Ladies and gentlemen, thank you for standing by. Welcome to the 3M Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Good morning, everyone, and welcome to our second quarter business review. For those of you that attended our Investor Meeting in Kentucky last month, we hope you found it helpful in understanding our company further. Also, as I've mentioned on the past two calls, please mark your calendars for the morning of Tuesday, December 7, when we'll host our Annual Outlook Meeting in New York City. Complete details regarding timing and location will be available very soon. Before we begin, take a moment please to read the forward-looking statement on Slide #2. During today's conference call, we'll make certain predictive statements that reflect our current views about our future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of our most important risk factors that could cause actual results to differ from our predictions. So let's begin the review, I'll turn the program over to George, and please turn to Slide #3.

Thank you very much, Matt, and good morning, everybody, and thanks for joining us on our second quarter call. As you see, it was another outstanding quarter for us in both revenue and earnings as we essentially repeated and built upon the success patterns of recent quarters. In fact, sales of $6.7 billion matched our previous all-time quarterly record set in 2008. And coming off the depths, the recent recession, I think this is a remarkable achievement by 3M's people, holding one year after such a terrible economic contraction. We once again delivered tremendous organic volume growth 18% this time, to the twice the rate of global IPI. While it's difficult to determine accurate and the exact sources of growth, the strong economy was certainly a factor and as we explained, last quarter, we continue to take market share and create new markets with the high level of new product vitality. It's opening many old and many new customer doors for us. As we've done throughout the downturn, we continued to invest in and build for the future. In Q2, we took a major step forward, increasing advertising and promotions by nearly 30%, mostly in consumer and increased R&D spending by 13%. I think this speaks directly to the strength of the 3M model and that we were able to generate very high-quality results even as we invest and build the future success. Second quarter record operating was $1.6 billion, up 34% on last year. I'm especially pleased with our margin performance at 23.7%, with all businesses achieving 22% or better margins. The corresponding EPS of $1.54 per share is 38% increase year-over-year. Now let me take you quickly through the business highlights. Please turn to Slide #4. In our largest business, Industrial and Transportation, sales were up 23% and…

Thanks, George, and good morning, everyone. Please turn to Slide #6. On a year-over-year basis, sales rose 18% in the second quarter to $6.7 billion, and importantly equaled the previous peak sales level from the second quarter of 2008. Growth was led by Asia Pacific at 42% and Latin America and 23%. We saw tremendous growth in some sales through some of our large and important business and industries, including 61% in the Electronics and 49% in Automotive OEM. As George mentioned, we grew much faster than the underlying market in both of these cases. As in the first quarter, organic volume drove up our results in the second. Organic volume rose 18% worldwide, with increases of 38% in Asia Pacific, 22% in Latin America, 11% in Europe and 9% in the United States. Acquisitions there is 70 basis points of growth versus the second quarter of 2009, primarily attributable to the recent purchases of ACE products, home of one of the great consumer health care brands, and A-One labels, the second-largest retail and office label producer in the world. Both of these transactions are on track to deliver in 2010 and well beyond. Selling prices declined at 60 basis points in the quarter, a bottom line with our plan entering the year. The decline was largely due to normal price down trends within our Electronics businesses. Gross profit grew 20% year-on-year and gross margins rose just over a point to 49%. Strong volume growth certainly boosted gross margins, in fact, utilization rates were very good in the quarter. We also experienced carryover benefits from restructuring actions undertaken in 2009. These gains more than offset some modest pricing headwinds, both in terms of selling prices, which declines 60 basis points and raw materials, which increased just over 3% year-on-year on…

[Operator Instructions] And our first question comes from the line of Scott Davis of Morgan Stanley.

Across the board, things were, obviously, very, very strong, I think with the exception of Health Care, which was kind of -- which I suppose is somewhat tougher comps because that business was pretty strong last year. I guess my question is kind of what are you seeing in that business because it was a little slow, at Dental here as well. Is there across the board some destocking going on in Dental? Is there -- is it just a function of kind of tougher comps? Just a little bit more color, I guess, is what I'm asking.

