3M Aktie

All right. Good morning, everyone. I'm Joe O'Dea. I lead the Multis effort at Wells Fargo and very pleased to welcome 3M for our next session and CEO, Bill Brown. Bill, thank you so much for being here this morning.

Thank you.

We're going to get right into the Q&A. Why don't we start on some of the shorter-term side of things and thinking about the demand patterns where with Q1, you outlined Q2 and some acceleration in thinking about organic that could move north of 3, just kind of what you've seen over the course of the quarter so far?

Well, first of all, good morning, everybody. It's great to be here. Thanks for having us. Just overall, our strategy is gaining traction. It's a back to basics, focus on fundamentals approach to rebuild 3M is more resilient, more consistent, higher performing company with better top line growth coming from innovation and commercial excellence, better operational execution at the ground level, driving margin expansion, cash generation and disciplined capital deployment.

That's basically what we laid out a couple of years ago, and we're executing very well on that. We did have a solid Q1. Q1 start earnings per share, up 14% in Q1, saw 30 basis points of margin expansion. We saw double-digit growth in free cash flow. Organic revenue growth came in just over 1%. We saw some pockets of macro pressure. But I think encouragingly, as you referenced, we ended the quarter with very strong orders, up double digit in Q1. Backlog grew year-over-year and sequentially double digit, which was very encouraging for us as we turn the quarter into Q2. And in fact, we're pretty far advanced into Q2. Those orders and that backlog is converting to revenue. We said we'd be above 3% in Q2, we'll be solidly above 3% in Q2. Given the fact that we're pretty far deep into the quarter. So we're very confident about that.

We see momentum continue to build. We saw good progress in Q1 in about 60% of the portfolio that's general industrial or safety that was up mid-single digits, which is very encouraging. We see trends in that area continuing into Q2. We saw 5 months of solid PMI. PMI in May was actually pretty good at 54%. So it's actually encouraging the macro trends. We see that continuing to build couple of places of some pressure in our business, but that's really around consumer electronics, auto, a little less so on the consumer behavior. But generally speaking, orders have been pretty good. They continue into Q2.

As we sit here today, we've built backlog even further. Orders have been -- continue to be solid for the quarter. So they're more resilient. It's all coming from a lot of the work we've done in commercial excellence in innovation, which is building momentum. So the thought of it might have been some prebuy. I think it was -- maybe we overstated that a little bit at the end of Q1. But the fact is commercial excellence has been pretty good. Innovation has been pretty good. The quarter is looking good and we see the back end of the year, it continues to accelerate.

So we feel good from where we're standing again, a very solid Q2 and I think momentum building back into the second half of the year.

And maybe just spend a little bit more time on the prebuy aspect of things because I think that was some focus thinking about the order growth that really accelerated. Good order throughout Q1, but accelerating and so a little bit...

So basically, so what happened is, look, we typically go out with price increase on April 1. And what was happening in the Middle East, we saw oil prices coming up. So we went out with additional price increases on top of what was April 1, and we said, based on our performance, the innovation, on-time delivery, our responsiveness into the channel, we believe our ability to drive prices a lot better. And so we're going to hold the line on that. So we were very careful about that. We communicate that to our channel partners, to our customers.

So naturally, we thought we would see some acceleration of orders. It was probably some of that. But given the momentum we saw in April and May and now into June on orders, there might have been some prebuy. But predominantly, it is innovation-driven, commercial excellence driven and probably less so on the prebuy. More I think the self-help part of it than the prebuy.

That was going to be the follow-up is it does seem like there's a bit of a rising tied behind the short-cycle macro but you would attribute to...

There's clearly some macro strength behind us on the industrial side, on the safety side, a couple of other places, like semis are good. Our data center business has been pretty good. Aerospace and defense has been pretty good. Commercial branding in Q1 was pretty good. So there's good parts of the company that have performed pretty well.

Some of it is macro driven. I think I would put more on just there's a lot more hustle in the sales force in commercial excellence. We're clearly making good strides here on innovation. And I know I'll talk more about that here, but really good progress on driving new products into the marketplace.

So frankly, I put more on the fact that it's a lot of the things that we're doing differently inside the company than necessarily there's a short-cycle macro. That we believe is happening, but I think it's more the self-help side.

And let's touch on the Middle East in terms of the $0.05 to $0.15 of contingency within the guide on oil macro and about what you've observed over the course of the quarter.

Look, so we said we would have $0.05 to $0.15 of contingency, if you will, for macro or oil-based Middle East type effects. Our business in the Middle East is not very big. It's less than 2% of our revenue. So they're not seeing an issue there. We, like other companies have seen some logistical challenges of moving product through the Middle East, not into but through the Middle East. But we're managing through that. We have a big network. It's working very well. That's managing pretty well.

So as we sit here today, we do not see a need to call on that $0.05 to $0.15 of contingency in the year, but that's as we see it today.

Okay, then want to spend a little bit more time on segments and starting with Safety and Industrial and 75% of the segment, we're seeing kind of mid-single-digit plus type of growth and to sort of address it from both a macro side or cyclical side and then a self-help outgrowth side. So just on the cyclical and in terms of things like abrasives and perhaps the business we're seeing the good growth. What's behind that?

Look, Abrasives, the -- other parts of that portfolio have actually been performing very, very well. The Electrical Markets business has been pretty strong. Public safety in that space has been pretty good. So it's actually going, I think, reasonably well. It's -- there's some macro behind it, for sure. But that's the business segment that we really launched our commercial excellence activities in back into the middle towards the end of 2024 when I came on board, so we need to drive organic growth, and that's going to come from launching more products and then selling more of what we have in the market today, which is commercial excellence.

And the team there got on that very, very quickly. There are several dimensions of it. Part of it is sales force effectiveness. It's the coverage, the incentives, the training, the hustle at the front end. We're really seeing that take effect in that SIBG business, for sure. We laid out an agenda to cross-sell, perhaps we were a little conservative in retrospect. We said we would hit $100 million worth of cross-sell opportunities over 3 years.

Last year, we were at $50 million by Q1, we're at $80 million of booked cross-sell opportunities, our pipeline is another $85 million, and we're sort of just 1.5 years or so into that journey. So that's going very well. We said we would reduce the attrition or the churn in the portfolio in SIBG. In fact, it's been running higher than we would have expected or you would expect it. I don't think we're really necessarily focused on that. This is just share a wallet loss because you're not delivering something on time or not being responsive.

But with our OTIF coming up, our new product launches, the sales hustle, we are seeing improvements in attrition rate as well. So you put all those pieces together, with some innovation that's happened across those segments and abrasives and other parts, we are seeing good tailwinds in that particular part of the business.

Do you have any kind of rough approximation for the outgrowth? And so when you see this traction building behind something like commercial excellence and leading in Safety and Industrial in those markets that are growing.

So it's -- on a quarter-by-quarter basis, it's hard to see, but the way I look at this, we were, say, 3% to 4% in the second half of last year, we're 3% to 4% here in the first half, 3.2 in SIBG in the first quarter.

We'll be in that 3% to 4% range. It's going to accelerate. It's accelerated from second half last year to the first half of this year. It's going to accelerate first half in the second half. But call it, 3.5%, 4% in that particular range. Look, IPI has been running around 1.6%, 1.7%. The U.S. is 1.0. So I don't think you debate that at 3 to 4 pick your number there, we're out running the macro, for sure.

So clearly, the goal we set was to drive $1 billion above the macro over 3 years. We're seeing really good progress in that -- across the company, but particularly SIBG.

And then on the electrical markets side of thing 6 straight quarters of really good growth there. Part of that, you've got data center exposure within that, but you've talked about $100 million of revenue that's inside the data center, $500 million that's bringing power to it. Just overall, what your visibility is there? What you think that revenue can get to?

So it's been very, very good. I mean, first of all, EMB, the electro markets business, about a $1.5 billion business, and it is growing very, very strongly going the last 6, 7 quarters, been very good. Part of it is the data center business. So as you pointed out, $600 million worth of business going at data centers.

In SIBG, it's about $0.5 billion that's outside bringing power to the facilities, medium voltage cable splices, terminations, insulation, all the things you need to bring power to a facility. And that's been very good. It's been growing high single digits, low double digits a lot of momentum behind that, a lot of backlog. We feel very good. If anything, it's a production constraint, not a demand constraint for us in that particular business.

The other part of the business is roughly $100 million is growing more than 50% each quarter, which has been really good, is around the data set -- inside the data center business. It's really the combination of what we're doing on Twin X, which is our cap copper cabling, moving to optical fiber, which is our new product called EBO, Expanded Beam Optics. And that transition has been very, very encouraging.

As we sit here today, some of the orders we saw in Q1, some of are longer lead, they delivered the back end of the year. Some of it comes from that particular business. So EBO is an optical interconnect technology. It's a -- once something that's dust resistant, it's resilient, it's durable and reduces the time to revenue for a data center doing all the cabling by about 85%. We've got tons of IP around this, more than 100 individual patents, another 50 patents pending. We -- for a couple of years, we've been in testing with a major hyperscaler. It's been validated by that one.

That went placed an order in Q1. It's part of the order trajectory we saw in Q1. That will deliver in the back end of the year and it's developing a lot of enthusiasm. The addressable market for us around optical connects inside of a data center, again keep in mind, it's -- that business for us is $100 million as we sit here today. The TAM, we believe, at the end of Q1, we saw is over $1 billion, 90 days later, we're thinking it's more like north of $2 billion. As all these hyperscalers, chip designers, developers, are looking more carefully at their architecture inside of data centers, how do you replace bring more optical interconnect.

Because of all the data connectivity and replace copper, that is a trend that's really massive is moving fast and we're scrambling to stay up. We -- a couple -- earlier this year, we announced that we would expand the capacity of our optical fiber business by doubling it. In fact, 90 days later, so we're feeling that might be a little bit short as we speak today.

So a lot of momentum in that business. I think we're at the front end of that, and I'm really encouraged by the trend we're at.

And so that $100 million is what sits in T&E.

That piece sits on our transportation and electronics business. That's correct. So $0.5 billion is power outside SIBG, the other parts inside EBO.

And your market position there. Are you talking about something in the scope of 10% market share and you see opportunities to...

Again, a lot of -- there's other technology. It takes some time to get confidence with the hyperscaler. We wouldn't have the capacity even today. to be able to provide much more than we have today. So it's going to take some time to ramp up that business. But we believe we're very well positioned to gain share in that particular space.

And just last one on SIBG. As we move forward into the back half of the year, the areas that have been growing will naturally have some of the tougher comps, things like roofing granules, easier comps as part of that mid-single-digit growth potential, is there a narrowing of growth spreads across the business?

There will be. I mean we will see better comps on the roofing granules side. We're seeing that already in Q2. I expect we'll see more of that in the back half of the year. Auto aftermarket was a little light. It's probably a little light in the quarter, we'll see easier comps in the back half of that business as well.

So yes, you'll probably see some narrowing of growth across SIBG, but solidly in the mid-single-digit range or better in the back half of the year.

And it's not like the stuff that's really growing those comps become problematic.

I mean I think the momentum is behind us. I mean, yes, there are going to be some more challenging comps in some certain parts of the business, but we think there's momentum behind us. We think it's building that slowing. So I don't see there being much of a headwind on that side yet.

Shifting to transportation and electronics and just the organic growth acceleration opportunity over the course of the year and talk about the setup there and the drivers behind it.

So Q1, we were flattish in that EBG business, but very strong orders. So orders are up double digit. Backlog was up 30% over the course of the quarter. It was very, very strong in that business in terms of the backlog. Again, coming back to somebody I mentioned before on the optical interconnection data center is a part of that, for sure.

When you think about the business, half of the business was growing mid-single digits. So again, semis, data centers. Aerospace and defense in that area has been pretty good, growing at high single digits, low double digits, a very strong commercial branding in that business was pretty solid in Q1. And then half the business was down. It was around consumer electronics and auto. Those are the 2 pieces. As we think about -- as it goes forward, we know we'll accelerate going into Q2 and we'll see some acceleration into the back end of the year.

The businesses in Q1 that were relatively strong, continue to be very strong. And the ones that were weak, the market, the macro isn't necessarily getting any better on consumer electronics or auto, but we're gaining penetration, for example, in consumer electronics, we're penetrating more on the mainstream side, in auto, we're penetrating more where we don't have as much concentration like, for example, in China, OEMs has been a big push.

So we're actually gaining some share in those vertical markets. So we'll see some acceleration at business as we go from the first quarter to second and second quarter into the back end of the year. And keep in mind, too, we're going to start to see both an SIBG and TEBG, more tailwinds on price. So we went out with a price increase on April 1, generally speaking across all of our business. But then on top of that, we went out with oil-based price increases that will start to benefit us a little in Q2, more substantially in the back end of the year.

And if can just unpack a little bit more the premium versus mainstream to understand the mainstream opportunity. And so the revenue mix today heavily toward the premium side, but the time line or the TAM that you have in mainstream.

So look, it's a -- first of all, we're about 70-30 premium to mainstream. We provide bonding solutions, adhesive tapes. We provide connectivity, thermal barriers, other things that go into phones and devices, films, polarizers and it goes into phones, tablets, notebooks, even white screen TVs. So it's a pretty broad business. We see opportunities that take some of the things we've done for premium suppliers. And it's not just the premium device manufacturer, but sometimes the premium device manufacturer is also making mainstream or lower-end devices.

So we're seeing good penetration both with -- those typically that are more mainstream as OEMs as well as mainstream devices within premium suppliers. And sometimes it's defeaturing products we have in the market today. And we're finding an ability to do that and attack parts of that business. Different polarizers we provide for widescreen TVs or small phones.

So good penetration. It's growing over time. It's happening as we speak, and I think that's helping us perform a little bit better than the macro towards the back end of the year.

And then shifting to the consumer side of things and the recovery prospects there and going from sort of Q4, Q1, the challenges and how you see that unfolding going forward?

So on the consumer side, we started out last year, we did 3 quarters of about 0.3% growth. So it was just modestly positive Q4, Q1 was a bit weaker. We see Q2 getting better than Q1. It could be flat to up a little bit. We see it accelerating a little bit in the back end of the year. I think what's encouraging of our consumer business is not very big as 20% of the company. What's encouraging is 11 of the last 13 weeks, we saw a positive POS or point-of-sale growth, which I think is very good. I mean so we're seeing good trends. We're seeing weeks of supply in the channel compress.

So there's not as much channel inventory. We've seen weeks of supply, so flow through the channel is getting a little bit better. That is a business that's benefiting from a lot of the activity that I'm talking about commercial excellence and innovation. We went for a long stretch of time. We weren't bringing any new products into the consumer products market. We just were pulling back. We were pulling back on ad merge on innovation. And we reversed that. And what's happening now, we've -- between '23 and '25, we've doubled the number of new product launches in the consumer side.

If you look at what we'll do in '26 versus '23, it's triple. And when you look at just what we're doing internationally, launching products for the international market, we're up like 7 or 8x. I mean so it's some substantial investments in new product development. And it's things like Brite by Scotch-Brite, which as we sort of say the tagline we bring the joy to scrubbing back into the business.

So it's like there's really good things here. We talked last year about Pro Sharp painter tape is very important. Fill treat the number of varieties or SKUs we have in the Fill treat side. So a lot of new innovations going in consumer. Consumer were performing better or on time in full performance is getting better. We're advertising and promoting better. And we're starting to see that traction happen in the business. It's not going to be a big grower at the back end, but if we can get sequentially a little bit better and start to see positive growth in the consumer business, I think we'll be...

The next topic, which is running the 3M assets better, right? And you talked about this on the second quarter '24 call, gave more detail at the Investor Day. Kind of 3 core priority areas that want to dig into a little bit, starting on the growth side. And so within growth, there's commercial excellence, there's R&D. The R&D efficiency right?

Because the idea is we'll spend the same amount, but we'll get more out of it. So just some of the tools that you're implementing.

So look, this is fundamental relook back to basic fundamentals approach to running the way we do R&D today, as I call it an R&D factory, like a factory with metrics, instrumenting it. So it's a variety of things like are we launching products on time. We weren't measuring on-time attainment. Q1, we were at 83%. Last year was -- in the low 80s. It was -- before that, it was kind of 70%.

So continuing to get a little bit better on launching products on time, which I think is quite important. We are spending a little bit more on R&D. We're shifting our spend more towards our priority verticals. Typically, we would have spent less than 30% of R&D on new product development. We're now running about 40%, which I think has been pretty good. It's -- we're running our business cases a lot more rigorously. We're tracking, are we accomplishing them. We were -- in Q1, we launched 84 products. We're watching the funnel.

So we're bringing more new products into the front end of the funnel. So I think the front of health is quite important. So if you go back to where we were in 2023, we launched 123 products in the marketplace. For 3M, it's not as much as we could do. We used to do 600, 700. It went to 169 last year it was 284. This year, we'll do more than 350, and we're well on our way tracking towards the goal of 1,000 products over the next 3 years by the end of 2027.

So the business is doing really well in this, bringing back innovation into the business. And a lot of it is just the fundamentals of how you're executing day to day. And now we're starting to bring AI technologies into how we innovate, which is very important. We laid out a goal at the Investor Day to reduce the cycle time to launch a product, to launch a new product by 20%. We're already tracking a little bit better than that. And AI is going to help us accelerate even further as we go beyond 2027.

So this is a complete remaking of how we innovate, which is the core capability of 3M is bringing new products to life. So it's reinstrumenting that whole business, bringing what I call kind of a factory mentality to how we run R&D.

And then also on the growth side, you've introduced a target to outgrow the macro about $1 billion '25 to '27. Just remind us where you are on that through '25, '26, what the setup would be '27?

We're tracking beyond that. So we said we would do $100 million, $300 million, $600 million between '25, '26, '27 above the macro. Last year was about $150 million. This year will be more than $300 million. So we're tracking well to achieve that growth of $1 billion over the macro. It's really coming from the segments we've just talked about. A lot of it is the tailwind around general industrial safety, A&D semiconductors or data center business is all giving us tailwind to out-accelerate the macro.

So we feel pretty good about that trajectory. And again, it's not just the new product development. The key piece last year is more around commercial excellence. Because it's taking time to -- as you launch more products till that actually starts to drive the top line, it takes some time. So last year it was more commercial excellence. This year, it's kind of half and half between commercial excellence and innovation-driven growth.

As we get into 2027, it's going to start to be a lot more driven by new product introduction. So it's shifting a little bit the flywheel is moving and we are this year outperforming the macro and we'll continue to do that next year.

And it doesn't sound like doing better earlier on means that you're pulling anything in from...

No, I don't think so. No, no. Look, I mean, at the end of the day, I mean, we said we'd grow $1 billion over the macro this is 1.5 years ago, and a lot's changed since then. The macro, I think is, if anything, it's a little bit tougher than what we had expected at the time, but the company is performing a lot better than I would have expected.

So it's not pulling anything in. It's capturing new opportunities. When we stood up at the Investor Day early last year, I mean we knew we had a product inside the data center with copper is called TwinX. We had developed EBO. It was going to really nascent. It was sort of buried a little bit and simply because of all the investment that's happening inside the data centers, the transition around AI and the amount of data that's flowing through these data centers, they have to move to the optical fiber.

So we've got a great technology as the right spot. So we didn't highlight that last year. It's really evolved in the last 6 to 12 months. So it's a view at different pieces that are really picking up and taking a lot of steam here.

Another priority area is operational efficiency. And so when you outlined that it was -- the target was $1 billion of annualized net productivity. Just walk us through where you are on that cadence.

So by the end of this year, we'll be at least halfway through that. So it's been good progress and it's basic things. It's around procurement savings, logistics savings, modes and flows, cost of for quality has been something I've been talking about quite consistently. We had not been measuring it inside the company very rigorously. So we were measuring it. We were north of 7% of cost of goods. We closed Q1 around 5.5%, 5.6%.

So on a $13 billion cost of goods base, $13.5 billion, it's over $200 million of cost improvement simply because of cost of poor quality. And there's probably another couple of hundred million dollars ahead of us yet. There's a lot of opportunity here.

So it's really just rewiring this. When I think about what we're trying to do around operational excellence, it gets back to this concept that we have about moving from a holding company to an operating company, and it's a multistep journey. And I've been laying this out with it for investors sort of consistently every earnings release and the track and the progress we're making here. I said that's the path we're going to go through. It starts off with just taking all of the factories which are run regionally and have them run centrally.

So then we did that 2.5 years ago and that now we can look at across all of the company, what's happening across the flows, how the factories run together. That's been a very important part of the journey, building these metrics. I talk about utilization or OEE, that's now come up to 62.5%, 300 assets. That's been a very good performance on time and full, cost of poor quality. All these metrics around driving that factory network to be much more efficient, much more stable and it's continuing to evolve.

The next step is around the consolidation of the network, and we're making really good progress on the network consolidation. All of that is getting from sort of low 40s to the mid-40s to now the high 40s in terms of gross margin. That's the goal we have in that business. And this is the trajectory that we have put in place to get there. And each quarter, I go through some of these metrics, which demonstrates the progress we're making quarter-to-quarter.

It's not a linear journey, but the company is making good progress in moving from holding company operating model to more of an integrated operating business.

And so there's momentum behind the outgrowth, but the momentum behind the net productivity because that step-up next year, that would be a larger contribution.

It's going to be a large contribution next year. It's going to continue -- and again, we're going to start to bring in things around the network consolidation. So lots of pieces to this. But yes, it's -- we feel very good about $1 billion over the next -- by the end of '27.

Yes. And then the third priority area was around the portfolio and what you do around capital deployment as well. You've talked about 2% to 3%. There was the precision grinding and finishing business. I think that was maybe 50 bps. Just where you are on the remaining part of that 2% to 3%? Is that something that happens this year?

So it will happen over time. I mean, I'm not going to put a time stamp on it. But look, we said about 10% of the company is more commodity like, meaning we didn't have the right to win in certain segments. Technology wasn't being used to drive differentiation in the space. We'll look at those pieces over time. We said there's 2% to 3% that was more in active discussions or what things we would try to do.

PGF happened to be one. So we sold the precision grinding business, it took with 7 factories, brought our factory count down to now, but just about 100 with the closure that happened as well. So we saw some good activity there. The capital is really -- the portfolio side and generally capital deployment isn't just around the divestitures. There's activity here. I've said to drive -- to grow the company long-term sustainable top line growth we've got to shift the portfolio, and we know we've got to do that. It's both getting out of some things that don't really fit but also starting to get more into things that fit into priority verticals like we've done with the Madison [indiscernible] joint venture, which, by the way, will close on July 1.

So all the regulatory approvals are done. We're going to close that transaction on July 1. It's going to be an important one for us. It's also about organically prioritizing how we spend money inside the company. 80% of what we spend on R&D now goes to the priority verticals I laid out at the beginning of last year. And this also gets at how we do capital deployment.

So there's a broad piece around this. We continue to look at the portfolio. There's no time stamp on this. We'll be smart and disciplined in how we make decisions around the portfolio.

And when you think about the margin opportunity that comes through the net productivity, just in terms of which segments the biggest impact from that and have the most opportunity going forward?

I think it's -- look, it's -- you'll see margin growth across the company. And a lot of the productivity because it's an integrated network, it accrues to all of the businesses across all the portfolio. But everyone's -- each business runs into different market dynamics. I think I step it back. I think the industrial businesses will see more margin growth over time than the consumer.

The consumer business is a little bit lighter in terms of the portfolio across the company in terms of the margin performance. But I'd see more in the industrial side of the business. But again, a lot of the productivity work we're doing accrues to every one of them because it's an integrated network.

On the pricing side of things and more pricing has had to be put in the market, just what you're seeing in terms of that sticking? Or is there any kind of demand impact in pockets of the business?

Yes. So we typically would see pricing to offset material cost inflation. So if it's a 2% inflation environment, I know it's a little bit higher than that, you'd see about 50 basis points of price. As we came into this year, we said we would get about 80 basis points of price in 2026. Some to cover material cost inflation, some to cover some of the tariff impact that was there last year, which is where we're at.

In Q1, we're a little bit lighter on pricing. We didn't -- we're surprised by that. Our pricing increases go out April 1. You'll see that pick up in the balance of the year. And on top of that, we went out with an oil-based price increase. At the earnings release, we sized that $125 million, about 50 basis points of price. So the oil price impact, cost impact was going to be offset dollar for dollar with price. That's 50 basis points. That puts us at 1.3 points of pricing across the company.

Again, similarly to my comment on the margin expansion, you'll see clearly more price in SIBG, than TEBG and better in TEBG than the consumer business is kind of the way I would characterize it. But we are seeing that price taking hold we're very confident of that. It's a different environment today thinking about pricing we were in a couple of years ago.

When you're delivering products on time and you've got hustle in the sales force, you're bringing new products to market. You're executing better, your ability to drive pricing is better than if you're not performing. So I'm confident we'll see pricing take hold in the business, as I've just laid out.

We saw went through an inflationary period in 2022, 2023. So across the multi-industry group, good pricing response such that margins were actually moving up. But where are we in terms of that fatigue from the customer side of things? And so is the right objective these days price dollar for dollar, it does net to -- there's a margin headwind tied to it.

It's -- I mean, we clearly want to offset some of the cost headwinds on inflation, oil, tariffs, I mean, those kinds of things. We're clearly embarking on a journey to offset that. But look, at the end of the day, when you bring in new products to market, you have an opportunity to think differently about price and the value you provide to the channel, and we're thinking pretty hard about that.

I don't think we were maybe as aggressive as we could have been last year on pricing on tariffs. I think we could have -- we could have gone out harder than that. We're getting smarter about this. We're governing pricing a lot better. It's part of our commercial excellence initiatives. But this is an area that it's taking a lot of time and attention for the business.

We're watching sort of the discounting, the rebates, the things that happen sort of the deals, if you will, slot times in the past, because, again, in a holding company structure, pricing was negotiated down at a very local level. And we are seeing instances where you gave price discounts with for volumes of one.

So there's really no volume coming from that. We're correcting all of that. So there's a different governance process on pricing. So when you put all that together and you're launching more products, I think our ability to drive price, it maybe get some margin expansion from prices better today than it would have been 3 or 5 years ago.

And we probably only have time for one more so, but I want to touch on Madison. And so with that combination and talking about high single-digit growth targets, the margin opportunity that you have there, just how bringing the businesses together becomes a...

So this was a good -- this is a very, very important transaction. We're bringing together 2 complementary businesses in a priority vertical, that's a safety vertical. So just by way of background, we're creating a business about $800 million worth of revenue, a little bit better than that. We're combining our Scott SCBA, fire safety business with Madison Fire & Rescue, so suppression tools, fire rescue tools in a joint venture, which will own 51%. We've got a 49% partner in a private equity firm. We'll fully consolidate this.

