3M CO Q4 2025 earnings call

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 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, and I will hand the call off to Bill. Bill?

Thank you, Chinmay. Good morning, everyone. We had another quarter of strong performance with second-quarter adjusted earnings per share of $2.16, up 12% versus last year and above expectations. Organic sales growth was 1.5%, with all three business groups reporting positive growth for the third quarter in a row. Operating margins increased 290 basis points year-on-year through productivity and cost controls, while we continued to invest in growth initiatives. Free cash flow was solid at $1.3 billion for the quarter and 110% conversion. Our performance reflects the culture of excellence we're building inside the company as we continue to drive the rigor and opt-ampo necessary to deliver on our strategic priorities in this uncertain macro environment. As part of our commitment to innovation excellence, we're increasing the cadence of new product launches.

In Q2, we launched 64 new products, up about 70% versus last year, which puts us at 126 launches for the first half and on track to exceed our target of 215 for the year. The pipeline remains healthy, and there's more rigor and discipline in the process with better business cases and higher launch schedule attainment. Most importantly, five-year new product sales bottomed last year and was up 9% in the first half, accelerating from Q1 into Q2 and tracking well to be up more than 15% for the year. With 64 launches in the quarter, there are a lot of exciting new products to discuss, but let me take a moment to highlight just a few.

In our fire safety business, we launched a low-profile rugged air pack with updated electronics to enable telemetry and connectivity that has been well received by our largest firefighting customers, especially those who value compactness and maneuverability in small spaces. In our consumer business, we've been building around the Filtree platform with four new product launches in the last six months, including one with a reusable filter frame that can be refilled by a collapsible deep pleat filter, analogous to a razor blade model. This innovative design reduces shipping costs and saves retailers storage and shelf space. At the same time, we're continuing our focus on commercial excellence as we drive increased Salesforce performance, capture higher cross-selling opportunities, improve price discipline, and reduce churn. You'll recall that our team in safety and industrial launched the program in the U.S.

late last year and has now expanded this effort into Europe and Asia. We've trained over 400 sales managers and see early results through higher closed-won opportunities and improved order rates. We now have 48 cross-selling pairs identified, about double since Q1, with a pipeline value of over $60 million and $10 million of new orders booked to date. We're tightening pricing controls by reducing price deviations and focusing on bigger deals with strategic customers. We're reducing customer churn by leveraging our predictive analytics model to identify and win back customers at risk. SIBG has been first out of the gate on the commercial excellence initiative, and we're seeing promising early results with average daily order rates up low single digits in Q2.

Our strategy is working, and we're now extending this 3M enterprise-wide commercial excellence model across the organization, with transportation electronics quickly leveraging the learnings and best practices from SIBG while adapting it to the unique nature of a more spec-in type business. Our second priority is operational excellence. In the second quarter, we made good progress on several fronts, including service, asset utilization, and quality. On service, our on-time and in-full metric reached 89.6%, the highest quarterly performance we've achieved in nearly six years, and we exited June at just over 90%. Consumer and TEBG remained consistently above 90%. SIBG was 83% for the quarter, improving more than 300 basis points year-on-year. Our overall equipment effectiveness metric was approximately 59%, showing continued improvement both year-on-year and sequentially, with a lot of runway ahead of us.

We're now at the point where OEE is improving on a consistent basis through better tracking and deeper root cause analysis, and it's highlighting potential capacity consolidation opportunities. For example, a core manufacturing process at 3M is adhesive coating, and we have about 250 different types of coaters throughout the network, some quite old and all expensive to replace. One of our larger coaters is in Knoxville, Iowa, making fiber adhesive tapes. Through an extensive effort to reduce changeovers, increase operating speed, and improve machine uptime, the team drove a 12-point improvement in OEE and freed up enough capacity to retire two 70-year-old coaters at another facility. This is just one example of the broader opportunity at 3M to use a rigorous, methodical approach to get more production out of our higher capacity assets and proactively decommission aging, less productive assets in the network.

