Ladies and gentlemen, thank you for standing by. Welcome to the 3M second quarter earnings conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

At that time, if you do have a question, please press star one on your telephone keypad. As a reminder, this call is being recorded Tuesday, July 21st, 2026.

I would now like to turn the call over to Chinmay Trivedi, Senior Vice President of Investor Relations and Financial Planning and Analysis at 3M.

Thank you. Good morning, everyone, welcome to our quarterly earnings conference call.

With me today are Bill Brown, 3M's Chairman and Chief Executive Officer, and Anurag Maheshwari, 3M's Chief Financial Officer. Bill and Anurag will make some formal comments.

We will take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our investor relations website at 3m.com.

Please turn to slide two and take a moment to read the forward-looking statements. During today's conference call, we'll be making certain predictive statements that reflect our current views about 3M's future performance and financial results.

These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-Q lists some of the most important risk factors that could cause actual results to differ from our predictions.

Please note, throughout today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release.

With that, please turn to slide three. I will hand the call off to Bill.

Bill?

Thank you, Chinmay. Good morning, everyone.

We delivered strong performance in Q2, including organic growth of 5.4%, operating margin of 24.9%, up 40 basis points, earnings per share of $2.40, up 11%, and free cash flow of $1.3 billion with 107% conversion. We returned $1.4 billion to shareholders in the quarter, including $400 million in dividends and $1 billion of share repurchases.

Since 2025, we returned $8.6 billion to shareholders against our commitment to return $10 billion+ through 2027. Given our strong first half performance, we're raising our guidance for the year for sales, EPS, and free cash flow.

Our results today exceeded our expectations, demonstrate the progress we're making to build a higher performing company, and continue to give us confidence we're on the right path forward. The strategy we put in place two years ago is delivering results.

We're building momentum and executing against our strategic priorities. Commercial excellence initiatives continue to drive results through improved sales force effectiveness and stronger account execution, supported by AI-enabled tools that enhance planning, prioritize opportunities, and accelerate productivity.

Cross-selling continues to outperform expectations with $110 million of opportunities booked and another $120 million in the pipeline, upward of 40% quarter-over-quarter, putting us ahead of the goal we set at our Investor Day. We're rebuilding the innovation engine at 3M and significantly accelerating our pace of new product introductions.

In the quarter, we launched 92 new products, up 44% versus last year, bringing our first half total to 176 launches and putting us on track to deliver more than 350 new products this year. The benefits are showing up in our results.

I'll talk more about our innovation journey in a moment. Our focus on operational discipline and productivity improvement continues to create value across the enterprise.

Cost of poor quality improved 60 basis points year-over-year, while overall equipment effectiveness improved 140 basis points. As asset utilization improves, we're able to consolidate production into fewer assets, optimize our manufacturing footprint, and retire older and less efficient equipment.

While overall utilization remains a long-term opportunity, there are pockets in our manufacturing network today where capacity is constrained and short of demand. One example is our New Ulm facility, which produces cable accessories for electrical markets, a product that's facing high and increasing demand.

Here, the team ran a multi-week sprint that set a disciplined operating cadence against a locked production schedule, improved material flow, eliminated process bottlenecks, focused the team on rapidly resolving the underlying constraints holding back output. As a result, the work center achieved record production levels in June, delivering $13 million of incremental revenue, or nearly 50 basis points at the SIBG level.

The actions were taken across commercial execution, innovation, and operations are part of a broader transition at 3M from a holding company to a more integrated operating company model. The next step in the journey is around transformation, simplifying and standardizing core processes, reducing complexity in our factory and distribution network, reshaping our portfolio.

Today, many of the activities and support functions like finance, HR, and customer service operate independently across regions and business units, creating unnecessary complexity, inefficiency, and duplication. We're bringing these activities together into a single global service delivery model, partnering with an external provider to run them at scale using automation and AI.

This move will increase agility, accelerate technology adoption, sharpen our focus on the capabilities that are most critical to driving growth and long-term value creation. We're also continuing to enhance our portfolio.

On July 1st, we closed on the acquisition of Madison Fire & Rescue, consolidating it with our Scott SCBA business into a new majority-owned joint venture, receiving $700 million in cash as part of the transaction. This JV generates revenue of $800 million, growing at high single digits with margins above our company average.

This is a clear example of how we're reshaping the portfolio towards higher growth, higher margin businesses, strengthening a priority vertical while keeping our capital allocation disciplined. Another priority vertical is data centers.

I want to touch on an exciting announcement we made last week. We entered a strategic partnership with Microsoft, who become the first hyperscaler to deploy our patented Expanded Beam Optical, or EBO technology, in Azure data centers.

This is a powerful proof point of how we're applying 3M's innovation to one of the fastest-growing markets in the world. Our connectors install faster, hold up far better to dust and handling, and help customers stand up AI capacity more quickly.

We're rapidly scaling production capacity both internally and externally and engaging the broader ecosystem of suppliers, partners, and customers to support standardization and industry adoption of EBO technology. On slide four, we show that the positive momentum in Q1 in several growth areas carried into Q2, driving strong performance in the first half across adhesives, abrasives, aerospace, electrical markets, and safety.

We continue to see a couple of places with pressure, including consumer electronics, auto and auto aftermarket, and U.S. consumer spending.