Again, it's targeting for closure on July 1. So the process of being done very, very well. The businesses together independently, we're performing very well. And together, we think it will be better. So very complementary. It opens up a broader addressable market for us. We have opportunities to leverage channels. Scott very important in the U.S. market but really never took the product internationally. We have an opportunity there because Madison is more -- has a bigger presence in the international markets, particularly in Europe. We have an opportunity to get better at how we drive products through the channel within the U.S. We go through similar distributors, but a lot time not the same one.

So we have an opportunity to do cross-sell and just better commercial execution and how we drive business. This is a space that the market itself is pretty resilient. It's been a high single-digit grower recently. The margins today are at -- or actually they're above a 3MY average. And when I look at cost synergies, the opportunity to take revenue synergies. This is a -- what we'd say it's a quality asset with a lot of upside.

So we feel good about where we're at. I like the transaction. And again, because of the structure, when it does close, we'll be pulling $700 million of cash out back to the parent company from the closure of this deal again July 1.

So it's a great transaction, and it will be reported to the marketplace as a separate division within SIBG. So you'll get visibility into what I'm talking about in terms of the growth performance over time starting really in Q3.

I think that brings us to the end of our time. Bill, thank you very much.

Thank you, thank you, thank you very much.

Ladies and gentlemen, thank you for standing by. Welcome to the 3M First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded, Tuesday, April 21, 2026.

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 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 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-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. But 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 3-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. And 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, reduce cycle times and clear 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 3 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, run time and changeovers, creating a stronger foundation for sustained productivity and fixed cost leverage.

And 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. And 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 and finishing business within SIBG, which reduced our footprint by 7 factories. And we closed 1 factory and announced 3 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 3 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 [ Novato ] 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 second half.

In automotive, the market was soft as expected in the first quarter. Global IHS build rates were down about 3% overall and 10% in China, which pressured volumes. And 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 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 $1 billion-plus 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 road map 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 multiyear 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. TEBG 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 TEBG growing mid-teens, driven by industrial, safety, data center, semiconductor and aerospace.

The auto momentum accelerated through the quarter, resulting in backlog growth of 20% over last year and 35% sequentially, positioning us well for the second quarter. First quarter 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 3 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 of selling 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 3 days while maintaining service levels of greater than [ 90% ]. In addition, we returned $2.4 billion to shareholders in the first quarter, 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 group performance for the first quarter. First, Safety and Industrial had another quarter of 3%-plus growth as we continue to gain traction on commercial excellence initiatives and realized 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 remains 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 of 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 first quarter 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 a 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 first quarter, we are reiterating our guidance for the year. Organic sales growth of approximately 3%, earnings per share ranging from $8.50 to $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 3 weeks of April gives us confidence that all 3 business groups will accelerate growth in the second quarter and through the balance of the year.

On margins, we had a solid start with the 3 business groups growing 60 basis points despite 100 basis points year-on-year tariff impact. As we lap tariff pressure in the second half, 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 nonoperational, we expect positive trends driven by a $2 billion share repurchase in the first quarter 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 earning elements and the current guidance. We are trending $0.05 to $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 until we have more clarity about the rest of the year. Overall, we are moving with determined pace, and we'll continue to calibrate as the year progresses.

Regarding cadence, we expect sales growth to accelerate in Q2 and the back half of the year. Backlog conversion and continued order strength is expected to support growth momentum in both SIBG and TEBG in the second quarter. 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 second half, we expect the first-half EPS to be higher than the second half.

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. And 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 risk and control the controllable and for their commitment to strengthen the foundation and drive profitable growth.

With that, let's open the call for questions.

[Operator Instructions] And our first question comes from the line of Jeff Sprague with Vertical Research.

Bill or Anurag, just trying to dig into the order commentary a little bit more, maybe you could give us a little more perspective on the pre-buy, the size of it, if you could. And I guess the prebuy would imply getting ahead of price increases and the like. So maybe a little bit of color on how much additional price is now embedded in your organic growth forecast.

And just also on these backlog numbers, obviously, the delta sound great, but it's not really a backlog business. So kind of the question, is it law of small numbers on those deltas? Or is there actually significant visibility that you can anchor to as you look into Q2?

Jeff, thank you for the question. I'll start, and maybe I'll pass on to Anurag on the backlog point.

As we said, we had very good orders in the first quarter, up double digits, which was very good. And you're right, we're not really a backlog-driven business, but backlog was very strong coming out of Q1 and continues to build into Q2.

Over the course of the quarter, we saw good order growth in January and February, kind of up mid-single digits. But it accelerated quite a bit in the month of March. So it would be well over the double-digit number that we ascribed for the whole quarter. And it continues into April, which I think is very encouraging.

Now how much is price? I mean the reality is we do a price increase every year on April 1. So it's hard to discern how much was a prebuy. We think there's some of it. We've signaled to investors -- to customers rather that we're going ahead with a price increase on top of what we went out with April 1, associated with the price of oil coming up. So that could cause a little bit of pre-buy, if you will. But again, it's hard to discern exactly how much would that be.

You asked about price for the year. For the year, we had guided before at about 80 basis points. We came in a little bit below that in Q1. We still see -- outside of oil-based increases around 80 basis points. But when you add in oil and the expected price increase from oil, it could be around an extra 50 basis points is what we're thinking at the moment. So price for the year around 1.3 points.

I don't know, Anurag, maybe share a little bit about the backlog.

Yes. Thanks there, Bill. You are right that we are largely a book-and-ship business. We have about 75% of our revenue in a quarter comes from book and ship, but we do get backlog coverage as we enter the quarter. With the numbers that we mentioned, which was about 35% up sequentially to 20% year-over-year, provides us about 400, 500 basis points of additional coverage as we enter into the quarter, which is not insignificant given the growth acceleration that we expect from Q1 and Q2.

So I think it's really good to kind of see that we are starting with a very good backlog coverage for the quarter. Combined with the order momentum that Bill spoke about in the first 3 weeks of April, it gives us really confidence for acceleration of growth through the -- through second quarter.

And typically, we do not talk about orders and sales because of the book and ship because they converge together. But this time, you could see the big spike. And as Bill mentioned, part of it could be the pre-buy, but a lot of it is commercial excellence, NPI and other initiatives that we are driving, which resulted in order acceleration.

Great. And then maybe just a quick follow-up then. Just a comment about then accelerating into the remainder of the year. By that, do you mean each quarter will be a faster growth quarter than the one that preceded it, even though the comps are getting tougher in the back half of the year?

Yes, we see Q2 being better than Q1. And we see the second half being better than the first half, is the way we're currently looking at it, Jeff.

Our next question comes from the line of Scott Davis with Melius Research.

Just to follow up on Jeff's question. Are customer inventories low and there's a little bit of a restock occurring? Or are they balanced? How do you guys kind of see that element right now?

So we track it pretty carefully on the Safety and Industrial business group, the distribution inventory is relatively normal, I'd say maybe a tick below what we typically would see. We would typically see 65, 70 days, and it's a bit below that. On the Consumer side, it's about normalized from where we were last year, around 13 weeks of supply coming into the year was a bit higher, maybe 13.5. But right now, we're around 13.

So on the Consumer side, fairly normal. On the Safety and Industrial side, I'd say normal to maybe a bit light in the channel.

Okay. Helpful. I think you mentioned your factory footprint is down like 10%. Is there another 10%? I mean how do you guys kind of think of where the endpoint on that journey is?

So it's -- we're going to keep talking about this with investors as we go forward. I mean, at the end of last year, with 108, we sold and closed on PG&F, the precision grinding business, which was 7 factories scattered across Europe, one in Asia, a couple in the U.S. So it was not a large business, but a big factory footprint.

So that brought down by 7. We closed 1 in the first quarter. We announced a couple of others. So that will close over the course of this year into next year. So that puts us below 100. The number will be below where we happen to be today. We'll continue to look at that and size it for investors as we go. But clearly, the footprint just under 100 is bigger than we really need today.

Our next question comes from the line of Julian Mitchell with Barclays.

Just wanted to start maybe if you could give any color around the second quarter dynamics in a bit more detail, understand the organic sales growth accelerates year-on-year from the 1% in Q1.

Also, I think Anurag, you said first half EPS more than second half because of the contingency. So I just want to gauge sort of how much sequentially or year-on-year EPS should grow in Q2? And what's the sort of margin embedded in that guide would be?

Sure. Sure, Julian. Let me answer those questions.

So first, just on the revenue growth. As we mentioned because of the good backlog and the auto momentum, we expect organic growth in the second quarter to be higher than 3%, with all the 3 BGs accelerating. SIBG, which was at 3.2%, obviously going higher than that. TEBG, low single digit. And CBG flat to positive. So that's the expectation of the revenue growth acceleration.

Obviously, that's going to come with high flow-throughs. We're going to continue with the productivity that we did in the first quarter will continue to the second quarter. And between volume and productivity, we'll offset all the last quarter of the tariff year-over-year impact for us, a pickup in stranded costs and investments. So you will see operationally for us, it's going to be a solid margin, about 24.5%, and good EPS flow-through coming from that.

On below the line, we will see a couple of pennies of headwinds relative to last year. Last year, in the second quarter, we had a divestment of an investment that we had in India, which was about $0.08 to $0.10. Then you see a little bit of tax, which was favorable in Q1 coming back in Q2. So those are two headwinds.

Of course, they will be offset by the share buyback, which we did in the first quarter, which is going to help us in the second quarter, plus a little bit on the non-op pension side. So you put all of that together, we should grow more than $0.05 in the second quarter, which for the first half would put us at about $0.30-plus of EPS growth, which is more than half if you include the contingency for the full year.

Now the contingency, as I mentioned, we kept it for the second half of the year, depending on how things evolve. If we continue performing the way we do, revenue grows over 3% in the second quarter, which is a good exit rate as we enter into the second half. And if it continues at that a little bit better with good volume flow-through, no tariff headwind, the margins in the second half could be much higher than the first half. Yes.

I appreciate all the color. Just one very quick follow-up. That was very thorough. Maybe on the pre-buy dynamics, credit for calling that out, but trying to understand what you're assuming for how much that sort of reverses because you've got organic sales growth accelerating in Q2. We have maybe some sort of -- I don't know if a prebuy is helping that or the unwind hurts that. Maybe flesh out that prebuy sort of dynamic over the balance of the year.

So Julian, I mean we -- it's hard to discern exactly how much is pre-buy. I mean we get orders coming in, it's quite strong. But we are seeing much better traction on new product introductions, a lot of momentum building on commercial excellence. And keep in mind, part of what was driving Q1 growth, including into early April, are some longer-lead products that will go into semis, more importantly, in data centers, delivering in Q2 in the back end of the year. So you have all these factors in there.

I think when I step back and look at the full year, as we said, we'll see acceleration into Q2 and then in the back half. And all these pieces come together. And any pre-buy that's happened will wash out in Q2, but we do see acceleration in the back half on the back of really core operating fundamentals around NPI and commercial excellence.

Our next question comes from the line of Joe O'Dea with Wells Fargo.

On the $0.05 to $0.15 of contingency tied to oil macro uncertainty, can you just outline kind of roughly how you think about the split on the demand side versus the cost side of that and your planning assumptions? And then really looking for any color on the oil exposure sort of across the business, and what you're thinking about that contingency could flow through if you need to use it?

Okay. Let me start with the contingency, and then I'll -- and then Bill, you can add from there on.

On the $0.05 to $0.15 of contingency that we kept, it's actually across the 2 buckets that you mentioned around here. As I mentioned, in the second quarter, we'll be above 3%, we expect -- which is a good exit rate as we go into the second half.

So if there is a little bit of an impact on the volume piece because of macro, which we are not currently seeing right now or a little bit of the input cost that goes up, so I guess it gets spread between the two, Joe, to be honest.

Our objective right now is to continue driving what we control on the NPI commercial excellence continue to outperform the macro and drive more productivity so that we don't have to use the contingency in the second half.

And Joe, on the oil price, the way we look at it is really two pieces. One is on the supply side. The other is demand. And on the supply side, we have about 45% of our cost of goods is raw materials and about 1/3 of that -- so it's about $6 billion of raw material spend. And about 1/3 of that is its basis in polychem. So it's ethylene, it's propylene, esters, acrylates, all those various things. And we are seeing some upward cost pressure on that.

What we've seen so far and expect is about $125 million of cost increase there, which are offsetting into pricing. As I mentioned earlier on that we expect about a 50 basis point uplift on price coming from that oil-based exposure.

How that affects the overall macro economy? What's going to happen with consumer spending, auto? I mean that's still all unfolding as we speak and depending upon what happens in the Middle East, but that's our current assumption as we speak today.

Got it. And then just on the transportation, electronics commercial excellence program, can you talk about where you are on that trajectory? I think you started to see traction in SIBG last year, and that continues, but just the efforts that are underway. And as we think about the growth acceleration, just any quantification of how you're thinking about commercial excellence contributing to better T&E growth as you move through the year?

Yes. So it's a good question. I mean, they're doing a great job on this. They're falling right behind what we've done in SIBG, which has been very, very successful. I'm very pleased with the traction on the sales force, on pricing discipline, on cross-selling, on churn reduction and looking very hard at attrition with the predictive AI models that we have in place.

And the team at TEBG is doing the same sorts of things. I think the cross-sell opportunity is not going to be as robust, but they move very aggressively on improving on the sales force and better incentives, better targeting. We're close, we're on targets. They're tracking attrition rates, which I think is very good. They have the same predictive models tailored for TEBG into that business. So they're making good progress. It's going to roll out over the balance of the year.

One of the key things we're focused on is making sure we have the right mix and focus of our sales reps versus application engineers. Are they -- do we have the right mix between the two? And are they calling at the right level in the customer, for example, in automotive at the OEE versus the tiers?

So it's a little bit different than what we see in SIBG, but they're working it pretty hard. And I think you're going to see in the back end of the year certainly improvements in TEBG coming from a lot of that commercial excellence work.

Our next question comes from the line of Andrew Obin with Bank of America.

So on the Transportation and Electronics, to just to dig in a little bit further, also double-digit orders. So it seems like we -- a lot of questions into the quarter about weakness in consumer electronics. So does that mean that we are offsetting consumer electronics into the second half?

Yes, Andrew, it's exactly what's happened and will happen. In fact, when you -- again, when you discern with TEBG, just in Q1, I mean they were flattish, but half of the business was up mid-single digits and half the business was down mid-single digits. And you can really isolate that in the 2 areas, which is auto, auto OEE and commercial vehicles, and consumer electronics.

So we show in our slides that electronics as a whole is flattish. What you see there is you see very strong semiconductor, data center business offsetting a weaker consumer electronics business. As we look at the balance of the year, we see electronics start to get modestly positive. Again, I think CE, or consumer electronics, may soften a little bit. But we are seeing better trajectory and growth in the data center and the semiconductor business.

And Bill, just to follow up on that. At CES, you showcased some pivot in strategy on consumer electronics. You've also talked to your analyst -- your first Analyst Day about the need to rebuild the R&D pipeline, particularly on the electronics side. Can you just talk about how these two internal initiatives impacting your growth and the growth trajectory over the next 12 months, let's say?

Yes, that's a great question. I mean, we're putting a lot of time and effort into making sure we have good new product introductions in consumer electronics, both for the premium segment as well as for the mainstream segment. Wendy has been talking about this quite a bit. We are seeing good traction here.

Unfortunately, the market isn't cooperating with us. We do see a greater downturn in LCD, which is where our strength happens to be. But we do see a lot of innovation in this space. We are gaining some share modestly in the mainstream side.

When you look at content per device, 3 or 4 China OEMs have increased their content per device in the first quarter and the fourth one, we saw a pretty good order for us. So I think we're making some progress here. And this comes on the back of a lot of the NPI work that's happened in TEBG, and there's more to come.

Our next question comes from Andy Kaplowitz with Citi Group.

So can you give us some more color into what you're seeing in Consumer? I know you talked about share gain actions in Consumer. So maybe you can elaborate on what you're doing there? And how much discounting do you have to do to get there? And should Consumer contribute to your margin performance this year? Or could Consumer margin continue to be pressured a bit over the year?

So look, I'm pleased with what's happening in Consumer. The market for us, we're 70% U.S. So it's really focused on the U.S. consumer. We sell a discretionary product. As Anurag mentioned, we had a couple of pockets of strength in the year from new product introductions. I think the team has really gotten back to basics, focusing on priority brands and started to innovate again.

The reality is we went for a lot of years without a lot of new product introductions, a lot of Class 3, so they're incremental, some are Class 4, but really starting to kind of be more aggressive on new product introductions. And I think we're holding our own and in fact, starting to gain back shelf space because we have new product coming into the marketplace.

Yes, it's not a segment that we see upward movement on pricing, we're trying to contain the discounting that happens half the year. Again, the market is a little bit soft. For the year, we expect to see some growth. It will be positive. It won't be a meaningful driver of the overall 3M growth in the year.

But again, we're down 1.3 in Q1, down a little bit more than that in Q4. We were up sort of modestly for the first 9 months of last year at 0.3 points. So I mean, they're hanging right around flat to up a little bit. And when the consumer starts to spend more, we'll have the right products with good innovation, great commercial excellence efforts there, and we'll see that business to return to growth.

Helpful. Then Bill, maybe just a little more thoughts about portfolio management. You obviously opted for a JV structure with the purchase of Madison, despite seemingly leaning into safety as one of your priorities. So maybe a little more color on why you chose the JV structure there.

And then stepping back, can you give us an update on how you're thinking about overall 3M portfolio? I think you've said in the past 2% or 3% of your portfolio is actionable in terms of divestitures, 10% is commodity. Like is that still the right numbers of the company?

Yes. So look, I'm really pleased with the structure and the conclusion of this Madison, Scott and [ SCBA ] joint venture, where we're a 51% owner, it's going to be consolidated. It's a strategic bolt-on acquisition. And what you just referred to as a priority vertical, it is. It does strengthen our SCBA business. It's a great brand. We have been innovating in this space. We talked last year about some new innovations coming on to the marketplace. This also creates some scale by putting this business together for future organic and inorganic opportunities.

Madison and all of its fire and rescue products, have been performing very well. They bring a terrific management team. They're growing double digits. The margins are coming up. So it's -- I think it's a great combination in a space that we like quite a bit.

Bain Capital is our partner on this. They're 49%. We know them well. They are very good at post-merger integration, they bring a lot of operating rigor and good expertise on driving incremental M&A while we focus on other areas around the company.

So when you put all that together, I think it's a strategic opportunity for us. It gives some optionality for do we pull it back or do we suit something else over time. But the reality is it's a terrific deal. It is going to be accretive to our growth, margins, earnings over time. So I feel pretty good about that particular deal.

We closed on PG&F, the Precision Grinding business on April 1. It wasn't very big, but businesses that don't perform sometimes can be difficult to transact on. But I'm very, very pleased that, that one got over the line. We continue to look at the rest of the portfolio.

Yes, we're around 10% of our business is more commodity like. We don't have a clear right to win, not a lot of technology differentiation. We said 2% to 3% was in flight, PG&F was part of that. We continue to evaluate this, and we'll talk to investors as we go on what that shaping happens to be.

But the reality, the investors should see the transaction on Madison with Scott as an important strategic signal for investors around the things that we want to do to reshape our portfolio to be higher -- structurally higher growth and higher margin potential.

Our next question comes from the line of Chigusa Katoku with JPMorgan.

First, can you maybe recalibrate us on the outlook for U.S. IP and electronics you're embedding and your assumptions for the full year? I think it was U.S. IP flat and electronics up mid-single digit last quarter.

Sorry, Chigusa. You're talking about IPI, the macro?

Yes, the U.S. IPI.

Okay. So well, thanks for the question. And I guess, congratulations on the role. Welcome to the call. So just in terms of the macro, as we came into Q1, we saw some of the similar trends we saw in '25 continue. So maybe a couple of comments relative to where we were in January.

Global IPI is still around 2%. It's not moved around very much. USAC or U.S. is up a little bit better. EMEA is down a little bit. China is still mid-single digits. And interestingly, those trends are exactly what we saw in our business through Q1. So U.S. up a little bit, Europe down a little bit, China mid-single digits. So it's pretty much aligned with that.

GDP is still sort of in that same 2.5% range. Auto builds are still floating around between flat to down 1. It's really early in the year. I think that tends to be more of a backward-looking indicator. But right now, it's sort of flat to down a little bit. U.S. retail is flattish.

The place that we're watching a little bit is consumer electronics where the outlook is for a little bit more softness as we get into the back end of the year. But overall, the macro is trending about where we saw it in January and through last year.

Okay. Great. And then on this contingency, I was just wondering what it would take for you to remove this. I think it's prudent that you're including in guidance, but you've been seeing good order trends, you're operationally raising guidance by about [ $0.025 ]. And without this contingency, it would have been a $0.10 raise. So kind of what would it take for this to be removed?

Yes. Thank you for the question, Chigusa. Listen, we'll probably give you an update in our next earnings call on that. As we go through the next couple of months, we're pretty confident with the backlog and auto momentum on the Q2 revenue. We'll see how that plays out as well as we have executed. We have a very good playbook on -- which we adopted from the tariffs last year in terms of working with the customers and pushing out the price increases over there.

So that's an area we will kind of monitor on the yield over there over the next couple of months plus and see where oils are at which levels they are after a few months. And if we continue performing the way we did in Q1, both on the productivity as well as in operational excellence, and come July, we will give you an update on where we stand for the full year.

Our next question comes from the line of Nigel Coe with Wolfe Research.

We covered most of the topics. So I just wanted to -- a couple of quick follow-ons. Just going back to the pre-buy comments, just trying to understand, why you think there may have been a pre-buy? Is it because you're trying to rationalize the strong orders? Or is there something else that you're hearing from customers? So just maybe cover that.

And then on the 50 basis points of additional price, is that in the form of a surcharge? It certainly seems like it's in the surcharge, so that rolls back if oil comes down. And would that hit in 2Q? Or is that more in the back half of the year?

So really, Nigel, thanks for the questions. Look, it's hard to avoid the fact that we're pushing pricing a little bit more aggressively. We know there's an inflationary environment. We know price oil is going to go up. We know the impact on our company. We know perhaps what we did 4, 5 years ago, maybe not moved as quickly on pricing when oil came up, which we're correcting for that. I think we're being a lot more attuned to what's going on in the macro.

And we're enforcing it better. If a shipment goes out beyond a date, that shipment will have a price increase associated with it. I think the customers have seen that and heard that. And then when you put all that together, it gives us a sense that perhaps there's some advanced buying from these price increases that are going out.

So again, we'll know more in the next month, 6 weeks, how much of that might be prebuy, simply because we'll watch the orders through the balance of the year into the balance of the quarter and into May. So that's kind of basically how we're thinking about the prebuy here at the moment.

On pricing, we do see right now about $125 million worth of cost impact, which we've been relating to pricing, and that would translate to about 50 basis points. So that's factored into the guidance of about 3% organic for the year, but that's kind of what we're thinking at the moment on pricing.

Our next question comes from the line of Chris Snyder with Morgan Stanley.

I wanted to also follow up on pricing and I guess a little bit on price cost. When do these surcharges take effect? I would imagine some point in Q2, but any color on when they take effect would be helpful.

And it just seems like with the $120 million of cost inflation that you referenced, Bill, on the 50 bps of price, the plan here is to be, I guess, be neutral on price cost. And I asked because if I remember a year ago, you guys were actually EPS negative on the tariff inflation. Just want to make sure I have that neutral view right.

So Chris, I think we've learned a little bit. Yes, we're moving a lot faster than we did last year on tariffs, tariffs came on. And I think maybe we're a little tentative at front, but I think we ended up offsetting a good part of the tariffs on cost and price. We're trying to be careful on that. So yes, exactly, we will offset cost increases associated with oil through price increases, and that's the assumption that we're making here.

I mean you're right. Historically, we have covered material cost inflation with pricing. So historically, with a 2% material inflation, that would translate into roughly 50 basis points of price. For the year, we are guiding to about 80 basis points, again, a little bit lighter in Q1, but inflation in Q1 came in a little bit lighter as well. So for the year, 80 basis points.

With oil coming in, that's driving an incremental 50 basis points of price, so a total of about 1.3 points roughly for the year on pricing. And that's our current expectation. It's not a surcharge. The price is going out embedded into the pricing of our products. And that's kind of -- and it's depending on the product and the geography, but generally speaking, it was less of a surcharge, more being built into the underlying price.

Yes. And in terms of the rollout in the timeline, we've already started in April in a couple of countries in Asia. And then in the United States, it starts in May 1 and Europe as well. So it is imminent right now with all the letters going out to the customers, knowing when the surcharge is going to impact them, oil price increase is going to impact them. Yes.

Appreciate that. And then maybe if I could follow up, just any color you could provide on how firm or how much flexibility is there on these delivery dates for these orders or what's in the backlog? And then I guess asked because I remember a year ago, there was elongation on those orders, I think, tied to some of the preordering ahead of tariffs. And it seems like there could be some of that again now. So just kind of wondering, trying to gauge that as a potential risk into Q2.

Chris, the delivery is limited to the lead times that we have. So it's not like an order can be placed for 6 or 12 months of delivery. So it's definitely within the time frame that is we always describe. Yes.

Our next question comes from the line of Amit Mehrotra with UBS.

This is [ Neil ] on for Amit. So I know we just got first quarter results, but if I could ask about the growth algorithm into 2027 because the outlook suggests some meaningful improvement in trends exiting this year.

If I just look at new product introductions, for example, I mean, these are accelerating. And if we add maybe 2 points of macro growth to new product introduction, would that math imply that 3M is growing around 4.5% organically next year?

Yes. Thanks for the question, Amit. I'll start and Bill can add from there.

[ Neil ]. [ Neil ] on for Amit.

Yes, I'm sorry. [ Neil ] for Amit. Yes. So I -- we said this year that we will grow about $330 million, $300 million above macro. And as we get into the second half of the year, from the exit rates, you are right, we will be north of 3.5%, which would imply that we would be above where we are in the first half and above where the full year would be. So we do feel very good as we enter into next year with what we are doing on the NPI as well as what we are doing on commercial excellence and how that is translating.

So first is, obviously, we've got to grow in the second quarter about 3%. And if we do grow above the 3.5% in the second half of the year, I think it will give us good momentum to kind of accelerate the growth into 2027. But it's a little bit too early to kind of talk about that, and we'll provide more color as we go through the course of the year.

Our next question comes from the line of Deane Dray with RBC Capital Markets.

I was hoping we can address the point-of-sale momentum. I mean that's a surprising number, up 7 on the last 8 weeks, given the pockets of macro pressure. So just your impression here, is this consumer driven? Is it more on the commercial side at all? Just some context and the momentum into April?

Deane, so it is consumer driven because it's in the consumer business group. I think it's very encouraging for us to see POS up. That's a sell-out 7 of 8 weeks, which I think is really good. It does kind of make us feel a little bit better going into Q2.

And that business, Consumer business stabilizing, perhaps growing a little bit in Q2 and the balance of the year, so those are good trends. I think it reflects the team's very aggressive efforts on driving promotions, getting shelf space, driving NPI, being really aggressive at hustling at the customer interface, good on-time performance still in at 95%, 94.5% range. So just really good work.

