$MMM 3M Company Q2 2026 Earnings Conference Call

Thank you, Ch. And 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 a billion of share repurchases. Since 2025, we returned $8.6 billion to shareholders against our commitment to return $10 billion plus 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, and we're building momentum in executing against our strategic priorities. Commercial excellence initiatives continue to drive results through improved Salesforce 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, up over 40% quarter over quarter and 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, and 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 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 own 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, and 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, and 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 and partnering with an external provider to run them at scale using automation and AI. This move will increase agility, accelerate technology adoption, and 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 and Rescue, consolidating it with our Scott SCBA business into a new majority-owned joint venture and receiving $700 million in cash as part of the transaction. This JV generates revenue of $800 million, growing at high single digits and 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. And I want to touch on an exciting announcement we made last week. We entered a strategic partnership with Microsoft who will become the first hyperscaler to deploy our patented expanded beam optics 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 places with pressure, including consumer electronics, auto and auto aftermarket, and US consumer spending. We're clearly outgrowing the market in aggregate through better commercial execution, including increased cross-selling and improved customer retention and 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, and slide five highlights this 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 next-tail 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 of 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 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 '26. 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 Honor to share the details of the quarter. Honor.

So good morning Jeff, that's a great question. Thank you for that. Yeah, 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. You know, it's not really macro tailwinds. The macro on the industrial side looks pretty good, but there's some headwinds in the marketplace. It's mostly just internal performance. And you know, when you look at just a 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 is pretty good. Mostly driven in the first half from commercial excellence activities. You know, a lot of the things we've laid out in the past around Salesforce 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 and 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 which takes 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 and in fact even greater into 2027 based on just the momentum that we happen to be building here. So 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 to $350 million and that's largely on the back of good commercial excellence but the machine turning faster on innovation. So all good signs and we're very pleased with the performance in the quarter and we expect our momentum to continue.

Good morning, Scott.

So, Scott, thanks for the question. Yeah, it's getting quite a bit of excitement and we're excited internally as well. It's a technology that was developed several years ago. 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 the space, 50 pending. So 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 was in the $40 to $50 million range. We do think it will scale over time. Could be four or five times that or even more over the next several years depending upon our progress here as well as the adoption of optical technologies and data centers 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. But even that isn't anywhere near the volume demand in the marketplace. So we're also working with various contract manufacturers; we're pretty developed on one. The third item is that we will not be successful as a sole provider here. This is about enabling an ecosystem of partners. So we formed a multi-supplier agreement. There are 44 players in this agreement all throughout the ecosystem. There are multiple hyperscalers, chip manufacturers, connector manufacturers, and it's about how to enable the whole ecosystem. So all of those things are in place. We're deep in the trials with other hyperscalers. I won't say much more about that, but the TAM this year for EBO technologies is around a billion dollars. We think it'll grow to two by 2028, two billion. It could be beyond that over time, but 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. But 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.

Yeah, good questions. 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 at 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 were in Q3 in the back end of the year. But long-term, we like ...

In China. We like the team that's executing in China, the strategy, and we're pretty optimistic about the future in China.

So a bunch of good questions. First on the last piece around the outgrowth next year. This year, we originally said we would be a billion over the macro, 125, 326, and 627. Clearly last year we did a bit better than 100. This year we'll do more than 300, around 450. So that continues to ramp. We'll come back early next year and talk about next year. But clearly we're performing better than the macro. And it's both commercial excellence as well as innovation or NPI. On NPI, the progress has been fantastic. The chart we put into the webcast is very important. It shows a deep inflection and we're clearly on the right track. We typically launch a product within about 250 days from the beginning of development to launch. That's down substantially from where it was two years ago. By 2027, it's going to around a 20% reduction in overall cycle time. But there are nuances in the data. We're launching more class 3s, which are shorter in duration and more incremental. But the company is pivoting more to class 4s and class 5s. Class 4s move into adjacent markets, and class 5s are completely new products for new markets. The team is focusing more on the fours and fives. You'll see more impact in the back half of the year as products we started working on a few years ago launch this year and become meaningful. They'll be even more meaningful into 2027. The engine is moving, momentum is building. The team is executing fantastically well across all these dimensions. We're launching more, but there are more ideas coming into the front end of the funnel. The pipeline is very healthy. I think this will continue to build momentum in the back half into next year. This is what we're known for — material science driving differences in the world. We're doing a good job.