Let me take it and then George can -- actually, they performed at basically their historical growth rate give or take a point. You do have to recall that they did have some favorable impact of H1N1 in the second quarter of last year, Scott, probably to the tune of a point, point and a half of sales that didn't repeat here in the second quarter. But we feel very, very positive about the progress of that business. And a lot of it is, they did not fall off as much nearly as many of the other businesses. Our Oral Care business, as George said, was up 7%. So we had very good results there. So we really have no concerns within our Health Care business relative to the growth.

The two businesses that saw that kind of maintained, I mean, they compressed a little bit, Scott, but maintained kind of normal performance versus the Consumer and Office business and Health Care. And you're just really seeing some small debts from them last year and comparable smaller growth issues. So it's really arithmetic issue. It just measures the stability in Oral businesses rather than anything to worry about.

The other thing, price down 0.6%. I think that's first quarter. We've seen kind of price turn negative. I know, obviously, we've got some -- the Display and Graphics is always kind of a negative price curve. But is there any kind of reason why prices came down? Because, I mean, most of your main commodities, I believe, in the first half of the year were probably a little bit higher.

I guess no particular reasons, Scott. As you point out, the electronics is the fundamental, the structural piece of the price down. I think it's fair to say that if you'd ask the question, did we give up some price to maintain volume and so forth. When you look at our volume levels, I think it would be fair to say that there's probably some price, okay, that we're trading off to get some volume. But that's not a big concern for us. The businesses who have material cost increases are well aware of it, and they managed the relative position of price to cost very well as you can see in our overall margin results.

I think, Scott, there are some pricing opportunities that we might be able to grab now. And also, when you think about the very high mix of electronic volumes and sales, it kind of distorts the net pricing picture. So again, I don't think there's anything for you to be concerned about. But it looks like there might be a little bit of opportunity here and there.

And just quickly, I just wanted to get a chance, and I know it's a little early in the year to start talking about pension. But just to try to make sure we get our models right for next year, if we had to mark-to-market where we're at with discount rates, where do you think that would be for next year?

Well, Scott, let me first of all try to address kind of the broader issue. We have a very, very solid balance sheet. I don't lay awake at night worrying about kind of our pension plan from a funding status. You kind of asked a question probably more of an EPS. And I think it's important that you, as well as investors, kind of make sure that they would differentiate between EPS and kind of what the cash flow impact is going to be for a number of us who face a little bit of a headwind situation. But let me just try to, I guess, table set where we're at. Going into the year, we had a carry over amortization issue of probably in the order of about $200 million. So if you use tail end of last year's assumptions, and for our U.S. plan, that would have been an 8.5% ROE and 5.77% discount rate. That effectively left us in a situation that going into 2011, assuming those results affected, we would have about a $200 million headwind. If you then look forward, and I'm not going to give you a specific number, but I'll give you some sensitivities that you can look at, because obviously, we only measure this come year end. It's one of these things where you only measure it at one point in time during the year. But for every 25 basis point change in the discount rate, it impacts our pretax by about $28 million, and every point of return on assets is about $6 million. So hopefully that kind of helps you. From a modeling standpoint, you can look at kind of your own set of assumptions. It's of course here at the end of the second quarter. We entered an environment where discount rates have really come down very, very significantly. I would not look at that as a realistic point from a funding perspective, because I think most of us will probably believe that interest rates are going to have to ratchet up in the future. So it's just a matter of when we start to see that happen. And I think we're all hoping of course that the equity markets have a little more of a back half rally to it. I think we'd all like to see that.

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

First question around -- again, you talked a lot about, again, breaking up that top line core volume growth and talked about what is implied in sort of what must be share gains from new product discussions, et cetera. But how are you still seeing that restocking part of it playing out? I mean, as you now reflect back on the quarter, what's your sense in terms of total restocking? I know you just talked about dental a little bit, but just total restocking across the business.

