3M Co ($MMM) Q2 2026 Earnings 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, 40 cents up 11% and free cash flow of $1.3 billion with 107% conversion. We returned $1.4 billion of 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 per 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 M 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 the 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 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 to for new markets like EBO for data centers to adapting existing technologies to new applications like Nextail 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 in markets with our growth to market multiple improving from roughly inline to 2x and with businesses that declined in 2023 turning solidly positive in 26. While I was 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 Jeeoff 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 tailored. The macro on the industrial side looks pretty good, but there are some headwinds in the marketplace. It's mostly just internal performance. And you know when you look at just the quarter 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 you know better performance at the front end. You know pricing governance. You know, 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 is it 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, you know, 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 340 350. And that's largely on the back of good commercial excellence but the machine turning faster on innovation. So, all good signs and you know, we're very pleased with the performance in the quarter and we expect our momentum continue.

So Scott, thanks for the question. Yeah, 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. You know, it just in a nutshell, it's very durable, dust resistant, vibration resistant, you know, fiber optic connect 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. You know, we've got about 100 patents in the space, 50 pending. So, it's very well protected and we're very excited about this. You know, it's been in testing for several years with Microsoft. We're very pleased that, you know, they have qualified us for as a technology for the Azure data centers. You know, that's very encouraging. The revenue this year it was in the 40 $50 million range. You know we do think it will scale over time could be 4 5x 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 that transitions you know a couple of things are happening here. One, you know, 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. And 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. You know the third item of this is that you know we will not be successful as a sole provider here. This is about enabling an ecosystem of partners. You know so 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. So all of those things are in place. We're deep into trials with other hyperscalers. I won't say much more about that. You know, 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, you know, 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. 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 uniqueness 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. You know in the second quarter we were double digit growth first half about 8%. You know a lot of the performance there. Keep in mind again we're 50/50 between domestic production and export. You know, 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 you know 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 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.

So, a bunch of good questions. First on the last piece around the outgrowth next year. I mean look, this year we originally said we would be a billion over the macro: 125, 326, and 627. And clearly last year we did a bit better than 100. This year will do more than 300 to around 450. So that continues to ramp. So 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. Look on NPI, the progress has been fantastic and the chart that we put into the webcast is 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 from where it was two years ago. By 2027, it's going to around 20% reduction in overall cycle time, but there are some nuances in the data here. We're launching more class 3s, which are shorter in duration, more incremental, but the company is pivoting more to what we call class 4s and class 5s. Class 4s are those that move into adjacent markets and class 5s are completely new products for new markets. So 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. But the engine's moving. The momentum is really building. The team is executing fantastically well across all these various dimensions. We're launching more, but there are more ideas coming into the front end of the funnel, so the health of the pipeline is very good. So I think this will continue to build momentum in the back half and into next year. It's what we're known for: materials science and driving using materials science to make differences in the world, and I think we're doing a good job with that.

Look, on margins, you see the chart, up 500 basis points from a couple of years ago. So we are making really strong progress here, and it's both gross margin but also importantly in SG&A and IT and other kinds of expenses, indirect cost. 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 to 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 the metrics around that. We are reducing our cost support quality, that came down again. Our operating equipment effectiveness is coming up. We're driving hard on procurement, receiving 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 than it exists today. The next step really as we transform is simplifying, standardizing, automating more of our processes both on our SG&A side, I kind of 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 with an ability to hit the high 40s over time, but the road map is relatively clear. It's along the same lines we've been laying out and talking about over the last couple of years. And as we get into transformation, we'll see margins continue to expand. So we feel good about the performance and optimistic about the future on margins.

So 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 US 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 retailers stock for back-to-school season. But we'll keep monitoring it and communicate with investors as we need, but we feel it's going to normalize here and help us in the back half of consumer to be flat to up slightly, which is what our expectation would be in the back half of the year.