This thinking can be extended to all of our core manufacturing processes, making, coating, slitting, packaging, and over time, more holistically, to the design of our future network. We're also making progress on quality. In the second quarter, our cost support quality was 6.1%, down 30 basis points sequentially and 90 basis points year-over-year. We're using AI-enabled models to optimize machine settings for more efficient changeovers, leading to better utilization and higher yield. Quality is a core element of our enterprise-wide 3M excellence operating model, and we're extending our efforts to improve quality in every function and everything that we do. Our third priority is effective capital deployment. In the first half of the year, we returned $3 billion to shareholders via dividends and share repurchases, and we'll continue to be opportunistic on buybacks in the second half of the year while preserving balance sheet flexibility.

In May, we announced a settlement with the state of New Jersey on PFAS claims, taking the opportunity to settle both site-specific and statewide claims with broad protections against future litigation and cash payments spread over 25 years. We continue to manage other state, federal, and international matters, all of which are extensively covered in our 10-Q. On the back of the progress we're making on our priorities and the strong results in the first half, we're increasing our earnings guidance to a range of $7.75-$8.00. Now inclusive of the anticipated impact of tariffs. We expect organic growth to be approximately 2% for the year, reflecting the current macro environment as we see it today. Slide four highlights several of the key macro trends we're tracking and their impact on 3M.

All metrics on the left reflect a global economy that remains sluggish and moving laterally, not materially improving or worsening. Our safety and general industrial businesses were up low single digits in the first half and are both beginning to see a pickup due to our commercial excellence initiatives. Auto will be flattish in the second half, a step up from the decline in the first half due to share gains in new models, while consumer electronics is likely to soften a bit in the back half due to slower demand for premium devices. Auto aftermarket will remain challenged, and consumer will likely follow a similar pattern to the first half due to the subdued U.S. retail environment.

As we navigate these uncertain times, we're focused on what we control, solving customer problems through innovation excellence, delivering high-quality products on time to customers, and driving efficiency and waste elimination, 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 on the quarter. Anurag.

Thank you, Bill. Turning to slide five, we reported another quarter of strong profitable growth and robust free cash flow generation. Starting with the top line, all three business groups delivered positive year-on-year growth despite the fluid macro environment, resulting in total company-adjusted organic growth of 1.5%. We saw continued momentum across electronics, general industrial, and safety end markets, which was partially offset by known softness in auto and automotive aftermarket. Consumer was flattish as sentiment remains cautious. By geography, our growth was led by China, up mid-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. was up low single digits, led by growth in electrical markets and personal safety, partially offset by weakness in auto, OEM, and aftermarket.

Europe was flat, with strength in electrical markets and personal safety, partially offset by weakness in transportation safety and auto. Q2 daily order trends were up modestly year-on-year, driven by our progress on commercial excellence in the industrials businesses, partially offset by weakness in consumer as retailers are watching to see how the season plays out. Our backlog continues to grow, providing 20-25% coverage of third-quarter sales. Q2 adjusted operating margins were 24.5%, up 290 basis points, and operating profit increased high teens or $225 million. In constant currency, driven by continued strong operational performance. This included a $300 million benefit from volume growth, broad-based productivity, lower restructuring cost, and equity calm timing, partially offset by $50 million of growth investments and $25 million from tariff impact and stranded cost headwind.

Collectively, this contributed $0.31 to earnings, which was partially offset by $0.02 from FX and $0.06 from non-operational below-the-line items. Our strong operational performance resulted in overall adjusted EPS of $2.16, an increase of 12%. Relative to our initial expectations of approximately $2. This outperformance was driven by four factors. First. Continued G&A efficiency as we make progress on IT optimization and lower indirect expenses. Second, metering of increase in year-over-year investments in response to a lower demand environment and evolving tariff landscape. Third, weakening of the U.S. dollar. Finally, we had a $0.06 benefit from the sale of an investment below the line, which was initially anticipated in the third quarter and offset the impact from tariffs and other below-the-line items.