Anurag talked a little bit about a couple of pockets that are growing a bit better, but it's pretty broad-based. We see really good trajectory here through the first quarter now going into Q2 on the clubs, which is not surprising, given where consumers happen to be today. But we feel good about the trends and good about the outlook for Q2 so far.

Good to hear. And I'd love to hear a bit more about the Expanded Beam Optics opportunity. There's a lot of focus on this. It's addressing the data transfer bottlenecks in AI processing. So just where do you stand competitively? How quickly can you ramp on this? Is there any question of manufacturing capacity? Because the take rate on this is one of the fastest growing right now in data centers.

Well, Deane, exactly. That's why we're so optimistic about it and why we're talking more about it. And the fact that we've had some really good robust IP protection around the technology. It is expanded beams. So it's not a point-to-point fiber connection to the data center. It's sort of like an easy click between two pieces of multi-fiber device referrals that come together.

And we can put that together at 80% less time with a less strain technician; better reliability, can operate in a dusty environment, which is why it's gotten some good take rate. We've had at least a validation by at least one hyperscaler, a second one is in testing. I expect that will be positive as well.

We had a fairly large order coming in, in Q1 relating to the hyperscaler that has certified it. We are in a ramp-up mode. We will double capacity towards the back end of the year. We're investing quite significantly to expand capacity, relying on other partners in the space. Hyperscalers won't go with a single source of supply. So we've got to make sure we have some dual source, either a couple of factories or us with a contract manufacturer.

So all of this is working. We're working the ecosystem. The pace at which this has happened is very encouraging, and the team is pushing hard. I'm really optimistic about where it's going to go from here. This is a polymer EPO as it moves to ceramics, which is more EBO or fiber to the chip. I think it opens up a lot more opportunities with a lot of other players in the space. So look, it's encouraging, which is why we want to share today with investors.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

I'm just going to ask one since we're near the top of the hour, and we've gotten through a lot of the questions on my list. Just on some of the margin puts and takes, so have you guys seen any changes to your full year productivity assumption or stranded costs or growth investments? And I guess was any of that kind of front-loaded into the first quarter? How are we thinking about phasing throughout the year of those 3 items?

Right. Thanks for the question, Nicole. So we said that we have a contingency of $0.05 to $0.15. So let's say, at the midpoint, it's $0.10. About half of that is because of productivity, and most of that was in the first quarter.

So the -- I would say the only two changes that we made from our previous guidance, about $0.05 of that was very good productivity both on the supply chain side as well as the G&A. And a lot of it we saw in the first quarter. And obviously, we try to continue with the momentum that we have.

The second $0.05 at the midpoint, I would say, is because of our active capital deployment where we bought back $2 billion of shares in the first quarter of 2.5 billion, which obviously gives us accretion through the course of the year and active cash management with the cash balance that we have. Those are the big changes.

But we're not changing our productivity guidance, stranded cost guidance at [ $150 million ] tariffs. I mean that all stays the same as it was back in January.

Our final question comes from the line of Laurence Alexander with Jefferies.

Just very quickly, can you just address what your customers are saying about potential supply chain bottlenecks, I guess, particularly in the kind of sulfur, helium, methanol derivative chains? And does that -- are those factored into your contingency that you kind of see ways to work around those shortages if they develop in the back half of the year?

So Laurence, it's a good question. I mean that's probably affecting some of the pre-buy activity perhaps. Look, I think we're all working through this. We're in direct contact with all of our suppliers trying to manage all of our sources of supply, making sure we've got a variety of players that we can go to.

So it's on our minds. So I know it's on theirs, and it's going to affect behavior as we go through the next several months, and we watch what's happening in the Middle East and through the Strait of Hormuz. So we'll keep you updated on that, but it's certainly a factor that's on everyone's mind today for sure. So thank you.

This concludes the question-and-answer portion of our conference call. I will now turn the call back over to Bill Brown for some closing comments.

So I know we're a couple of minutes late, but thank you all for joining today. And I want to thank again all of the 3Mers for their efforts, for their dedication and executing against our priorities, strengthening the foundation, as Anurag say, controlling the controllables, delivering value to our customers and shareholders. So thank you. Thank you all for joining today. Have a good day.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.

Okay. Moving right along with Bill Brown, CEO of 3M. Quite a diverse, global business. So maybe some perspective on what's going on out there in the world and how it may impact your business just with the recent developments we've seen in the last couple of weeks, as a start.

So first of all, good morning, everybody. It's great to be here. Let me start by just mentioning that we are -- we continue to execute the foundational priorities that we've laid out for the company going back now almost 2 years. I've been talking about it pretty consistently in all of our earnings releases. It's really about driving commercial excellence and operational excellence, innovation excellence across the company, building our culture.

You see it in both our operational metrics, and I talk about these quite extensively at every earnings release around utilization or what I call OEE, OTIF, cost per quality, the number of products that we're launching. You'll also see progress that we're making in our financial metrics around returning to growth, driving margin expansion. We're really pleased with what we've done there. Generating strong cash, returning a lot of cash to shareowners, tracking above our Investor Day commitments. So overall, I think the company is performing very, very well.

As we go into '26, we see a lot of the same trends that we saw through last year continue on into this year, and I could talk more about that. With this added volatility, Steve, as you were just referencing about what's going on in the Middle East with the elevated price of oil, we certainly are impacted like everybody else around the world. We don't have a very large business in the Middle East. It's kind of like less than 2% of our revenue. We do see shipments and transshipments through a couple of important logistics hubs in the Middle East. So air freight, logistics will be a little bit -- have some friction to it.

We're watching very carefully, with the price of oil being elevated, we certainly use oil-based polymers in our products. And that's going to be -- we'll see how it affects over time. But if the price of oil stays elevated, we're going to take action like we had to do last year and be responsible on pricing. Like we were with tariffs, we're going to do the same thing with oil this year. But it's something that we watch very, very carefully and we'll be responsive on. So again, economic conditions continue almost like they were last year coming into this year.

When I think about the pieces of the company, we watch a number of different things. I talk a lot about IPI and what's happening in the Industrial Production Index. At the beginning of this year at our earnings release, I talked about IPI softening a little bit on a global basis, down around 1.5%. So U.S. coming down, China slowing down a little bit. That's an important factor for us.

Given we have a big presence in the Industrial business, we watch PMIs, other metrics around the world. It's actually encouraging to see PMI be above 50 for a couple of months in a row, which I think is a good trend. As we started this year, we see in our Industrial businesses some of the continued momentum that we were building last year. Order rates for us remain pretty healthy. We're seeing backlog growth in our Industrial side.

So general Industrial and Safety for us is about 60% of our company, so it's a big piece of it. And we see good performance there across abrasives and tapes, our electrical market business, our safety business, all continue to do reasonably well. And a lot of it is, with the backlog, we've got to make sure we convert here as we get into March, mid-March. But that part of the business is doing pretty well.

There's another 40% or just under 40% of the business that's a bit softer. Consumer products is about 20% of the company. And we're seeing the trends just really like we saw last year. It's relatively soft. Consumers are focused on nondiscretionary spending. So we're watching it very, very carefully. It's sort of, again, the same trends we saw last year.

We're watching very carefully what happens in automotive. We knew automotive was going to slow down for us a little bit this year. If you look at IHI build rates -- IHS build rates for this year, it's going to be down -- I think yesterday I saw the new numbers down 0.8 point over the course of the year. Q1 is going to be weak. Q1 in China is down 9%. So we're watching automotive very carefully. It's a little less than 10% of our business, like 8%. So that's an important one to watch.

And the third part about it is broad Electronics, but in particular on Consumer Electronics. Consumer Electronics is about 8% of the company as well, and we're watching very carefully what's happening in the end-demand for memory pricing. So stepping back, you can see about 60% or a little bit more than that, Industrial, doing pretty well; 40%, a little less than that, being a little bit softer as we turn the quarter into '26.

So I guess from a top line perspective, does that kind of put you at the lower end of the range for the first half on organic at least? Or is there like volume's a little weaker, you have a little more price to offset? What's the bottom line there?

Yes. So as we said in the earnings release, we saw we'd be at 3% organic this year, up a little bit from last year, into a bit of a weaker economy. But we saw organic growth rate accelerating through the year. So naturally, it's going to start off a little bit lighter in the first quarter. It will build into the second and it will build into the back half of the year. But 3% organic growth for the full year.

So that's still something achievable even with kind of the mix?

Yes. It's still very early in the year, we're still mid-March. Again, we're watching the order trends. And for us, again, Industrial has been pretty good; it's been pretty resilient. It's actually picking up a little bit as we get into March. So we feel good about Industrial. We just have to watch the other parts that I just mentioned.

Can you just delve into what's happening on the Consumer Electronics front, maybe which areas specifically in your portfolio that you're seeing the most pressure? From this...

Yes. So again, our Electronics business as a whole is about 10%. It's about $2.5 billion. Consumer Electronics is around $2 billion in business. So we sell tapes, bonding solutions into a variety of consumer electronic devices, from phones, tablets, PCs, TVs. We've historically been 70-30, 80-20 premium-to-mainstream, which for us this year is actually working out because the market is the opposite or the inverse of that. The market is more mainstream and low entry devices and less on the premium side.

Why that's important with the memory prices coming up quite dramatically, the premium players have much more robust supply chains, they of course are pricing at a premium, a better ability to deal with memory prices coming in. So that part of the business has been a little bit more resilient. It's not unimpacted, but more resilient.

Of course, we're pushing as well to develop products by cost-engineering or value-engineering some of the premium products we sell into the premium devices, going after the mainstream side. We're making some good penetration into that segment. But overall, that business is likely to be soft.

As we've been pushing on this for the past year or 1.5 years, again, what this is really is taking cost out of premium products going into those higher-end devices. As these midstream mainstream players are starting to see more pressure on their business, they're opening up their BOMs for different ideas. And we're able to provide some different solutions and, hopefully, we can gain a little bit of share in the mainstream side. So premium is under a little bit of pressure, more so in mainstream, but it opens up an opportunity for us to gain share.

So net negative, but you guys are offsetting that with some of your NPI and your...

It's going to be not offset entirely, but we're offsetting some of it, yes.

And are we talking about, in this business -- I know there have been some pretty significant cuts to device shipments, I mean, are we talking about this business being down like double digit or is it more...

We don't think it would be down double digits.

Yes. So it's something between 0 and double digits...

It's going to be down a little bit, but some place in that range.

Like 5...

We're not going to get -- pin myself down. We got a couple of weeks left in the quarter, Steve.

Okay. Sorry. Just trying to be more precise on that front. On the growth side, where are you seeing -- are you still on track for this $1 billion of outgrowth? Remind us of where you are there and where you're seeing...

So we're making very -- look, it's very good progress actually. We outgrew the macro last year by about $150 million. We see ourselves outgrowing the macro this year $300 million or more. Last year, and we laid this out very clearly at our Investor Day last year, we said early on we'll outgrow the macro through commercial excellence and over time the contribution from innovation is going to start to pick up. And that's what's exactly what's happening.

So last year, the outgrowth versus the macro, only about 25% came from NPI or launching new products. More of it came from commercial excellence. This year, it's about half and half, but it's going to tilt more towards innovation-driven outgrowth as we get into 2027.

So the progress has been very good on commercial excellence. This is really just getting back to basics about how the salespeople call on customers, how they price or how we watch attrition or what we call churn and the drivers of that, cross-selling opportunities. We started on this initiative back in late 2024 with SIBG, our Industrial business. It's actually been making very, very good progress. We're seeing that now extend into our Transportation Electronics business, which has been historically more of a spec-ing business, but spec-ing doesn't mean that you go and win the spec and you forget to call on the customer.

So the company, we're actually trying to push very hard on developing and transferring some of that knowledge, some of those skills we're developing in SIBG, over into TEBG. We're seeing some good traction, good progress there as well.

On NPI and driving innovation, the company, we sort of bottomed out back in '22, '23. We launched only 125, 128 products over that 2-year period of time. We start to bring that back up because we're pushing a lot more into driving innovation and launching more products. In 2024, we launched 169; last year, we launched 284; this year, we launched over 350 products. And we're on a good trajectory to launch more than 1,000 new products over the next 3 years, really through 2027.

So we're making good progress in all of that. That is what's going to drive our outgrowth of the macro this year as well as going into next year.

And just remind us of what that number this year. I think it was $150 million last year. What's the number...

It should be just over $300 million.

So you're on track -- you're on track for that.

We are on track, yes.

And any types of products that really -- like specific products that really stand out? I know 3M has like thousands and thousands of SKUs, it's always hard for us to find a couple of things that really stand out. Like I remember optical films back in the day, although that would -- that turned out to be somewhat of an anchor over time. And anything that stands out that you're particularly excited about, maybe something in the data center or something like that?

We're seeing actually really interesting developments and innovation really across all of the priority verticals that we're in. It's not -- there's hardly -- a lot of things you can actually call -- even in Consumer products, we're bringing to market a lot of interesting products, a lot of new ideas. We're launching some more products in that space, which we hadn't done in a long time.

The one area we're actually putting a little more time is in data centers. We've got a new product, which is a new optical interconnect. It's called EBO or Expanded Beam Optics. It's quite interesting. We've got some patent protection around that. We're starting to get some traction with the ecosystem around data centers. We have a foothold, a toehold within a data center through copper-based TwinAx interconnects. That world is moving towards from copper to optical fiber, optical connections.

We've got an interesting business. Not very big today, it's about $100 million, inside the data center. But we've gotten a product that's been validated by at least 1 hyperscaler. It's been in testing. We've just received a pretty significant order. We are looking to scale that up.

Yesterday at OFC, which is their Optical Fiber Conference on the West Coast, we announced that we're more than doubling the capacity of that particular part of our business. We do see a lot of upside. It's a multibillion dollar addressable market for us. But you start and you build over time, and that's the way we're going.

It's a polymer-based electrical -- optical interconnect. The world is going to move to ceramics and on-chip optical connections. We've got a pretty good path on how to develop that over time. So that, I think, is very encouraging. But again, it's just pulling out 1 product out of many, many that teams are innovating on. So I'm sure a lot of people listening in are going to be concerned I didn't raise all these other great things we're working on elsewhere. But that's one I think that's pretty notable.

Right. That sounds pretty interesting. Just on the pricing front. You've mentioned obviously oil-based raw materials. Maybe just talk about price/cost, how we stand today. And are you kind of -- how quickly can you pass some of this through if we do stay higher for longer oil-based stuff?

So pricing has been a big focus area for the company. We typically price to cover material cost inflation. That's sort of the minimum. So on a 2% inflation economy, that's about 50 basis points of price. And that's been where we've been for some time. Last year, we targeted 70 basis points; we came in at 60 over the course of last year. So we were a bit above sort of just covering material cost inflation.

But again, what we're trying to do is cover as part of the tariff impact through pricing. Through the back end of the year going into the fourth quarter, we did see ourselves making some investments in promotions and discounts to gain some shelf space in our Consumer business. We see that continuing here into Q1. So pricing will be a little bit lighter here in Q1. But for the year, we're guiding to about 80 basis points of price this year.

We typically put our price increases out starting on April 1, so they get communicated through the channel in advance of that, so it's already out in the marketplace. So we already are set for price increases on April 1.

But I think we've been pretty nimble on this. We have a couple of more times through the year. We can do something on pricing. We can always go the route of any -- of surcharges to the extent that we see oil prices remaining elevated, impacting our raw material cost, we can push through a surcharge, almost like we -- in fact, exactly like we did last year on tariffs. So we've got an ability to go and do this. And I think we've been pretty nimble here.

We're focusing on how we govern price, making sure that when we do give rebates or discounts or promos, that they're smart and you get the volume benefit from those rebates that we're giving in the marketplace. It sounds kind of obvious, but that's something the team is focused hard on.

And over time, it's really about, through all this innovation that we're doing, how do we better price to value? And it's something that -- it's something we're working on inside the company. It's an opportunity ahead of us. It's not an impact in 2026, but I do think it will be material beyond '26.

When do you think you need to pull the trigger on incremental price? Or are you on April 1 kind of baking in what's happened here on some of the cost inflation? Or is it not at that point yet because everything's so fluid?

It's not at that point yet in the base price, because base price was communicated about 45 days ago, 60 days in advance. But we are looking at surcharges or other things we can put in place relatively quickly.

Okay. On the margin side, you guys have a lot going on. Maybe just talk about the different buckets of margin expansion opportunity, whether that's G&A or productivity in the factories. Maybe just an update on margins?

So the margin story I think is a very, very good one. We said we would hit 25% by 2027, and we'll likely come in a bit above that, which I think is encouraging. Last year, we were up 200 basis points; the year before that, more than 200, it was like 260, 280 basis points before that, the year before that, 2024. So it's been on a good trajectory. This year, we said 70 to 80 basis points. Again, we're tracking well to come in a bit about 25% next year.

So we saw better progress on G&A than we had expected last year. At our Investor Day, we thought, as we looked out, that we would see more opportunities out of cost of goods, driving gross margin expansion. That opportunity is still ahead of us. Through last year, we saw more opportunities in G&A, really looking at our indirect expenses, in IT costs, in just some things that we thought we could pull back on and invest it more appropriately in growth initiatives. So we saw good progress on G&A.

This year, we'll see that tilt more on to the gross margin side, and that's a big opportunity for us in the future. It gets back -- it's really just the basics around how do you get productivity out of our factories and out of our distribution and supply networks. It's something like just really basic kind of operations.

We laid out this transformation agenda that is really looking hard at how do you streamline and simplify our costs, our processes inside the company. We still have G&A activities in 4 service centers around the world. We don't need them in those 4, and we're not in those locations.

When you're moving from a holding company model to an operating company model, in a holding company model, you have all services, all these processes which are driven very distinct and independent down to an individual business unit level. As an operating company, we're pulling all these things together and standardizing them and then outsourcing some things. So a lot of things we're looking at, do we do those activities internally or do them externally? And that's something that's quite important.

On the factory side, look, we have 108 factories. It's more than we need. We have 84 distribution centers. We won't have that many over time. This is something that we're looking quite aggressively at right now. We'll lose about 7 or 8 factories simply because we sold the business last year. There's a few more that are in flight. Earlier this year, we launched -- we announced 2, well, smaller factory closures in the U.S., and 1 is downsizing in Alabama. But there's more that are going to happen here over time. There's automation opportunities that are going to drive this. But we see over time margin expansion continue to grow at the company.

And when you look at this year, obviously, last year blew the numbers away, are there any obvious upside levers this year, whether it's mix or these benefits from maybe the plant closures? Anything this year that gives you more confidence in being above the high end of the range?

There's a lot of things that are within our control. I mean clearly, we've got more opportunities on the G&A side, and we're continuing to take a hard look at that. We're going to keep looking at -- we're going to invest $225 million this year in growth initiatives. We're going to kind of watch that very carefully based on what's happening in the marketplace and throttle up, throttle down based on what we're seeing in our individual numbers. We're seeing good opportunities in productivity.

But what we're doing is we feel confident on 70 to 80 basis points this year; we can get there. But what we're doing is we're building -- there's runway for margin expansion beyond '27. I know investors are hung up on hitting 70 or 75 or 80 or 100 basis points this year. We'll get and we'll achieve the goal that we set out earlier this year. Will we get to above 25% next year? We are confident we can get there. But this isn't an endpoint, it's a step along the way. And we do see continued margin expansion opportunities beyond that.

And it goes beyond simply looking at rooftops or number of our factories or number of distribution centers. There are things that we can do in our facilities and our factories around automation. We have -- we invest substantially in capital, but we have not fully automated those things that we think we can automate. We still have 7,000 material handlers inside the company. We have 800 people in the company that visually inspect films. You can invest in state-of-the-art visual inspection systems. The payback on those is quite interesting and attractive to take out costs.

Those things are all ahead of us. Those are inches. You move those piece by piece by piece. But that's what builds this road map to driving margin expansion over time. We said we can get back to the high 40s on gross margin, and we can do that. And it's through all of these initiatives coming together and bearing fruit. It's not any one of these individuals, but collectively, there's a lot of untapped opportunity inside the company to drive margins.

What's the time frame for that high 40s?

It won't be this year. Look, it will happen over time. I mean it's going to take several years to get there. But again, what I'm laying out is this journey. I've been there for almost 2 years now. You can see the pieces and that things that you could do step by step. We've got a good leadership team that are focused around this. We know what to do. We know the steps to take.

Some of these things, look, at the end of the day, when you're looking at closing a factory, the payback on these things are 3, 4, 5 years. They don't happen overnight. And I think part of that, that's maybe why we didn't do it in the past, they're hard to do. They're risky to do. The payback isn't today or tomorrow or this quarter. But they're fundamental to building this long-term value-creation engine at 3M that we're trying to build. And that's the journey that we happen to be on.

So we'll get there. It will take some time. First, we got to hit our numbers this year, just over 24% operating margin. Last year, it was just over 23%. 2 years ago, it was just over 21%. Next year, it will be just over 25%. You can run the math. It's going to continue to build over time.

So when you get to -- I mean I feel like it was yesterday when you guys gave these long-term targets, but the -- yes, the kind of on to the next thing. Will you give another kind of, do you think, in terms of 3-year targets? Or will you maybe shift to like a margin algorithm? And is that -- is 30% to 40% kind of core incremental how we should think about 3M?

So in terms of the long-term target, we'll think about that towards the back end of this year. Again, it's really just 1 year ago when we had this Investor Day and we laid out 3-year targets. And frankly, the world's changed and our ability to drive margin expansion is different as well. Again, G&A was a much more important contributor last year. And as I mentioned at the earnings release, we're embarking on this transformation initiative inside the company to really think structurally about our processes, our footprint, all these various pieces. So our knowledge of what we want to do is going to be a bit different.

So we're going to make progress this year. We'll update investors maybe towards the back end of this year or early next year on where we see ourselves going. Maybe we'll do another Investor Day. And then we'll think about what's the right way to communicate to investors about the journey that we're on. Is it another set of 3-year targets? Is it margin algorithm? We'll come back on this.

In terms of incrementals, we've been between 30% and 40%, but right now, we're sort of at the top end, maybe a little bit above the top end of that incremental side. So when you look at just taking cost out and the volume that we're driving, this is going to be the driver of margin expansion over time. So the company is performing pretty well on that side.

Do the drivers shift a little bit as this NPI comes into play so that like the mix of that NPI becomes more of a factor, as opposed to just like brute force G&A, it's kind of -- it was G&A, now it's some of this longer-term investment in productivity, and then on top of that, wherever the mix goes?

So look, these are all the factors that are going to drive margin expansion over time. To start, you've got to sort of fuel the fire. You've got to focus on your priority verticals. You got to focus your spend. We're clearly stepping up a little bit on R&D spending, not just in terms of the amount. We're up about 30 basis points of R&D as a percentage of revenue. But more importantly, we're shifting the amount that we're spending on new product development towards new product development. I mean it was -- last -- a couple of years ago, it was 28%, then it was at 32%. Last year, it was 37%. This year, it will be at 40%.

So you think about that, we spend over $1 billion in R&D. That 12 points of shift is over $120 million of money that's going into developing new products from other things. So there's a fuel to the fire.

So a part of that, when you launch products, you bring new things on the market, it gives you an opportunity to reset the cost base or reset the price. And we got to get a little bit better on value-based pricing, but as you bring new products into the marketplace, yes, it should drive incremental margin expansion.

So all of these pieces have to work in tandem. They don't happen all at once. But the story that I'm laying out, the strategy we're embarking on really is a multifaceted piece, and we're making good progress across all these different dimensions. So we're focusing a lot on these priority verticals in places where we think we have an outsized ability to grow, drive margin expansion, be competitive. That's a multiyear journey to push more funding towards those places we think we have the best returns. That's the place we're at.

And those priority verticals, just to remind everyone, aerospace, electronics, home cleaning, AR/VR, data centers, home improvement, auto, energy, industrial automation, safety and semiconductors?

Yes, that's -- you got them all. Yes. I mean these things are going to shift, they're going to like tighten down over time.

That's about 60% of the company.

It's little bit more than that. Yes, exactly.

So how do you think -- I think the challenge for 3M historically was the pyramid discussion, where 3M really targeted kind of the high end of the pyramid and very high-margin stuff. I think you guys are kind of trying to broaden the base a little bit and, at the same time, make more margin out of it, which is a bit harder to do. Am I looking at that the right way or...

In certain parts of the business. Like in Electronics, we do see an opportunity to go after more of the mainstream market. Again, that's where the bigger part of the market happens to be.

I think the company in the past, right or wrong, was run for simply margin expansion, and all of our metrics around that, all of the incentives around that. And if you think about even the restructuring program that we launched a couple of years ago, it was all driven on fast payback, sort of easy -- relatively easy-to-do restructuring. It didn't get at the fundamental things you do to run the asset better. It takes multiple years to go and do that. That's what we're embarking upon now.

So we are running and we're trying to go after a relatively small part of the market with premium brands and higher price. There's a piece of the market out there that we can go at with value-engineered products, not the higher end, but value-engineered products, and develop a position, grow our volumes, which has a really good drop-through inside the company, and hold or expand margins and tap into a bigger part of the market. That's what we're doing in certain parts of the market, certainly in Consumer Electronics.

And just shifting gears a little bit to portfolio, you guys have talked about -- sorry, taking a step back, free cash flow, really strong performance, 100% conversion. Is that a sustainable -- the 100%, is that sustained with all the productivity that you guys are doing? Or should we settle back into more like the 90% to 95% range on conversion?

No. So in Investor Day, we said we'd be at 100% or better going out the next several years. And it really has 3 pieces to that. One is really strong earnings growth with a high cash contribution to that. Really aggressive, disciplined focus on capital spending. We've changed internally our approval thresholds, are reviewing this in a lot more detail. Again, part of this HoldCo and OpCo model is I see a lot more of our capital spending around the world, and we're focused heavily on that.

And the third dimension is improvements in working capital. We do have an opportunity to improve our working capital performance, in particular, inventory. Inventory has been running in the high 90s. We think we got to be running in the mid-70s over time. So each day is, I believe, around $35 million or about that amount of money. So it's opportunities driving inventory. So that's the piece over time.

As we sort of collapse the distribution network, the number of factories, hold our on-time, in-full performance above 90%, pull in our lead times, also bringing down inventory, part of that is going to be better planning systems, we've got to get a lot better inside the company on how we forecast and plan for what we produce, how that goes back to suppliers, on-time performance of suppliers. So all these elements come together. But yes, we can sustain 100% or better on free cash flow performance.

Okay. Just on the portfolio, you've mentioned 10%-ish as being noncore. Where are we in that portfolio and how you're looking on that?

So what we talked about last year is we saw about 10% that were in parts of the business that were more commodity-like, that didn't drive differentiation through new product introductions. I mean, look, the hallmark of 3M is we're an innovation-driven, high-performance company. And those are the kinds of businesses that we want to be in. So we'll move out of these other parts over time. We saw 2% to 3% that were a little bit more actionable. We got out of a piece of that. We'll keep updating investors as we make progress there.