We're clearly outgrowing the market in aggregate through better commercial execution, including increased cross-selling and improved customer retention, a faster pace of innovation. Overall, our first half performance positions us well for continued momentum in the second half of the year.

Innovation has always been one of 3M's greatest competitive advantages. Slide five highlights a significant inflection in launches and new product sales beginning about two years ago.

Our goal is to restore that advantage at an even higher level by combining our unmatched material science capabilities with greater speed and better execution. Over the past couple of years, we've taken deliberate actions to increase rigor, accountability, and focus within our R&D organization, what we've been calling our R&D factory.

As a result, we're beginning to see meaningful improvements across the innovation pipeline. We're increasing the pace of innovation and are on track to nearly triple the number of new products introduced this year versus three years ago and launch more than 1,000 products by 2027 while reducing development cycle time by about 20%.

We expect performance to continue accelerating as we leverage AI to move more quickly from idea generation to development and production. These efforts are translating into commercial results, with five-year new product sales reaching about $4 billion this year and new product vitality index climbing to the mid-teens this year and 20% next year.

The right side of the slide highlights several next-generation innovations and showcases the breadth of our portfolio and ability to address emerging customer needs. From developing new products for new markets like EBO for data centers, to adapting existing technologies to new applications like Nextel high-performance fibers for fuel cells and light reflective films for space satellites.

These products demonstrate how we're applying technology to unlock new growth opportunities. Slide six pulls it all together.

Over the last couple of years, we've moved from a decline of 4.4% in 2023 to positive growth of 3% on a trailing 12-month basis through the first half to 2026, while at the same time expanding margins by about 500 basis points. This is 3M excellence at work and demonstrates that we can both grow the top line and increase margins simultaneously.

Our performance is increasingly outpacing underlying end markets, with our growth to market multiple improving from roughly in line to 2x, and with businesses that declined in 2023 turning solidly positive in 2026. While we're still in the early innings of our journey to create value, the momentum is building.

I'm encouraged by the progress we're making and confident in our ability to continue to deliver above-market growth and sustainable margin expansion over the long term. With that, I'll turn it over to Anurag to share the details of the quarter.

Anurag?

Thank you, Bill. Turning to slide seven, we exceeded expectations across all financial metrics in the quarter, delivered mid-single-digit organic growth, margin expansion, double-digit earnings growth, and robust free cash flow, all reflecting strong progress against our strategic priorities.

Starting with top line. In an unchanged macro environment, the organic sales growth of 5.4% was driven by successful execution of our commercial excellence initiatives and increasing contribution from new product launches, supported by a strong operating tempo.

Coming into the quarter, we had expected sales conversion from the Q1 order strength to accelerate revenue growth to over 3% in the second quarter. With the sustained order momentum in the quarter, combined with good supply chain execution, we were able to grow above expectations.

This puts the first half organic growth at 3.3%, comfortably outperforming macro. By geography, we saw broad-based growth across all the five regions.

China grew double digits with strength in industrial adhesives, safety, and auto films as we executed on our key account and local NPI strategies, leading to share gains. U.S.

and Canada industrial businesses grew mid-single-digits, partially offset by softness in Consumer and auto aftermarket. It was encouraging to see Europe return to growth, up mid-single-digits despite a muted auto market.

In Asia, we saw double-digit growth led by India, a trend that has continued for seven straight quarters as a result of increased sales coverage in a growing economy. Q2 adjusted operating margins were 24.9%, up 40 basis points, with the business group operating margins up 70 basis points, partially offset by expected corporate headwind of 30 basis points.

Operating profit increased $110 million, or $0.16, including a $240 million benefit from sales growth and broad-based productivity, partially offset by $30 million of investments and $110 million from tariff impact and stranded cost headwind. We have not received any tariff refunds to date.

The $0.24 of EPS growth in the quarter is driven by $0.16 of operating profit growth and $0.08 primarily from lower share count as we continue to return capital to shareholders. The benefit from tax timing and lower pension cost was offset by a prior gain on investment.

This earnings growth was also reflected in the unadjusted results with Q2 GAAP EPS of $1.78, growing 33% year-over-year. This included the impact of costs from ongoing transformation actions, exit of certain PFAS manufacturing assets, and gain from change in value of our Solventum ownership.

Free cash flow was robust at $1.3 billion, or 107% conversion, as we benefited from strong earnings and working capital management, including seven days improvement over last year in inventory. We returned $1.4 billion to shareholders via dividends and gross share buybacks.

For the half, we generated cash flow of $1.9 billion and returned $3.8 billion to shareholders, including $0.8 billion in dividends and $3 billion in share repurchases. Turning to the next slide, I will provide a quick overview of our growth performance for each business group.

Safety & Industrial delivered a standout quarter with 8.2% organic sales growth, driven by the continued expansion of commercial excellence initiatives and the ramp-up of new product launches. We delivered double-digit growth across the four industrial businesses, electrical markets, industrial adhesives and tapes, abrasives, and industrial specialties.

This growth was driven by targeted commercial initiatives to reduce customer churn, strengthen sales coverage and effectiveness, and increase cross-selling. Safety grew high single digits on the back of new product launches and continued international expansion.