Well, Steve, it's really not that high to be frank with you. We pull our people here, and they really say there's just not a lot. In fact, if you look at the Census Bureau data, it shows that there's a little bit maybe more destocking than there is restocking net-net. So I don't think that's a big factor. We tried to calculate what impact was in the first quarter because we have those in monster numbers. And we cranked in three into the number, it might have been a little bit high. So I don't think it's a big factor at all, Steve. Maybe it's 1%, if you want to sort of put a number on the total this quarter. It's certainly not more than two, it's certainly less than the last quarter. So I don't think that's what's driving it, Steve. It seems to be when you look at the market growth, and you subtract all of the other things you know, you're left with this sort of 8% or 9% of growth that you can only attribute to in a share gain or on a new market creation. And that's been the pattern that's existed for three or four quarters now. And of course, you can probably understand we intend to try to do our level best to repeat it. And so it does seem that the new product growth model seems to be working, Steve, and I don't think that it's a big piece of this is being driven by restructuring. Remember, a lot of the channels that we have, have no stocking. Automotive has no stocking points. Electronics has no stocking points. We don't really send a lot through channels that do. So I don't think it's a big deal, Steve.

For the second half of the year, as you look to that organic growth number that you've described, again, that's still dependent mostly on new product introductions and market share gains versus the cyclical rebound. Is that fair to say or...

Yes, Steve, I would say that we're not anticipating that, I'll call it the restocking side, okay, is the reason for the back-half growth. It really is our fundamental performance in the back half of the year. I guess I'll just add to George's comment as he says, it's a little bit of a tricky question, okay, on restocking because when you're selling to OEMs and electronics and auto and the like, is we don't think there's restocking going on. Of course, until the point in time that, obviously, they overbilled, okay. And then there's some point in time they may have the excess inventory in that to adjust production schedules down. But it's very interesting that a lot of supply chains across the globe are very, very tight today just to meet existing schedules. So I don't think there's been a lot of room for people necessarily to build a lot more inventory back in the system. Plus, and let's face it, coming out of the recession, people are just more and more cautious about kind of a little bit of last minute ordering still, and they are waiting until -- and actually trying to tighten up the supply chain even more and pushing some of that back into the suppliers.

Steve, there's another phenomena that we've heard about, and that is in the electronics area. There is some double ordering. Because the supply chains are so tight, so lean, and some customers are worried about being able to get products, we do hear some occasional tales of double ordering. And of course, in the end, it's he who has the service quality, he who has the inventory is going to get that business. So you've got some kind of weird conditions existing in some of the businesses. So in part, I think it's not a big factor as we see it at the moment.

And could you maybe expand on the sort of incremental margins in Consumer and Office and Safety over the last quarter? Just struck me on the incremental side a bit low, but just peeling that apart a little bit.

Yes, in both of those businesses, you just have to be a little cautious, Steve, because of the sell into distribution and when we promote products. Generally speaking, in the first quarter and the consumers specifically, we don't spend a lot of money in average sales and promotion. But that starts to kick up here in Q2 and then through the rest of the year. If you look at those margins in that business though, you just kind of -- I still think that we're leading margins in about any Consumer business. So I look at that business really more from a standpoint of are we investing in it enough and really helping the retailers sell through the products that we have. So I think it's more of a timing of expense issue than it really is any kind of an incremental. So if you look at it over a trend basis, Steve, in kind of an annual basis or longer-term basis, they should have somewhere incremental margins. But you just have to be a little cautious on a quarter-by-quarter basis.

Only one last piece of color, Steve. We did decide to fund some projects on more advertising and merchandising and feet on the street in some of these emerging markets. There just seemed wonderful opportunities to us. So we did make some of that spending in this quarter. So again, I think you should see, as long as you understand the reasons behind the question or behind the data, you'll feel more reassured. Because actually the positive, we were investing in growth not suffering some sort of price compression or difficulties in the business. It was completely the opposite.

[Operator Instructions] And our next question comes from the line of Jeff Sprague from Vertical Research Partners.

