as in the past). Based on how these expenses are amortized, stock option expenses will be slightly higher this year, then will decline starting in 2008-09.

Free Cash Flow

For 2006, full-year free cash flow was $2.7 billion. This was down about $600 million due to higher tax payments [from the sale of pharma division, I think] and increased capital expenditures. MMM expects a further decline in FCF in 2007 for accounting reasons. When MMM sells European-pharma, the cash it receives is not included in FCF. At the same time, the taxes it pays on the sale, and other costs incurred because of the sale, decrease FCF. Accordingly, FCF will be down, and management will have to break down the numbers at an appropriate time in order to allow an apples to apples comparison of FCF from 2006 to 2007.

Housing Market Impact

U.S. growth was hurt by slow-downs in the housing and auto industry. Shingle manufacturers basically shut off orders during the quarter. Also, saw impacts on retail do-it-yourself establishments (home depot), appliances, automotive, and elsewhere.

MMM notes that it gained share in some areas during the slow-down but not enough to make up for the volume loss.

Pension Issues

MMM contributed $350 million into its pension plan(s) during the year. It saw double digit returns in pension plan assets this year. As a result, the U.S. Pension plan is 99% funded, and on a global basis, plans are 96% funded. Its plans assume a 8.75% return on assets [this is somewhat high.] It is not clear if this $350 million is included in the FCF number or not.

Under new standards, employers must recognize underfunded pension plan as a liability on the balance sheet. Thus, MMM is recognizing a $1.9 billion dollar decrease in shareholder equity in 4Q 2006. This does not affect cash flow or earnings. [I think the reason why this is so high is party because MMM has other obligations to retirees, probably for health care. I noticed they have a retiree-obligation in its 2005 annual report that is not characterized as a pension-obligation, but that is poorly funded.]

Capacity Constraints

Capacity constraints have been an issue for MMM, and it has begun to address them. The problem areas have been roofing granules, industrial tapes. Some plants working 24x7. This is actually not desirable because when factories get beyond 95% capacity, overtime costs increase, along with costs for expediting freight and emergency repairs. This is particularly a problem where plants are located here in the U.S. and demand is overseas.

MMM is building new plants. In addition to addressing the capacity problem, this also provides a platform for greater organic growth over the long-term. MMM is also moving towards simplifying and streamlining supply chains (it calls existing supply chains "convoluted").

MMM will start to churn out some products from the new plants in 3Q 2007. It has not yet seen benefit in sales or earnings from the moves it has been making.

Cap ex will increase from 1.2 to 1.4-1.5 billion in 2007. 15 significant plant construction efforts are underway at this time (including plants in China and Russia).

Acquisitions

MMM talked about its well-oiled acquisition machine. It is excited about Brontis (sp?) Inc. (digital dentistry).

MMM expects positive impacts from its recent acquisitions sooner rather than later, it is getting them integrated.

Questions

The tone of the questions was fairly hostile, IMO. I think many of the analysts there have been following MMM for a long time, and are growing impatient.

MMM has not decided what it will do with the money from the European pharma sale. (I was hoping it would say fund retiree benefits, but it just hasn't decided yet). It did mention paying down CP [I didn't quite understand what it was referring to here].

Optical film margin was up in 2007

No idea what MMM's overall exposure to housing and auto markets is.

[The answers to other questions are blended into the discussion above.]


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