On margins, you see the chart — up 500 basis points from a couple of years ago. We're making really strong progress. It's both gross margin and importantly in SG&A, IT, and other indirect costs. We've talked about that. There was more to squeeze in that area, more cost to take out than we anticipated. We've done a good job on gross margins. We're tracking close to mid-40s right now. Productivity is really solid. We had great productivity in the quarter. We continue to build momentum. We're reducing our cost, support quality came down again. Operating equipment effectiveness is coming up. We're driving hard on procurement and seeing net savings even after inflation. Four-wall spend. We've doubled the number of Kaizen events. There's a ton of opportunity running the network and distribution side better. The next step as we transform is simplifying, standardizing, and automating more of our processes on the SG&A side and on the factory and network side. There's plenty of headroom. We see ourselves marching ahead with the ability to hit the high 40s over time. The roadmap is clear, along the same lines we've been laying out. 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.

Inventory levels in SIBG and TEBG are normal. There's no discernible trend one way or another. Not a concern. On CBG, what was encouraging is to continue to see the point-of-sale growth or sellout 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. We saw them step back a little in the US channel in terms of weeks of supply. It was about a one-week delta. As we come into July and Q3, we think this will normalize, especially as retailers stock for back-to-school season. We'll keep monitoring it and communicate with investors as needed, but we feel it's going to normalize and help us in the back half. Consumer should be flat to up slightly, which is our expectation for the back half.

Sure. Thank you. It's a good question. The second half will be accelerating from the first half. You mentioned specifically Q2, but it does continue to accelerate. There are positives: we continue to see good momentum in general industrial and safety. Semis and data center AI remain pretty strong. The roofing granules business is not very big, but we see some improvements in the back half on easier comps. We do see some tailwind on pricing. For the year, we'll be at about a point and a half, which implies about two points in the back half. All those things give us encouragement. The watch items: number one is consumer electronics. Market data indicates deteriorating production volume of devices, PCs, and tablets in the back half, expected to be down high teens, worse than the first half. That's a watch area. Auto is stabilizing in general but still expected to be down on build rate year-over-year in the back half. The auto aftermarket business is still expected to be soft. Repair claims are expected to be down. The US consumer remains cautious and value-focused. We expect flat to up growth in consumer in the back half. Those are the things we're more cautious about, but at the end of the day, we had anticipated being above 3% in Q3. We came in above 5% in Q2. We do expect good momentum going into the back half.

Yeah, Chris, it's a good question. We do play today inside the data center in a couple of ways. We play on copper networking with our twinax product sold into data centers. There's a gradual transition from copper to fiber happening across the data center and racks. It will eventually move down to the chip, which today is mostly copper-based. We've been playing on the copper side. Optics is going to become a bigger share of networking in data centers over time. Typically, fiber optic connections are point-to-point, difficult to do, ends need to be polished, specialized labor, time and effort. When you think about billions of individual fiber strands being connected, the market is looking for better solutions. EBO connections allow them to do this more quickly, seamlessly, and reliably. That's an important differentiator. We have substantial patent protection — 100 patents today with another 50 pending. We have and will continue to license other ecosystem players to manufacture that EBO expanded beam optics technology because hyperscalers require it. No one company can provide all the demand. We have a small share today, in the $40-$50 million range of a billion dollars. Over time, given our technology, momentum, and ability to scale, we think our share will grow materially.