George, back to your kind of maybe closing thought before you tossed it to Pat on if you haven't cracked the code, how do you deploy capital to further capitalize on it. Obviously, R&D is lagging sales, not really from lack of wanting to spend R&D but the sales are just so darn strong. But I wonder if you look at the balance between R&D and capital, how you think things play out going forward. I think you've done a lot of work untangling the hairball as you used to call it. But you do have a lot of new products in the pipeline. Is the growth challenge there actually just getting the capital on place to deliver them? Or do you actually feel like you get the need to continue to really prime that pump more to drive the top line?

We talked about this. If you look at that roughly 30% or 31% NPVI number where we're at right now, and we really haven't lowered a lot more people in the system. It's a similar number to what existed when it was down in the low 20s and the late teens, and then clearly have -- we've driven some real good productivity in our R&D. Now you say, to ease off the question, how much more can we get out of productivity and how much do we need to put in real money on spend. You have to think of a couple of things there. One is just the basic kind of administration burden in R&D. Secondly, as Pat makes the point, we still got loads and loads of growth opportunities in emerging markets which are generally less expensive. So my kind of feeling on the R&D spend is, yes, it probably has to go up a little bit if we're going to continue to accelerate that 30, 31 number of the 40 which is what really is our goal. On the capital, I think the kind of growth rates we've been seeing in some of these businesses, in Optically Clear Adhesives, in Optical Films, in Abrasives, in the Renewable Energy in those areas, we have really just loaded those factories up. And I think, I only say it on the call because I think we remind it to ourselves as well as to investors that there is another piece to this puzzle, that we have to have capacity to do it. So I think right now, we seem to have gotten the R&D net-net. I think we got the R&D thing run pretty well, Jeff. And here and there, we are just going to have to pay increasing amounts of attention to investments in those big businesses. We have talked to investors about increasing the capital spend to the year probably taking up by maybe another $100 million, maybe turn up to $120 million, but something in that order in response to the question really that you're asking. I think we're okay for now. I think we have the people to execute it, Jeff. But if we continue to get these kind of growth rates for a long time, clearly, we're going to have to put some more people in here and get some more infrastructure to execute to make sure it's all kept in balance.

And then I'm just wondering to get in the weeds a little bit on consumer, the organic growth was a touch lower than I was guessing. Was there any channel fill from kind of the label initiative or is that kind of more a back-half dynamic? Did that have any impact on the quarter at all?

Yes, Jeff, specifically on your question on label initiative. Very, very small here in the second quarter, that's going to take a couple of quarters to kind of gain some volume traction here. But the other thing, I guess, maybe I should have brought this up with Steve, is last year, if you recall during kind of the recession period, the retailers were really struggling getting floor traffic. So they actually try to pull some of their back-to-school into the second quarter. So one of the thing's that we did see fewer back-to-school sales in the second quarter, which we'll see now into the third quarter. So that's purely a timing issue.

And then just finally on Commercial Graphics, you're not the first company this earning season to start to hint that maybe some of these commercial markets are looking better. I wonder there if you can parse apart just kind of underlying demand versus your own new product momentum in that market. You see a genuine turn in demand? Or you think it's new products and penetration there?

It's hard to know exactly, Jeff, where it's coming from. If you look at the report you'll see that some of those markets are still pretty moribund. But I think the sales into distribution, R&D distribution there, Jeff, for the most part, utility sales, commercial construction sales, those sorts of things, which you see now that's for market division. I actually just briefly mentioned that in my remarks it will be a 17% growth. So I think it's way too early, Jeff, to be suggesting there's some kind of resurgence there. I'm hard-pressed to believe that. So I think it's us getting this through new products. And maybe here and there, maybe there's a little bit of restocking. If there's any restocking anywhere, that's the place in these distribution channels is where you'd expect it, Jeff. So I don't want to be forecasting any kind of resurgence in that market. It is way too early at this moment. But it does seem that the product formula is working to the extent this activity in that market.

And a lot like the rest of our businesses, the growth rate outside of the U.S. was much higher in that business than it was inside the U.S. even though we did see some recovery back in the U.S. as well.

