3M CO Q1 2026 earnings call

Thank you. Good morning, everyone, and welcome to our first-quarter 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 2 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-K lists some of these 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 3 and I will hand the call off to Bill. Bill?

Thank you, Chinmay, and good morning, everyone. We delivered solid operating performance in Q1 with earnings per share of $2.14, up mid-teens versus last year. Operating margin increased 30 basis points to 23.8%, and free cash flow was over $500 million, up double digits. During the quarter, we returned $2.4 billion to shareholders, including $400 million in dividends and $2 billion of share repurchases. We had a light start to the year on the top line with organic growth of 1.2%, driven by pockets of macro pressure. We saw encouraging order trends that support our outlook for acceleration in the balance of the year. Looking forward, we remain confident in achieving our full year 2026 guidance despite the volatile environment. Our performance reflects strong execution on productivity, cost discipline, and commercial rigor.

We're building a stronger foundation based on commercial, innovation, and operational excellence, underpinned by a relentless focus on strengthening our performance culture. In commercial excellence, we're seeing benefits from improved sales effectiveness and lower customer attrition, and we continue to make progress on cross-selling opportunities. To date, we've closed on approximately $80 million of new business against the three-year, $100 million target we laid out at Investor Day with a pipeline of $85 million of additional cross-sell opportunities. We've introduced AI tools to drive growth, reduce churn, and automate manual work, including an agent that analyzes our sales and opportunity pipeline data to develop customized coaching plans for sales managers to help reps meet their targets. We believe digital tools like Ask 3M, a new AI-powered digital assistant that helps customers find solutions to design challenges using 3M products, will allow us to reach a broader population of customers.

Our pace of new product introductions is accelerating with better on-time performance, reduced cycle times, and clearer governance and accountability across R&D. We launched 84 new products in Q1, up 35% versus last year, and we're on pace to launch 350 in 2026. This will put us ahead of our Investor Day target to launch 1,000 new products through 2027. We've maintained OTIF service levels above 90%, while at the same time reduced inventory by three days and delivery lead time by 25%, improving our competitiveness with customers. OEE improved over 100 basis points year-on-year as we optimize asset run length, runtime, and changeovers, creating a stronger foundation for sustained productivity and fixed cost leverage. Cost of poor quality decreased by approximately 100 basis points versus Q1 last year, driven by more structured root cause analysis, significantly increased Kaizen activity, and tighter process controls.

What matters is that these are not isolated wins. They collectively reflect greater execution discipline and constancy of purpose. That consistency and momentum gives us confidence that we can meet or exceed the medium-term goals we outlined at our Investor Day last year, even in an uncertain macro environment. While we continue to strengthen our foundation and shift from a holding company to an operating company model, we're beginning a broad-based transformation of the company, simplifying and standardizing processes, reducing complexity, reshaping our portfolio, and improving resilience and predictability. We see substantial opportunities to streamline operations and consolidate facilities. The transformation includes both deliberate footprint actions as well as targeted investments in manufacturing and process technology. For example, transitioning from solvent to solvent-free coating, which brings cost, capital, and environmental benefits.

Earlier this month, we closed on the previously announced sale of our Precision Grinding & Finishing business within SIBG, which reduced our footprint by seven factories, and we closed one factory and announced three other full or partial closures, bringing our total projected manufacturing site count to below 100. At the same time, we're investing more than $250 million over the next three years in standard, easy-to-replicate automation across our plants and distribution centers. By automating material handling in our warehouses, replacing manual slitters with automated systems, and automating our current manual visual inspection processes, we are improving safety, reducing labor costs, increasing yield, and putting ourselves in a better position to support demand as volumes recover. To illustrate the opportunity, we have 7,000 material handlers and over 600 operators performing manual visual inspections across our network and about 500 manual slitters.

When we automated the slitting operation at our Nevada facility late last year, we achieved a 30% increase in square yards per hour productivity. Over time, this transformation will allow us to accelerate towards a structurally higher growth, higher margin potential portfolio of priority verticals. Slide 4 provides a more detailed view of growth and orders by end market. When you look across our portfolio, roughly 60% of our businesses showed relative strength in Q1, including general industrial and safety. Importantly, we also saw strong orders in these markets, which gives us visibility and reinforces that the demand environment in these verticals remains healthy. At the same time, we experienced macro and industry-driven softness in about 40% of the portfolio that we've been highlighting as watch areas. In electronics, we delivered flat year-over-year growth in Q1 versus mid-single digits last year.