It was encouraging to see roofing granules return to growth, and we expect that trend to continue in the back half on a recovering market and easy compares. For the half, SIBG grew 5.7%, demonstrating sustained acceleration over the last two years.

Transportation and electronic sales grew 5.9% in the second quarter from the expected backlog conversion, combined with stronger commercial execution and account management. The first half growth of 2.9% reflects strength in approximately half of the business segments, more than offsetting end market weakness in the other half.

Semiconductor, aerospace, and data center business segments, comprising approximately 20% of sales, grew double digits as we gained traction from new product introductions, and commercial branding and transportation, which is about a third of the business, grew approximately 5%. On the other hand, auto was flat in a soft market, and consumer electronics was down low single digit, performing better than the broader consumer device market.

SIBG and TEBG, which together represent 80% of our business, delivered 7% growth in the second quarter and approximately 5% growth for the first half. Finally, Consumer, which makes up the remaining 20% of our sales, was down 2.1% for the quarter and 1.7% for the half.

Point-of-sales growth in the U.S. remained healthy and has been positive in 18 of the 26 weeks year-to-date, versus seven positive weeks in all of last year.

However, tightening of inventory levels at several key retailers in the second half of June more than offset this positive momentum. The second quarter performance caps a strong first half, including organic sales growth of 3.3%, operating margin of 24.3%, and earnings growth of 12%, giving us confidence to raise our full-year guidance across all the financial metrics on slide nine.

We are raising our organic growth expectations from 3% to greater than 3.5% for the year. This is a result of strong commercial momentum in our industrial businesses, supported by increased sales contribution from new product launches, which will more than offset the slight weakness in consumer business.

EPS guidance is increasing from a range of $8.50-$8.70 to a range of $8.80-$8.95, or a growth of 9%-11% year-over-year. This increases both the low and high end of the guidance and reflects about a $0.27 increase at the midpoint.

The increase in earnings versus the prior guidance is coming from stronger sales growth, productivity gains, and our capital deployment strategy. We now estimate oil inflation to be $150 million to $175 million, up from $125 million previously.

This impact is expected to be fully covered by the price actions we implemented in Q2. Though oil price cost is dollar neutral, it impacts margin rate by 20 basis points, which we will mitigate through higher volume and better productivity, resulting in operating margin expansion in line with our prior expectations.

Given the higher earnings growth and progress in working capital, we have increased our free cash flow guidance by $100 million to a range of $4.7 billion-$4.9 billion, implying conversion greater than 100%. The updated guidance implies second-half organic sales growth of high threes or better over two times macro, and margin expansion of about 100 basis points from the prior year, resulting in EPS growth of approximately $0.30 at the midpoint.

Sequentially, we expect operating profit to follow typical seasonality with similar phasing between the halves, while earnings will see an impact from tax timing. Turning to slide 10.

I want to take a minute to highlight the progress we have made since our Investor Day last year. We are at the halfway point, and with the strong 2025 foundation and the updated 2026 guidance, we are tracking ahead of Investor Day commitments across all metrics.

Our growth trajectory continues to accelerate from commercial excellence and innovation and is on track to exceed the $1 billion above macro commitment. Along with growth, we are seeing good operating margin expansion and are tracking ahead of the approximately 25% margin rate by 2027.

For earnings, we are trending to a double-digit CAGR, reflecting strong operational improvements coupled with below-the-line efficiency. On cash, we expect to continue the strong trajectory, exceeding our cumulative cash commitment and $10 billion return to shareholders.

Overall, we are pleased with the progress we are making and want to thank the team for their relentless focus, determined pace, and strong execution to drive long-term value for our shareholders. With that, let's open the call for questions.

Ladies and gentlemen, if you would like to register a question, please press star one on your telephone keypad. If your question has been answered and you would like to withdraw, please press star two.

If you are using a speakerphone, please lift up on your handset before entering your request. Please limit your participation to one question and one follow-up.

Our first question comes from the line of Jeff Sprague with Vertical Research. Please proceed with your question.

Hey, thanks. Good morning, everyone.

Nice to see the top line here. Bill, I was wondering if you could just even unpack this a little bit more.

There's some great detail on these slides, but just kind of looking at the new product launches and the like, closely on track to what you thought, I believe, right? The revenues are coming in better.

Do we have a combination of just upside in new product revenue relative to plan? It sounds like cross-sell is a little bit better.

Maybe what role kind of reduced churn is playing in all this. I guess really what I want to get to at the end of the question is, an algorithm of roughly two times macro, do you view that as sort of a sustainable model for 3M going forward?

Good morning, Jeff. That's a great question.

Thank you for that. We're very confident in where the growth happens to be.

We came in stronger than we had expected in the quarter. It really is a combination of both commercial excellence and innovation excellence, the journey that we've been on for two years that is maturing, I think, very rapidly.

It's not really macro tailwind. The macro on the industrial side looks pretty good, but there's some headwinds in the marketplace.

It's mostly just internal performance. When you look at just the quarter, we're a little bit better than we had expected.

Over the last 12 months at 3%, it's clearly trending above the macro. We think it's pretty good.

Mostly driven in the first half from commercial excellence activities. A lot of the things we've laid out in the past around sales force effectiveness, better performance at the front end, pricing governance.