But this structurally shifting the portfolio of the company is going to be an important driver over time for how do you sustainably grow and how do you get into higher-margin potential type of categories. So it's multiple dimensions. One is, just organically, we've got to focus and invest in priority verticals where we think we have a better right to win. Part of it is we've got to get out of businesses that don't perform and are more commodity like. And the third element is getting into business through M&A that are aligned to priority verticals, that actually sustains that journey as well.

So it's all these 3 pieces working together. They don't happen all at once, and portfolio shaping is a work in process, and I'll leave it at that.

Would you take dilution if you -- if somebody came along and wanted a bigger chunk of it?

We don't want it. We don't want dilution. We are very concerned and thinking hard about stranded costs. So we would work very hard internally to do what we have to do to take cost out to avoid dilution. And I'll just leave it at that.

Okay. Just on the liability front. I know in the filings, there's been a bit of an uptick in the MDL numbers. Hard for us to kind of understand really what's going on there. But maybe just an update on the liability front.

So the MDL numbers, so you're referring to the personal injury docket. So the judge in the MDL, this was in August or September of last year, there were a lot of unfiled cases. And for just better case management, the judge vacated the bellwether trial, which was scheduled for October, and encouraged the plaintiffs' attorneys to file all of the unfiled cases, vet them, so that they could be better managed. So that's what's happened.

So the number of cases that have now been filed are like just over 15,000. 15,200. And they're fairly stabilized at that. Each case has multiple claimants or could have multiple claimants in it. But it's been relatively stabilized.

We as the defendants and all of our other defendants and the plaintiffs are all vetting these cases, and the judge will eventually hold hearings and decide how he wants to proceed. And of course, there's mediation. It always happens in these sorts of things. But there's no new bellwether trial on the docket whether -- and if that happens, all depends on progress in the mediation and progress in the vetting.

So that's what's happening. And we'll talk about this all the time as we need to, updating investors and you can read very carefully in our 10-Ks, which are very voluminous, in terms of what's happening in that space.

The other side, look, we're watching very carefully is the AG cases. There's also some of those -- in fact, many of them are in the MDL as well. Those cases are going to lag the personal injury docket. But there's a lot of AGs, state AGs, that have sued us both inside and outside the MDL.

So we're going to take -- we're going to keep looking at these, and if we have an opportunity to take risk off the table, at a price that's reasonable for the company and manageable for the company, with appropriate protections, like we did with New Jersey last year, we'll do that.

So those are the 2 threads that we're watching. One is the PI docket in the MDL, and the other is the AGs, which is mostly in the MDL and sometimes outside of that as well.

So is it unlikely, I mean, the way things are trending, that we're really going to hear much more on this over the next 6 to 9 months? Is it more of kind of a '27 or it's really...

I wouldn't say that. I mean this thing is -- it's fluid. We're watching it. We're in mediation. And it's going to develop over the course of this year. And again, I'll let investors know as we make decisions on this, and report through public channels as well as in our Qs and Ks.

Anything on insurance recoveries that you're more or less optimistic around?

Look, the team has done a great job on this. This is a long game. You can imagine, we've got substantial insurance coverage. The insurers never want to pay, but we want to make sure that they live up to their obligations. And we're really holding their feet to that, I mean, through arbitration, through litigation. At the end of last year, we had already recovered about $750 million through -- across all of the different legal dockets we have. And we continue to work and advance this. This is an important piece of it. So the only thing I'd say today is, as of the end of last year, it's about $750 million recovered.

Do you think the drag on your multiple from liabilities is still a pretty material overhang that is kind of unwarranted?

I think there is some overhang. There's this risk discount, I think, within the company, which is why I'm really focused on this, because I do think it's important for us to bring some closure to these, again, at prices that are reasonable for the company and take risk off the table and protects the company down the path.

What I think tripped us up in the past was we, inside the company, focused way too much time up and down the chain across 62,000 people on litigation. And in fact, it's a very small handful of us that need to manage this. And the other 61,900 people ought to be focusing about the customer and innovating and commercial excellence and all the things that I've talked about. And I think we've made that good pivot. So most of the people are really focused on how do you drive value inside the company and a few of us are thinking about, okay, how do we take risk off the table.

Great. Thanks a lot for the time and making it in.

You bet. Thank you.

Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to the 3M Fourth Quarter Earnings Conference Call.

[Operator Instructions]

As a reminder, this call is being recorded Tuesday, January 20, 2026. 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 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-Q lists some of the most important risk factors that could cause actual results to differ from our predictions.

Please note through our 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 results in Q4, including organic growth of 2.2%, operating margin of 21.1%, earnings per share of $1.83 and free cash flow conversion of over 130%. These results capped a strong year with organic sales growth exceeding 2%, outperforming the macro environment and accelerating from 1.2% organic growth in 2024 and negative growth in 2023. This growth was underpinned by the strong commercial excellence foundation we've established and our focus on reinvigorating innovation. We delivered significant margin expansion with a full year adjusted operating margin of 23.4%, up 200 basis points year-on-year at the high end of our guidance range and on top of over 200 basis points expansion in 2024.

Adjusted EPS grew double digits to $8.06 and free cash flow conversion was slightly above 100% for the year. Our 2025 financial results reflect the progress we're making, and we're tracking ahead of the medium-term commitments we made at the Investor Day last year. 2025 was an important year for 3M where we implemented fundamental changes in the company, building a foundation for our future growth through commercial excellence and innovation. We previously described the 3 pillars of commercial excellence: Improved sales effectiveness and pricing governance, stronger collaboration with channel partners, including joint business planning and cross-selling, and increased customer loyalty. And we're making progress across all of them.

We've implemented greater rigor across our sales force and sales management, tightened pricing controls and developed over 600 joint business plans and closed on nearly $50 million of annualized cross-selling wins with a robust pipeline of opportunities. Innovation is the lifeblood of the company, and we successfully launched 284 new products in 2025, up 68% versus 2024, exceeding our initial target and more than double the launches in 2023.

We expect this growth to continue with 350 launches in 2026. These new products are vital for our long-term growth and are already contributing to our top line. Sales from products launched in the last 5 years were up 23% in the full year, exceeding our high-teens target and exit Q4 at 44%, giving us momentum into 2026. Our New Product Vitality Index, or NPVI, a measure of the freshness of our portfolio, ended at 13%, about 2 points above where we started the year. It was also a year where we saw operational excellence become embedded across the enterprise as we drove better service levels for our customers and stronger operating rigor in our factories and across our enterprise functions.

And I've been describing our performance across 3 important metrics: OTIF, OEE and cost of poor quality. OTIF ended the year above 90%, 300 basis points above the prior year and the best we've achieved in decades, and we sustained that rate for 7 months in a row. This improvement is translating into a better customer experience that's helping us win shelf space and reduce churn.

OEE, our asset utilization metric ended the year at about 63%, up over 300 basis points across assets covering 70% of production volume. Cost of poor quality also improved considerably last year and is now at 6% of cost of goods down 100 basis points year-on-year. We're focused on key areas of inefficiency like frequent or ineffective changeovers and late detection and material defects, leading to raw material yield loss, scrap and quality credits issued to customers. We're leveraging Kaizen events, visual inspection systems, automation solutions and AI-enabled models to optimize changeovers to improve quality with a target of 5.4% cost of quality in 2026 and less than 4% over time.

Meanwhile, we continue to deploy capital effectively for our shareholders returning $4.8 billion through dividends and buybacks in the year, progressing well in our commitment to return $10 billion to shareholders as part of our multiyear capital allocation strategy. The key to making this all work in the long run is our relentless focus on building a performance culture and delivering excellence everywhere, every day. This means greater speed and urgency, a deeper sense of accountability, challenging the status quo and finding ways to get better every day in the spirit of continuous improvement.

Our performance is a direct result of the cultural and operational changes we're driving across the enterprise that improve how we develop, produce and deliver products and build a strong foundation for the future.

Slide 4 is a chart we've used for the past few quarters, connecting macro trends to our organic growth. The macro remained soft and largely unchanged from Q3. But due to our strong execution, we've outperformed. General industrial, safety and electronics, collectively about 65% of our business came in better than expected with exceptional year-on-year strength in the second half in electrical markets. Aerospace and self-contained breathing apparatus, all of which were up low double digits. Abrasives, industrial adhesives and tapes and electronics were all up mid-single digits. Abrasives accelerating from low single digits in the first half, ITD holding steady through the year, and electronics not softening as previously anticipated. Auto and auto aftermarket remained soft as expected, while our consumer segment and roofing granules business were weaker than expected.

Despite the macro headwind, organic sales growth accelerated to 2.7% in the second half from 1.5% in the first due to the breadth of our portfolio and our strong execution.

Turning to our outlook on Slide 5. Our team's constancy of purpose and execution rigor allowed us to finish 2025 strong, and we're carrying that momentum forward into 2026. This year, we expect organic sales growth of approximately 3%, adjusted operating margin expansion of 70 to 80 basis points and earnings per share of $8.50 to $8.70 and free cash flow conversion greater than 100%. We're planning for the macro to be similar to 2025, but it's still early to put too much weight on market forecast.

We expect most of our industrial businesses to continue to perform well in '26 with watch items, including the pace and timing of a U.S. consumer recovery. auto build rates especially in geographies where we have higher content and consumer electronics. While we will closely monitor macro trends, we're going to continue to execute our game plan and control the controllables.

Lastly, I want to turn your attention to Slide 6, which is the framework by which will create value for shareholders over time. The 3 phases aren't net to be sequential, but evolve together with shifting emphasis, they build on what we outlined at Investor Day and reflect how we view these elements as interconnected and essential to building a stronger company operationally and financially. It started with a back-to-basics focus on fundamentals approach, which is all about building a sustainable foundation. I've been talking to you about these initiatives and how we track them since I joined 3M 21 months ago, and did so again today. These core elements are focused on commercial and innovation excellence, operational excellence and reinvigorating our culture with accountability and agility creating a solid platform from which to grow.

As we gained confidence in our execution in this foundational stage, we're beginning to shift our emphasis to the next phase of value creation, which is more transformational in nature. Like we previewed at Investor Day, this phase includes reengineering the structural cost base that underpins our supply chain network and business processes, simplifying and standardizing core activities and embedding an AI-first mentality as we shift from a holding company model to an integrated operating company.

We described this program at a high level last quarter as a thoughtful strategic long-term effort pace at the ability of the team to execute well. Transformation also includes proactive steps on risk reduction and effectively managing the litigation docket. Any time we can take care of risk at an appropriate price and with suitable protections, we'll be prepared to act like we did last year with the state of New Jersey. And as our organic machine begins to turn faster, and our risk profile comes down, we'll be prepared to execute on our portfolio management strategy to pivot the company towards higher growth and margin potential priority verticals that help us accelerate value creation for the company. This is a multiyear journey and progress won't be linear. But with a successful 2025 behind us, we're accelerating the transformation of 3M and building the runway for performance beyond 2027.

The 3M team is energized and motivated, and I want to thank them for the dedication and focus on delivering improvement day after day. And with that, I'll turn it over to Anurag to share the details of the quarter. Anurag?

Thank you, Bill. Turning to Slide 7. We had a strong finish to the year across all financial metrics. We delivered another quarter of sales growth above macro continued margin expansion, strong earnings growth and robust cash flow generation.

Starting with top line. In a continued muted environment, we delivered organic sales growth of 2.2% driven by our commercial excellence initiatives and new product launches. The growth was driven by strength in safety, electronics and general industrial, which more than offset the softness in consumer, roofing granules and auto markets. All 3 of our business segments delivered sustained order momentum, which contributed to a higher ending backlog compared to last year, giving us confidence as we go into 2026.

Fourth quarter adjusted operating margins were 21.1%, up 140 basis points and operating profit increased double digits or $125 million driven by continued disciplined operational performance. This included a $275 million benefit from volume growth, broad-based productivity and lower restructuring costs partially offset by approximately $50 million of growth investments and headwind of $100 million from gross tariff impact and stranded costs. Collectively, this contributed $0.17 to earnings, which was partially offset by $0.02 from nonoperational below-the-line items. Our strong operating performance resulted in adjusted EPS of $1.83, an increase of 9% and exceeded the top end of our guidance range.

I also want to mention that we took a $55 million charge in the quarter as we continue to make transformation investments to redesign our manufacturing, distribution and business process services and locations. Similar to last quarter, these charges will be excluded from our adjusted results. Adjusted free cash flow in the quarter was $1.3 billion with a conversion of approximately 130% as we benefited from strong earnings growth and working capital efficiency.

Turning to Slide 8. I will provide an overview of our business group performance for both the fourth quarter and full year 2025. First, in Safety and Industrial, we delivered another quarter of strong organic growth as we continue to gain traction on commercial excellence initiatives and realized benefits from new product launches. Fourth quarter organic sales increased 3.8%, driven by strong performance in safety, which grew high single digits through enhanced channel engagement and new product launches. Industrial adhesives and tapes growth accelerated to high single digits as we continue to win share globally in electronics and general industrial from new product introductions and improved manufacturing throughput.

Abrasives continue to improve, delivering another quarter of mid-single-digit growth, benefiting from sustained focus on sales force effectiveness. Collectively, this strong growth more than offset known weakness in automotive aftermarket and incremental weakness in roofing granules due to the slow housing market and weak consumer sentiment. For the full year, SIBG grew 3.2% with growth accelerating from 2.5% in the first half to 3.9% in the second half on the back of strong execution.

Turning to Transportation and Electronics. Fourth quarter organic sales increased 2.4%, driven by continued momentum in electronics and aerospace. These gains more than offset weakness in auto, which in our organizational structure includes commercial vehicles, which was down high teens in the quarter. Electronics continued to gain share, supported by commercial excellence initiatives and strong demand for our film technologies and optically clear adhesives. We also expanded our presence in the mainstream market by partnering with leading consumer electronic brands to deliver solutions aligned with their portfolio needs.

Aerospace delivered another strong quarter given by growing demand for space materials and continued strength in defense related markets. We have seen sustained growth in this portfolio where sales have doubled over the last 4 years.

For 2025, Transportation and Electronics grew 2%, with second half growth of 3% versus the first half growth of 1%, driven by continued focus on commercial excellence and the ramp-up of new product launches. Finally, consumer fourth quarter organic sales were down 2.2%. For the first 9 months of the year, the business was up 0.3%, and we had expected the fourth quarter to be similar, but weaker consumer sentiment and sluggish retail traffic in the U.S. resulted in lower point-of-sale trends on discretionary categories where we compete. This increased advertising and promotional investments in the U.S. and overall business growth in Asia and Latin America.

As a result of the fourth quarter weakness, CBG revenue declined by 0.3% for the full year. On Slide 9 is a summary of the full year 2025 performance. Overall, a strong fourth quarter capped a successful 2025 with organic sales growth of 2.1%, margin expansion of 200 basis points and EPS increase of 10% and free cash flow slightly above 100%. Sales growth strengthened from 1.5% in the first half to 2.7% in the second exceeding the 2.5% we mentioned in our July earnings call. This momentum underscores the impact of our commercial excellence initiatives, enhanced service levels and successful new product launches positioning us well to accelerate our performance going forward.

By geography, all areas delivered growth in the year. China grew mid-single digit from strength in general industrial and electronics bonding solutions supported by a strong focus on key accounts. This momentum more than offset the fourth quarter shift in smartphone manufacturing from China to other parts of Asia. In the rest of Asia, we grew low single digit led by strong performance in India, which grew mid-teens on account of progress and commercial excellence across all businesses. After a couple of years of decline, Europe grew low single digits due to strength in General Industrial and Safety, which more than offset the weakness in consumer and auto aftermarket. Despite soft consumer and auto aftermarket, the U.S. grew low single digit for the year on the back of commercial excellence initiatives in the general industrial and safety businesses.

Productivity initiatives drove strong margin expansion every quarter in '25 resulting in full year operating margins of 23.4%. Operating profit growth of approximately $650 million at constant currency was driven by $200 million from volume growth and $550 million of net productivity across supply chain and G&A. This was partially offset by $100 million in headwinds driven by $185 million in growth and productivity investments in addition to ongoing stranded cost and tariff impacts with year-on-year lower restructuring costs. The strong operational performance contributed $0.96 of earnings, which was offset by approximately $0.20 of nonoperational items for a total EPS of $8.06. This 10% EPS growth was better than our expectations and above the initial guidance at the start of the year.

And we returned $4.8 billion to shareholders in '25, including $1.6 billion in dividends and $3.2 billion through gross share repurchases. Overall, 2025 laid the foundation for a strong operating culture, grounded in excellence, accountability and a faster operating tempo, enabling us to overcome external factors to drive profitable growth. We have momentum as we enter 2026, and I will walk you through the guidance on Slide 10.

We expect organic sales growth to be approximately 3% and earnings per share ranging from $8.50 to $8.70 and free cash flow conversion of greater than 100%. We expect sales to accelerate for all business groups. SIBG and TEBG grew 2.7% combined in 2025, and we expect this growth rate will accelerate in 2026, supported by ongoing commercial excellence initiatives strong service levels and continued new product introductions, and we expect consumer to return to growth in 2026. The business groups combined will expand margins over $450 million or 100 basis points, including $875 million from volume growth and net productivity across supply chain and G&A. This will be partially offset by headwinds from PFAS rented costs and tariff impacts as well as an increase in growth and productivity investments to $225 million.

This is on top of the incremental investment over the past 2 years, bringing the total investment from 2024 to over $0.5 billion. Corporate and other income will be lower by $50 million to $75 million or 20 to 30 basis points, largely from wind-down of transition services agreements related to Solventum. Overall, we expect total company income to grow by $400 million at the midpoint of our 70 to 80 basis points margin expansion guidance. Adjusted free cash flow conversion is expected to be greater than 100%, driven by strong operating income growth and a focus on working capital management and we plan to deploy capital effectively, including a gross share repurchase of approximately $2.5 billion in 2026.

Slide 11 provides a look at earnings growth drivers which is primarily driven by strong operations consistent with our 2025 performance. Regarding cadence, we expect the rate of sales growth to increase through the year, with margin and EPS equal between the 2 halves. In the first quarter, the sales growth at SIBG and TEBG combined is expected to be higher than 3%. And we will continue to monitor the recovery in our consumer business. Volume, productivity and slight favorability in FX will more than offset the stranded costs, gross tariff impact and increase in investments, resulting in high single-digit year-on-year earnings growth.

Before we open the call for questions, turning to Slide 12, I want to take a minute to highlight the progress we have made so far. We are trending ahead of our Investor Day targets we laid out a year ago. Our organic sales growth is accelerating due to our investment in growth and commitment to commercial excellence and innovation. Our relentless focus on operational excellence is resulting in strong operating margin expansion and sustained earnings growth despite pressures such as soft macro tariffs and stranded costs. We continue to be a consistent generator of cash that allows us to effectively return capital to shareholders while maintaining a healthy balance sheet.

Not too long ago, our growth rates were trailing the macro. And now we are progressing ahead of our medium-term commitments of $1 billion growth over macro and a 25% operating margin by 2027. While we are focused on executing these commitments, we are also broadening our horizons to the out years, ensuring our transformation efforts position the company not only for the short term but for sustained profitable growth well past 2027. This strong performance is a credit to the expertise and the commitment of the 3M team, and I thank them for their hard work and dedication. With that, let's open the call for questions.

[Operator Instructions]

Our first question comes from the line of Jeff Sprague with Vertical Research.

I guess two for me, one longer term and one shorter term. Bill, just back to your Slide 6, as you said, all these things are going on to varying degrees simultaneously. But the pivot to priority verticals sort of jumps out to me, obviously, not the first time we've heard that. But I just wonder if you could put into context, how much of that pivot is sort of addition by subtraction versus sort of investment focus growing and bulking up sort of the areas that you view as the priority? And maybe sort of what percent of your current revenue base or business base would you say is in that priority bucket?

So Jeff, great question. So we've been talking about our priority verticals going back a year, actually to February of last year. It's a little bit north of 60%, it's growing, frankly, because of the investments we're making. And I put it in 2 pieces. One, we spent the last 1.5 years focusing a lot of our internal investment dollars on the priority verticals. And now probably 80% of what we spend on R&D is aligned to NPI in the priority verticals. And of course, they are defined as ones that are growing faster where we have good margin potential as well in the business where technology brings differentiation and right to win. And that's been the pivot in the organization.

Over time, as we think about what the portfolio is going to look like for us to get to a much better sustainable organic growth rate for the overall company, we've got to structurally adjust the portfolio, which means some pieces coming out and we've been talking about some of those pieces. We've said before, about 10% of our company would be in places that are more commodity like, and we'll probably -- we'll think about what we want to do with those businesses over time. But as we do that, we'll be pivoting both organically as well as inorganically towards those priority verticals, which is the nature of that chart. It shows that that's an evolution over time. And again, it's not necessarily sequential, but that's kind of the overall flow, how we think about creating value at 3M.

Yes. And then just -- just on the very near term, the flat view on U.S. IPI, it's kind of a tough slog out there, right? But your industrial businesses do seem to be well, right, abrasives and some of the adhesives Electrical businesses. So I guess there's some outgrowth there. But I guess just the nature of my question is just a little more color on how you see the year kind of starting out, Anurag gave a little bit of color, but did we start soft here in January? And do you see things sort of kind of picking up off a low base year as we exited the year.

Yes. So last year, I mean we -- the exit rate was pretty solid and we -- Anurag in his comments talked about the acceleration from about 2% to 3.6% across TEBG and SIBG as we went first half into the second half. Yes, IPI is softening, both in the U.S. as well as in China, those important markets for us, certainly. But we do expect our overall industrial businesses to remain pretty solid. I pointed out a couple of watch areas. One is in auto builds. Auto builds were around 3.8% last year, a little weaker in Q4. A lot of it was China but overall, it will be -- says right now, down 0.3% as much as you can believe the numbers and not so good across the -- all of the regions. So that auto was a little bit softer. We have to watch that. Consumer electronics is looking a little bit more flattish in terms of the overall macro forecast.

Of course, we believe in our business, electronics will continue to grow. We still see that to be overall electronics up mid-single digits for the year. Of course, we were watching very carefully, which happened what happens in the U.S. consumer market. Right now, it feels subdued. We had a very good December, although Q4 came in down 2.2%. So it dropped the year to be negative for consumer, but December, we typically see the third month pretty good, but it was up double digits over the prior year in December. And early in January, again, it's early this year. We're looking okay. So that's sort of the landscape, but I do see that even though IPI is coming down, our commercial excellence initiatives, our NPI initiatives, it's going to allow us to continue to outperform that macro, and we expect that to accelerate in '26 from what we experienced in '25.

Our next question comes from the line of Scott Davis with Melius Research.

I guess, I don't think you mentioned inventory levels, customer inventory levels in the prepared remarks. And just as we exited the 2025, where -- what's your sense of where your customer inventory levels were [ or are ], I guess, now kind of point in reference kind of pre-COVID, post kind of the new normal versus kind of pre-COVID? Just a little color around that, I think, would be helpful.

Sure. Good question. So on the industrial channel, No, it's pretty normal 60-day range, a little bit more than that. But as we would expect it to be, as we were selling out in Q4, we do watch POS out of our channel partners, and they were selling through. So even though we had good sales into the channel, we also saw good sales out of the channel. So pretty good actually on the industrial side, that's good.

On the consumer side, on the CPG side, it was a little bit elevated early in the quarter, but we had very strong growth in December and inventory started to come down and normalize, still a little bit elevated as we exited the year, but not as concerning as we were sort of at the beginning of the quarter. So overall, industrial, pretty good, consumer getting normalized as we speak.

Okay. Fair enough. And then, guys, what is the pricing strategy right now? I mean it kind of -- when just listening to the prepared remarks, it sounds like new products is where you lean in on price or at least try to get a positive mix shift there. But is there also a pricing strategy around getting an annual bump up perhaps that maybe you didn't get historically, but going out with price increases on, on [ January ] 1, particularly where you're going through distribution.

So yes, good question. So for the year, we had expected to be about 70 basis points last year, stepping up first half, second half as we are covering some of the tariff headwind. We saw that in the third quarter. And the fourth quarter was a little bit lighter because of the consumer market and the promos and discounts that we provided there to stimulate that business. So overall, we are a little lighter on pricing last year than we had expected, but still very solid. The place where we get pricing, generally speaking, is in SIBG, and that was solid, that remains strong. We continue to see good pricing movement here going into 2026. We expect it will be about 80 basis points more or less in 2026. A lot of it is SIBG. There's a couple of threads here. One is we do continue to cover material cost inflation. Two, we continue to tighten down our pricing governance, making sure across all of the industrial businesses that when we give pricing discounts, we get the volume we'd expect in giving those discounts. And then third, as you pointed out, Scott, is the pricing we should expect to get when we're launching new products. This is an area of opportunity for us over the medium and longer term. I think we're okay on this, but we could be a lot better. There's pockets where we are very thoughtful in pricing to value, but I would not say that today that that's over all of the NPI we're launching, and I think it's a long-term opportunity for the company.

Our next question comes from the line of Julian Mitchell with Barclays.

Maybe first off, I just wanted to understand the degree to which if any, there was a 6% EPS growth year-on-year in the first half, so not that different from the full year. Just wanted to check that and how you're starting out in the first quarter. Should we expect the consumer business to still be down, for example, and then that picks up steam through the year?

Thanks, Julian. Anurag here. So I would say in terms of EPS growth, we expect the first half and second half to be equal. So as I said in my prepared comments, the EPS will be equal between the first and second half, which implies similar growth rate as well. And if you look at what I said is in the SIBG, TEBG, given the exit rate, we do expect revenue to be over 3% in the first quarter. the CBG is an area we'll watch out. And you probably see that part of the revenue goal through the course of the year, but materially do not expect the rate of growth to be significantly different between the first half and the second half.

And if I look at productivity as well, it's pretty even loaded across the 4 quarters. So I think as we sit here today, we feel that it's a fairly even noted quarterly cadence for both revenue as well as EPS.

That's very helpful. And then just my follow-up would be around that sort of interplay and it's been touched on a couple of times, but between the macro and the self-help initiatives. So when we're thinking about the guidance for a deceleration in IPI in the U.S. this year, but an acceleration somewhat in 3M's own organic growth rate. It is our impression that that's really all self-help initiatives that you mentioned and the outgrowth for the acceleration in the second half of 2025 is your impression that, that was all self-help [indiscernible] as well with nothing from the macro? Just to understand how much you're sort of putting on your own shoulders versus relying on the external environment for this year?

