3M CO Q3 2025 earnings call

Ladies and gentlemen, thank you for standing by. The conference will be starting in just a few minutes. It is recommended that you use a landline phone if you are going to register for a question. We thank you for your patience and ask that you please remain on the line. Ladies and gentlemen, thank you for standing by. Welcome to the 3M Third 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, October 21, 2025. 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, and welcome to our quarterly earnings conference call. With me today are Bill Brown, 3M's Chairman and Chief Executive Officer, and Anurag Maheshwari, our Chief Financial Officer. Bill and Anurag will make some formal comments, then 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 10Q 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, and I will hand the call off to Bill. Bill?

Thank you, Chinmay, and good morning, everyone. The 3M team delivered another strong quarter in Q3 with organic sales growth of 3.2%. The fourth consecutive quarter of positive organic growth across all three business groups against a macro backdrop that is largely unchanged and generally soft. Our 3M Excellence operating model helped drive operating margins up 170 basis points, earnings per share up 10% to $2.19, and free cash flow of $1.3 billion, a conversion of 111%. Our strong performance through the first three quarters of the year enables us to increase our earnings per share guidance to $7.95 to $8.05. On the back of a strong Q3, we now expect full-year organic sales growth to be greater than 2%, with adjusted free cash flow conversion remaining above 100%. Our strategy is working, and our efforts to advance our top three priorities are yielding results.

Most notable this quarter is our work on commercial excellence. The rigor associated with turning customer opportunities into wins faster is clear, and we are squarely focused on accounts with the highest potential while limiting special pricing actions. Our cross-selling program continues to outperform our expectations, and we have nearly doubled the pipeline since last quarter and closed on nearly $30 million of new business. To reduce churn, we are leveraging predictive analytics to win back business lost or at risk. The sales organization is stepping up its performance, embracing the up-tempo operating rigor and leveraging new tools and processes to win at the customer interface. We launched 70 new products in the quarter and 196 year to date, both up about 70% versus last year.

We now expect to launch over 250 new products this year, exceeding our goal of 215 and pacing ahead of our investor day target of 1,000 new products through 2027. We continue to shift resources towards new product development, align investment to our priority verticals, and drive accountability for on-time launch attainment. Most importantly, we're beginning to bend the curve on revenue from new products, with sales from products launched in the last five years up 30% in Q3 and 16% year to date, tracking to be up high teens for the full year. I wanted to highlight a few specific product launches this year that contributed to our performance this quarter. Earlier this year, we launched Scotch-Blue Pro Sharp Painter's Tape, a great example of a class three product in our consumer business that replaces an existing offering in this space, but with a better performance and cost profile.

We're now regaining share, growing high single digits, and outperforming in the category. Another launch in the consumer business expanded our size offering in our Filtrete business, giving us broader coverage of the market and leading to high single-digit growth in the category in Q3. Last quarter, we launched a new lightweight wireframe self-contained breathing apparatus, which contributed to our high teens growth this quarter in our SCBA business and SIBG. These are just a few examples that individually are not material at the company level, but collectively are beginning to have a positive impact on revenue growth and customer perception that innovation is back at 3M. Our second priority is driving operational excellence across the enterprise. Our efforts here are driving margin expansion, improving customer service, increasing asset utilization, and reducing cost of poor quality.

Our on-time in full metric was 91.6% in the quarter, improving 200 basis points sequentially and 300 basis points over last year, achieving the highest on-time performance we've had in any quarter going back 20 plus years. We've now been consistently over 90% for four months in a row. Improved OTIF shows up tangibly in our financial results as lower service fines, but also intangibly through a better customer experience, leading to winning more shelf space and enhancing customer loyalty. Our intention now is to shift to the next stage of operational excellence, sustain or improve OTIF while simultaneously tightening delivery lead times and lowering inventory. We continue to roll out our operating equipment effectiveness metric, which is now being systematically tracked on 229 of our most important assets, representing about 60% of our production volume, an increase of 32 assets since last quarter.

Year to date, OEE is about 63%, up 300 basis points versus last year. This focus on better asset utilization is both reducing changeover time and unplanned downtime and increasing run length and run rate, unlocking incremental volume opportunities. For example, in our optical adhesives line at our Jinshan plant in China, we were able to increase utilization from 63% to 81% by optimizing visual defect controls and reducing curing system downtime, freeing up enough capacity to double our share of an electronics customer's business. Quality is another critical aspect of operational excellence and is a company-wide priority. Our cost of poor quality in the quarter was 5.7%, down 40 basis points sequentially and 150 basis points year over year.