We're pushing a lot with our channel partners, joint business plans. Cross-selling is much better.

On loyalty, we are getting better on attrition. We've been tracking this very carefully over the last couple of years.

We've seen about 200 basis points of improvement in attrition, primarily coming out of our SIBG business. It would take some time for that to turn, but it's starting to turn.

It's still too high, but it's actually making some good improvements here. As we look to the back end of the year, we do see the innovation engine contributing even more in the back half.

In fact, even greater into 2027, based on just the momentum that we happen to be building here. We feel pretty good.

This year, we think we'll be about $450 million above macro in the full year. A little bit better than we thought last quarter, around $340 million-$350 million, and that's largely on the back of good commercial excellence, but the machine churning faster on innovation.

All good signs and we're very pleased with the performance in the quarter, and we expect our momentum continue.

Great. Maybe just unrelated, follow-up for Anurag.

Madison not included in the guide, although it's closed. Is there some peculiarity we need to work through before we dial this in?

Just curious on why that wasn't included, and are we looking at a lower tax rate for the year? Thanks.

Great. Well, thanks for the question, Jeff.

No, we just wanted to provide an apple-to-apple guidance from our last earnings call so that we can see how our organic performance has impacted our revenue, EPS, and cash. We have a page at the back of the webcast that has the revenue margin and other information on Madison.

It does not have a material impact to the EPS guidance range or the numbers, and we'll incorporate that in our third quarter call. Just for tax, we still plan to be around 20% for the year.

Great. Thank you.

Thank you. Our next question comes from the line of Scott Davis with Melius Research.

Please proceed with your question.

Hey, good morning, guys.

Good morning, Scott.

This Expanded Beam Optical thing seems interesting, but I'm trying to get a sense, I guess, of a couple things. One is really materiality and how that scales out.

It looks like it was launched with Microsoft as kind of the partner. Is there an opportunity for that to scale across more hyperscalers and how do you think about that?

I'll just leave that as a little bit of an open-ended to help us understand where the upside is in that market.

Scott, thanks for the question. It's getting quite a bit of excitement, and we're excited internally as well.

It's been a technology that's developed several years ago. Just in a nutshell, it's very durable, dust resistant, vibration resistant, fiber optic connection technology.

We've proven with a hyperscaler that it can reduce by about 85% the time to revenue, time to install circuits in a data center. We've got about 100 patents in this space, 50 pending.

It's very well protected, and we're very excited about this. It's been in testing for several years with Microsoft.

We're very pleased that they have qualified us as a technology for the Azure data centers. That's very encouraging.

The revenue this year, it was in the $40 million-$50 million range. We do think it will scale over time.

Could be 4x or 5x that or even more over the next several years, depending upon our progress here, as well as the adoption of optical technologies in data centers as that transitions. A couple of things are happening here.

One, as we continue to develop the technology, each hyperscaler has some uniqueness in their architecture, so that's got to be developed. We've got to scale it both internally and externally.

Earlier this year, we announced that we would double our capacity on EBO this year and another doubling over the next year to 18 months. Even that isn't anywhere near the volume demand in the marketplace.

We're also working with various contract manufacturers, we're pretty developed on one. The third item in this is that, we will not be successful as a sole provider here.

This is about enabling an ecosystem of partners. We formed a multi-supplier agreement.

There's 44 players in this agreement all throughout the ecosystem. There's multiple hyperscalers, chip manufacturers, connector manufacturers, and it's about how do you enable the whole ecosystem.

All of those things are in place. We're deep in the trials with other hyperscalers.

I won't say much more about that. The TAM this year for EBO Technologies is around $1 billion.

We think it'll grow to two by 2028. $2 billion, it could be beyond that over time.

Again, we've got to be very successful in how we scale this product and make sure we've got good quality, deliver on time, all those basic pieces. We're very encouraged about the progress that we're on, the results that we're seeing.

The team's done a great job here, and we're optimistic about the growth in the space.

Okay. That's helpful.

Then just a quick follow-up. I'd kind of given up on China, but it sounds like China could potentially be a growth engine for you guys again.

Is that an exaggeration, or how do you view the short, medium, long-term kind of China market today versus maybe when you took over the job a couple years back?

Yeah, good question, Scott. I mean, look, we've been pretty consistent that China's been a very special market for us.

It's performing really well. We've got a great team on the ground.

We've organized a little bit differently and uniquely there as well as in India, sort of a hybrid organizational model. We have global business groups, but we stood up a team focused on China, based in China, same thing in India, and we're seeing the results.

In the second quarter, we were a double-digit growth, first half about 8%. A lot of the performance there, keep in mind again, we're 50/50 between domestic production and export.

The domestic economy, from an industrial perspective, remains pretty solid in China, and we're performing well. A lot of it is localizing NPI and a lot of it is commercial execution on the ground.

The team is doing a fantastic job. We have more than 5,000 people there, six factories, and again, we're developing more localized technology.

The export is the other 50% of the business. That part of the economy has done pretty well, and we feel pretty good about the results, and we'll continue to press it every quarter as we are in Q3 in the back end of the year.

Long term, we like our position in China, we like the team that's executing in China, the strategy, and we're pretty optimistic about the future in China.

Sounds good. Best of luck, guys.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Amit Mehrotra with UBS.

