3M Company 2026 Q3 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, 3M's 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 will 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 will 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 strong performance in Q3, including organic growth of 3.3%, operating margin of 26.2%, up 110 basis points, earnings per share of $2.50, up 12%, and free cash flow of $1.2 billion. We returned $600 million to shareholders in the quarter, including $400 million in dividends and $200 million of share repurchases. These results include Madison Fire and Rescue, which is now fully consolidated into our financial reporting and reflect a change in acquisition amortization reporting. Our updated guidance for the year incorporates both items, and Anurag will provide additional details later in the call. Based on our Q3 performance and continued strong order trends, we remain confident in achieving organic growth of greater than 3.5% this year. The progress we are delivering reflects the disciplined execution of the strategy we have been implementing over the last two years.

As we've discussed, our value creation framework is centered around three phases: building the foundation, driving transformation, and accelerating performance. Our results today are clear evidence that we're making progress across all three. We're strengthening the foundation of the company and rebuilding critical capabilities to position 3M for long-term success. We've invested in sales force effectiveness and AI-enabled tools. We've sharpened our focus on priority verticals where we can win and improved how we allocate R&D resources. Operationally, we're delivering on our goals to improve productivity, quality, and supply chain performance. In the quarter, we launched 87 new products, up 24%, and we're on track to exceed our target of 350 this year. Year to date, five-year new product sales are up 34% versus last year to nearly $3 billion, resulting in new product vitality in the mid-teens from a low of 11% in 2024.

Cross-selling is also gaining traction with $140 million in wins booked to date and another $120 million in the pipeline, well ahead of our original $100 million three-year goal. In today's higher inflation environment, our price execution has been particularly strong and fully offsets material and oil cost pressures. Across our manufacturing and supply chain network, productivity improvements, including procurement savings, higher asset utilization from increased throughput and lower downtime, and improved quality, drove gross margins up 230 basis points year over year. Cost of poor quality improved by 40 basis points, and overall equipment effectiveness improved by 20 basis points. We continue to see meaningful opportunities to further simplify and standardize, reshape the portfolio, reduce risk, and improve enterprise resilience and predictability.

We've closed 16 manufacturing sites and distribution centers year to date and are taking action on 10 more over the next 12 months, supporting further gross margin improvement beyond 2027. The Madison Fire and Rescue acquisition, which is now combined with our SCBA business and reported as a separate division within SIBG, is off to a good start. The JV delivered high single-digit pro forma growth and operating margins ahead of our deal model and 3M overall, and integration is well underway to capture synergies across distribution, international expansion, and operational performance. We continue our efforts to address litigation risk and are actively working with a court-appointed mediator for the AFFF personal injury MDL, and more information is available in our quarterly filing. Moving to Slide 4, I'll provide a bit more color on our end market performance.

We continue to see strong momentum in general industrial and safety, with second half growth accelerating to high single digits above our prior expectations. In electronics, we're seeing increasing strength in semiconductors and data centers, which is partially offsetting a weaker consumer electronics market, especially in LCD displays. Auto OE and aftermarket is trending in line with prior expectations, with a modest improvement from down low single digits in the first half to about flat in the second, and with OE a bit softer and aftermarket a bit better. The consumer business, which contributes about 20% of sales, improved sequentially to about flat in the second half as modest improvement in consumer POS spending is partially offset by channel inventory adjustments at a few specific retailers. Net net, we still see sales accelerating the second half and our full year above 3.5% organic. Turning to Slide 5. Over the medium to long term, accelerating innovation across our frontier verticals, including aerospace, data centers, and others, will be an important driver of growth.

Space materials is a great example how we can take differentiated 3M technologies and extend them into entirely new markets. As shown on the left side of the slide, we are combining our capabilities in films, adhesives, and others to solve light, thermal, energy, and weight challenges across multiple parts of a spacecraft, from the satellite chassis to solar arrays. Our current pipeline supports opportunities from low earth to geosynchronous orbits and across a range of commercial and government customers. In Q3, we launched a lightweight reflective film for a commercial constellation to reduce light scattering toward Earth and address light pollution concerns. We plan to launch another product in Q4 to provide a moisture-resistant barrier for solar panels.

We have more than 10 other projects in development or in pre-pipeline stage that will follow in the next few years. On the right side of the slide, there has been a lot of interest in Expanded Beam Optical and the opportunity ahead of us. In light of an 8-K filing and press release last evening, I wanted to take a minute to highlight the progress we are making. As a reminder, EBO's patented ferrule technology enables faster installation, greater durability, and higher density optical connections for AI infrastructure. The technology is particularly valuable in scale-out and scale-across applications, including optical back planes, where connectors at the back of a server rack can be difficult to access, install, and maintain. We previously announced a partnership and deployment with Microsoft and said we were also engaged in proof-of-concept work with five additional global hyperscalers, one of whom was Amazon Web Services.

Last evening, we filed an 8-K stating we issued a warrant to Amazon to purchase up to 3.2 million shares, or approximately 0.6% of 3M common stock, based upon the achievement of $6 billion in cumulative sales of optical connectivity and other data center-related products over the next seven years and other event-based milestones. We also announced that we signed a contract manufacturing agreement with Genius Electronic Optical Company, or GSEO, and acquired a 4.7% stake in the company in a private placement to cement our strategic partnership. GSEO is a credible and proven supplier of premium consumer device components, and they will help us rapidly advance technology development and scale EBO manufacturing on top of our internal capacity expansion plans. As we previously said, success in this space requires building a robust ecosystem of partners.

We are actively supporting industry standardization through the EBO Multi-Source Agreement, which started with 17 members and is now up to 63. This MSA brings together hyperscalers, connectivity providers, and chip designers under a common framework to establish industry standards and certify practitioners. EBO was highlighted by many of these ecosystem partners at last week's Open Compute Project Global Summit, including by one other hyperscaler demonstrating EBO in a next-gen rack design running live traffic, and it was headlined in a recent article by SemiAnalysis, a well-respected trade journal. We believe the combination of industry collaboration through the MSA, growing ecosystem adoption, and differentiated 3M know-how positions us well to benefit as EBO becomes a larger part of next-generation AI infrastructure. Overall, we have made meaningful progress in reinvigorating our innovation engine over the last two years.

Success requires speed and precise execution, and we're building a stronger, faster, more innovative, and more resilient 3M. As this company-wide effort evolves, I'm confident it will translate into faster growth, higher margins, and stronger free cash flow over time. With that, I'll turn it over to Anurag to share the details of the quarter.