Our focus on quality has driven yield loss reductions across all three business groups as we leverage Kaizen events and AI tools to optimize changeovers, use automation to replace manual visual inspection, and deploy design for manufacturing in our new product development efforts to reduce scrap during scale-up. While we're making progress, we have a long runway for improvement toward our target of achieving less than 4% cost of quality as a percentage of cost of goods sold. Our third priority is capital deployment. We returned $900 million to shareholders in Q3, $400 million in dividends, and $500 million of share repurchases. Year to date, we've returned $3.9 billion to shareholders. Consistent with what we said at investor day and since then, we continue to evaluate our portfolio at a profit center level to shift our businesses towards higher growth, higher profit potential markets.

Addressing this portfolio will not only be accretive to earnings over time, but importantly will free up management time to focus on higher value opportunities. We previously communicated that 2% to 3% of revenue was under review for being divested, and in the quarter, we made progress with an agreement to sell our precision grinding and finishing business within our SIBG abrasive division. While this business is small at less than 1% of company sales, it's been a drag on results with over a decade of sales declines and seven dedicated underutilized factories across the U.S., Europe, and China. As such, we do not expect this divestiture to be dilutive to earnings. This is a good outcome for shareholders, and it's indicative of the portfolio shaping we spoke about at investor day that enables us to be a more focused and higher performing enterprise.

On slide four, macro trends remain soft and largely unchanged from Q2, but due to our strong execution, we are outperforming. Looking at our end markets, in Q2, we said general industrial and safety would improve off its low single-digit growth in the first half, and that is what happened, despite a surprisingly weak roofing granules market. Electronics was up mid-single digits and flat to the first half and was a bit better than expected. Consumer was flat as expected, and auto and auto aftermarket were down mid-single digits, with performance improving modestly in auto OE and weakening in commercial vehicles. Slide five pulls it all together and puts a spotlight on our 3M Excellence framework in action in SIBG.

On the right shows 11 quarters of organic growth at SIBG, from minus 6% in early 2023 to the most recent quarter at 4.1%, aligned with the key factors driving this improvement. Over this period, new product launches more than doubled, OTIF improved by 12 percentage points, age backlog declined by 13 points, cross-selling has accelerated, and more rigor and management focus was implemented across the sales force. While progress is evident, we're still in the early innings as we execute on the fundamentals and extend the 3M Excellence framework to other parts of the company. I'm really proud of the team. Our third quarter performance gives us confidence we're on the right track and reflects the culture of excellence we're building inside the company as we continue to drive the rigor and uptempo necessary to deliver on our strategic priorities.

As we navigate these uncertain times, we're focused on what we control: innovating for our customers, embedding commercial excellence across our businesses, improving service, optimizing capacity, reducing waste, and effectively deploying capital, all with a renewed sense of urgency that defines our new performance culture. With that, I'll turn it over to Anurag to share the details of the quarter. Anurag?

Thank you, Bill. Turning to slide six, we had a strong quarter across all financial metrics. We delivered sales growth acceleration, continued solid margin expansion, double-digit earnings growth, and strong cash flow. Starting with the top line, in a consistently muted macro environment, we accelerated organic revenue growth from 1.5% in the first half to 3.2% in Q3, driven by successful execution of our commercial excellence initiatives and contribution from NPI, underpinned by a strong operating tempo, which resulted in growth above macro. By geography, our growth was led by China, which was up high single digits with strength in industrial adhesives, films, and electronics bonding solutions, driven by strong commercial execution that led to share gains.

The U.S., where we first focused our commercial excellence initiatives, grew nearly 4% in the quarter compared to 1% growth in the first half, with strength in general industrial safety and demand for Filtrete™ filters partially offset by market-driven weakness in auto aftermarket and roofing granules. It was encouraging to see Europe return to growth in the third quarter, up low single digits due to strength in personal safety communication solutions, which more than offset the weakness in auto. Q3 daily order trends were up 3% year on year, with growth across all business groups. Though our sales came in better than expected and aged backlog continues to decline, the strength in orders resulted in a year-over-year increase in backlog, providing 20% to 25% coverage of fourth quarter sales. Q3 adjusted operating margins were 24.7%, up 170 basis points year on year, driven by continued strong operational performance.

Operating income grew by approximately $175 million in constant currency, including an approximately $325 million benefit from volume growth, broad-based productivity across supply chain and G&A, and lower restructuring costs, partially offset by about $50 million of growth investments as planned and $100 million from tariff impact and stranded costs. Collectively, this contributed $0.25 to earnings, which was partially offset by $0.04 from FX and non-operational below-the-line items. Our strong operating performance resulted in adjusted EPS of $2.19, an increase of 10%. Relative to expectations, our operational outperformance was driven by higher volume and productivity as the team continued to execute our strategic priorities. I also want to mention two items highlighted in a press release issued this morning that are excluded from adjusted results. First, we recorded a pre-tax charge of $161 million related to the agreement to sell our precision grinding and finishing business.