Please proceed with your question.

Thanks. Morning.

Bill, Anurag, just hoping to get a little bit more color on NPI in terms of when you typically expect these new products to sort of really inflect. I'm sure it takes a few quarters or maybe a year or two.

Anything within the NPI in terms of are these truly new products or increasingly still new products or I know what you call Class 3 products or refresh products, any thought there? I think there was this expectation that maybe $600 million of outgrow next year on year 3 of the plan.

Is that still the way to think about the outgrowths from a lot of these actions? Thank you.

Amit, a bunch of good questions. First, on the last piece around the outgrowth next year.

Look, this year, we originally said we would be $1 billion over the macro, 2025, 2026, and 2027. Clearly last year we did a bit better than $100 million.

This year we'll do more than $300 million, around $450 million. That continues to ramp.

We'll come back early next year and talk about next year. Clearly we're performing better than the macro, and it's both commercial excellence as well as in innovation or NPI.

Look, on NPI, the progress has been fantastic, and the chart that we put into the webcast, a very important one. It shows this very deep inflection, and we're clearly on the right track here.

We typically would launch a product within about, from the beginning of development to launch, it's running around 250 days. It's down substantially than where it was two years ago.

By 2027, it's kind of around 20% reduction in overall cycle time. There's some nuances in the data here.

We're launching more Class 3s, which are shorter in duration. They're more incremental.

The company is pivoting more to what we call Class 4s and Class 5s, and Class 4s are those that move into adjacent markets, and Class 5s are completely new products for new markets going into. The team is focusing more on the 4s and 5s.

You'll see more impact in the back half of the year as those products that we started to work on a few years ago start to launch this year and become meaningful in the back half. They'll be even more meaningful into 2027.

The engine's moving. The momentum is really building.

The team is executing, I think, fantastically well across all these various dimensions. We're launching more, but there's more ideas coming into the front end of the funnel.

The health of the pipeline is very good. I think this will continue to build momentum in the back half and into next year.

It's what we're known for, material science and using material science to make differences in the world, and I think we're doing a good job with that.

Okay. That's very helpful.

Thanks, Bill. Just as a quick follow-up, when we started, I remember at the Investor Day, the story originally was really about sort of getting the gross margin from the low 40s to the high 40s where you guys used to be.

Obviously with tariffs and all the developments that have happened, you've still been able to move the needle on the operating margin line, much to your credit, despite sort of gross margin being sort of stuck in the very low 40s. Is there an opportunity, do you think, structurally at least, with all that we know now, we can still get back to the high 40% margin on gross margin?

If you can just sort of talk about that, just given all the structural dynamics that have occurred over the last couple of years.

Look, Amit, on margins, you can see the chart, up 500 basis points from a couple of years ago. We are making really strong progress here, and it's both gross margin, but also importantly in SG&A, in IT, and other kinds of expenses, indirect costs.

We've talked about that quite a bit. There was more to squeeze in that area, more cost to take out than we'd anticipated, and we've done a good job.

On gross margins, we're tracking close to mid-40s right now. The company has done a good job.

Productivity is really solid. We had great productivity in the quarter.

We continue to build momentum. I give you sort of the metrics around that.

We are reducing our cost per quality. That came down again.

Our operating equipment effectiveness is coming up. We're driving hard on procurement.

We're seeing net savings even after inflation. Four-wall spend, we've doubled the number of Kaizen events inside the company.

Look, there's a ton of opportunity here just running the network, the distribution side better as it exists today. The next step, really, as we transform, is simplifying, standardizing, automating more of our processes, both on our SG&A side, and I talked a little bit about that in the prepared remarks, but also on the factory side, the network side.

There's plenty of headroom here in front of us. We see ourselves marching ahead and with an ability to hit the high 40s over time.

The roadmap is relatively clear. It's along the same lines we've been laying out and talking about over the last couple of years.

As we get into transformation, we'll see margins continue to expand. We feel good about the performance and optimistic about the future on margins.

Great. Thank you very much.

Appreciate it.

Thank you. We'll go next to the line of Nigel Coe with Wolfe Research.

Please proceed with your question.

Thanks. Good morning, everyone.

Quite a different pick quarter. I think Bill or Anurag, you mentioned last quarter started off quite weak and it got better through 1Q.

I'm just wondering how the 5.4% looked from April through June. Did we start off stronger, got weaker?

Any color there? Any updates on how orders and maybe backlog exited the quarter?

Yeah. Hey, good morning, Nigel.

Hey, it was quite good throughout the course of the quarter. It was more linear than we've typically seen.

As you said, we started the quarter with very good backlog. If I look at April and May, it was probably 600 basis points better relative to other first two months of prior quarters.

It was quite good as we went into the first two months of the quarter. June, the auto momentum kind of sustained as well because we did our price increases, which came with effect from May 1st.

Just through the course of the quarter, we saw very good linearity, and the team executed very well to post a 5.4% growth. We did see similar, as I said, auto momentum in the second quarter, like the first quarter, which strengthened the industrial side of the business.

Our orders were up about 10% for the quarter, and backlog about close to 20% up year-over-year. As we get into Q3, we feel good visibility for Q3 and the second half of the year.