Free cash flow was $1.3 billion, 10% higher than last year as we benefited from strong earnings, and we returned $400 million to shareholders via dividends and executed on a $1 billion in gross share buybacks. For the first half, our gross buybacks were $2.2 billion. I will provide a quick overview of our growth performance for each business group on slide six. Safety and industrial organic sales grew for the fifth consecutive quarter, up 2.6% in Q2. This was broad-based, with six out of seven divisions posting positive results. Similar to the first quarter, industrial adhesives and tapes and electrical markets continued to perform well on the back of new product innovation and commercial excellence. It was encouraging to see abrasives turn positive as we launched new products and executed a commercial strategy to increase sales effectiveness.

Auto aftermarket continued to see challenges, down mid-single digits amid industry pressure, with collision repair claim rates down double digits year-to-date. Transportation and electronics adjusted sales were up 1% organically in Q2. Growth was led by commercial graphics and auto personalization driven by demand for a new product, the premium fleet wrap and expanding sales coverage. Electronics and aerospace and defense showed strength while our auto OEM business was down low single digits, reflecting continued weakness in auto builds, particularly in Europe and the U.S., which were each down low single digits year-on-year. Finally, the consumer business was up 0.3% organically in Q2. Though consumer sentiment remained soft, we continued to execute on growth initiatives, including new product launches in Scotch-Brite kitchen scouring, Scotch-Blue Pro Shop painter's tape, and Command, and continued service improvements and increase in advertising and merchandising investment.

Along with organic growth, each business group expanded margins year-on-year, SIBG up 320 basis points, TBG up 230 basis points, and CBG up 370 basis points. Overall, our focus on delivering organic growth and improving operational excellence helped us deliver solid results in the first half, including growth of 1.5%, operating margin expansion of 250 basis points to 24%, and earnings growth of 11%. Before providing the details of our updated guidance, let me start with a reminder of how we framed it in April, which is the middle column on slide seven. On organic sales growth, due to the soft macro, we indicated that we were trending to the lower end of a 2-3% range. Our first-quarter productivity gains were very strong, but given the dynamic environment, we did not flow through this outperformance into our guidance and maintained the EPS range at $7.60-$7.90.

Given that the tariff situation was uncertain, we kept tariffs out of the guidance range at the time but estimated a gross impact of $0.60 or a net impact of $0.20-$0.40 after mitigating actions. We have now updated the guidance to reflect our strong first-half performance and have also incorporated the tariff impact. We are updating our organic revenue growth guidance to approximately 2% and expect all three business groups to grow low single digits for the year with a similar profile to the first half. On the back of a strong first-half performance, we now expect margin expansion of 150-200 basis points and are increasing both the lower and higher end of our EPS range, which is a $0.13 increase at the midpoint, $0.23 of that coming from operational performance, offset by $0.10 of FX and tariff impact.

We now expect a free cash flow conversion to be higher than 100%, building on strong first-half performance, efficient CapEx, and second-half improvement in working capital, providing us with further optionality on capital deployment. Let me walk you through the drivers of the EPS guidance updated on slide eight. First, we are flowing through $0.23 of operational improvements, which include actions to offset the tariff impacts. This is driven by $0.16 of productivity, which includes the G&A efficiency gains, and $0.07 metered investments. As we highlighted previously, we are investing in a metered manner while maintaining the critical growth investments to support our strategic priorities. Finally, as mentioned, we have now included tariffs in the guidance, which is a gross headwind of $0.20, partially offset by the foreign exchange headwind reduction from $0.15 to $0.05. On the other non-operational items, there is no change from the prior guidance.

Putting this all together, the EPS growth year-on-year is driven by strong operational improvement, and we now expect an operational benefit of $0.95-$1.20, partially offset by $0.50 of tariff, FX, and non-op headwinds for a total EPS growth of 6%-10%. Regarding the second half, we expect year-on-year earnings growth of $0.18 at the midpoint. Similar to the first half, this includes an approximately $0.50-$0.55 benefit from volume growth and continued productivity, net of stranded cost and growth investments, which is partially offset by $0.30-$0.35 of tariff impact and higher interest expense. Before we open the call for questions, I would like to acknowledge and thank the 3M team for their focus on operational excellence and controlling the controllable in a dynamic macro environment, which gives us confidence in meeting our increased guidance and delivering strong shareholder returns in 2025. With that, let's open the line for questions.