So Julian, thanks for the question. Let me maybe frame it by just talking about a little more granularity, the $1 billion over macro. We talked about over -- at the Investor Day, over the next 3 years and Anurag mentioned. In 2025, our growth came in at 2.1%. We look at the overall macro to be around 1.5 points. That's IPI, GDP, with some sectors that were a bit weaker was where we see it. So we saw ourselves with about 60 basis points of outperformance versus the macro. If you just run the math, that gives you about $150 million. So a little bit better than we had expected to be $100 million over macro last year. And the majority of that, probably 75% of it or more was commercial excellence. Less of that was new product introductions, but we did say that, that would start to even out in an NPI or innovation would take over in that third year. And that's, in fact, what we're seeing in 2026. So we're guiding here at 3%. We expect the macro in 2026 to be a little bit better at 1.5, maybe 1.7 range, something like that. So our outperformance this year versus the macro was more like $300 million or more. And that's roughly half and half between NPI and commercial excellence.

So that's how we see this playing out. And yes, the back half last year did show that. We did outperform the macro. A lot of it was that your phrase, Julian, was carrying it on our shoulders and we expect to see more of that coming into 2026. We're launching more projects, which is very good. We're getting a lot more granular tracking the incremental revenue coming from Class 3s, 4s and 5s, and as we look out into next year, we're pretty confident that those are going to start to move the needle for the company, which is why we feel good about outgrowing the macro here in '26.

Our next question comes from the line of Joe O'Dea with Wells Fargo.

I wanted to start on footprint optimization. If you can give a little color between factories and distribution centers, how you're thinking about targets for footprint reduction or consolidation in 2026, both in terms of kind of number of facilities and as well as op profit impact? And then any color around segments and regions where we would see the biggest impact there?

So look, it's all part of our broader transformation agenda. We're just starting on that as we speak. We did see some announcements at the back end of last year. We announced one small facility last week in our network. We ended the year around about 108 factories. We have several -- about 7 coming out with the sale of precision grinding and finishing so call it about 100 factories that will come down over time. I can't size it for you today. We will be making some investments in '26 to restructure that network. But keep in mind, these things are 3-, 4-, 5-year payback. So we'll start on it, accelerate into '26, accelerate in 27. But this is really about building that margin runway to grow beyond 25% in '27 in terms of operating margin.

So we will consolidate this network. It will be factories and distribution centers. We're making some progress on DCs as well. But I won't be able to size it for you today in terms of the specific numbers, but that's the -- that's the trajectory we're on here.

And then just wanted to touch a little bit more on consumer. If you could elaborate on kind of what you tracked over the course of the quarter, kind of early into this year, sort of a step down in demand trends versus what maybe it was a little bit more transitory and just kind of how that's pacing? And then separately, just with the focus on memory chips out there, I think you said consumer electronics or you expect it to be up mid-single digits, but any impact you're seeing in the markets tied to that?

So on the consumer market, as I mentioned earlier, we -- as we entered -- first of all, for the first 9 months of the year, we were about 30 basis points of growth in each quarter, which was pretty consistent, and that was above what we saw the macro. It was a good time to return to growth. We feel very positive about that. And we had expected that we would see the similar trajectory going into the fourth quarter. That didn't happen. We saw October and November being a little bit light. You sell through the channel was a bit light, POS was light. So inventory started to come up a little bit. We start to see that reverse a little bit in December. So December -- orders were okay, growth was double digit over the prior year December. The holiday season was a little bit muted, I would say, so overall, for Q4, we came in at down 2.2%. And as I said, as we turn the corner into January, it's very, very early. We're only a couple of weeks in. We're trending as we would expect it to be.

So I can't really comment too much about that. We'll say more over time. But that's a consumer again. I would just characterize it as being relatively soft, bumping around flattish as we entered as we ended the fourth quarter. So on electronics, overall, we have -- so it's consumer electronics business, we have -- we provided adhesives, we provide films into that area for foldable devices for de-bondable devices, a lot of NPI going into that space. We are focusing on growing our position in the mainstream market. 3M as a whole in consumer electronics is more like 80-20 or 70-30 premium to mainstream and the market is the opposite of that. We do see an opportunity to grow and penetrate mainstream. Some of that is in China, and we're making good progress. So a lot of the NPI that we're launching, we are penetrating into a lot of China OEMs and Asia OEMs in that mainstream market. And I think we're starting to gain some share there. So that's why we see that business for us when we add in -- in semiconductor, data center, all in electronics to be up mid-single digits here coming into 2026 similar to what we saw last year.

Our next question comes from the line of Steve Tusa with JPMorgan.

Just on the -- on that electronics point. So the reported revenues were down sequentially and also year-over-year. Is there adjust that back to get to that mid-single digit for the fourth quarter? I mean you said it was strong, but what was kind of the organic rate of growth. It's tough to tell from the from the subsegment disclosure?

Yes. We ’d see in the mid-single digits. What we're looking at in the table is with PFAS, and we exclude the PFAS out of the results. So when you exclude that, it's mid-single digits.

Okay. And then when you're expanding into this mainstream area, is there any kind of dilutive impact to margins at all? Or you kind of make up for it in the other end by being more efficient with some of the initiatives you're working on?

No, we're not seeing it being margin dilutive as we innovate here, develop products, design to cost, it's an important push that the team is making is designing more cost-effective product. Now we're not seeing any margin degradation. And so far, it's been good. It's early, but it's the push we're making. And again, a lot of NPI in that space.

Okay. Sorry, one more, just for this year, the $500 million in, I guess, litigation costs in '25. How do you expect that to trend in that adjustment to trend in '26.

It's probably going to be in line with that. I can't really tell you if it's going to be up or down. I mean it depends on what happens in the overall docket, but I would expect it to be pretty similar to that.

Our next question comes from the line of Andrew Obin with Bank of America.

So on SIBG growth in '26, I think last quarter, you had the Slide 5 that showed SIBG growth correlation to improving OTIF, new product introduction. And you sort of can see in the fourth quarter on a 2-year stack, clearly, there is more momentum. So given that comps in the first half are going to be easier than in the second half, but at the same time, we have seemingly good momentum with self-help. Should we see first half stronger growth than second half? Or should the growth be fairly steady year-over-year throughout the year?

So Andrew, it's a very, very good question. We do see really good momentum in SIBG as it went from the first half of the second half. And I could see where you're going, and I'll pass that message on to Chris, I'm sure he's listening as well. The reality is there's good momentum, really good progress on commercial excellence. We're launching more projects there. The only caveat is -- as I talked about earlier, we do see U.S. IPI a little bit softer. We know the roofing business. experienced a trough really in Q4. It was weaker than we'd expect -- quite a bit weaker than we had expected. And that's a -- that's a piece of the SIBG business. I'd expect that weakness will drag into the front half of this year. So there's going to be some offsets. But yes, I mean, largely, I think you're heading in the right direction. I think SIBG is performing really well. We'd expect to continue that trend here in 2026.

And just a follow-up on electronics. You sort of talked about extending into mainstream and the sort of echos strategy from the days of George Buckley the pyramid strategy. Is this just the focus on consumer electronics? Or are you thinking of sort of tweaking it and implementing it beyond consumer electronics, the sort of mainstream strategy.

No, it's -- I'm speaking today basically on consumer electronics. And I think you've commented before that this strategy was embarked upon in the past. Look, this has to be a very thoughtful way of going at this. We have to make sure that all of our infrastructure, our designs, our sourcing, how we manufacture, how we ship, how we price, always geared towards going after that segment, which is quite big, but making sure we do it profitably. So it's a bit of a business model shift as well. So I drive you back to what we're trying to do on our transformation agenda.

A lot of this business model shift is shifting our cost structure, both G&A as well as on the factory side. And if we do that and we bring that cost out, that does allow us to lower the water level of our cost and attack these interesting and growing segments or profit rates that we have today. So that's where we're going. We're pushing ahead in consumer electronics. Could it be -- go beyond that. We'll see. But right now, the comments are specific to consumer electronics.

Nothing wrong with that strategy, our stock outperformed under [ George Buckley].

Our next question comes from the line of Amit Mehrotra with UBS.

Anurag, I guess I wanted to just ask about incremental margins for this year. The implied is sort of in the low 40%, which is not that much above the 30% to 40% kind of core organic on the growth. So I'm just kind of curious what the productivity assumption is, what the offsets are from stranded costs? Maybe I'm double counting, maybe some of that's already included in the 30%, 40%, but if you can unpack that for us, I think that would be helpful. And then on the first quarter, specifically, I know you said high single digits, not to be nitpicky, but are we kind of above $2 per share in 1Q, like any final point would be helpful.

Okay, great. Thanks for the question, Amit. Just firstly, if you look at both volume and productivity in 2026, it's going to be higher than what it was in '25. So in '25, between volume and productivity, we had about $750 million of operating income increase. And that was a 2.1% organic revenue growth with 3% growth, the $200 million of volume will now become closer to $250 million and productivity actually goes up from $550 million to about $600 million. So overall, we're going to see about [ $125 million to $150 million ] increase between volume and productivity in '26 and the productivity is going up on 3 real buckets around there.

First is on supply chain. We expect half of that to come out of supply chain, which is continued cost of poor quality, bringing it down procurement, managing a 4-wall spend in the factory in logistics. There's about $150 million of indirect expenses. We did a good job in '25. We'll continue to do that in '26. And another $150 million in G&A efficiency as we look at our processes of optimization and so on. So overall, I would say that the incrementals between volume -- between productivity and the volume growth is going to be higher. What's offsetting it in '26 or the $0.5 billion, which is being offset in '26. One is a pickup in investments. Last year, we did [ 185 ]. We're going to do an incremental [ 225 ] this year. The stranded cost goes up from $100 million last year to $150 million this year. So I would say those are probably the 2 biggest buckets, which we obviously, we have half a year of tariff as well, which is $140 million.

So you put these 3 together, that's $0.5 billion of it. Obviously, as we go into '27, a couple of them will not recur, but the incrementals overall are pretty good for '26. Now on your first quarter, it is a very specific question that you're asking me. What I would say is that as I spoke about volume and productivity, I said about $875 million to $900 million for the year. The first quarter is almost 25% of that, right? So if you kind of run the numbers through, and there will be a little bit of FX favorability in the first quarter given where we were last year. We run all of that through, it will be high single-digit EPS growth.

Okay. And then just maybe a longer-term question for Bill. You've obviously given us a lot of metrics, whether it's OTIF or OEE. And I'm kind of intrigued by this move to this design to cost approach in the R&D function. NPI is helpful, but it doesn't really capture kind of how the addressable market is changing based on the incremental NPI side. I'd be curious, one, how do you hold the R&D function kind of accountable to this cultural shift? And what can you kind of share with us in terms of the NPI coming out, how effective that is in going after the 80% of the market that you're kind of not there at the moment.

So Amit, good question. I'll just hit it briefly. I think there's 2 pieces of it. One is is the value engineering efforts that we are stepping up dramatically this year on to take cost out of products that are on the market today, which does require additional engineering work, there's qualification work, there's things that have to happen, generally speaking, to get those initiatives taking hold. We also define to drive that back into the overall design mindset in thinking of cost as we start developing products, and that's the push we're making is thinking about it early in the design process, which is the best time to be thinking about that.

How we hold people accountable in R&D or anywhere through the company product leaders, general managers, even me, is the quality of the business cases and making sure that the business cases are developed rigorously from the ground up with a good sense of what the costs happen to be and you start with the design to cause mentality and holding people accountable to the results of what we're investing in based on these business cases where we're going to be pushing the company more this year.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

Just wanted to circle back on China. I think you guys have embedded 4% IPI growth in '26 and that compares to like 6% in '25. I know '25 was like a pretty good year for you gone. What you're seeing in the region and where that decel is coming from for next year?

So thanks for the question. China actually had a very good year for us. I had a good couple of years. In '24, they're up double digits. Last year, they're up mid-single digits. It was a little bit lighter in Q4, but only because of as Anurag had mentioned in his prepared remarks, the shift out of China smartphone production when you exclude that, the market -- the China business for us remains mid-single digits. And as we turning the corner to this year, yes, the macro is softening a little bit, is what we're expecting. I think 2 points down year-over-year on IPI, at least as we see it today and the forecast yet, this could go in lots of different ways. But we see that market to be more low to mid-single digits this year, still growing, maybe not as robustly as we saw last year, but still low to mid-single digits. The bottom line is we run China a little bit differently in the company just like we do in India. It's a hybrid model. So we have global business groups and a really strong, dedicated, driven local team. We're driving a lot of localization of R&D, localization of sourcing.

We're attacking the market. We've got 6 factories there, 5,000 people. And it's -- and we've got people lined up to really drive that business. And I think we are performing well. And I would say we're outperforming. And I expect the same thing here in '26.

Bill, that's helpful. And then obviously, you had quite a bit of new noise from a tariff perspective over the weekend. So can you just confirm the tariff headwind that you guys are embedding in 2026 doesn't include any of this potentially new tariffs from Europe? And have you guys tried to quantify what that could mean for your business if they are enacted?

So Nicole, great question. So what we're embedding in our guidance is the carryover effect of the $0.20 of gross impact that we saw last year. That's in and Anurag mentioned, that's mostly in the first half of this year. That's what's in the guidance because that's what's in law. That's what's in practice today and we're moving. Now the pieces that at least the [indiscernible] now talking about relative to Greenland and new different tariffs on Europe, it's about 8 countries, we talk about 10% in February, the 25% midyear or something like that. For us, the trade flows between U.S. and Europe is around $1 billion. We're a net exporter. So we export $700 million into Europe. We import back about $250 million.

If you just run the numbers at 10% and then growing up to 25%, you can get to something in the order of $60 million, $70 million. But that's as -- over the course of the year, we'll see some of that going in inventory. We'll see some of that dragging into 2027. So if that plays out exactly as we expect and the trade flow as I mentioned, it could be a $30 million, $40 million impact this year. But again, we're a long way from that becoming an executive order. So we'll see. We're watching it as everybody else is. That is not yet in our guidance.

Our next question comes from the line of Chris Snyder with Morgan Stanley.

I wanted to ask about consumer. Bill, I think you said December was up double digits. So with the quarter down 2%, I guess, October, November would be down high single. So really sharp positive rate of change there. I guess is there anything to call out with the comps to December, just have a really easy comp because it doesn't seem like you guys expect much of that strength to continue into Q1, maybe 1 month doesn't make a trend, so too early. But any color there would be appreciated.

Yes. We typically -- Chris, we typically see seasonality within the quarter in CBG to be lower in the first couple of months and then higher in the third month. We saw that pattern play out each quarter last year, including in Q4. This 1 was a little bit different. It was a little bit weaker in October, November than we would have expected and then a little bit stronger in December than we would have expected. I think part of it was the team pushing pretty hard, a lot of really good work that the team did in promotional programs with our large retailers who also were striving to drive their growth. And that combination, I think, paid some dividends in December. So we grew a little bit better than expected in December, a little bit weaker in October, November. I wouldn't read too much into the trend so far in the first couple of weeks.

Let's see how the next number of weeks and maybe a couple of months ago. But at least it seems to be holding okay to what we had expected in the first couple of weeks. So I wouldn't read too much into that at this moment, Chris.

I appreciate that. And then if I could follow up on the U.S. IT assumption. You guys are calling for flat in '26 after 1% growth in '25. When we look at the quarterly U.S. industrial production numbers, they seem to be strengthening as '25 went along. You guys are obviously calling for things to soften. Do you see anything out there that is softening? Is there just some conservatism in that assumption?

So you're right. I mean if you look at IPI through the course of last year, what we're seeing backward looking, it did improve sequentially over the course of the year. It was a little bit stronger in the back half than it was in the front half. According to forecast, it looks like it's flattish in 2026. So we're reading those numbers. For us, as I mentioned before, we do expect our industrial business to continue to perform very well. The 2 areas within industrial that we're watching. One is an auto aftermarket. It looks like it's still remaining relatively soft or expected to be range soft on car repair claims, both in U.S. and Europe as well as in the roofing granules business because of the housing market, consumers not looking to replace the rules right now. That business has been a little bit. So fact's very soft in the fourth quarter. We expect some softness in the beginning of this year. But again, I just come back to the -- with the execution of the team and commercial excellence and NPI. I think they're doing a very good job. I expect it will outperform that industrial macro as we get into '26.

Our next question comes from the line of Andy Kaplowitz with Citigroup.

So as you said, you originally forecast '25 averaging high-teens growth from that rolling 5-year new products. But you averaged closer to mid-20%. It's obviously one of the metrics leading to your market outgrowth. But what could it average in '26? And does it suggest you get higher than that $300 million or higher, as you just said in terms of market outgrowth?

So we do see a higher in '26 than '25 in terms of market outgrowth. And it's exactly from the progress made on innovation and 5-year new product sales coming up Again, when we look at the '26 numbers, we assess the macro as it affects 3M to be on the order of around 1.7%, that we're projecting growth of the company, organic growth that delta, that outgrowth is over $300 million above the macro. Half of that is coming from new product introductions, both those that were launched at the back end of '25, we had a very good back half as well as those that we expect will launch in 2026.

So I feel really good about the trajectory we're on and the momentum we're building here. This is really, I think, moving the needle with a little market tailwind, we'll see even greater pickup, but I feel good that we'll outgrow the macro next year. This year, '26 as a result of some of the initiatives we have in place on NPI and commercial excellence.

Got it. And then you were able to essentially hold the line, I think all year in '25 in consumer in terms of growing margin nicely despite flat sales. And with the understanding that Q4 organic sales declined, it seemed like you still had a relatively significant degradation in margin performance. So could you give us more color on that? Was it mostly just the increased advertising promos that you talked about? And can you talk about your confidence level and growing consumer margin or at least holding up in '26?

Yes. So good question. It was the promos and discounts that were offered. I think for the whole year, we did very well. We're up 130 basis points. We're down 110 in the fourth quarter. But again, for the year, really good. The team is doing an excellent job of focusing on the priority brands and appropriately investing in admire NPI launches in CBG, we're really good up double year-over-year, and I expect margin growth as we get into '26 as well as they really level out the business. So I feel pretty good about the structure that we have in place in CBG and the strategy that's being executed and with a little bit of consumer recovery, you'll see that coming through in the CBG business this year. So I appreciate that question.

This concludes the question-and-answer portion of our conference call. I will now turn the call back over to Bill Brown for some closing comments.

Well, thank you, everybody, for joining again today. And thanks to all of the 3Mers for their efforts, for their dedication in executing against our priorities and delivering value to both our customers as well as our shareholders. Thank you, and have a good day.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.

All right. Good morning, everybody. Welcome to day-2 of the Goldman Sachs Industrials and Materials Conference. My name is Joe Ritchie. I cover the multi-industry sector and also co-run the Industrials and Materials business unit. We're really excited to kick off today with 3M. We have Bill Brown, the Chairman and CEO here.

Before we kick it off, I am required to make certain disclosures and public appearances about Goldman Sachs' relationships, companies that we discuss, disclosures relate to investment banking relationships, compensation received or one or more percent ownership. We are prepared to read aloud disclosures for any issuer upon request. However, these disclosures are available in our most recent reports available to you as clients on our firm's portal. So with that, Bill, thanks for joining us here today.

Great. Thanks for having me.

So let's kick it off. Look, it's been 20 months. Talk a little bit about like how the operational discipline across the business has really changed? What's been the most important structural change that you've driven so far? And what still needs to happen to kind of sustain this going forward?

Right. Well, thanks for having me again. In 20 months, it only feels like 19. So it's been -- time is really flying here. So no, it's -- we're off to, I think, a very good start. We're building momentum. But I'd say, we're still early in the innings, early in our transformation journey at 3M. I think there's 2 fundamental changes, I think, that are happening at 3M. And one, it gets back to what I started talking about my very first earnings release at 3M, and that's the priorities.

I think the thing that we've not changed is around the priorities. So the #1 thing is around focus, it's constancy of purpose, it's consistency. It's staying true to the 3 priorities and the things that we're trying to do inside the company. It's around driving growth, driving operational performance and effectively deploying capital. And every meeting I'm at internally, every all hands I do, we just get back from Asia, we did 3 all hands. I always start with safety and then these 3 priorities. And it's the same thing I do in my earnings releases.

And every quarter, we have a little bit more to say because we're making progress. So we're talking more about the things that we're doing, the impact of the activities. But number one is around constancy of purpose. And I think you can see that in the messaging and in the results for sure. The second is a foundational element around culture that we put out. I've talked about this at our Investor Day back in February. It does seem like eons ago, but back in February. It's around driving rigor and operational execution and speed and urgency and accountability throughout this organization, challenging the status quo.

A lot of people at 3M have been around for a long time. And I'm encouraging people to think about today differently than yesterday and tomorrow differently than today. And that's sort of challenging every single day the things that we do and want to do differently. So those are the, I think, 2 important changes that we made inside the company. And I think what you see is good momentum and progression towards those Investor Day targets that we laid out back in February. We talked about driving growth of $1 billion over the macro. We talked about hitting 25% margins by 2027 and returning $10 billion of cash to shareholders over 3 years. And across all those dimensions, I think we're making good progress, and we're well on our way.

It's great to hear, Bill. And so one of the things you guys have really talked about is this innovation engine. So talk a little bit about how new product vitality is driving better commercial success across 3M?

So this is -- I mean, look, people join 3M to innovate and solve tough problems for customers. It's fundamental to what defines 3M. And I think you know we've lost our way on innovation over some period of time. So it was one of the top priorities to get back to driving growth from innovation. I'm really pleased with how the team is responding to some of the structural changes that we're making today in how we innovate and develop and launch new products.

So I won't go through the numbers in much detail. It's -- I go through this every quarter, but we had launched 196 products in the first 9 months of the year. We're very proud of that. It's up 70% over last year. It's almost in line with where we were. Actually it's more than last year, and it's going to be for the year, about 250, so it will be double where we were 2 years ago. So we're launching a lot of products. So the 250 this year is above the goal we had set for this year, it was around 215. 215 million would have gotten us to 1,000 products over 3 years. That was the goal we set out back at the Investor Day.

And again, we're tracking ahead of that. I think what's important is not just what we're launching, but the backfill of the pipeline because one of the worries that I had was when you're launching more products, and I knew we had some things in the pipeline to go launch that you'd start to dry up in the pipe. And in fact, we're not doing that. We launched 70 products in Q3. We put 130 new projects into the pipeline, and we have 1,000 new ideas sitting out there about to go into a business case development.

So we're actually filling the front end of the pipe at a faster rate than we're launching product which I think it is really important. We are starting to move the curve a little bit on top line growth. Our 5-year new product sales year-to-date is up 16%. For the full year, it will be up 19%. The reason we use 5-year new product sales, that gets to a vitality index. Historically, 3M many years ago was in the 30% range. We dropped to 10%. By the end of this year, we'll be at 12%, get back to 20% by 2027.

But that's how you drive the growth of the business. You got to get back to bringing fresh products to market. So I think it's actually going reasonably well. We're making good progress at instrumenting the organization in driving more rigor and discipline into this factory we call R&D. Our launch attainment is now running north of 80%. Beginning of the year, it was 70%. Last year, it was in the mid-60s. I think before that, I'm not even sure, quite frankly, we were measuring launch attainment. So we're launching products within a 2-week window of when we said we would when it got into the development pipeline, which is really -- extremely important.

We've got a good idea generation process. We're spending a little bit more on R&D, about 30 basis points of sales now more in R&D. But importantly, we're pushing more of the spend in R&D towards new product development. We had historically been around 40% or sometimes north of 40% of R&D spent on new product development. That dropped below 30%. We're running around 35%, 36%, and you'll see that number coming back up.

Now a lot of the products we're launching are going to be replacement products, things that keep the portfolio fresh. So you're not seeing a lot of impact on the top line, but you will over time. Most of what we're launching are things like a new color and a command strip or expanding our size range in Filtrete or a new self-contained breathing apparats, a variety of different products, but they're sort of incremental.

But over time, we'll be launching more products into adjacencies and new products. I think that's when you'll start to see the top line turn because of innovation. But don't get me wrong in this one. It's really important to launch more products. We're getting the rhythm back going, the rigor into the process a lot better. And you will see the top line move because of launches that are happening.

Makes a lot of sense. So product vitality is one part of it. You've also talked about rebuilding your commercial program as well, like early quoting, stronger channel partners. Like how far along are you in that initiative?

Look, this is -- I think we're still early innings on the Commercial eXcellence piece. And I think this is an area that I was a little bit more surprised about when I came to 3M. It's reflective of the historical culture at 3M. We were operating more like a holding company than an operating company, meaning each of our sales forces around the world were run fairly independently and no sharing of best practices, no common systems or processes. And that's starting to change a little bit as we move from a holding company more to an operating company.

And we laid out 3 levers to drive commercial excellence. One is improving the performance at the front line, the frontline execution of the sales force. So are they -- who are they calling on? Are they getting the right training from the manager? Are they meeting with their manager? Did they have Close1 targets? When are the quotas being set? And are they held accountable to those quotas? How is pricing governance happening? And we're seeing opportunities across all of those things.

It's -- you got to imagine, I mean, the sales manager was not meeting with the sales rep more than once a month, a couple of times a quarter. Now we're tracking. It's happening 3 or 4 times a month. It's very regular and reviewing what you're losing, what you're winning? Are you tracking your Close1 targets? Putting rigor into how that sales force is working. I think that's really starting to show some benefit.

The second lever, we do -- we sell a lot through distribution, through channels. So are we improving the effectiveness of those channel partners? This is like going out and talking to them about joint business planning and cross-selling. We set a 3-year goal in SIBG of $100 million of cross-sell revenue by year-3. We're tracking well ahead of that. We gave some of the facts at Q3. We're over $120 million of opportunities. We've closed and won annualized $30 million so far within about 9-month window. So moving along very, very quickly. And we're finding opportunities not just within SIBG, but also between SIBG and the Transportation & Electronics business.

The third is around increasing -- improving customer loyalty. It's reducing attrition or churn. Part of the driver of that is going to be -- we're not delivering things on time in full or quality or new products or pricing was off. But the best way to grow your business is to not lose it, and we were losing too much business. We're not tracking that very rigorously. We use AI tools for both predictive and response to attrition or churn, and we're starting to make some improvements in that.

It started off in SIBG. A year ago, we launched this initiative in our Safety & Industrial business, mostly a channel business, the largest part of the company. They started in the U.S. They rolled it out globally. And you can see the progress that we're making in SIBG. If you go back to the beginning of last year in the first half, we were down 1.6%. We ended up at plus 1.6% in the back half of the year, front end of this year, 2.5%. And of course, you saw growth in Q3 was at 4%.

So we're seeing the pickup. And I think a very important chart that investors should look at is the one we put it into our earnings release at the end of October on SIBG. It maps out 11 quarters of growth at SIBG going back 11 quarters ago, minus 6% to plus 4% in the latest quarter because of improving OTIF. We're launching more products. We're driving commercial excellence, more cross-selling wins, and you can see the direct effect of some of those pieces.