Obviously, 75% of our business is book and ship, so we have to monitor as we go along. But so far, the first two weeks, orders and backlog look good.

That's great. That's really encouraging.

My next question is really, you mentioned the Consumer channel destock in the second half of June. Just wondering how long do you think this destock will happen?

Any intel on how inventories look for 3M products? Then any color on how inventories are looking in SIBG and TE and selling the sell-through color would be helpful as well.

Inventory levels in SIBG and TEBG are normal. There's no discernible trend one way or another.

Not a concern. On CBG, look, I think what was encouraging is to continue to see the point of sale growth or sell-out growth around 2.5% in the quarter, which was very positive.

We felt good about that. It was really isolated to a couple of retailers, and we saw them step back a little bit in the U.S.

channel, step back a little bit in terms of weeks of supply. It was about a one-week delta.

As we come into July and into Q3, we think this will normalize here, especially as retailer stock for back-to-school season. We'll keep monitoring it and communicate with investors as we need.

We feel it's going to normalize here and help us in the back half of Consumer to be flat to up slightly, is what our expectation would be in the back half of the year.

That's great. Thanks, Bill.

Thank you. Our next question comes from the line of Chigusa Katoku with JPMorgan.

Please proceed with your question.

Morning. Congrats on a great quarter, and thanks for taking my question.

My first question is on organic growth. You've raised your organic growth guidance nicely, but it still implies some deceleration in the second half from the strong second quarter levels.

I think pricing should come through when you have some EBO delivery schedules on the back end. What's driving this?

Is this Consumer and electronics, or the timing of deliveries, or is this prudence?

Chigusa, thank you. I mean, look, it's a good question.

The fact is the second half will be accelerating from the first half, you mentioned specifically Q2, but it does continue to accelerate. There's some positives here.

We continue to see good momentum in general industrial, safety. We see semis, data center, A&D remains pretty strong.

I don't know our communicator about the roofing granules business is not very big, but we see some improvements in the back half on easier comps, and we do see some tailwind on pricing. For the year, we'll be up about a point and a half, which implies about two points in the back half.

All those things give us encouragement in the back half. Look, the watch items are, number one, is going to be Consumer electronics.

The market data indicates a deteriorating production volume of devices, PCs, tablets in the back half of the year, expected to be down high teens. It's lower than it was in the first half.

That's a watch area. Auto is stabilizing in general for us, but it's still expected to be down on the build rate year-over-year in the back half.

The auto aftermarket business we still think was going to be soft. Repair claims is still expected to be down in the back half of the year.

Look, the U.S. consumer remains cautious.

As I just commented, we do expect flat to up growth in Consumer in the back half, but the consumer remains cautious and value-focused. Those are the things that we're more cautious about.

At the end of the day, we had anticipated being above three in Q3. We came in above Q2 rather, we came in about five.

We do expect good momentum going into the back half of the year.

Great. Thanks so much for the color.

As a follow-up, I just was wondering if you could give a little bit more color on what drove the strength in margins this quarter. Is it mix, price cost, or productivity?

You're pretty much at your 2027 margin target right now in the second quarter. When should we kind of expect to hear about updated targets?

Okay. Hey, thanks for the question.

We finished the quarter at 24.9% margin, which is the highest we've ever been. This was 40 basis points higher than we thought where we would be.

A large part of it was the volume performance relative to the 3%, we came in over 5%, it was also continuation on the productivity side as a combination of both G&A and on the supply chain, which had actually very good productivity for the quarter. I would say it's broad-based between volume and productivity.

Okay, great. Thanks for the color.

Thank you. Our next question comes from the line of Chris Snyder with Morgan Stanley.

Please proceed with your question.

Thank you. I wanted to follow up on the data center conversation, specifically the EBO opportunity.

I think you said that this could be a $2 billion market by 2028. I'm just kind of curious, what is the competitive environment here?

Just as we try to think about what share of that $2 billion market could accrue to 3M. It feels like a new technology that I would think the company is well positioned from a share perspective.

Just any color on that. Thank you.

Yeah, Chris, look, it's a good question. We do play today inside the data center in a couple of ways.

We play on sort of copper networking, with our TwinAx product, sold into data centers. There is a gradual transition from copper to fiber that's happening.

It's across the data center, across the racks. It eventually will start to move down to the chip, which today is mostly copper-based solutions.

We've been playing on the copper side, and optics is going to become a bigger share over time of networking in the data centers. Typically, fiber optic connections are point to point.

It's very difficult to do that. The ends have to be polished.

It's specialized labor. It takes time.

It takes effort. When you're thinking about billions of individual fiber strands being connected in data centers, the market is looking for better solutions here, and EBO connections allows them to do this more quickly, and seamlessly, and more reliably.

I think that's kind of an important differentiator. As I mentioned earlier, we've got substantial patent protection around the technology, 100 patents today with another 50 that are pending.

We have and we will continue to license other ecosystem players to manufacture that technology, that EBO, Expanded Beam Optical technology, because that's required by hyperscalers. There's no one company or supplier that would provide all of the demand for these hyperscalers, whether it be servers or chips or racks or whatever it happens to be, including EBO connectors.

That's the path that we're on. We've got a small share today.

It's in the $40 million-$50 million range of a billion dollars. Over time, given our technology and the momentum we think we're building here and our ability to scale, we think our share in that segment will grow materially, and that's what we would expect.