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

I wonder if you could talk a little bit about the incremental margins in the second half of the year implied in guidance. It looks to me if you kind of scope the high end to the low end of the range, you're more in the mid-20s. You were kind of 39% in the first half, and we're talking about the price/cost getting less negative in the back half as you trend through it, presumably you're stepping up some investments in that context. But I wonder if you could just talk a little bit more about the elements that are driving out lower incremental in the back half, and kind of what level of conservativeness you think you might be building in there?

I guess two things, I guess factual to kind of talk about it here. One is we are stepping up our investments in the back half of the year around growth activities. Those programs take a while to gain the traction, need be. The FX markets, we think, vis-à-vis the first half will be a little bit more unfavorable the way they're kind of playing out here. The baseline of the assumptions that we had at the end of the quarter, now the euro has kind of bounced back here a little bit. But the way we do our forecast is really kind of more off of a quarter-ending rate. So FX is a little bit unfavorable, and I think you're looking at it from OI leverage, not an EPS leverage because the other thing you see on the EPS side, of course, is our tax rate is higher at the back half of the year. But I think you're focusing more on the operating income leverage. So those will be kind of the factors that I see. And then the other question always becomes what happens to the fourth quarter? I feel reasonably good about third quarter volume levels. Fourth quarter is always kind of a question as to what happens come December, around plant utilization and the like.

And then you didn't get all the way into negative territory on net debt to cap, but you got pretty close. You did step up the buyback a little bit, but presumably, that's just in the context of offsetting the options. Just give us an update with regards to where you are in getting a little more aggressive with the balance sheet?

Well, on the repurchase, it was not just anti-dilution. It really was our view as to there was some good buying opportunities in the second quarter. And that will still be our mantra is that if we see a good opportunities in the market, we will continue to pursue them. But I must also say, on the other side, is that George and I feel a lot better about our acquisition pipeline as it's materializing here in the second half of the year. So that's kind of balance all those factors out. We all know that reinvesting back in this business is the right thing to do. So that's going to be our first and foremost priority.

I mean, if you think about the many acquisitions we've done and all the rebuilding we've done, we still manage to maintain good growth, raising great returns, great margins. It's really why I posed that question. I posed it for ourselves before anybody posed it for us because I knew it was going to go down that pathway. And as Pat said, we have a number of quite exciting acquisitions, which are close to maturity that we hope to get completed in the second half of the year. I think you'll be quite impressed with some of them, some nice technology, areas that we're trying to get closed. So I think you'll see this concern disappear, certainly weighing as the year goes on.

And, Terry, also, I just want to rewind it back to Scott's question. Companies like us who have a pension legacy issue, part of the reason we do keep a very strong balance sheet is to be able to adjust to, I'll call it, shocks in the system. So we feel very good about our flexibility there.

Just then lastly, George, wonder if you could talk about the 25% increase in CapEx in 2011, presumably the biggest increments go to where the growth has been highest. But any other color you can put on those initiatives for us? It's a pretty big increase and, obviously, you wouldn't be making those if you didn't figure an opportunity to continue to grow the business, but maybe you can put some more color there for us.

No, Terry, there are a lot of places, which you're getting a little bit tight on capacity. In particular, it's the Renewables Energy area. We need more capacity there. We need more capacity in some of these very, very exotic, shirt abrasive grain areas. We need some more capacity in Optically Clear Adhesives. The demand for display technology, with the kind of things that we make for them, is just enormous. So they are the areas, but they're not the only areas we're seeing good growth in the general industrial tech usage. I suppose at some stage, we really think you see some other markets like construction come back. But as you quite likely pointed out, Terry, it's focus on those areas where we see the greatest growth. And even in our Optical Films business, it's quite remarkable that the guys in Optical done just an absolutely magnificent job of reinventing that business, driving out just awfully massive cost, I mean, eye-popping cost out of it and increasing productivity per square meter by almost 300 percentage, just really quite remarkable what they've done. And it looks like, now you can -- you know how that business can be. But it looks like that business is set for the next year or year and a half pretty nicely, maybe in a little longer. And we'll probably going to need some more capacity. You need to alter some of our capacity, modify some of our capacity is dedicated to other places of possible priority or put some new capacity in there. So that's where the demand is going to be, Terry.

