3M CO Q2 2026 earnings call

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.