Thank you. I appreciate that.

Maybe if I could follow up on price cost. I would imagine there was some lag on Q2 price cost, just given how quickly the commodities inflated and when we think about the timing of your price actions in April and May.

Can you maybe just kind of talk about price cost in Q2? Is it fair to assume that price cost gets better as we look into the back half, just with the incremental price coming through while commodity inflation is still certainly persisting, it does seem like a lot of these petrochemical inputs have eased a bit, versus what we saw earlier in the spring.

Thank you.

Look, it's a great question, Chris. Q2, our price was at 1.6%, so it was about in line with what we'd expected.

In the first half, it was around a percent. We started the year a little bit lighter.

We do see that increasing in the back half of the year to be about 2%. As Anurag mentioned in his commentary, the impact for us this year, embedded in our year, is $150 million-$175 million from oil-based increases.

That is up from where we were earlier in the year at $125 million. To your point, there is a bit of a lag in that kind of rolling through the system, we're being adaptable here.

We're adjusting as we go. We are trying to offset that dollar for dollar.

It will impact margins, we do expect we'll offset the higher price of oil on a dollar for dollar basis through pricing. We're executing this a little bit better.

We got on it faster this time, earlier in the quarter. We're being very careful to watch volume here, at the end of the day, I think we're capturing it.

Price cost on oil is sort of neutral. Overall, with the other price increases, it'll be slightly positive from where we stand today.

Thank you, Bill. Appreciate all that.

Sure.

Thank you. Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

Please proceed with your question.

Yeah, thanks. Good morning, guys.

Good morning, Nicole.

Maybe just on productivity and stranded costs and growth investments, had anything shifted at all in that outlook? Anything major to highlight as we consider the cadence in those items between the first half and the second half?

Yeah. Overall, Nicole, I would say nothing has changed significantly in terms of the cadence.

What's gotten better is productivity, which I'll come to that in a second. Just on the stranded cost, it's still $150 million for the year.

More in the second half versus the first half. On investments, we said it's going to be $225 million, and the investments are spread over growth, productivity, and foundation stuff of about $225 million.

$75 million in the first half, $115 million in the second half. I wouldn't say anything has changed on those two items.

Clearly on the productivity side, as Bill earlier mentioned on supply chain, it's definitely better than what we have seen through the course of the year.

Okay, got it. Thanks, Anurag.

I think you guys did like $3 billion of buybacks in the first half, and the prior guidance was for $2.5 billion, so you've already exceeded that. How are you thinking about buyback cadence, if there is any, in the H2 of the year?

Listen, we'll continue to be opportunistic and disciplined in just an overall capital allocation framework. As you correctly said, we started the year at $2.5 billion.

We found the opportunity to buy more stock. We've done about $3 billion at an average price of about $153 for the first half, and we'll just continue to be opportunistic going forward.

Thank you. I'll pass it on

Thank you. Our next question comes from the line of Piyush Avasthy with Citi.

Please proceed with your question.

Good morning, guys, thanks for taking my questions. I wanted to focus on Safety & Industrial segment.

Growth in 2Q was very strong. Maybe if you can dig in a bit deeper on the drivers, like how much is healthy end markets versus your own commercial excellence and innovation initiatives.

Not sure if there was any pull forward. Ultimately, I want to get a sense of second half dynamics.

Comms get slightly tough, but do you see a path to sustaining this high single-digit growth?

Just in a nutshell, look, IPI is running around 1.82%. U.S.

is a little bit less than that, around one, just over 1%. Clearly we're growing well above the macro.

I believe it's the performance of the organization, both in terms of commercial excellence as well as innovation. Anurag went through some of the underlying drivers across the divisions of SIBG.

It was pretty broad-based. It was strong across all of what they're in except for auto aftermarket was a little bit light, which again, it's a big business, so they've had to overcome that.

I think the momentum there is pretty good. As you go into the back end of the year, there's nothing that indicates the industrial market is getting softer.

We feel pretty good. As Anurag said, the orders in Q2 was pretty strong.

SIBG was up mid-teens, the order growth rate there is pretty good. Backlog is up year-over-year.

I think the momentum continues, and again, it really is just the balance of really good commercial excellence. Keep in mind, that team jumped on commercial excellence very early in the process, early into 2024, and have made great progress.

I commented earlier about attrition coming down or churn coming down, which has been great. Working hard on the sales force, providing sales AI tools, which makes them more effective and efficient.

A lot of work on cross-selling. That's dropping through to the bottom line.

I would characterize this as a lot of really good back-to-basic hustle that's happening in SIBG, but also in other businesses. We feel good about the momentum, and even with the tough compares, we think second half will be pretty strong growth as well.

Helpful, Bill. Maybe taking a step back, any additional color on how we should think of 3Q and 4Q in terms of top-line growth and operating margin based on your 2026 guidance?

Should we expect normal seasonality? Not sure if there are any other dynamics that we need to be aware of.

Sure. Let me take that question.

You should see the normal seasonality through the course of the year as well. Our guide says we're going to be over 3.5% for the year.

The first half was 3.3%, clearly there's going to be acceleration in the second half. You should see a lot more coming from productivity as well, both on the supply chain as well as some of the transformation projects that we have undergoing.