George, just to follow up on that point on optical because it's interesting, I mean, with that much cost out, do you see that business, and obviously, there's still going to be cycle there, but do you see that the volatility of the margin through the cycle as less dramatic? I mean, through that cost out process, if you reduced the fixed cost, mix in that context or how should we think about that?

Yes, we have. I think you should yourself ask the questions and we ask it ourselves is what is the asymptote? The price on these electronics, it comes down and down and down and down. Of course, the ultimate goal of any large consumer electronics company making TVs is to have an empty box on the wall that cost nothing that does everything. And that's their ultimate goal. But if you just look at where the asymptote likely lie, look at the cost of materials, weigh them, look at the cost of the building material multiplied by some small return, and you can make some estimates of where that asymptote is going. If I was making an educated guess right now, Terry, I think the bottom of this cost reduction cycle for TVs comes within the next three years. And so I think if we continue to win that battle, so the asymptote gets there, I think the pricing pressure goes away. You reap the rewards of all the cost reductions and efficiencies that you've got. And what consequently happens when you get to the bottom of these kind of cycles, Terry, you see actually recounting. So I think this sort of matures then into a somewhat slower growth, stable margin, good margin, great relationship business that is like many other businesses in 3M, they've gone through this kind of transitions. I think the corner of that journey is somewhere close to three years away. So as long as we can keep on winning for around that time, Terry, we can be in great shape.

[Operator Instructions] Our next question comes from the line of Bob Cornell of Barclays Capital.

Just a couple of mop-up questions. At the Analyst Day, you mentioned, George, that the all incremental growth spending, a third of that would occur in the second quarter. Did it actually happen? Or sounds to me like you might have put some of the growth spending at the second half?

I'd say the answer for George there. I'd say that realistically, with the projects we've got, it takes a while to get people hired and then in place and executing. So I'd say probably, Bob, it's probably moved a little bit beyond more towards the back half of the year from where we obviously have penciled on paper.

I mean, the corporate expense, and I like, allocated was again, your $80 million number looks like, which is in line with the first quarter but weighing more than I've modeled. I mean, what's going on there? What's the outlook for that line item for the year?

Well, Bob, what's in there, year-on-year specifically, is, I'll call it, the finance-related losses on our pension plan. And I think where we've modeled that, about $30 million a quarter, I believe, is kind of the year-on-year impact. Some of the other things that are rolling through there are as our earnings go up, we do have higher, I'll call it, variable comp around bonus payouts and so forth. And that flows through there as well.

So how would you guide that for the balance of the year then? About $80 million a quarter?

I would say that, that or slightly less than that, Bob, would probably be my thinking.

Our next question comes from the line of Stephen Tusa from JPMorgan.

Can you just talk about what the third quarter organic gross target is? Just to get an idea of this kind of realtime economy, no real restocking/destocking, just curious as to what you're seeing in near-term?

Steve, I don't think we gave a third quarter guidance number, but good try. But if you think about -- if you extrapolate the 13% to 15% and you take what we did in the first half, it kind of gives you a back half number if you just do the math as 8% to 12%. And you look at the comps, the comps are more difficult in the fourth quarter than the third quarter. So I think it's fair to say that the third quarter should be better than the fourth quarter from a reported perspective.

So that comp gets about 10 points tougher from the third to the fourth from negative 5% to positive 6%?

Yes, but I don't know if it's going to translate directly to that. I guess the other way I'd look at it is as I look at Q3 to Q2 is another way to think of it, I think Q3 will be a lot like Q2 from a revenue and absolute revenue perspective is maybe the way to kind of look at it, Steve.

And then just on D&G, I know you guys have talked about that margin going back to around 20%, but I guess you're saying it's now more stable at a higher level. Are you now coming off that kind of 20% target for D&G now?