Yeah, it's a great question, Chris. Q2 price was at 1.6%, about in line with expectations. In the first half, it was around 1%. We started the year a little lighter. We see that increasing in the back half to about 2%, as Anrag mentioned in his commentary. The impact for us this year embedded in our year is $150 to $175 million from oil-based increases, up from earlier in the year at $125 million. There is a bit of lag rolling through the system. We're adapting, adjusting as we go. We're trying to offset that dollar for dollar. It will impact margins, but we expect to offset the higher price of oil on a dollar-for-dollar basis through pricing. We're executing a little better, got on it faster this time earlier in the quarter. We're being careful to watch volume, but 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.

Sure.

Good morning, Nicole.

Listen, we'll continue to be opportunistic and disciplined in our 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.

So, just in a nutshell, IPI is running around 1.8% to 2%. US is a little less at 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 and innovation. Anrag went through some of the underlying drivers across the divisions of SIBG. It was pretty broad-based, strong across all except auto aftermarket, which was a little light. That's a big business, so they've had to overcome that. But I think the momentum is pretty good as we go into the back end of the year. There's nothing indicating the industrial market is getting softer. Orders in Q2 were pretty strong. SIBG was up mid-teens, so the order growth rate is good. Backlog is up year-over-year. I think the momentum continues. It's really a balance of good commercial excellence. That team jumped on commercial excellence very early, early into 2024, and have made great progress. Attrition or churn has come down. They're working hard on the sales force, providing sales AI tools, making them more effective and efficient. A lot of work on cross-selling, dropping through the bottom line. I would characterize this as a lot of really good back-to-basics hustle happening in SIBG and other businesses. We feel good about the momentum. Even with tough comparisons, we think the second half will be pretty strong growth.

Hey, good morning, Dean.

Well, consumer electronics was down low single digits in the quarter. We do expect the market in the back half of the year to be down high teens. I think that's largely related to memory shortages and high cost of memory. That's rolling through the marketplace. In the quarter, we're performing better than the macro, down low single digits versus where the market is. We expect to outperform in the back half, but the market is getting weaker because of memory.

You bet.

On the way we measure utilizations across about 300 assets, we continue to increase that. We're systematically tracking. More than half our volume is running around 63.5% to 64%. So there's plenty of upside capacity across the overall network in aggregate. As I mentioned in my remarks, there are certain assets that are constrained — I mentioned one in particular in New which makes electrical connectors; volume is spiking. We've got to find ways to unlock capacity, a lot of it basic in how you run the lines, workflow, and material flow. Over time there might be some capital, but overall utilization is an upside opportunity. Fundamentally understanding utilization across individual assets in the 100 plants allows us to look at how to consolidate between cells within a factory and factories themselves. That's the unlock we call transformation, occurring over the next 3 to 5 years. It's a longer-term journey. But clearly, as we start to ring out capacity and increase utilization, we have an opportunity to rationalize the network.

Yeah. Brett, when we talk about growth above the macro, a lot of it is going to be net new growth. That's what we articulate. Class 3 for us is running around 75% of the launches. Class 4s and 5s, which are more new adjacent markets or new products for new markets, are running around 25%. Over time, that goes up to 30% maybe a little better. It'll be higher in the industrial side. We expect TEBG and SIBG to get to 40% or beyond class 4s and 5s, but as a company we're still around 25% today.

Look, in a nutshell, we expect and do see that margins on new products over time raise the overall margin threshold. They launch at lower volumes, so you might see less absorption or they may not come in at the higher margin initially, but they do over time because new features can drive better pricing. Also, new products can come to market at lower cost. The team is really focused on design to cost. We're looking to bring new features that help drive price and also drive cost down in the designs themselves. That combination should allow us to unlock margins through new product introductions.

Well, thanks everybody for joining us today. Thanks again to all the 3Mers for truly delivering another outstanding quarter of great execution and delivering value for our customers and our shareholders. I want to thank them all for their efforts. Thank you for joining the call, and have a good day.