We're now following that through that same process into our Transportation & Electronics business. learning from some of the best practices that we saw in SIBG, we're rolling that through into TEBG. Of course, there's a spec-in business, so it's going to be a little bit nuanced, but there's a lot of the learnings from SIBG can be rolled into TEBG, and we're starting to see some benefits there as well. So look, this is -- it's early innings. We're starting to train up the sales force, driving more rigor into that, holding the salespersons accountable, making sure they're appropriately trained with the right incentives early in the year with the quota we got early in the year, this will make a big difference.

That's super helpful. So maybe let's transition on potentially early thoughts on 2026, right? So you've had Electronics & Aerospace, which has been strong, Auto OEM and Consumer still soft. What are you -- how are you thinking about end market demand as we head into 2026?

So you're right. I mean, Auto has been relatively soft. The build rate has been up, but it's mostly been China, and not the U.S. And I think all regions are expected to be down in the build rate in the fourth quarter. We start off at the beginning of the year in Auto being down mid-single digits. We're flattish in Q3, but we're starting to gain some share here, which I think is really important. And it's important to go out and win with China OEMs, win with the winners. So we're pushing a lot into China.

Electronics has been pretty good. Aerospace & Defense has been pretty decent for us. As you go across the pieces of the portfolio, even at TEBG, our commercial branding and transportation business has been relatively solid, low to mid-single digits. Safety in SIBG started off at the beginning of the year, low single digits, growing mid-single digits in Q3. So getting a little bit better. The abrasives business has been challenged in the last couple of years, sort of low single digits, growing mid-single digits in Q3.

So parts of the portfolio are doing quite well, and there's a few pockets that aren't. As you said, Auto could be -- it's a little bit weak. We'll see what happens going into next year. We know in a few parts of the business and commercial vehicle is not a very big part of the company, very small, actually, $100 million, but it's down quite a bit and getting a little bit worse through the course of the year. Our roofing granules business in SIBG has been under some pressure, start off the beginning of the year, low single digits, was down in Q3, kind of similar trend going into Q4.

So we're seeing some pressure in a couple of parts of the business, but the consumer has been relatively weak all year and not getting much better going into Q4. So that's kind of the trajectory of some of the businesses. We're planning for a macro that looks pretty similar to that in 2026. So that's what we're thinking about. But through Commercial eXcellence and Innovation eXcellence and a lot of the work we're driving in terms of productivity and Operational eXcellence across our factories, we do expect to outgrow the macro going into next year, and we're planning for being able to achieve that.

So what we're looking at is some growth above the macro going into next year. And through productivity, the things that we're doing there drop through on some of the incremental volume, offsetting some tariff carryover going into next year, some stranded costs because of getting out of PFAS, we still have our algorithm in place for driving high single-digit earnings per share growth going into 2026 and beyond, on track to '27 targets.

Super helpful. And just one nuance there. The macro that you're planning for, is that a comment around -- comparable to your full year this year, your exit rate in 2025?

It's pretty much where we're coming out of the year in 2025 as we see transitioning into next year. Look, it's hard to predict what the macro is going to look like in the next 3, 6, 9 months. So what we're doing is we're recognizing that we've got a lot of things that are self-help stories here at 3M and a lot of things we can control. And we're saying regardless of what's happening in the macro, we need to be growing the business next year and growing earnings.

When you're tracking your potential like project funnel to drive productivity going into next year, has that project funnel increased or accelerated? Because I know you had a lot on your plate for this year and the performance has been very good this year. So just curious like how has that productivity funnel really changed over the past 12 months?

So it's been very good, actually. We've -- we came into the year, you'll recall back at the Investor Day, we thought the margin expansion over the next 3 years was going to come more from factory productivity, supply chain excellence and things happening in the gross margin side. We've been driving productivity and gross margin, but it's been offset somewhat by stranded costs and tariffs that have been rolling through the gross margin side.

We're finding more opportunities to take cost out of G&A through end-to-end process redesign, thinking structurally about where we have activities around the world, driving process excellence, reducing indirect costs, including an IT spend. So we're finding more opportunities to drive productivity across the G&A functions. And I think you've seen that so far in our margin results year-to-date. Year-to-date, we're up 220 basis points. For the year, we're guiding between 180 to 200 basis points. And that's tracking ahead of what we said we would get to over the course of the 3-year goal getting to 2027.

If you just go back to where we were at 2024, we ended the year at 21.4% operating margin. That's where we ended. To get to 25% by '27, it's 360 points, 120 on average every year. Of course, it's not going to be linear, and it's not linear this year. Again, we're up 220 year-to-date for the year, 180 to 220, more from G&A activities. And as we're starting to think about this, I think as going into '26, we'll see more coming from our supply chain activities.

We're doing, I think, a reasonably good job in our procurement side in offsetting inflation, including tariff pass-throughs from some suppliers. So we're doing some good work there. Within our 4-wall spend, a good work that's happening, more automation opportunities. One of the areas that we have seen some progress this year, and we'll see some progress over the next several years is improving on quality cost. I've been talking about this for over a year. We went through some details in February on what's driving cost per quality. But it's been running -- as of the end of Q3, it's at 5.7% of cost of goods. You run the math, it's about $800 million. Last year, it was over $900 million. So it's down $100 million year-over-year.

And that 5.7%, we think over time, should hit a goal of being below 4% of cost of goods. So a lot of opportunity ahead of us in terms of driving cost of poor quality down as well. Some will happen through automation, use of AI tools to more effectively change over lines with us going from product A to product B in our factory. So it's a pretty good productivity road map that we have here. And we're now starting to think about what are those ideas that are out there to structurally reduce costs across the company, both in our supply chain.

We know we've got too many factories. Our footprint is pretty large. We're still running north of 100 factories and about 80 distribution centers. Structurally, there's an opportunity to reduce cost. That's going to be sort of happening that drives the horizon beyond 2027. And some ideas of what we need to do to drive G&A function productivity as well. Just as an example, we have 4 shared service centers. They're not in the lowest cost places in the world. There's activities that should be in a shared service center. There should be some better performance driving metrics. We should look at putting them into low-cost countries or outsource some of those activities. And that's what's ahead of us in terms of this transformation agenda that we're now starting to talk more about.

That's great, Bill. Look, we talked a little bit about new product vitality earlier. To what extent is that going to allow you to potentially have structurally higher pricing going forward? And then how are you thinking about pricing as well into 2026 because you have the whole tariff disruption this year? I'd be curious to hear what your expectations are.

So historically, we have priced to offset material cost inflation. I mean that's been our approach. So if you run about 2% material cost inflation on $6 billion of spend, $120 million, that translates into about 50 basis points of price. So that's in the number. That's what we've historically been doing to just offset material cost inflation. This year, we'll see about 70 basis points of price, 50 in the front half of the year, 90 in the back half of the year. The extra 20 for the full year is covering some part of the tariff hit. So that's what's happening.

You'll see that rolling into the first half of next year and annualizing in 2026. Look, we have a couple of ways to improve pricing. And I referenced one a couple of minutes ago, and that's better pricing governance through our sales force effectiveness, Commercial eXcellence initiative. There are too many times we see price discounts given or volume rebates given without getting the volume. So we do special price agreements that don't get any volume coming through, and we're getting much better controls around that.

The second part of it is around trying to drive better pricing and price to value when we're launching more products. When you go for a period of time and you're not launching a lot of products, we're not really focused on value-based pricing. Now that we are launching more products, this is a big focus of the team is how do you capture the value of what we're providing through the price that's being offered on the new product. And I'll give you a good example.

We talk a lot internally about Cubitron 3. It's our abrasive product within SIBG. It's a very interesting, unique design. It's proven to reduce the workload on a welder's arms and the time it takes to grind down a weld. And you can actually translate that into value, and we expect to get paid for that in the price of the abrasive product. And that's how we go to market. That's how we price that product. But it's pretty unique. We need to take that same sort of lessons around how do you price and drive it across all of the different products we're launching into the marketplace. So structurally, what we ought to be doing is driving better pricing over time than simply covering material cost inflation, and that's the objective of the team.

So I'm going to open it up to the audience in a second, but just a follow-on to that -- to what you just said. If you think about those 2 opportunities, which is sales force needs to do a much better job, not pricing down as the year progresses and then secondly, we need to do a better job of pricing our innovative products. Which one is a bigger opportunity for you?

I mean, look, they're both going to be pretty important. I mean, I think it's -- you got to walk before you run these things. I think when you're trying to price to value for new products, since the product coming on the marketplace, we have an opportunity as we're developing a business case, developing our marketing materials to say, look, there's going to be a different price for the new product coming in. So to me, driving price through new product innovation is going to be pretty important and one that we're focused quite a bit on.

Okay. Great. So I'll turn it over to the audience. Any questions from the audience?

A little bit about cash flow. With higher margins and better cycle times, how should we think about conversion versus historical?

So this year will be more than 100% of net income conversion, and we expect it will be greater than and equal to net income going into the next several years. We laid that out for at the Investor Day earlier this year. We generate very good cash inside the company. We have opportunity to do a little bit better on working capital. Inventories are running right now little bit higher than we would want them to be. We think it should be lower than that over time. It was around 100 days roughly at Q3. We should be down around 75 days. Each day is around $35 million.

So we see an opportunity to drive inventory performance. But look, one of the things I didn't really talk much about here is when I talked about churn, it's about delivering products on time and full. We hit the best quarter we've hit in any quarter going back 20 years on time and full at 91.6%, which is great results. And what's happening is people aren't complaining so much around not getting the product on time and full, customers aren't.

And we're taking an excuse away from the sales force as to why we're losing business. It's where we need to be. The number can actually come back up even further over time. But what we now have to do is think about on time and full a little bit differently. So how do you drive that up over time a little bit more? How do you reduce the lead time giving product to a customer and bringing the inventory down at the same time? And that's got to be the focus over the next 1 to 2 years. So cash flow has been good. We'll see continued conversion at or above net income. We'll continue to invest appropriately inside the company, but cash has been pretty good.

Other questions from the audience? It's a good segue from cash flow into capital allocation priorities, right? So you've been active repurchasing your shares this year. Clearly, you're reinvesting in the business. There's probably some M&A ambition as well. Maybe just talk to us about how you're thinking about managing all 3?

So again, cash has been very good. In terms of capital allocation, it's consistent with what we laid out at the Investor Day. Number one, we're going to invest in the organic opportunities inside the company. We have some of those. We've been investing inside the company last year, $150 million of incremental growth investments and this year, about $185 million. We said we would do $600 million in growth and productivity investments over 3 years. So probably a little bit more coming into 2026.

So there's opportunities to invest positively with good returns inside the company. We're going to maintain a strong balance sheet. Right now, we're running around 1x leverage, which I think is important. There's things ahead of us. There's liabilities we're watching very, very carefully. So we're trying to maintain a very strong balance sheet. We still have a piece of the Solventum spin on our books, about 15%. It's worth a little over $2 billion. So that's sitting there as well in terms of helping us with liquidity.

And then we're going to return cash to shareholders. We said at the Investor Day, we would return $10 billion over 3 years. This year, we're already around $4 billion -- $3.9 billion. Of that, $2.7 billion was in share buybacks. Of course, as the stock has come up, we've seen some option exercise inside the company, and we're sort of we're offsetting that as well. But we've been pretty aggressive in returning cash to shareholders.

Again, we're -- this year, it will be north of $4 billion of $10 billion. So we're tracking a little bit ahead of that goal we set over a 3-year time period. On the portfolio, look, we talked about this quite extensively back in February, and we referred to this at every earnings call. We will structurally shift the business over time into higher growth, higher-margin potential businesses, means getting out of some things that we're in today and perhaps getting into some things that can add accretively to the business and can take advantage of the innovation and material science capabilities of the overall company. And we're making some progress there.

We talked about a couple of things that we divested fairly recently of a business in the third quarter. It made strategic in financial sense to shareowners to go and do that. But over time, depending upon what's happening with our own liquidity, we'll look to acquire. But right now, we're thinking hard about the portfolio and the things that don't really make sense to be inside the portfolio.

On that addition by subtraction comment, so clearly, health care is no longer part of the portfolio. Are you -- are there potential options to do sizable things from a divestiture standpoint? Or are you thinking mostly trimming around the margin?

So look, we -- earlier in the year, we said we had 120-plus profit centers. We're going to look at them very individually, and we have. We concluded about 10% of that portfolio probably doesn't fit strategically in the sense of -- it leverages the innovation of the company. It's where we don't have a clear right to win, where it's more commodity like. Of that, 2% to 3% were things that we thought made sense to divest where it would make sense to shareholders. We've got to watch the dilution quite carefully and the stranded costs, and we start to action on that 2% to 3%. Look, we're looking at this daily. I won't say that there's small or big parts of it, but we're taking it in pieces.

Okay. Sounds good. You mentioned Solventum. How are you thinking about the timing of that exit?

So we have 5 years to do it on a tax-free basis. We sold 1/4 of our stakes, about 5% back in August at a pretty good price. We have 15% left. Just to keep in mind, we are a complete passive owner of Solventum. We have 5 years, and we'll monetize it within that 5-year period.

Should we talk about the potential liabilities that are out there? And do you want to give an update?

So there's not much of an update in terms of outside -- what's outside of the SEC filings. There's 3 things that we're tracking. Of course, one is the public water supplier settlement that was executed a couple of years ago. By 2028, we'll be about 80% of the cash through. So we're watching a couple of the opt-outs on PWS. The second area is around the attorneys' generals. There's lawsuits within and outside of the MDL, mostly within the MDL.

You probably saw back in May, we settled with the state of New Jersey. It was very attractive for us. It was a reasonable amount of cash over 25 years with a balloon out in 2050 and very broad liability protections around the state of New Jersey. And other states are looking at that model and perhaps can replicate something like that. So Vermont will be coming up maybe in the next year. There's a little bit of skirmish right now between whether that be handled in the state or federal court. We do know that Illinois is scheduled for next September. That's a little bit further out.

And there's other states that are again, within or outside of the MDL. And the third is around the personal injury cases, the bellwether that was supposed to happen in October was canceled or postponed for the judge to force a lot of the unfiled cases to get filed. That's now happened. We're in a vetting process right now. The number of cases went up to about 14,000 -- just under 14,000. Some have multiple claims within that, and we're going through a vetting process. And we'll have more to say through our SEC filings, but this is an active discussion and one that we're focused on quite aggressively inside the company.

Great. Let's transition over to China. Can you just level set us how big is China for you today? It's interesting how strong it's been as well, not seeing that for a lot of our other industrial companies. So maybe just talk a little bit about like what's driving the strength? Is it end markets, share gains?

Yes. So China, look, it's about 12% of the company. It's been growing very, very strongly for us. Last year, it was low double digits. This year, it was mid-single digits most of the year. Q3 was high single digits. So it's been growing pretty well. We have a very good footprint in China. We have 7 factories. We have close to 5,000 people. And we've got a unique model for 2 countries, one China, one India inside of 3, and we run our businesses globally, including through China and India.

But in China, we have a vertical organization run by a President of China because of some of the unique characteristics of that market, how fast it's moving, the requirement for local development that are moving at the speed and the pace of China OEMs. And that model has been very effective for us. Half the business is domestic and half goes export. It's -- and both are growing. And I would say, we're seeing solid market growth, but more importantly, we're seeing share gain because of the way the business is attacking the opportunities on innovation and commercial excellence.

We were there just a couple of weeks ago, we spent 3 days in China. And the team is doing an unbelievable job in terms of just attacking new parts of the market. Their journey on commercial excellence mirrors what we're trying to do around the world, but on steroids. I mean, they're moving at a very fast pace. They're driving the business very well. I'm pretty optimistic about the future in China. China, it's going to slow down here in the fourth quarter. We knew that. We thought that was going to slow in Q3. It didn't. But we feel it's going to slow down a little bit in Q4. There are some dynamics of things happening in China or moving outside of China.

So there's some dynamics of where electronic components are being manufactured through Asia, but the business is doing well. The innovation is good. There's more things we can do just local for local development. If you're in the automotive supply business and you're not winning with China OEMs, you're going to lose eventually someplace else.

You've got companies like BYD that in 18 months to launching new vehicles. They have 110,000 R&D engineers, and they require you to develop products in 6 to 8 months. That's a cycle time that we don't do. Most companies don't do anywhere in the world to supply to automotive OEMs. We are now doing that in China. We are developing and launching products for BYD and others in that 6-, 7-, 8-month time period. So -- and if you're successful there, you could be successful in other places around the world, and I think we're starting to prove that point.

That's great. So Bill, you mentioned a little bit on China and your expectations for the fourth quarter and that it's kind of in line with your expectations that it was going to slow down. Any other comments that you want to make on how things are trending?

So look, it's pretty much like we said at the end of the third quarter in terms of the overall macro trends. We do see the consumer market to be relatively soft. You can read it in every report, known demand and what's happening with retailers. We've not seen a strong consumer all year. We see consumers being cautious and focused on discounts and promotions and essential items only, and we see that going into the fourth quarter, perhaps into early next year as well.

Consumer is not a big part of the company, but it's an important part, but it has been soft. But even in that sort of soft macro backdrop, we found a way for the first 3 quarters of the year, it's actually 4 quarters in a row growing positively. So Q1, 2 and 3 this year, we grew at 0.3%. And it doesn't sound like a lot, but just making sure we're growing in consumer was quite important. We're launching more products, new products in consumer. We're more aggressive on advertising and merchandising. The strategy we put in place to focus on 4 priority brands is working. That hustle that's happening in the business has been palpable.

The team is doing a great job here, but consumer has been relatively soft. And I talked a bit before about the roofing granules business. This, I think I put this back on consumer behavior in many ways as well. We saw the front end of the year at low single digits. This is mostly replacement demand. Sort of joke internally, it's easier to buy a bucket than replace a roof. And I think it's what people are doing right now. They're not replacing the roofs. It will eventually happen. You have to. But when you have the housing market stuck, you're not replacing roofs, you're not doing things to upgrade your home as you're transitioning from the homeownership. And we're seeing that right now.

Q3 was in that roofing business was relatively weak, and it's as weak as it was in Q4. It will turn back eventually as it has to, but that's been a little bit soft coming into Q4. But generally speaking, it's the same trends that we saw in Q3 continuing into Q4.

Really helpful. Bill, any last comments you want to make to the investors that are listening?

Look, this has been a great journey. We're 18 -- now 20 months, I got to remind that. But look, this is that we're running at a great pace. What I'm finding every single day more and more opportunities to do things better. The one thing to take away, the culture inside the company is changing. This is going to be probably the single biggest factor to drive performance at 3M is changing the culture, driving the hustle and rigor and operational discipline and continuous improvement and driving accountability.

This will be the first year in many years, we're driving differentiation in the pay awards across 3M. It's really important. You get clear objectives and you get paid for performance. And I think that's what's going to happen inside the company. It's important. We're on a great trajectory, and we're going to win.

Bill, congrats on the progress. Thank you for coming.

Thank you. Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to the 3M Third Quarter Earnings Conference Call. [Operator Instructions]. 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 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-Q lists some of the most important risk factors that could cause actual results to differ from our predictions.

Please note while 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. The 3M team delivered another strong quarter in Q3 with organic sales growth of 3.2% and the fourth consecutive quarter of positive organic growth across all 3 business groups against a macro backdrop that is largely unchanged and generally soft.

Our 3 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 3 quarters of the year enables us to increase our earnings per share guidance to $7.95 to $8.05 and 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. Our efforts to advance our top 3 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. And 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, and 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 and drive accountability for on-time launch attainment.

And most importantly, we're beginning to bend the curve on revenue from new products with sales from products launched in the last 5 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 ScotchBlue Pro Sharp Painter's Tape, a great example of a Class III 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 filtering 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 wire frame 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 per quality. Our on-time and 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 4 months in a row. Improved OTIF shows up tangibly in our financial results as lower service fines, but also intangible through a better customer experience, leading to winning more shelf space and enhancing customer loyalty. Our intention now is a shift to the next stage of operational excellence, sustained or improved 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 change over 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 customers business.

Quality is another critical aspect of operational excellence and is a company-wide priority. Our cost per 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 launch reductions across all 3 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 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, we'll 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 7 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 4, Macro trends remained 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 will 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, that auto and auto aftermarket were down mid-single digits with performance improving modestly in auto OE and weakening in commercial vehicles. Slide 5 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. But 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 OpTempo 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.

And 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 strong quarter across all financial metrics. We delivered sales growth acceleration, continued solid mileage 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 filter REIT 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 nonoperational 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 2 items highlighted in our press release issued this morning that are excluded from adjusted results. First, we recorded a pretax 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 7. 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 capitalize on growth in construction of data centers. Industrial adhesives and tapes add 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 rentals 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 and 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 lower 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 4 quarters in a row, including 0.3% organic growth in each of the last 3 quarters. Though consumer sentiment remains soft, we experienced strong demand for filtered filters, Scotch Tapes and McGuire'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 8 for an update on our '25 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 to a range of $7.95 to $8.05 representing an approximately $0.12 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 9. 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 our 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. Nonoperational 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 their strong commitment to operational and commercial excellence and focus on delivering improvement day after day. Our performance to date and opportunities ahead of us provides 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.

[Operator Instructions]. Our first question comes from the line of Scott Davis with Melius Research.

You started kind of the prepared remarks around new products. So I wanted to lean in on that a little bit because -- every CEO at 3M has talked about new products, but you seem to be delivering and actually getting results. What -- without spending a whole heck of a lot more, really, what do you think -- what are you attributed to? Is it -- have you changed kind of the culture of compensation? I mean, I don't know, just open-ended questions, so I'll leave it there.

So good question, Scott. So I'm really pleased with the progress we're making on new product introductions. And I think what I've seen over the last 18 months or so is much greater pace and rigor urgency that I think we've seen in some time.

We're tapping into a lot of latent ideas, urgency, desire from the team's product developers, application engineers, business leaders to get back to what's important at 3M, and that's innovating. And we're really trying to support that. Investments coming up a little bit. We're putting some different metrics in place certainly, we're watching new product introductions and they're turning around relatively quickly.

Keep in mind, a lot of these 80% of these are sort of incremental line extensions, what we call Class III, but that will build over time and become more important. I'm really pleased to see the funnel you remain relatively healthy. So while we launched 70 products, we had 130 products coming into the front end of the funnel. So it's actually very, very positive.

And the number of ideas that the teams are coming up with are now close to 1,000. So we're tapping into this desire to innovate, bring new solutions to customers. And the whole team is really responding very well to this. We're increasing our speed eliminating non-value-added type activities. We are moving up a little bit on spend. I think in the quarter, it's up by 30 basis points, but it's not substantial. We are shifting more of our R&D dollars towards new product development. A couple of years ago, we dipped below 30%. Now it's running 35%, 36%. That should grow a little bit over time.

But overall, I think the team is refining very, very well. starting to bend the curve on revenue. You see some of the numbers coming in Q3. We'll see more in Q4. But this is something that's going to sort of accelerate as we get into '26 and '27. Keep in mind, we said we grow $1 billion over the macro. Half of that will be in new product introductions. But a lot of that's going to come in '26 and '27 because it takes time to move the needle on that or the growth early on will come from commercial excellence. So Scott is a great question. The team is doing a fabulous job, and we're just getting started.

That makes sense. And the natural follow-up really is that historically, new products have been -- you say Class III, that's the first time I've heard that reference on the 3M call. But clearly more focused on maintaining or driving margin in the new product flow versus kind of what I would call kind of new product categories, which was more of the legacy. If you go back to the '80s and the '90s, that was more of the the 3M way was create new categories.

Do you have a -- again, it may be hard to tease this out, but do you have a sense of what kind of an upside do we have can 3M actually be above -- historically, it's been kind of 2%, 3% growth company. Can it be a 4%, 5%, 6% because you're actually back to creating new categories again and driving that top line above kind of that traditional Class III, as you call it, new product innovation.

So Scott, so about 80% of the launches are a Class III means 20% in Class IV, Class V, which are adjacent markets or bringing new products into new markets. And we've seen a couple of this year that are quite interesting, particularly in our electrical market. It was a cable prep system, which is which is a Class IV, Class V product, that's really growing very nicely.

Look, as the team really pushes on this. I do think there's incremental ideas that we're working on Clearly, we're seeing a bit better growth in the macro here in the quarter. The macro is running in the 1% to 2% range. So posting 3.2 in the quarter is pretty good. This will grow over time. And again, it's -- we're not going to be at 50-50 Class III versus Class IVs and Class Vs, but you'll see more 4s and 5s come in into the pipeline into next year and into 2027. Very helpful.

Our next question comes from the line of Jeff Sprague with Vertical Research.

I wanted to touch on kind of the beginning of this maybe new restructuring journey that you're on. Bill, I know even from the day you started maybe before you started, you had sort of a vision of what should happen with this footprint, and now you've had a lot of time to be inside and really kicked the tires. I just wonder if you could give us a sense of is this the beginning of a 2 or 3-year very large project. Have you even really mapped this out yet. And sort of like what should we expect as we get into maybe 2026 as it relates to the new restructuring actions.

So thanks, Jeff. Look, Anurag talked about in his remarks that it's unlike the prior restructuring effort, this enterprise-wide restructuring effort that was more focused on short-term actions, quick payback. This -- what we're embarking on now is a more longer-term, more thoughtful redesign of our manufacturing network, our distribution network, our business process services, as we've embarked on our operational excellence journey, as we've seen over the course of this year, we're seeing more opportunities in G&A than I would have guessed earlier in the year. And if we didn't really say much about this in February at the Investor Day because we've learned a lot since then.

So this will be a structured improvement program over time. It won't be a big bang. It will be maybe more of a series of actions that I think will happen over time, more aligned to the long-term growth agenda of the company more aligned to what the team can go and do. We'll evolve this in a thoughtful way so we don't disrupt the business, disrupt the momentum we're building on new product introductions and driving operational efficiency.

So this is something that we're going to continue to work on. We don't size it today. We'll give updates to investors over time. It will not be a big bang. We'll shape more next quarter. This quarter, it was $14 million next quarter. It will be in that same range, about $15 million. As we get to early next year, we'll sort of frame it up for 2026. But this is something that will happen over time.

We'll provide some updates on what we want to do. But this is all about how do you grow and accelerate our margin expansion journey beyond 25% by '27, that's not where we're going to stop. A lot of the ideas we're seeing here today are going to be important ways of both returning earnings to owners as well as reinvesting back in the business. And if anything, I'm seeing more opportunities today than we saw 6, 8 months ago when we had the Investor Day.

Great. And then maybe just back on the growth real quick. So it sounds like the upside to the top line view here I know you can't probably perfectly parse it apart, but really isn't a better macro outlook. There's a bunch of pluses and minuses in the macro, but you would point to just more traction on the new product-related actions. And maybe just as part of answering that, Bill, you made a comment about special pricing actions, limiting them -- did you get the price in Q3 you were talking about? Or you decided you didn't need it because the volumes were better. I didn't quite understand what you were going towards what that question.

So let me comment on 2 pieces. One, on just the growth in the quarter, we're really pleased at 3.2%. We had guided, if you will, to 2.5% in the back half -- we said it would be similar in Q3 and Q4. And obviously, we did quite a bit better than 2.5%. So of that 70 basis point improvement, at least 50 basis points is what we would consider to be self-help. It's both commercial excellence and NPI.

The other 20 basis points is sort of net discrete items that shifted from Q4 into Q3, as Anurag talked about in his script. But relative to the macro, look, IPI is running around 2%. We see our blended macro around 1%, so in that 1% to 2%, we're seeing 150 basis points more or less of outperformance versus the macro. And I think at least 100 basis points of that is commercial excellence and new product introduction. So I think it's very good performance on the team, doing what we said we would do over the last year, 1.5 years.

Now on pricing, just to be clear, we are achieving what we said we would do on pricing, which was generate 70 basis points of price for the year, 50 basis points in the first half, about 90 in the back half, so 70 for the year. We typically get about 50 basis points of price to offset material cost inflation that has been running around 2%, maybe a tick above that. the incremental 20 basis points is to cover a piece of the tariffs.

Keep in mind, the net tariff impact for the company is around $0.10, gross is $0.20. So that $0.10 delta split 50-50 between price actions and costs. So hopefully, that answered the question. In short, it's we're getting price almost exactly as we said we would do at the Q2 earnings release.

Our next question comes from the line of Amit Mehrotra with UBS.

Anurag on the 2026 revenue, I mean I really appreciate you kind of engaging with us this early at least on 2026. You have this long-term margin target, maybe not so long term anymore in terms of 25% by 2027. It feels like if I just take the moving parts, 3% growth, 35% incrementals. You've obviously got a net productivity piece. You get pretty close to that number in 2026, unless there's something wrong with my math. Maybe you can just help us think about those moving pieces and maybe if you can kind of pull forward that target for margins.

Sure. Thanks for the question, Amit. So the internal of that page was twofold. One was obviously to see how we are performing versus the Investor Day targets that we laid out in February of this year in the spirit of transparency and how we are performing. And second was to give a little bit more of a framework for 2026, but the formal guidance will come out in January.

So first, just as you noted, if you look at the first 9 months of our performance, it's been really good across margin expansion, EPS and even free cash flow conversion. We thought we were going to be 100% free cash flow conversion at the beginning of the Investor Day, but now we're going to be over 100%. So what we laid out at Investor Day was that we'll get to 25% by 2027.

And last year, we finished at 21.4%. So that means 360 basis points over 3 years. If you look at our guidance this year, it's about 180 to 200 basis points. So really, really good work that we've done in terms of our margin expansion, clearly, productivity across supply chain, across G&A has really been good through the first 9 months of the year. So where we sit today, we actually feel very good about the 25% target that we set out for '27. We're moving absolutely in the right direction around there. And come in January, we'll probably provide a refresh on where we stand on our 3-year targets.

So as we get into '26, Amit, I think what we are going to see is continued outperformance versus the macro what we laid out in Investor Day was $1 billion over 3 years, $100 million this year, $300 million next year and $600 million a year after a cumulative $1 billion. Just at our second half performance, you'll see that we have about $100 million for this year. And next year, we see a line of sight because of commercial excellence in PI to get there.

On the margin side, supply chain. We've done some good work this year in a couple of times, but there's still other areas in terms of the factory spend, whether we see more opportunities, we kind of drive that harder and G&A will continue. So I think overall, you will see next year again to be a strong operating performance here. And from where we sit today, we feel pretty good about where we laid out the Investor Day targets and provide more of a refresh in January.

Okay. Great. And then, Bill, I just wanted to ask a question on the divestitures. I know you talked about the 2%, 3%. But if I remember correctly, that 2%, 3% was kind of part of this 10% of the 120 profit centers, umbrella that you thought maybe would be better in the hands of other people. Are you -- do you feel like you can execute more towards that 10%? Or are we still in that 2% to 3% kind of envelope? And how do you kind of -- I know this most recent divestiture is not dilutive to earnings, as you talked about, but just curious about how you balance the divestitures or the magnitude of divestitures with maybe the EPS impact to the company.

So Amit, look, let me be really clear about this. The process is ongoing. We're going to remain disciplined. You referenced appropriately the comments we made back at the Investor Day and in several forums, since then about how we're thinking about the portfolio, we have 120 profit centers. We've analyzed them to identify those businesses, which we believe have high growth, high march potential, our technology-driven businesses that are consistent with the 3M sort of heritage and DNA, we have a strong right to win versus others that aren't.

And we concluded that about 10% of that portfolio are in more commodity areas where they may no longer be a strong fit for the company where we don't have a clear right to win in this material science, technology-driven business. We're only going to be selling businesses where there's clear value to shareowners above what it would be as value to selling it to somebody else as opposed to what we would have by running it on our own.

And certainly, we're taking into account as we think through that, the lost earnings, the stranded cost dilution that the management time and effort and focus that happens on small businesses that don't perform well. We did one in the quarter here, and it was important to get that over the line. I'll just take you back to my comments in the script, we're less than 1% of the revenue. and 7 factories. So you can imagine what the profitability of the business happens to be.

And there's other opportunities like that. We'll analyze them individually will be very smart and we'll be very disciplined about this. And this will be -- it's a process that will unfold over time. And that's the process we're embarking on to build A3M that's a higher performance higher growth, higher margin potential overall entity and not every business we're in today will be part of that journey going forward on it.

Our next question comes from the line of Steve Tusa with JPMorgan.

Just on this fourth quarter, I mean, you did the 2019. I think your implied is like less than $180 million in the fourth quarter. I mean, I know there's some seasonality there, but I don't recall that kind of drop drop.

I think you mentioned there was some discrete item pull forward into the third. But then you mentioned that backlog provides actually some pretty good coverage for the fourth. I think the 25% coverage was a positive comment, maybe it wasn't. Could you maybe just provide a little more color on why the more than seasonal drop-off from 3Q to 4Q?

Sure, Steve. Thanks for the question. It's actually quite typical between the Q3 and Q4 from a volume and margin perspective, volume is typically $250 million lower between the quarter because of mainly the consumer back-to-school in the third quarter and in the industrial side. So that's pretty typical.

We also have factory shutdowns in the fourth quarter. So there's an impact on absorption. So I would say that's pretty typical step down in Q3 and Q4. This year, clearly, there is a little bit of a step-up in investments and in tariffs between the third and the fourth quarter.

The investments we thought were going to be $175 million for the year. we're stepping it up to $185 million, most of it in the fourth quarter, pretty encouraged by what we're seeing on the revenue side and where the investment is coming through is definitely more sales force training as we are scaling up the commercial excellence, hiring more salespeople for coverage in other parts of the world are hiring engineers, as Bill noted earlier. So definitely, there's a little bit of a step up on the investment side and tariff a little bit more in the fourth quarter. So I think it's quite typical.

If you look year-over-year, which is the more appropriate comparison, we do believe that we will grow above macro again in the fourth quarter. It's going to be -- if you look at the first 20 days of the month, and from the backlog coverage, you look at orders, you look at revenue, I think we are on a pretty good trend over year, and the revenue growth will pick up, and you've got good incrementals from them. We'll continue to drive on the productivity side as well. over there.

We clearly driven quite well in the 9 months of the year. We'll do more on productivity and G&A. And all of this will more than offset the pickup in investment in tariffs, in stranded costs. And at the midpoint of the guidance, we would be 100 basis points of margin expansion.

Now if we continue to perform the way we have in terms of either higher volume like in the third quarter or more on the margin side, we could be at the higher end of the guidance range, which would imply a margin expansion of 150 basis points in the fourth quarter for us.

Okay. And then just lastly, on this $1 billion of revenue, how much did you book this year of the $1 billion, do you think?

About -- you mean the growth above macro $1 billion?

Yes.

It would be close to $100 million by the time we finished the year.

Right. So that should be like substantially more next year from a over macro perspective for the full year in '26?

SP-2 Absolutely. I mean I'll go back to what we said at Investor Day, it would be about $300 million. So a $200 million incremental step-up next year.

Yes. But you said next year is a bigger year, right, for that $1 billion like it's going to take a higher share. Okay. No, that's great.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

Maybe just a few questions on some of the business trends you saw this quarter. So I think came in ahead of expectations. Can you talk a little bit about the drivers of that? And maybe if there was any sort of timing differential between 3Q and 4Q versus what you expected and thoughts on 4Q?

So just on the macro, we laid out a chart in the webcast about what's happening in the macro. It remains relatively soft, pretty unchanged from what we had seen 90 days ago or so. We did see a little bit softening in roofing granules. Anurag mentioned that in his prepared remarks. It's really the housing market is a little bit soft consumer spending is a little bit soft or they're not replacing roofs as much, which has definitely softened in the last 90 days.

Commercial vehicles is down. It was down -- I think it's going to be north of 20% here in the back half of the year. and that has weakened in Class V to VIII in North America from admissions, trends and tariffs and some other things that are happening there. We are seeing some better trends. I mean auto looks just slightly a bit better -- we do -- we actually were flattish in the quarter in a market that was up a little bit. Auto builds come up just a little bit year-over-year. So that's okay.

On electronics, we were up mid-single digits in the front half of the year, mid-single digits in Q3. Trends there are pretty good for us. It's about 10% of our sales looks pretty good. Last year, it was low double digits. So we're doing pretty well in the electronics segment. As you know, we provide adhesives and films, polarizer some other things into notebooks, tablets, PCs, cell phones, we've seen good penetration of the mainstream market.

We're typically a premium provider, and we're starting to see good penetration into mainstream, which is probably 80% of the market. lot of good NPI going into that -- in that business. So we're pretty pleased with the trends on electronics, and it's just a little bit better than we had thought 90 days ago, frankly.

Got it. That's really helpful. And then just from a geographic perspective, encouraging to see the acceleration in China and Europe. Any key standouts there in either region that really drove that improvement?

So U.S. was encouraging at coming up from the first half. I think first half was up 1%. Q3 was up 3.7%, almost 4%, which is pretty good. we're encouraged that Europe has accelerated a little bit. It was down in the first half about 1 point. It's up about 2 points in the quarter, which is good. China is quite interesting. You might recall, we grew about -- I think around double digits, low double digits last year.

In the first half of the year, we're up mid-single digits. Q3 was up high single digits, around 8%. So it's -- it was better than we had expected. We had expected a softening in the back half. And in fact, it accelerated a little bit in Q3, now it might weaken a little bit in Q4 but still be up. And so we're very encouraged with the trends here.

Remember, it's -- for us, it's a little 10%, 12% of the company. It's about 50-50 domestic and export. And the China exports in September were up about 8%. So China continues to be pretty resilient in lots of ways, but we've got a great team there. There's a lot of self-help that's going on. We changed our organizational model in China as well as in India. And we're seeing just better performance because we're driving operational excellence is driving commercial effectiveness, a whole lot better than we might have done in the past. So part of the growth that we're seeing in China is just, I would say, self-help along with the market, but I think a lot of it self-help.

Our next question comes from the line of Nigel Coe with Wolfe Research.

I just want to go back to sort of the point that Jeff was get into on the NPI. I think you mentioned 15% growth year-to-date from new products, Bill, and 19% in the quarter. I might have got those numbers wrong. But it does suggest that pretty much all your growth is coming from new product. Number one, is that correct?

And then secondly, is it too early to judge how the margin contribution is tracking for this NPI?

So Nigel, look, just to be clear, the numbers, we track -- what I talked about was new product sales on a 5-year basis. So going back, everything launched in the last 5 years. So some rolls on in the quarter and 5 years ago, the Q3 would have rolled off. And what we're seeing is -- because that's actually what we use that as a measure for vitality. So we measure the 5-year new product revenue as a percentage of the total revenue at points in time, we were in the high 20s, 30% vitality, maybe even a bit above that.

We started the year at about 10%. We'll end at 12%, will go to 20% by 27. That's what we watch, and we want -- that will convert into revenue each quarter that starts to build. So in the first quarter, that 5-year new product sales was up 3% in Q2 is up 15%, so for the first half, it was up 9%. In Q3, it was up 30%, which now takes year-to-date up to 16%. For the year, we'll be up high teens, and that's going to continue to build that's on a 5-year basis.

Some of that revenue is converting here in the quarter. I would say most of the outsized growth above macro in the quarter came out of commercial effectiveness, commercial efficiency, not much NPI. But again, as Anurag has pointed out before, that will build over time. So early on, we'll see more commercial excellence. And then eventually, we'll start to see NPI rolling in.

But the reality is as we launch more products, it's very clear that it's changing the discussion with our customers. Even if it's a typical replacement or there's some cannibalization, it's allowing a different conversation with the customer. We're gaining shelf space, and that's really encouraging to our customers, and we're winning business simply because we're launching more products.

Okay. That's very clear. And then Anurag, maybe on 2026. Can you maybe just give us a bit more definition on some of the margin puts and takes as it relates to the tariff roll forwards, stranded costs and then some of the productivity savings?

And then maybe a ticky one on the EPS. You talked about high single-digit growth per year planning for '26 and '27. I'm just wondering if you have confidence that that's a decent place order for '26.

Okay. Thanks, Nigel. Just on the margin hedgewinds and tailwinds for next year, it's going to be no different from what it is this year. In fact, on the volume side, as we just add a discussion, the outperformance versus macro should accelerate next year. So you should see higher volume growth, more incrementals coming -- flowing through from that next year versus this year.

On the supply chain side, we said that we'll do $1 billion of productivity over the next 3 years. We did good this year, but they'll be also finding more opportunities, which I mentioned earlier, if you look at the factory spend that we have, which is close to in logistics. So you're going to see a little bit more on the productivity side next year. G&A, we're off the blocks really well this year.

We're in fact finding more opportunities. We did some good work on IT side, on the indirect expense. And as we move into next year and the year after, we're also going to look at what does the strategy for IT mean for us. And for shared services as well as on the indirect, there's more that we can do facility management and MRO and so on. So you're going to see good tailwinds on that next year as well. So I would say, higher on the volume side, supply chain continuing and G&A continuing the way it is.

On the EPS side, we will give you more color next year. what -- as I said, the intent of that page was when we started the year for '25, we said we will be mid- to high single-digit EPS, right now at the guidance, we're going to be high -- close to double-digit EPS, 10% at the midpoint of our guidance for this year. So we're definitely off at a very strong start right now, but we'll probably give you more color on what the EPS for '26 '27 looks like next year.

Our next question comes from the line of Julian Mitchell with Barclays.

Maybe just wanted to try and understand on the margin front. I think in the sort of TE business group. Margins were fairly sort of -- it was down slightly in the third quarter, I think, despite a lot of the productivity sort of measures underway. So maybe sort of help us understand any sort of drivers within that?

And then when we're looking out over the next 12 months, is the assumption that most of the segments should see sort of similar margin expansion into next year? Or is there anything particularly moving around on mix or a calibration of investment spend?

So I'll add it really quickly here, Julian. Look, both SIBG and CBG margins were up about 200 basis points in the quarter. TEBG was down about $20 million it's a large portfolio of businesses, mix really matters in that area, but also that's the business that's going to be most impacted by PFAS stranded costs. So that was the biggest part of the headwind. And we'll talk more as we go forward as to the margin trajectory in each of the businesses, but that's really what went on here in the quarter.

And then more broadly, I suppose we'll see in the 10-Q out in a day or 2, the sort of updates on the litigation or legal front, but we've had some questions from investors around the movement in claims recently on personal injury in the last couple of months. Just wondered if you could sort of flesh out anything that you have seen there in your own tracking of that type of thing and what the next steps are on that personal injury front.

Yes. So exactly. So Julian, you're mentioning the injury claims on the personal injury, the claims on personal injury. There's really 3 broad areas that we're focusing as we try to manage risk here, and we're doing -- we're working relative to mitigate risk and manage risk as we go forward.

Certainly, the public water supplier piece is -- we settled that a couple of years ago, $12.5 billion. Very few opt-outs. We've talked before about some of the AG cases. State of New Jersey was last quarter. Vermont will happen over time. We'll see Illinois sort of in September of next year. some of within some outside of the MDL. So we continue to drive that. And you specifically mentioned about the third one, which is personal injury. There was an October trial date for the bellwether.

The judge decided to remove that date to allow unfiled cases to be filed. This is about how we want to manage the cases in the docket as we go through this piece. It's all about and now we're at how we vet some of these filed cases is happening right now. You'll note in the 10-Q that there have been more cases. It's just under 14,000 each each case has multiple claims, and we're now in the process of vetting all of that. And we'll talk to investors through SEC filings and these calls as we go forward as we learn more.

Our next question comes from the line of Andy Kaplowitz with Citigroup.

Bill, as you continue to shape your portfolio, I think you already talked about potential divestitures -- maybe can you talk about how you're thinking about getting 3M as exposed as you can, just some of the mega trends that are out there -- for instance, you cited strong demand in your electrical markets within Safety and Industrial, which I think is levered to data centers. So how are you thinking about the overall portfolio in that sense.

Well, that's exactly how we're identifying the priority verticals that we're focused on. And a good part of the company is aligned to the priority verticals. You specifically mentioned data centers. We're exposed to data centers, both inside the data center as well as outside that business for us is on the order of about $600 million, 100 inside the data center and $0.5 billion outside, which is connecting power to the data centers through terminations, through splices or a variety of other things. So that business is growing pretty well. It's probably mid-teens.

So we've got really good exposure that not as much as we would like, but certainly, it's growing over time. But that's how we came up with the thinking around the priority verticals was we aligned our technologies versus mega trends in the marketplace and capabilities of the company, and that's how we came up with a strategy we laid out back at the Investor Day in February.

Helpful. And then I think margin was the highest we've seen in quite a while in consumer -- can you talk about the puts and takes in that segment? I know you said it might be harder to get price within consumer, but are you actually getting any price versus cost in consumer? Or was it just good that you saw driving Q3 margins?

It's really good execution. It's really not pricing. It's the strategy that the CBG team has laid out to focus on priority brands, they're beyond the portfolio, SKU rationalization, their focus. They're launching a lot of new products. I mean they're up more than double year-to-date and in the quarter. So their NPI is really good.

The commercial excellence is really good. We're pushing more ad merchant to that space. So the team is performing exceptionally well. It's pure execution. And I would say 0.3% in the quarter. They've grown positively in the last 4 quarters, it's 0.3% in Q1, Q2. So it's a pretty consistent story in what I would say is a relatively weak consumer market. So purely execution, they're doing a great job.

Our next question comes from the line of Chris Snyder with Morgan Stanley.

I appreciate you squeezing me in. Maybe only one just because we're running up on time. I wanted to ask about China. First half mid-singles, Q3 high single, so accelerating. I think it's a real disconnect versus what we're seeing elsewhere from others around China. So I guess my question is, what do you see for China into Q4 and next year? And do you think there's any risk that maybe that business is running a little bit hot to the extent there's maybe an overproduction in China ahead of some of the tariff negotiation deadline windows.

So thanks for the question, Chris. Look, I'm really, really pleased with what the team is doing in China. It doesn't feel to me like it's overheating at least from our perspective. I think -- what we're seeing is a more resilient economy. But I think much more importantly is just the execution by the team. As I mentioned earlier in the call, about half of the business is going after the domestic market. there's some stimulus going into the market, but the execution of our local China team to go after and attack new opportunities is quite substantial.

And half the market is on the export side, and we continue to perform really well in that space as well. One of the key growth theme for our TEBG business in China is going after China OEMs. And to capture those opportunities, you have to innovate. You have to innovate at a pace that's consistent with the pace at which these OEMs are launching vehicles in a year or in 18 months or even less than that.

And in the quarter, we saw our ability to launch a new product offering into China to capture share with a China OEM in 10 months. So we're seeing a lot more hustle, a lot more speed more eagerness. So I'm really pleased with what's happening in China. We thought it would soften it did not. It actually accelerated we think it might soften a little bit in Q4. I don't know what's actually going to happen because the team is pushing pretty hard.

But I'm encouraged by the trends, our position there, the footprint, the team, the leadership, and I think we're doing a great job.

Our next question comes from the line of Deane Dray with RBC Capital.

I'll also keep it to 1 question. Just circling back on the divestiture and the review of potential noncore businesses. So can you talk about the timing -- is this -- is it front-loaded? Do you want to try to get it done in the next couple of quarters? Or will it be an annual review? And then related, are you restricted in any way by the courts on potentially larger exits spin-offs or is that it for spin-offs?

So on the second one, there's no restriction. And on the former one, look, we're going to be very thoughtful, very methodical. We're going to execute transactions as we're able to do it effectively driving value for owners. It's a portfolio management is not something you think about once a year or once in the strategic plan, but it's an ongoing effort.

We clearly identified a piece of the company that doesn't appear to fit, and we're executing against that while also and really importantly, building the muscle inside the company on how we execute through the basics, the fundamentals, which is the strategy we laid out in the middle of last year. It's a focus on fundamentals, operational excellence, commercial excellence innovation excellence. And that's really what we're spending a lot of our time on.

As we think about how the portfolio should move as we pivot the business into these higher-growth verticals aligned to the question came up earlier around mega trends in our priority verticals. So this is the path we're on. And again, we'll be thoughtful and very methodical.

Our next question comes from the line of Joe O'Dea with Wells Fargo.

I'll keep it to one as well. But I just wanted to circle back on commercial excellence and clearly some traction that you're seeing there. But trying to understand the time line? And if you could put it in the perspective of kind of what inning you're in, in Safety and Industrial?

And then talk about how long it's taken to get to that $100 million pipeline? Because really, what I'm trying to understand is I think your earlier days on T&E and don't know where you are on consumer, but trying to think about how repeatable what you're doing in Safety and Industrial is in these other segments and the time line to see traction there?

Joe, thank you for the question. It's a great one. We're really proud of what the team is doing in commercial excellence. We have great, great momentum here, and we did start mostly in SIBG, and within SIBG, was starting in U.S. They then went to Europe and Asia, it's the rest of world. And then Wendy and the TEBG team as a fast followers, learning from those lessons are drafting right behind them, again, starting in the U.S., then going internationally. Karina has our effort going on in CBG. It's actually building, I think, terrific momentum. It's in 3 areas, the pillars we call them.

One is commercial management. It's how we improve our processes and capacity at the front end. It's standard tools, it's improving our sales force. It's it's basic execution between our sales reps, sales manager and how they execute at the customer interface. Part of it is a second, which is channel effectiveness, is all about how we engage with the customers joint business planning. And that's what gave rise to these great ideas on cross-selling and the pipeline that we have that's over $100 million of of cross-sell opportunities, which we now have captured $30 million on an annualized basis. That number is going to be bigger than what Chris laid out at the beginning of this year at Investor Day. And we're actually seeing even opportunities to cross-sell between TEBG and SIBG and consumer. So it's actually quite good.

And the third is how we improve loyalty to reduce churn. This is a great opportunity. The best way to grow is to not lose. We are reducing our attrition that comes through better quality and better on-time and full performance. So this is gaining traction. We're clearly in our early innings and this will build over time for sure. So I'm really pleased with the progress up on our commercial effectiveness work.

Okay. Well, I think we -- I think that brings us to the end of the call. I wanted to thank again all the 3Mers for their continued drive towards excellence, improving every day. executing against our priorities and delivering value to shareholders and to customers. And thank you very much, and thank you all for joining the call today.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.

Thank you, everybody. I'm Chris Snyder, U.S. multi-industry analyst. Super excited to have Bill Brown up here with me today, CEO and Chairman of 3M. Thank you for coming.

Thanks for having me.

Yes, absolutely. So over a year into the job now, I guess as you kind of look back, what do you think has been your biggest success? And what do you think has been the biggest challenge as you step into the role?

So year has gone very fast, as you'd expect. The team has been very busy. When I came in -- when I joined 3M and I came in, I saw an opportunity to get back to basics, focus on the fundamentals of the business, sort of reinvigorate the culture, focus on accountability, agility and innovation, all those things you're trying to do to make the business better. And it's playing out largely the way I expected it would.

A year ago, I laid out 3 priorities around top line growth for both innovation and commercial excellence, driving operational performance across the enterprise and an effective capital deployment. And I think we've made really good progress on all of those dimensions. The company is responding, I think, very well to the challenge to get back to innovation in the first half of this year, and I talk about these metrics all the time at our earnings releases. We launched 126 products in the first half of the year, which, just for perspective, we launched 128 in all of 2023. So it's up almost in line with where we were 2 years ago, up 70% year-over-year. I think importantly, it's growing rapidly. We're on track to do better than 215 launches this year. And as we laid out at the Investor Day, 1,000 over the next 3 years. Again, we're -- the first 6 months has been progressing very well, and I see that continuing to accelerate.

The second part of growth is around commercial excellence. And this is an area that -- when I started, I said, look, it's going to turn -- take a little bit of time to turn the top line revenue around with innovation. So we've got to get better at selling what we actually have in the market today. And that's the commercial excellence. And we started in our Safety and Industrial business group towards the back end of last year. And it's got several elements to it. It's getting this productivity out of our sales reps and sales management, pricing discipline, cross-selling initiatives, reducing attrition or churn of our customers. And we're seeing really good progress.

We started SIBG in U.S., moved internationally. So we went to Europe and then Asia. Now we're sort of drafting TEBG behind that. And I think you see real concrete evidence of some performance improvement there. At the beginning of last year, SIBG was negative organic growth in the first half of last year. In the second half, it was up 1.6%. First half of this year is up 2.5%, and we do see the back end in SIBG accelerating. And that's largely on the back of commercial excellence, some through NPI, but a lot through what the team has been doing on commercial excellence. So very good. We're focusing pretty heavily on our culture, driving a 3M Excellence operating model. I talked about this quite a bit at our Investor Day earlier this year, which is very important. That's sort of driving a lot of the operational excellence, which is a second priority across the company.

And I talk a lot about the metrics that go behind that. But you start to see some proof points here. And if you just look at what we did the front end of this year, our margins were up 250 basis points over last year. For the year, we're guiding between 150 to 200 basis points. Just to benchmark you last year, in 2024, we're at 21.4%. In our plan, we laid out hitting 25% margins by 2027. It's up 360 basis points. And of course, if we do 150 to 200 this year, it's tracking pretty well in advance of that target. So I think we're making good progress in all these dimensions.

I think the challenge that I've seen and maybe the opportunity is really around driving operational excellence in the company. And I've talked a lot about the complexity of our network, how many factories and distribution centers I have, and we've got to get at that. A lot of it is around the maturity of the team, the metrics, the processes. I've done this before. I've seen what it takes to drive a performance culture, drive operational excellence. We'll get there. We'll hit the targets we set out at the Investor Day, but that's maybe a little bit less progress than probably a lot more on, I think, on some of the things behind the top line growth initiative.

A lot of stuff for 1 year. So you guys are obviously moving fast. You have a lot of targets. I mean you unveiled a lot at the Investor Day. Collectively, there's a lot of things to improve growth and improve margins. Is one of those more important to you?