Stable within our window of visibility, okay. What we've always said around that business, Steve, is that we understand the nature of playing in the consumer electronics game. And as long as George is explaining, as long as we're winning both on a cost standpoint and a product standpoint, it's a very good business. But you always have to be aware that, that business can change rapidly. So we're trying to bracket our thinking in that business around, on the downside, it can be a 20s type of margin business. But when it performs well, it will do very well for us. And we just want to be, I guess, fair with everybody to realize that within just kind of the nature of that business is that you can have that range of outcomes. But of course, what we're focused on is how do we keep the upside going? Realizing though that we have experienced and just the nature of the industry, such that at times, they can have a tendency to retract. So we're trying to provide a kind of a reasonable bookend for you to think about.

I think what was meaning [indiscernible] I'm sorry I was just going to add something if I can, Steve. When I was speaking to Terry, I want to be clear that I meant that the stability would come when the asymptote had been reached. And the pressure on price, there will always be pressure on price in that industry. But I said that the 12, nice 12, nice 14 will probably translate to some minus three, that kind of number. And what I really mean is not the possibility of volatility between now and then, it's just when that asymptote is being reached. It's much more like it. This is a more stable, a more normal 3M-like business going forward.

You gave a great bridge, I think, last quarter on the sequential increases, whether it's merit pay, investment. Any kind of moving parts going from second to third quarter from a cost perspective that isn't related to volume that we should be aware of?

No, other than -- Terry did ask a question on incremental margin. When you kind of model it out, it does imply less than we've been running in Q1 and Q2. And really just around I guess two things: you got variability around foreign exchange and then you do have our new growth investment set as more back-half loaded, which is probably, we probably have $50 million to over $50 million more in the price of last half of the year than we do in the first of the year.

But they all going to accelerate, Steve. They really are.

Our next question comes from the line of John Roberts from Buckingham Research.

The strong June volumes that you talked about in Germany and other export-like countries, they were actually up more than the average for the quarter. Is that just because the comps were easier? Did they bottom late so they had easier comps in June or are they actually accelerating up?

I just say they are accelerating. I mean, Germany, as the economy, has performed very well. Export-related businesses have performed well. But the question, remember that in the first half of last year, they were impacted. But I think Germany vis-à-vis the rest of Europe obviously has outperformed.

Secondly, is back-to-school ordering in Consumer and Office back to pre-recession levels? Could you maybe just characterize how that feels relative to maybe on normal environment rather than the last year?

Because, John, it's a great, great question, I'm not so sure I can answer that. My intuition would say it's not. With unemployment the way it is and just a sensitivity around consumer spending, I would have a hard time believing that it's the same level that was back in kind of the pre-recession period. And remember, in the Consumer business, we actually start to see that all the way back into '07, so which is probably more of when the, I'll call it, the peak was.

Our next question comes from the line of Ajay Kejriwal from FBR Capital Markets.

Just a question on emerging market, nice growth there, 38%. And you gave some nice color by country. But wondering if you could provide some comments on how much of that 38% is just underlying growth in those markets versus what you're doing on new products and new channels and all the initiatives you have in driving growth there?

I don't know the answer at the top of my head, Ajay. But I would say it's at least a 2:1 ratio. And it may be as much as a 3:1 ratio. We'll get Matt to get those number afterwards. But it's an excellent multiple. We are doing much, much better in local those markets. You can think that China market number, for example, 50%-ish was growth in their market in the early teens. If you're aware, we're on a 3x or more of multiple there. Germany is obviously not an emerging market, but their IPI for the quarter was around nine. We put in 20 for the month, 27 in June. So between two and three multiple there, and it's the same in Latin America. So it does seem to be coming from the share gain or new market creation. That's the conclusion I think that you have to reach.

Yes, I'd have a sense to look at it. What was the underlying growth rate of those economies, and say whatever we're kind of doing over and above that is really a combination of kind of penetration gains and new products. Recall what we said in some meetings is that one of our strategies is to invest heavily in these local technical organizations to develop products that are more closely aligned with local market demands. You start to see that significantly in place over like China and Brazil. Where we are, more and more, we got products that are more tuned to the local market. That we've also got the dynamic at a place like China where a lot of these electronics is moving to China. So a lot of the new product development that we've got in places like Optical and Optically Clear Adhesives also start to flow through in a place like China and Taiwan.