We see the benefits of that come through. Both of them will more than mitigate the pickup in stranded costs and investments that we are going to make to ensure that this is sustainable for the future.

I would say it's normal seasonality with the EPS growing by $0.30 in the back half, equal between Q3 and Q4.

Appreciate the color, Anurag. Thank you.

Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets.

Please proceed with your question.

Thank you. Good morning, everyone.

Good morning, Deane.

A significant upside in free cash flow, especially compared to your five-year average. Can you talk about any one-timers?

There was a reference to the benefit of tax timing, but also some nice improvement in inventory days. Is that also sustainable, and do you have some targets that you can share?

Yeah. Thanks.

It is very strong cash flow just on the back of very strong operational performance. We obviously have good earnings, and the cash conversion cycle continues to do better on the back of lesser inventory.

Our inventory's improved by seven days year-over-year, it's just fundamental good operational performance that's driving the free cash flow.

Great. You didn't call it out exactly, but can you reference any of the impact on memory chip pricing, availability, and how is that rippling through your consumer electronics?

Well, the consumer electronics was down low single-digits in the quarter, and we do expect the market in the back half of the year to be down. I think it was like high-teens.

I think that's largely related to memory shortages and high cost of memory. I think that's rolling through the marketplace.

In the quarter, we're performing better than the macro, again, down low single-digits versus where the market happens to be. The market is getting weaker because of memory.

Great. Thank you.

You bet.

Thank you. Our next question comes from Brett Linzey with Mizuho.

Please proceed with your question.

Hey, good morning, all.

Good morning.

My question's on utilization and footprint rationalizations. There's a bit of a tug of war here, right?

You've got the secular and cyclical accelerating, but some other areas a little bit more cautious. What's your current capacity utilization across the footprint?

As you look at some of the organic growth potentially accelerating here in the back half, how are you balancing rationalization versus expansion? Are you thinking there's further actions as we look into 2026 and 2027, or are you revisiting some of the plans currently given the improvements?

Look, the way we measure utilization is across about 300 assets across the organization. We continue to increase that we're systematically tracking.

There's more than half our volume. It's running around 63.5%, 64%.

There's plenty of upside capacity across the overall network in aggregate. As I mentioned in my remarks, there are certain assets in our network that are constrained, and I mentioned one in particular in New Ulm.

There's others in New Ulm, which makes electrical connectors. That volume is spiking, so we've got to find ways to unlock capacity.

A lot of it's kind of basic at how you run the lines and the workflow and material flow. Over time, there might be some capital there, but overall, utilization is an upside opportunity for us.

Fundamentally understanding utilization, how it's measured across individual assets, across the 100 plants we have in the network, allows us to then start to look at how do you consolidate between individual assets, cells within a factory, and factories themselves. That is the unlock of what we call transformation that's going to occur over the next three to five years.

It's a longer-term journey, but clearly, as we start to wring out capacity, increase capacity utilization here, we have an opportunity to rationalize the network as well.

Understood. Thanks.

Just to follow up on the new product launches, 92 in the quarter on pace for the 350+. What portion is incremental share or TAM expansion versus replacing or cannibalizing existing SKUs?

I guess, is there a metric you guys are looking at that looks at net new contribution internally versus gross NPI that might help us bridge some of the opportunity here over the next couple of years?

Yeah. Brett, let me look.

When we talk about growth above the macro, a lot of it is going to be net new growth, and that's sort of what we articulate that. Class 3 for us is running around 75% of the launches.

Class 4s and 5s, which is more new adjacent markets or new product for new markets, that's running around 25%. Over time, that go up to 30%, maybe a little bit better than that.

It'll be a little bit higher in the industrial side, so we do expect TEBG and SIBG to get to 40% or beyond 40% Class 4s and 5s, but we're still running as a company around 25% today.

Thanks, Bill.

You bet.

Congrats on the quarter.

Thank you. Our last question today comes from Laurence Alexander with Jefferies.

Please proceed with your question.

Can you give a high-level assessment of the margin profile in the new product mix relative to your core businesses? Used to be that was a significant gap, and I'm curious if the gap is stable, that is, as your overall margins are rising, is the margin embedded in the new product pipeline also rising?

Should we think about it more as over time, kind of you're just having a mix shift where the higher mix is what's driving the margin lift, but eventually, those two would converge at some equilibrium.

Look, in a nutshell, look, we expect and we do see that margins on new products over time raise the overall margin threshold. As they start, they launch lower volumes.

You'll see just absorption or maybe as they may not come in at the higher margin, but they do over time because new features can drive better pricing. Also, new products can come into the marketplace at lower cost.

One of the things the team is really focused on is design to cost. We are looking to both bring new features which help us drive price, but also drive cost down in the designs themselves.

That combination should allow us to unlock and does allow us to unlock margins through new product introductions.

Thank you.

Thank you. This concludes the question and answer portion of our conference call.

I will now turn the call back over to Bill Brown for some closing comments.

Well, thanks everybody for joining us today. Thanks again to all the 3M-ers for really truly delivering another outstanding quarter of great execution and delivering value for our customers and our shareholders.

I want to thank them all for all their efforts. Thank you for joining the call, and have a good day.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.