Our performance in semiconductor and data centers was very strong, while consumer electronics was soft due to industry-wide memory chip issues, which is impacting demand. Electronics orders were up double digits due to significant activity in semis and data centers, which will convert to revenue in Q2 and the H2. In automotive, the market was soft as expected in the Q1. Global IHS build rates were down about 3% overall and 10% in China, which pressured volumes. In consumer, we continue to see soft U.S. consumer discretionary spending with a few pockets of strength in categories with recent new product introductions. POS trends in the U.S. improved over the course of the quarter and were positive in 7 weeks of the last 8 weeks, providing some encouragement heading into Q2.

Overall, orders were up slightly over 10% in Q1, and backlog grew double digits both sequentially and year-over-year, giving us momentum into Q2. This strength reflects the combined impact of our new product introductions, continued progress in commercial excellence, and orders for longer lead time products, with some additional benefit from pre-buying ahead of recent price actions. It's encouraging to see order strength continue into the first few weeks of April. Turning to slide 5. As part of our ongoing focus on portfolio shaping, last month, we announced the acquisition of Madison Fire & Rescue, which will be combined with our Scott Safety business to create a leading global fire and safety business. The combination of Scott Safety's premium self-contained breathing apparatus with Madison Fire & Rescue's premier portfolio in rescue technology and fire suppression creates an $800 million revenue business growing at a high single-digit growth rate.

This strategic transaction broadens our safety portfolio, one of our priority verticals, by expanding our market reach and building scale for future growth. It positions us to maintain above-market growth, enhance margins, and drive strong free cash flow generation. I also want to highlight our growing data center and associated power utility business with current revenue of approximately $600 million, $100 million inside the data center and about $500 million bringing power to the facility. This is a priority vertical space where we are introducing new products like EBO, or Expanded Beam Optics, a high-performance optical connector engineered to improve installation speed, reliability, and operational efficiency within data centers. EBO builds on our existing TwinAx copper connector for high-speed data transmission and positions us well for the copper-to-fiber transition underway.

With hyperscaler validation, a significant order in hand, and a $1 billion+ addressable market, we're investing to more than double our capacity to support growing AI demand. We see additional opportunities here as demand expands to ceramics, silicon photonics, and on-chip optical connectors. We have strong IP to support this evolving market and a clear roadmap to develop new products that further drive growth. Overall, I'm pleased with our progress this quarter, encouraged by the pace, op tempo, and executional rigor of the 3M team.

We're on a multi-year journey and progress won't be linear, but we're building the capability to execute consistently, to innovate with purpose, and to allocate resources toward the parts of the portfolio that deliver the most value. I'm grateful to the 3M team for their commitment, hard work, and focus as we deliver progress every day. With that, I'll turn it over to Anurag to share the details of the quarter. Anurag?

Thank you, Bill. Turning to slide 6, we had a good start to the year, performing ahead of expectations on orders, margins, earnings, and cash. Starting with top line, we delivered organic sales growth of 1.2%. SIBG showed continued momentum and grew over 3%, slightly better than expectations. TBG was flat, lighter than expectations due to ongoing weakness in certain end markets like consumer electronics and auto, as well as late timing of order intake within the quarter. In CBG, we did not see the expected recovery in the U.S. consumer market, resulting in organic sales down 1%. Notably, we saw significant strength in orders this quarter, driven by progress on commercial excellence and NPI. Overall, orders grew slightly more than 10%, with SIBG and TBG growing mid-teens, driven by industrials, safety, data center, semiconductor, and aerospace.

The order momentum accelerated through the quarter, resulting in backlog growth of 20% over last year and 35% sequentially, positioning us well for the Q2. Q1 adjusted operating margins were 23.8%, up 30 basis points year-on-year driven by strong volume and broad-based productivity, which more than offset approximately $145 million of tariff impact, stranded costs, and investments. Operating income from the three Business Groups was up $85 million, with 60 basis points of margin expansion driven by supply chain productivity, including improvements in cost of quality and procurement and logistics, and continued focus on structural G&A reduction. Corporate was a 30 basis point headwind from planned wind down of Solventum transition services agreements. Our sustained operational performance of driving growth and productivity led to EPS improvement of $0.26 or 14% to $2.14.

In addition, we benefited from lower share count, timing of tax benefit and FX, offsetting tariffs, stranded costs, and investments. Adjusted free cash flow was $540 million in the quarter, or up 10% from strong earnings growth and improvement in inventory, a decrease of three days while maintaining service levels of greater than 90%. In addition, we returned $2.4 billion to shareholders in the Q1, including approximately $400 million in dividends, reflecting a 7% increase per share and $2 billion through opportunistic share repurchases. Turning to slide 7, I will provide an overview of our Business Groups performance for the Q1. First, Safety and Industrial add another quarter of 3%+ growth as we continue to gain traction on commercial excellence initiatives and realize benefits from new product launches.

We delivered mid-single-digit growth across industrial adhesives and tapes, safety, electrical markets, and abrasive systems driven by continued share gains from new product introductions and targeted commercial initiatives to reduce customer churn, strengthen sales coverage, and increase cross-selling. Collectively, this growth more than offset continued weakness in roofing granules as the housing market and consumer sentiment remained soft. Even though auto repair claims were down mid-single digits, it was encouraging to see our auto aftermarket business be flat to slightly up after a couple of years of decline from good execution of the key account strategy. Turning to Transportation and Electronics. While growth was flat, orders were up low teens accelerating through the quarter, resulting in backlog up about 30%. Approximately half the business delivered mid-single digits growth, including double-digit growth in semiconductor and data center, driven by continued market demand and ramp-up of EBO that Bill referenced earlier.

In addition, we saw growth in aerospace and commercial branding from better sales effectiveness. This was offset by the other half of the business, which is exposed to consumer electronics and auto, where the market was down. Finally, Consumer Q1 organic sales were down 1%, driven by weakness in USAC, as we did not see the expected pickup in retail traffic in the early part of the quarter. We did see pockets of strength. Scotch-Brite grew approximately 10% on the back of new product launches. We also saw good traction in international markets, especially in China and Asia, but it was not enough to offset the impact of USAC, which makes up majority of the CBG revenue.

By geography, in China, we again grew mid-single digits despite soft auto and consumer electronics end market, as we executed on our key account strategy and launched local NPIs in a relatively strong industrial market. USAC was up slightly with mid-single-digit growth in industrials being offset by softness in electronics and consumer. Asia had another quarter of good growth with India in the high teens as we drove higher sales coverage across the country. EMEA was down about 1% due to market weakness in auto. Moving to slide 8. Though the macro remains uncertain, given our good performance in the Q1, we are reiterating our guidance for the year. Organic sales growth of approximately 3%, earnings per share ranging from $8.50-$8.70, and free cash flow conversion of greater than 100%.

For sales, the strong backlog, combined with continued strength in orders in the first three weeks of April, gives us confidence that all three Business Groups will accelerate growth in the Q2 and through the balance of the year. On margins, we had a solid start with the three Business Groups growing 60 basis points despite 100 basis points year-on-year tariff impact. As we lap tariff pressure in the H2, the continued momentum on productivity and volume acceleration gives us confidence in our expectation of approximately 100 basis points margin expansion for Business Groups this year. On non-operational, we expect positive trends driven by a $2 billion share repurchase in the Q1 and lower net interest expense. Overall, we are maintaining our EPS guidance, which includes a contingency, and we will go through the components of the earnings bridge on the next slide.

Given the strong earnings growth and good progress on working capital, particularly inventory and continued CapEx efficiency, we believe our free cash flow will be more than $4.5 billion for the year and greater than 100% conversion. Slide 9 shows the trend of key earnings elements and the current guidance. We are trending $0.05-$0.15 higher on earnings from momentum on productivity and lower share count and interest expense. We are facing higher input costs due to the recent increase in oil price, but have implemented targeted price increases to mitigate the impact at the current levels. Given that we are early in the year and we are operating in a volatile macro environment, we think it is prudent to keep a contingency till we have more clarity about the rest of the year.

Overall, we are moving with determined pace and will continue to calibrate as the year progresses. Regarding cadence, we expect sales growth to accelerate in Q2 and the H2 of the year. Backlog conversion and continued order strength is expected to support growth momentum in both SIBG and TBG in the Q2. We anticipate consumer to improve as point of sale is on an upward trend, resulting in normalized inventory levels. On EPS, given the contingencies for the H2, we expect the H1 EPS to be higher than theH2. Our 2026 financial outlook puts us on pace to exceed our medium-term financial commitments that we laid out during Investor Day around growth, margin, and cash. On capital allocation, we have already returned over $7 billion of the $10 billion shareholder returns that we had committed to.

Before we open the call for questions, I want to take a minute to thank the team for a strong start to the year and being proactive in this environment to mitigate risks and control the controllable, and for the commitment to strengthen the foundation and drive profitable growth. With that, let's open the call for questions.