As you look forward, that multiple versus the underlying economic growth in those countries, how do you feel about that? As you get some tougher comps, I would imagine some of that math will get compressed. But, I mean, the 38% looks a really robust number.

I think if Inge Thulin was here, I think Inge would say that his objective for the emerging markets continues to be in that 2.5x, 3x the economy growth rates.

And then on H1N1, that was clearly a headwind for both Health and Safety in the quarter. Maybe if you can remind us how much of that headwind in the third and the fourth quarters was 2Q the big, tough comp?

In each of Q3 and Q4 for the company, the number was about $90 million. So it's the equivalent of about a one and a half of drag on the growth rate for the total company in each of Q3 and Q4, Ajay. And the great majority of that would be in Safety, Security, Protection.

Our next question comes from the line of Jason Feldman from UBS.

A little bit of a follow-up on some of the supply chain issues, as long as it's ramped up, had you had issues with your own supply chain and the flip side as well? You've mentioned double ordering in electronics, do you think this capacity, but are there areas where you're really having difficulty keeping up with the demand or losing on a business today because of capacity constraint?

Yes, in some cases, I think that's what we are. There are some unmet needs, Jason, here and there. I think that's a fair observation.

And there's been a lot of talk about internal investments in R&D, but specifically, on the marketing and advertising, Consumer and Office and elsewhere, should we think of this as kind of a new run rate or we see kind of continued material linked business going forward?

Well, I would say it's a new run rate until we decide that they're all, obviously, that they are paying off. And then we decide if we want to take on new investments on top of that. So in absolute dollars, we're now ramping up our spending. And then thus far, we're very confident on our growth projections for those investments. So if they continue to pay off the way we think they will, then obviously, we'll take a look to see should we ramp them up more? Now if you look at our ratio of sales, if you take a look at say SG&A, I do believe their SG&A cost will continue to get leverage out of SG&A in total as our revenue expands.

Our next question comes from the line of Laurence Alexander from Jefferies & Company.

This is Amanda Sigouin on for Lawrence. Concerning the consumer electronics end market, is 3M seeing any signs of momentum slowing here? And is that likely because customers are running into capacity limit?

I mean, I guess, we haven't seen it specifically from our business, and I think part of this is cluttered a little bit because of, as George hummed about double ordering and so forth, the supply chain has been very, very, put it in kind of a fragile state. I've seen some reports over the last week where there's been some belief that maybe there's a little bit of a kind of a slowing and pull back a little bit. But thus far, we haven't seen it on our site from a demand perspective yet.

Amanda, the interesting thing about some of this big growth in electronic recently has come from technology changes, has come from the movement from CCFL backlit, LCD TVs, LED TVs, driven by brighter pictures, higher refresh rates, and much lower energy usage. So you've seen this driven by consumer making the choice to not only get new technology but getting it, with cost savings the source side of it. Certainly, all these display, these smart phones, smart display devices are all driving a large demand, new gaming, 3D cameras, 3D televisions, 3D gaming. So I think it's coming from new technology, and it is not necessarily connected directly with kind of consumer sentiment. Now whether in the end, that will fall off as bulls, we always would expect, it is. But in our business, we haven't seen anything to cause -- it doesn't mean there have at least some changes here and there, but nothing we've seen that would cause us any untoward upset. So, so far, so good.

And just moving to the automotive and related aftermarkets, could you provide any further color on trends you're seeing there and the outlook for the back half?

Well, in the Automotive Aftermarket, probably, we'll be more like kind of current pace of activity. So that doesn't really change that dramatically. The OEM, so you'll get into a comp issue here as you get to the back half of the year. First half had very, very robust build increases, 25% in the first half auto builds. That will not continue in the back half of the year as how the industry went through the traction last year. They start to ramp up production in Q3, Q4 last year. So you just start to see smaller increases on a year-over-year basis on the auto side.

That concludes the question-and-answer portion of our conference call. I will now turn the call back over to 3M for some closing comments.

Well, thank you very much, everybody. Hope you like the presentations and like the results, very much appreciate your spending time with us listening, and we look forward to talking to you soon. Thanks a lot, guys.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation.