3M Company (MMM) Earnings

Management highlights

### Overall Q2 2026 Financial Performance - 5.4% organic growth, 24.9% operating margin (up 40 bps year over year), $2.40 EPS (up 11% year over year), $1.3 billion free cash flow with 107% conversion - Returned $1.4 billion to shareholders in Q2 ($400 million dividends, $1 billion share repurchases); $8.6 billion returned to shareholders since 2025 against a 2027 commitment of $10 billion+ ### Commercial Excellence - AI-enabled sales tools improve planning, opportunity prioritization, and salesforce productivity - Cross-selling outperformed expectations, with $110 million in booked opportunities and $120 million in the pipeline, up over 40% quarter over quarter, ahead of investor day targets - Reduced customer churn and improved account execution have driven sustained share gains ### Innovation Pipeline Acceleration - 92 new products launched in Q2 (up 44% year over year), 176 launches in the first half, on track to hit over 350 new products in 2026, targeting more than 1,000 launches annually by 2027 - Targeting a 20% reduction in product development cycle time, enabled by AI - Five-year new product sales are expected to hit ~$4 billion in 2026, with the new product vitality index reaching mid-teens in 2026 and 20% in 2027 - Focused on new high-growth applications including expanded beam optics (EBO) for data centers, high-performance fibers for fuel cells, and reflective films for satellites ### Operational Discipline & Network Optimization - Cost per quality improved 60 bps year over year, overall equipment effectiveness improved 140 bps - Resolved capacity constraints at a high-demand electrical cable accessories facility through process improvements, delivering $13 million in incremental Q2 revenue - Overall company capacity utilization runs at ~63.5-64% across the 100-plant network, leaving significant aggregate headroom, with only isolated pockets of constrained capacity ### Strategic Transformation - Transitioning from a holding company structure to an integrated global operating company, consolidating duplicated independent support functions (finance, HR, customer service) into a single global service model in partnership with an external provider to leverage automation and AI - Portfolio reshaping: Closed the acquisition of Madison Fire and Rescue on July 1, 2026, consolidated it with 3M's Scott SCBA business into a new majority-owned joint venture, receiving $700 million in cash. The JV generates $800 million in annual revenue, grows at high single digits, and has margins above the 3M corporate average - Entered a strategic partnership with Microsoft to deploy 3M's patented EBO technology in Azure data centers, a high-growth emerging use case for the firm's material science capabilities

Guidance

- Raised full year 2026 organic growth guidance from 3% to greater than 3.5%, implying high-single-digit organic growth (over 2x macro growth) in the second half, driven by strong industrial commercial momentum and higher new product contribution that more than offsets slight consumer segment weakness - Raised full year 2026 EPS guidance from $8.50-$8.70 to $8.80-$8.95, representing 9-11% year over year growth, with a 27 cent increase at the midpoint. The upward revision reflects stronger sales growth, productivity gains, and disciplined capital deployment - Increased full year 2026 free cash flow guidance by $100 million to a range of $4.7-$4.9 billion, implying conversion greater than 100% - Updated oil inflation expectation to $150-$175 million, up from $125 million previously, but the full impact will be offset by Q2 price actions, with operating margin expansion expected to remain in line with prior targets - Management is tracking ahead of all 2027 investor day commitments: on track to exceed the $1 billion above-macro growth commitment, tracking ahead of the 25% 2027 operating margin target, on track for double-digit EPS CAGR, and on track to exceed cumulative cash and $10 billion shareholder return commitments - Share repurchase activity will remain opportunistic and disciplined; 3M completed $3 billion in buybacks in the first half (exceeding the prior $2.5 billion full year target) at an average price of $153, and will continue to deploy capital opportunistically in the second half - The Madison Fire and Rescue JV transaction has no material impact on 2026 EPS, so it was not included in updated guidance and will be incorporated into guidance starting in Q3 2026

Segment performance

1. Safety and Industrial Business Group (SIBG): 8.2% organic sales growth in Q2 2026, with 5.7% organic growth for the first half. It represents 50% of 3M's total business, with double-digit growth across all four core industrial sub-segments (electrical markets, industrial adhesives and tapes, abrasives, industrial specialties) and high single-digit growth for the safety business. 2. Transportation and Electronics Business Group (TBG): 5.9% organic sales growth in Q2 2026, with 2.9% organic growth for the first half. It represents 30% of 3M's total business. Double-digit growth was delivered by semiconductor, aerospace, and data center sub-segments (20% of total company sales), while commercial branding and transportation grew ~5% (33% of total company sales); auto was flat in a soft end market, and consumer electronics declined low single digits, outperforming the broader market. 3. Consumer Business Group (CBG): 2.1% organic sales decline in Q2 2026, with a 1.7% organic decline for the first half. It represents 20% of 3M's total business. Positive point-of-sale growth in the U.S. was offset by inventory tightening at key large retailers in late June. SIBG and TBG combined delivered 7% Q2 organic growth and ~5% first half organic growth, while total company first half organic growth hit 3.3%.

Risks & headwinds

- End market weakness persists in consumer electronics, auto and auto aftermarket, and U.S. consumer spending, which will offset some strength in higher-growth segments - U.S. tariff impacts and stranded cost headwinds reduced Q2 operating profit by $110 million, and 3M has not received any tariff refunds to date - EBO technology adoption for data centers depends on broader ecosystem development and customer customization for individual hyperscaler architectures, which creates execution uncertainty for scaling - Inventory de-stocking at key U.S. retailers created a headwind for consumer segment Q2 results, with continued consumer caution expected in the second half - While aggregate production capacity is sufficient, isolated pockets of capacity constrained exist in high-demand product lines, requiring operational workarounds and potential future capital investment

Analyst Q&A

• Q: The stronger-than-expected Q2 growth is driven by what mix of new product upside, cross-selling, and reduced churn, and is the growth outlook tracking ahead of plan? /

  A: The upside is a combination of both commercial excellence and innovation, with most of the first half upside driven by commercial initiatives including improved salesforce effectiveness, better pricing governance, and lower churn. The firm now expects full year 2026 outgrowth above macro of ~$450 million, up from prior expectations of ~$340-$350 million, with the new product innovation machine also accelerating faster than planned. Management expects this growth momentum to continue.

• Q: What is the market size, scaling potential, and competitive position of 3M's EBO technology for data centers, following the Microsoft partnership? /

  A: The 2026 total addressable market for EBO is ~$1 billion, projected to grow to $2 billion by 2028. 3M currently generates $40-$50 million in EBO revenue, and this could grow 4-5x or more over the next several years as adoption increases. 3M holds 100 existing patents with 50 pending, and is enabling a multi-supplier ecosystem of 44 players to drive industry-wide adoption, which is required to meet the needs of large hyperscalers. 3M expects its share of the market to grow materially over time.

• Q: Can 3M still return to a high-40% gross margin over time, as originally targeted at investor day, despite recent headwinds from tariffs? /

  A: 3M has already expanded operating margins by 500 bps over the past two years, with gross margin currently tracking near the mid-40%s driven by ongoing productivity improvements, procurement savings, and better asset utilization. There is still additional headroom to reduce SG&A and indirect costs, and the roadmap to reach high-40% gross margin over time remains clear, with continued margin expansion expected as transformation efforts progress.

• Q: What drove stronger-than-expected Q2 margin, which is already near the 2027 target, and when should we expect updated long-term targets? /

  A: The 40 bps Q2 margin upside versus expectations was broadly based around two factors: stronger-than-expected volume (5.4% organic growth versus prior expectations of 3%), and broad-based productivity gains across both G&A and supply chain operations. Management did not announce a timeline for updated long-term targets in this call.