Second, we took a $14 million charge as we begin to invest in the long-term transformation efforts to redesign our manufacturing, distribution, and business process services and locations. This initiative is different from the traditional restructuring programs we have previously undertaken, like the recently concluded enterprise program, which focused on short-term actions for quicker paybacks. Accordingly, the charges related to these actions will be excluded from adjusted results going forward. Adjusted free cash flow in the quarter was $1.3 billion, with conversion of 111% as we benefited from strong earnings and capital expenditure efficiency. I will provide a quick overview of our growth performance for each business group on slide seven. We started commercial excellence initiatives in safety and industrial, and as a result, we are seeing early gains with organic sales up 4.1% in Q3 and 3.1% year to date.

Growth in SIBG was led by electrical markets, up low teens as we prioritized service performance and capitalized on growth in construction of data centers. Industrial adhesives and tapes had another quarter of mid-single digit growth as they continue to win share in bonding solutions for electronics, auto, and appliances from new product introduction and better order conversion. Both personal safety and abrasives accelerated to mid-single digit growth, up from low single digits in the first half, driven by increased sales effectiveness and new product introductions. Collectively, this strong growth more than offset known weakness in automotive aftermarket and emerging weakness in roofing granules from the slow housing market and weak consumer sentiment. Overall, our focus on commercial and innovation excellence helped SIBG grow 4.1% for the quarter, the highest growth since 2018 ex-COVID.

Transportation and electronics adjusted sales accelerated from 1% in the first half to 3.6% in Q3, bringing year-to-date organic growth to 1.9%. While there was some discrete timing between Q3 and Q4 in our transportation safety business due to a large pavement marking project, the main drivers of growth were double-digit growth in aerospace, continued momentum in the electronics business, and automotive being flattish after a down first half. In electronics, we're expanding from the premium segment into the mainstream with new product introductions and better sales coverage. This quarter, we won content with a major mainstream player to supply optically clear adhesives for smartphones and low sparkle film for notebooks. In our auto business, the weak commercial vehicle sales were offset by growth due to spec-in wins and increased penetration with Chinese OEMs.

Finally, in a relatively weak consumer market, our consumer business has demonstrated the ability to grow four quarters in a row, including 0.3% organic growth in each of the last three quarters. Though consumer sentiment remains soft, we experience strong demand for Filtrete™ filters, Scotch Tape, and Meguiar's products supported by new product introductions, continued service improvements, and increased advertising and merchandising investment. Overall, we are delivering on our commitments with strong year-to-date results, including organic growth of 2.1%, operating margin expansion of 220 basis points to 24.2%, earnings growth of 11%, and free cash flow generation of $3.1 billion. We also returned $3.9 billion to shareholders, including $1.2 billion in dividends and $2.7 billion in share repurchases. Please turn to slide eight for an update on our 2025 guidance. Our year-to-date sales growth of 2.1% gives us confidence we will deliver growth of over 2% for the year.

Our focus on productivity has enabled us to deliver strong margins every quarter, and on the back of this performance, we are updating our margin expansion expectations to 180 to 200 basis points for the year. As a result, we are raising our earnings per share guidance for the year from a range of $7.75 to $8.00 to a range of $7.95 to $8.05, representing an approximately 12% increase at the midpoint, or 10% growth for the year. We continue to expect free cash flow conversion of greater than 100%, with absolute free cash flow dollars being higher, reflecting the increase in earnings. Please turn to slide nine. This updated 2025 guidance is ahead of the initial guidance set at the beginning of the year and positions us well to achieve the financial commitments we made at our investor day earlier this year.

For 2026, we will provide formal guidance on a Q4 earnings call in January, but our framework remains consistent with what we communicated at our investor day in February: growth above macro, continued margin expansion and earnings growth, and strong free cash flow generation. While the macroeconomic outlook is uncertain, we will outperform by scaling commercial excellence across all business units and leveraging new product launches. Alongside growth, we will improve productivity in our supply chain and G&A to more than offset investments, stranded costs, and anticipated tariff impacts, resulting in margin expansion in 2026. For EPS, we expect operational performance to be the primary driver of earnings growth, similar to this year. Non-operational performance will be influenced by changes in interest rates and FX, while tax rates should remain stable and share buybacks will continue to be accretive.

Finally, we continue to expect to deliver cash flow conversion that exceeds 100%. Before we open the call for questions, I would like to acknowledge and thank the 3M team for the strong commitment to operational and commercial excellence and focus on delivering improvement day after day. Our performance to date and opportunities ahead of us provide us with increased confidence in delivering on our updated 2025 guidance and commitments we laid out at the investor day. With that, let's open the line for questions.