Sure. So thank you. 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 semi data center AI remains pretty strong. On the roofing granules business, it's 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 at about a point and a half, which implies about two points in the back half. So 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, which is worse than it was in the first half. So 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 is going to be soft. Repair claims still expected to be down in the back half of the year. And look, the US 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. So those are the things that 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 rather. We do expect good momentum going into the back half of the year.

Okay. Hey, thanks for the question. So we finished a quarter at 24.9% margin, which is the highest we've ever been, and this was 40 basis points higher than we thought we would be. Large part of it was the volume performance relative to the 3% we came in over 5%, but it was also continuation on the productivity side as a combination of both SG&A and on the supply chain, which had actually very good productivity for the quarter. So I would say it's broad-based between volume and productivity.

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. So 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. And 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 allow them to do this more quickly, seamlessly, and more reliably. I think that's 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. But we are, we have and will continue to license other ecosystem players to manufacture that technology, the EBO expanded beam optics technology, because that's required by hyperscalers. There's no one company or supplier that will 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. So that's the path that we're on. We've got a small share today, again it's in the $40-50 million range of a billion dollars, but 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.

Yeah, 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 Anrag mentioned in his commentary. The impact for us this year embedded in our year is $150 to $175 million from oil-based increases, that is up from where we were earlier in the year at $125. So to your point, there is a bit of a lag in that rolling through the system, and we're being adaptable here. We're adjusting as we go. We are trying to offset that dollar for dollar. It will impact margins, but we do expect we'll offset the higher price of oil on a dollar for dollar basis through pricing. We're executing in 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. So price cost on oil is sort of neutral. Overall with the other price increases, it'll be slightly positive from where we stand tonight.

Sure.

So, just in a nutshell, look, IPI is running around 1.8%, US is a little less at around just over 1%. So clearly we're growing well above the macro. And I believe it's the performance of the organization, both in terms of commercial excellence as well as innovation. Anrag 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, which was a little bit light, which again it's a big business, so they've had to overcome that. But I think the momentum there is pretty good. As we go into the back end of the year, there's nothing that indicates the industrial market is getting softer. We feel pretty good. As Anrag said, the orders in Q2 was pretty strong; SIBG was up mid-teens, so the order growth rate there is pretty good. Backlog is up year-over-year. So I think the momentum continues. And again, it really is just a balance of really good commercial actions. Keep in mind, that team jumped on commercial actions very early in the process, early into 2024, and have made great progress. I commented earlier about attrition coming down, 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 the bottom line. So I would characterize this as a lot of really good back-to-basics hustle that's happening in SIBG but also in other businesses. So we feel good about the momentum, and even with the tough comparisons, we think second half will be pretty strong growth.

Hey, good morning Dean.

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. So, and I think that's largely related to memory shortages, a high cost of memory. So, 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. We expect to outperform in the back half of the year, but the market is getting weaker because of memory.

You bet.

So look, on the way we measure utilizations across about 300 assets across the organization, we continue to increase that. We're systematically tracking more than half our volume. It's 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 in our network that are constrained, and I mentioned one in particular in Newm. There's others in New which makes electrical connectors that volume is spiking. So we've got to find ways to unlock capacity, and a lot of it's kind of basic in 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. But 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, what we call transformation, that's going to occur over the next 3 to 5 years. It's a longer term journey, but clearly, as we start to ring out capacity, increase capacity utilization here, we have an opportunity to rationalize the network as well.

Yeah, Brett, let me look. When we talk about growth above the macro, a lot of it is going to be net new growth. That's what we articulate. But class 3 for us is running around 75% of the launches. Class 4s and 5s, which are more new adjacent markets or new new if you will, new products for new markets, that's running around 25%. Over time that will 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.

Look, in a nutshell, we expect and we do see that margins on new products over time raise the overall margin threshold. As they start a launch, lower volumes, you'll see just absorption or maybe that 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. So we are looking to both bring new features which help us drive price but also drive cost down in the designs themselves, and that combination should allow us to unlock and does allow us to unlock margins through new product introductions.

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