So it's not. Look, it's -- the things that we talk about, at the end of the day, if we want to innovate more, we want to sustainably and consistently drive top and bottom line growth for 3M. We've got to fix a lot of the plumbing inside the company, how you develop a product, how you produce a product, how you get a product to the customer. Again, back to basics, these are really kind of basic type of things that we really focus on. And we are showing, I think, a lot of progress on the initiatives we put in place. We are investing in growth initiatives inside the company. That's very, very important.

To me, when I think about it, margins and growth, I do think that there's opportunities to expand margins. We see we're doing that at the beginning of this year, yet still have money set aside to invest in growth. And I think when you drive the growth, we have good drop-through that's going to expand margins. So there's a virtuous cycle here. We just -- we're on the front end of this, and I see this kind of accelerating over time. But I do think it's really both of them. I think we have proven ourselves in the past with the ability to drive margin expansion. I think where we maybe not have proven ourselves on the top line, and I think we have an opportunity to do them both. And I think that's where you see sustainable growth for shareowner value.

I appreciate that. You've started providing as you can see, a lot of metrics to us on time and full, equipment utilization is something that's very important. I guess what's the most important metric to you? And for all of us outside looking in, what should we monitor to say, hey, this is going on track?

They're all important. They're interdependent. They're not -- what I'm doing is giving you some milestones, some proof points of the progress that we're making. And these are the things that I talk about internally. As much as I share externally with investors, this is -- these are things that the team is focused on internally. You can't drive on-time in full or OTIF up if you don't fix your operational utilization of assets because you have to have surge capacity. One drives the other. These are both very important.

When I think about like how do you drive growth, one of the key reasons we see customers [ trading ] or churning from the company is we're not delivering on time in full. Coming out of the pandemic, we were around 80% as a company. Back at the end of Q2, we were at 89.6%, up 300 basis points year-over-year. Really good progress in TEBG and CBG, the consumer business group, a little bit behind on Safety and Industrial. Through Q3, we're consistently above 90%. This is -- these are the right metrics to focus on. One thing I would draw your attention to, for consumer, if you're below 95%, we sell to a lot of big major retailers. If you're below 95%, you get fined.

I've talked in the past about the gross to net inside that gross to net on sales are fined, and it's in tens of millions of dollars. And it's a deduct from sales because they typically pay you less than you had invoiced them for. One of our largest retail customers flowing back forever would always find us every single quarter. In Q2 last year, it was $0.5 million in the quarter. In Q2 of 2025, it was 0 for the first time because we're consistently delivering above 95%. So you start to lose that drag on the revenue growth because we're not finding or discounting. I think more importantly, they're starting to look to us that were giving us more shelf space because we're more reliable. We're bringing more products to market, higher quality on time. And that's a partner that you want to be doing business with. And this is where we're seeing some good traction along the ways here.

On operating equipment effectiveness or utilization, it's kind of like a metric that's a bit in the weeds, right, 59%. So we're measuring it sustainably, 200 assets, more than half our volume. It's going to get to 230 assets at the end of the year. These are the biggest assets we have. So why is this important? Because, look, if you're not measuring the utilization of your assets, first of all, you don't know what your search capacity is for spot demand or short-term demand that you want to satisfy. That's very important. But over time, we all know we've got too many assets in the network. We have too many factories, too many distribution centers. It's fundamental to start to understand what do you do with those assets by knowing what the utilization of those assets are today. And I gave a small little snippet of a microcosm at the Q2 earnings release when I talked about one of our coder assets.

Now we make, we do making, we do coding, we do slitting, we do packaging. We have these core value streams across our factory network, and this is coders. We have more than 250 coders in our network, and we took one. On 1 coder, we raised the utilization by 12 points, and it allowed us to bring 2 other coders in the network into that one and close these 2 down. Small microcosm, small example of what you can think about, well, how about the other 250 coders, how about the splitters, how about the factories? And as you think about this, this is the path that we're on, the basics around how you run this network like it is and over time, starting to squeeze the assets down. And that's what's going to happen over time. That's what's going to give us this trajectory beyond 2027 to grow margins beyond this 25% we set out at the Investor Day.

I wanted to follow up on the on-time in full. You talked about Q2, I think, at 90%. I think that maybe the end of '22 was 80%. So we've already seen a big improvement there. Is that having a material impact on the organic growth already? And is the bigger impact actually what you said that, no, they give us more business and maybe that comes through a little bit later?

So we started to measure attrition or churn in our Safety and Industrial business. Again, they were the first out of the gates on commercial excellence. One of the key pillars of that is why are you switching business as a distributor customer to another supplier. The feedback through that work that we've done, one of the key things is around that we don't deliver things on time and full. The distributor needs it, it's not available.

So for the first time, they'll wait, the second time they'll wait, the third time they may wait. By the time it's the fourth time, they will look to an alternative, maybe not quite as good, maybe a different brand, but they'll start to move to that. And once you've lost them, it's hard to get them back. And we see that. The number is substantial. We -- it's surprising to our team internally. And one way to grow is to not shrink, not lose business. So what I can say is by focusing on-time in full, we are having a different discussion with our distributors.

We have seen our churn rate come down. You will see SIBG accelerate because of that. And we are starting to win business back, small pieces, a couple of million here and there by actually going back and asking for the business back and proving that we can deliver good product on time and in full. So it's a very important metric, but it's just one of many metrics we have in terms of a contract with our customers, but it's an important one.

Yes. I mean, you clearly -- you're making a commitment to R&D and innovation. You talk about the new product introductions. Are they -- I guess, one, what is like the time frame for that R&D to convert to sales? And is it having an impact in '25?

So what we laid out at the Investor Day is that we would generate $1 billion of growth above the macro over the next 3 years. And we said, look, half of that is going to come out of commercial excellence and half is going to come out of new product introductions. We also said that the front end of it is going to be mostly commercial excellence and that NPI or the growth from innovation will be the accelerant beyond it in '26 and '27.

I can tell you, we will see some impact in the back half of this year in certain parts of the business. That's good. You'll see more acceleration into next year. But I think the things that we're starting to work on in terms of innovation are the right sets of things. We've now sort of built a dashboard of common metrics across the company. I know and you know as investors, you know that NPI just launching more is sort of indicative, it's not the result, but it's the way you start to get the momentum moving. You get the organization thinking about it again. They're starting to get more comfortable with launching products, generating ideas, working on the flow.

Now you can start to work on, okay, what's the revenue coming off of that, which is why we leaned forward with investments that in the first half of this year, 5-year revenue from new products is up 9% over last year. In Q1, it was up 3%. In Q2, it was up 15%, for the first half, up 9%. For the full year, it will be up mid- to high teens. Our Vitality Index, which is a measure of 5-year revenue over total sales, used to be above 20%. The beginning of this year, it was around 10%. We'll end the year at 12%, get to 20% in 3 years by the end of 2027. That's a measure of the freshness of your portfolio of your offering to the marketplace.

When you drive that revenue up that new product sales, you will see incremental growth. You'll see it happening in '26 and '27. But it's also important to our customers. You'd be surprised at how many people I talk to or our distributor and customers that are more excited about doing business with 3M simply because we're getting back to innovation. Those are the comments I have. So we're getting shelf space because we're on time and full, but also because of the promise of new innovation, new innovative product coming on to the marketplace. The things that we're launching today, probably, I'd say 80% of them are replacement products. We've got to launch them because you just have to stay live in the marketplace. It's going to cannibalize some revenue. It does bring some incremental benefit. Sometimes you get price a little bit for it, sometimes it's lower cost. But this stuff will build over time. And as we start to move beyond the ones that are replaced -- purely replacement and you now start to launch things that are newer to the world or adjacent markets, you'll start to see revenue increase from that, and that will be starting into next year.

I appreciate that. If we look back over the last decade plus of 3M, my math would say it's been 1.5%, maybe 2% organic growth profile. And I think anyone who listens to this message or attending the Investor Day at the headquarters would say the growth will get better. But I think it's harder to kind of triangulate or pinpoint well, how much better. So I guess what do you think is the right growth profile for the company?

So look, we did 1.5 points in the front end of the year. At the end of the day, we thought we would do a little bit better in Q2, but it was 1.5 points in the front end of the year. But we're going to accelerate in the back half. We said 2% for the full year, which means accelerating to 2.5% or about that in the back half of the year. This is the direction we're heading. And to get to $1 billion over the macro, that's about 1 point above the macro, a point above the 2% baseline macro we're looking at.

So we're seeing acceleration over the next 3 years, 3%. This is the front end of this journey. What I'm seeing in terms of improving the basics, there's so much opportunity to grow the top line that we had not explored. I think we're at the front end of this. I think to sustainably and structurally change the trajectory of the company, we're going to have to look at the portfolio as well. There are some businesses when we look at the profit centers, there are some businesses that are lower growth and are drag on the growth. And there are some places that perhaps we can bolt on to. And as you think about that transition over multiple years at 3M, you start to structurally shift the portfolio, that's when you start to get to something north of 3%.

So it's something we're working on. We've got to walk before we run. We've got to hit the targets we laid out to investors at the beginning of this year. I think we're making great progress. But that's kind of how we're thinking about growth.

I wanted to follow up on the portfolio point. I mean, obviously, like a lot on your plate right now. But I felt like a year ago, there was maybe more conversation on the portfolio, and it feels like that's kind of died down. I guess what should investors expect to be areas of interest to 3M and potential areas of divestiture?

So as we said at the Investor Day, look, we have to look structurally at the portfolio. How do we systematically move this portfolio into higher growth, higher margin potential businesses. And we are looking at that very surgically. We showed a chart at the Investor Day. I had laid out 120, 121 different profit centers. We're looking at it very surgically, which ones are where we think we have high growth, where we have high margin potential, where we have a right to win, where technology is required for differentiation. Those are very attractive markets. Those are the priority verticals that we talked about at the Investor Day. Semiconductors, it's going to be data centers. It's going to be aerospace and defense, electronics, automotive, a bunch of others, safety. There's a lot of different pieces. So that's the place that we're going to start to invest in.

At the same time, that analysis looked at a bunch of businesses that just don't fit. I would size that it's around 10% of the portfolio, more or less. We're in the market for about 2% to 3% of that. That's what I -- that's what I talked about earlier last year -- late last year. Look, some of these businesses have been in the portfolio for a long time. I think they've been envisioned for divestiture for a number of years. We never took it on. They're not necessarily great businesses. We don't have a right to win, the more commodity like. And so you're selling into a market where you also now have this sort of tariff overhang. The process is ongoing. We had one that transacted earlier this year, a small one. We have a couple of others that are -- we believe are getting close, but the auctions are kind of thin. But the reality is like we've got to move these out. It's not just simply because they're a drag on growth or on margins, but they also do drag on management time and attention. And our time and attention ought to be on things that are more productive for our owners, which is why we're focused on this. So yes, we talked about it late last year. There's an ongoing process, and we'll communicate as we make progress on these divestitures.

I imagine even the ones that maybe aren't "good businesses" are benefiting from a lot of the initiatives that you're bringing to the company. Is any part of this like clean them up, get them better.

Well, sure. I mean that's the approach we're looking at really all of these various pieces of the company. So some of the ones that we're divesting, it's -- you have to sit back and look at what would it take to make it a good business. Some are not in great spots. I mean, it's just commodity markets. And the nature of 3M, we're a material science innovation-driven company. And there's some business that we're in that just we don't think has -- there's any headroom here through innovation. They're better owned by other people. There's a number of places even in the priority verticals where we've got good solid businesses, but clearly a much greater opportunity to win.

And I'll give you a good example, automotive. This year is not a great market for automotive. The build rate sort of flat to up 1%. It's likely going to be softer in the back end of the year. We have a decent position in automotive, I think, globally, around $22 per vehicle. But that penetration is more on the Western OEMs, a lot less on China. And that's clearly, we've got to be innovating in those areas. But when -- in an analysis we've done and just sort of tear down a vehicle and the team just did this in the last couple of months, tear down a vehicle and you have your engineers looking at all of the components that are there. What things could we provide with where we could sell that products we have on the market today. It's quite a bit bigger than $22 per vehicle.

So we have an entitlement to grow in these areas by just getting better, closer to customers, better execution at the customer interface. There's a lot of ways of just growing where we think we are entitled to win where we haven't been pushing as hard. So that's where I want to spend my time. It's not so much in the pieces that I think are more commodity like.

I appreciate that. You kind of talked about earlier 1.5% organic in the first half. 2.5% in the back half. Tariff prices coming through. You called out, I believe, better trends in July on the conference call. Can you kind of just like update us on the market and what to expect from here?

Okay. So not much has changed in the macro from where we were at the end of July when we gave our earnings release. It's still relatively sluggish, things moving laterally, not getting materially better or worse really across the franchise, across the company. IPI is still running about 2%. PMIs are contracting. We see in auto, I just referenced auto a little bit, flat to up a little bit. It's down in the back half of the year. It was up a little bit in the front half of the year.

Again, you're seeing more growth in China, less on the U.S. and European OEMs. We think electronics is a part of our company. These are all macro numbers, softening a little bit in the back half. We think the consumer is going to stay relatively sluggish through the back end of the year. That's our expectation today. So it's largely where we're at. But when I step back and think about that's sort of the macro backdrop, we get back to focusing on our priorities, the things that can make that different and better, and that's NPI and that's commercial excellence.

And through those efforts, especially in a business like Safety and Industrial is where we do see some acceleration in the back half of the year. We had a chart in our earnings release that laid out sort of the vertical markets we're in. General industrial is about 40% of the company. Safety is another 15%. So about 55% of the company is in a business where it was low single digits in the first half. We see it getting better in the back half of the year. Between auto and auto aftermarket, it's about 15%.

Auto aftermarket is relatively weak, and we expect that will continue to be through the back end of the year. The automotive business, again, was a little bit soft in the front half of the year. We think that's going to be flat to maybe down a little bit, but sequentially a little bit better. We expect electronics to still be up low single digits in the back half of the year. And again, consumer is sort of flattish. So we have a lot of levers to pull that are just controlling our own destiny, and that's what we're really focused on. And that's why we came back and we said we'll accelerate growth in the back half of the year despite what I thought is -- I think is a sluggish economy.

Yes. So it seems like at the company level, that growth rate is as expected from July. Under the surface, are there any verticals that are maybe doing better than you thought in July? Any that are maybe coming in a little softer?

It's really as we described it in July, as I just mentioned, I think, again, general industrial is sequentially getting a little bit better, safety getting a little bit better. Electronics will be up in the back half of the year, which is good in a softening market. Part of it is through some of the introductions we have, we're gaining some share of market in some notebooks and tablets and some phones. We're starting to get some penetration into the mainstream market in electronics. We're starting to see some wins coming through in the automotive business. Those are some of the areas that I think we're -- because we're innovating in those areas, I think we're doing pretty well.

Yes. I guess on the channel, how do you guys feel about the amount of inventory in the channel, whether it's in distribution at big box? And how do you think that could track at the end of the year?

So the channel is kind of normal. I mean we track it really closely on the industrial side. It's nothing notable in the channel on the industrial side. On the consumer side, we had typical summer build and it sort of bleeds down towards the back end of the summer. And we look at it over the last 5 years, and you see the lines, they're almost on top of one another. So it's exactly as we would have expected from where we were in the past. So no particular challenge on inventory -- on channel inventory, either on industrial or on consumer.

Anything on the geographic on a regional basis that's worth calling out?

China for us has been a pretty good market last year in 2024, we were up high single digits in the front half of the year, up mid-single digits. We expect that to soften in the back half. Q3 so far has been in line with the first half, so a little bit better, but we still expect that, that's going to soften. Europe is a soft market. We thought it would accelerate a little bit in the back half, but it's still pretty soft. U.S. is going to accelerate a little bit from the front half of the year. The rest is sort of in the rounding, but that's -- the thing to point out, I think China has been a little bit more resilient for us so far quarter-to-date.

Can you talk about the business in China? Is it mostly products that are being sold into the domestic market? Are you guys supplying to OEMs that are selling domestically exporting out?

Yes. So it's both. We actually have a good business in China. It's just over 10% of the company. We have 7 factories, about 5,000 people. So it's a good position. About half the business in China is for the domestic China market, which is benefiting from local stimulus, and that's what we've seen in the front half of this year. The other half of the business is for export. A lot of it is electronics. So we ship in, produce a product, sell to somebody and then it gets exported. And that for the first half of the year was pretty good. That's the piece that we expect might soften a little bit in the back half of the year.

U.S. exports to China, I believe, like $400 million plus for you guys. So pretty material. I think there was probably a point in time where that was like essentially embargoed when the tariff rates were at their peak levels. Now as we're seeing those deescalate, can you talk about what you're seeing in that business? Is that starting to ramp back?

So it didn't stop. I mean the reality is we kept shipping into China. We kept moving like we were moving. The teams are working, okay, what do you do to mitigate them? What passes through? What exemptions you have. Some of this goes in, in inventory, it rolls out over time. So it didn't really impact the flow of product or our business generally. Of course, it was -- it caused some cost for us. For the year, we said we'd be about $0.20 per share on a gross basis, $0.10 net. That is in the margins now. It's in our guidance. And part of that is China and the duties going into China, which now, of course, have come down.

Could you provide an update on the litigation front? The news flow is picking up a little bit, some state cases and personal injury. What should we be looking for?

So there's 3 broad areas of litigation. One is on the public water supplier issue. And we settled, as you all know, the U.S. public water suppliers a couple of years ago, about $12.5 billion. That cash goes out over 13 years, and we're well down the path of paying for that. There's a couple of opt-outs we've got to manage, but that's one thread. The second thread is around attorney general cases.

You probably saw a couple of months ago, we settled New Jersey. That was very favorable for us in some ways, partly because it managed free -- the cash associated with that over 25 years, starting in 2030 going to 2050. And it gave us broad protections against other litigation around PFAS in the state of New Jersey. And that was the reason that we ended up going with that settlement. There's other AGs that are in various forms of litigation, some inside the multi-district litigation, some outside of that. But the New Jersey framework I think, is a good one. It's what they're looking at, which is cash payments over a long period of time and broad protections against other liabilities, which is what encouraged us to move forward with that particular settlement. It was something that we try to manage as carefully as we can. The third -- and the next piece on AG, by the way, is around Vermont.

Now Vermont was supposed to go -- it was supposed to be trial-ready in October -- sorry, in August that moved to November. And the U.S. Court of Appeals just very recently ruled that we have as 3M to right to try that case in a federal court. So I don't know yet what's going to happen in Vermont. We haven't heard any more of that, but that's sort of evolving. The third threat or third area of litigation was around personal injury. There was supposed to be a bellwether trial around kidney cancer coming in October. The judge in the MDL just recently vacated that order and no new trial date has been set.

And the reason he did that is to make sure that the plaintiffs attorneys file all of the unfiled cases. And it's really the judge trying to get some order and management around the case load in the MDL. So we've not heard more about when that case is going to get reset. It could be -- it will be next year. I don't know when it's going to be. I assume it will be the same case could be something different than the bellwether that was going to be in October. But those are the 3 major areas that we're pacing. And again, I -- in this conversation, I always refer you back to the 10-Q because I'm giving you a couple of highlights and the things that I'm focused on, but there's a lot of things here that are worth reading in that 10-Q.

I appreciate that. Maybe outside of settlements, can you just kind of talk about what should we -- what investors should expect around just the cash cost just to litigate these cases?

So we're managing this. Look, this is something that's in our -- the cash guidance that we give and how we manage our balance sheet. We've got a strong balance sheet to afford both the expenses associated with it as well as any settlements we happen to have. We -- as you know, we took up our -- if you will, our guidance this year, so free cash above net income. Over the next 3 years, we said it would be in line with net income. We've got a good balance sheet around 1x leverage ratio. We still own shares in Solventum. We sold down 1/4 of it just for cash management, if you will, more than anything. So we've got lots of things that we can do, a lot of levers to manage cash.

And of course, insurance recoveries are going to be part of this over time. We always talk about this if that comes up as a question in the earnings release, getting back money from insurance companies. But we're managing this. We think we've got a good balance sheet, and we'll handle these things as they come.

Yes, I appreciate that. And maybe just kind of transitioning back to the business. So 3M made the decision to stop producing PFAS. It's still a critical component in semi or auto as what I understand. So is this just now being supplied from international suppliers? Is 3M or anyone else in the industry working on products that could replace that where there could be maybe a great market opportunity?

So look, I mean, we're out of manufacturing PFAS by the end of this year on track to what we said we would do. And that volume is going help to others. It's a component that will be used in semis and lithium-ion batteries and other parts of U.S. government purchases for a long, long period of time, that won't be 3M. To the extent that these things are persistent, remain persistent in the environment, that won't be part of 3M's future, but others will step in, of course. We are doing a lot of work to engineer PFAS out of some of the products that we market and sell like a command strip, we're down the path on innovating that, getting rid of any PFAS components in various products we have. And some of our internal R&D efforts have been directed towards that. That's starting to wind down towards the back end of the year and into next year.

I appreciate that. Maybe kind of talking about company margins. Obviously, the macro in many ways will dictate the volumes. But what are the -- there's a lot of moving parts on the margins, whether you have productivity, TSA, PFAS kind of cost. Can you just kind of talk about the moving parts on margins into 2026?

So look, I'll just take you back to the Investor Day. We said we would grow our margins to 25% by 2027, and we're making, I think, great progress on this. That was one of the key goals was $1 billion above the macro on top line growth. We would be $1 billion net productivity. We would return $10 billion to shareowners through repurchases and dividends, about half of one, half of the other. We said earnings per share would grow at the high single-digit rate. We said free cash would be greater than or equal to net income.

I mean that was the basic framework, and that's exactly where that's the path that we're on. We went into some depth on what we're doing to take cost out of our factories, our supply chain networks, and we're moving very well purposely down that path. A lot of opportunities in just 4-wall productivity, cost quality, a lot of different pieces of that, I think we're making good progress on. For me, I think the margin expansion at the front end of the year, we saw more opportunity coming out of G&A than I think we would have expected at the Investor Day. We had just come through a pretty extensive restructuring program. And a lot of it was driven on G&A or SG&A, a lot of it was U.S. because it was relatively straightforward to do.

When I thought we would hold SG&A over time with more S and less G&A, the fact is we're seeing opportunities to do better than that. And I think there's more than we had previously expected. So we're seeing lots of opportunities to drive productivity, both in the factories as well as in our G&A functions. You asked about stranded costs, whether it's PFAS or TSAs, we had $100 million this year, another $100 million coming next year incremental to this year, all of which is embedded inside these -- the margin targets that I'm giving.

I appreciate that. And then tariffs, you guys guided a tariffs, I think it was $0.10 in the back half of the year. So not a huge number. Do you think mitigation can take time. Do you think as you look into next year, you could start to fully mitigate that or attract some?

We're going to try to. I mean, you're exactly right. I mean it's $0.10 net. It's $0.20 gross. It's partly offset with price, partly offset with some cost actions, and we'll endeavor to kind of work on that next year. There'll be maybe some into the front half of next year, but we're getting through this year, and we'll come back and talk about '26 in the beginning of '26.

But the direction of the team is we've got to offset it. And that's what we're really focused on doing. So just on tariffs, just to be clear, when I talk about sequential growth, 1.5% to 2.5%, part of it is pricing coming through. So part of it is volume growth. Part of it -- I get an extra 40 basis points of growth, if you will, in the back half because of pricing going out offsetting tariffs. So that does help us move from the 1.5% to 2.5% sequentially.

I appreciate that. Well, I know we're up on time. Thank you. Could have questions all day, but we got to go.

Great. Thank you.

Thank you so much. Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to the 3M Second Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded, Friday, July 18, 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.

Thanks. 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 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-Q lists some of the most important risk factors that could cause actual results to differ from our predictions.

Please note what 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 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 3 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 continue to invest in growth initiatives. And 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 optempo 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 $2.15 for the year. The pipeline remains healthy, enters more rigor and discipline in the process with better business cases and higher launch schedule attainment. And most importantly, 5-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 and that has been well received by our largest firefighting customers, especially those who value compacts and maneuverability in small spaces.

In our consumer business, we've been building around the Filtrete platform. with 4 new product launches in the last 6 months, including 1 with a reusable filter frame that can be refilled by a collapsible deplete filter analogous to a razor, 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 sales force performance capture higher cross-selling opportunities, improved price discipline and reduce churn. You'll recall that our team in Safety and Industrial launched the program in 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 on 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. And 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 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 I 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 full metric reached 89.6%, the highest quarterly performance we've achieved in nearly 6 years, and we exited June at just over 90%. Consumer and TEBG remained consistently above 90%, and SIBG was 83% for the quarter, improving more than 300 basis points year-on-year.

Our overall equipment effect of this 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 coding. And we have about 250 different types of coders throughout the network, some quite old and all expensive to replace.

One of our larger coders is in Knoxville, Iowa, making fiber adhesive tapes through an extensive effort to reduce changeovers, increase operating speed and improved machine uptime, the team drove a 12-point improvement in OEE and freed up enough capacity to retire two 70-year-old coders 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 per 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 in 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 to $8, 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 4 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.

And with that, I'll turn it over to Anurag to share the details on the quarter. Anurag?

Thank you, Bill. Turning to Slide 5. We reported another quarter of strong profitable growth and robust free cash flow generation. Starting with the top line. All 3 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% to 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 costs and equity comp 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 nonoperational 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 4 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 6.

Safety and Industrial organic sales grew for the fifth consecutive quarter, up 2.6% in Q2. This was broad-based with 6 out of 7 divisions posting positive results. Similar to the first quarter, industrial adhesives and tapes and electrical markets continue to perform well on the back of new product innovation and commercial excellence. It was encouraging to see abrasives turn positive as we launch new products and execute our 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 & 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 remains soft, we continue to execute on growth initiatives including new product launches in scotch, bright kitchen scouring, ScotchBlue PROShark Painter's Tape and Command and continued service improvements and increase in advertising and merchandising investment.

And 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 7. On organic sales growth due to the soft macro we indicated that we were trending to the lower end of our 2% to 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 maintain the EPS range at $7.60 to $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 to $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 3 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 to 200 basis points and are increasing both the lower and higher end of our EPS range, which is a [ $0.33 ] increase at the midpoint, $0.23 of that coming from operational performance offset by $0.10 of FX and tariff impact. We now expect our 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 8. 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 nonoperational 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 to $1.20, partially offset by $0.50 of tariff, FX and non-op headwinds for a total EPS growth of 6% to 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 to $0.55 benefit from volume growth and continued productivity net of stranded cost and growth investments, which is partially offset by $0.30 to $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 controllables 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.

[Operator Instructions]. Our first question comes from the line of Scott Davis with Melius Research.

Bill, can you talk about the new product plan? And I guess, kind of more specifically teasing out the impact on kind of margin versus growth? And how you think about the tipping point where you can really start to see growth above your end markets? I'll just like to it that, I have a follow-on.

So Scott, I'm glad you asked about R&D and NPI because it's been a very important initiative. And as I talked a year ago, this would take some time to materialize. And we are starting to see some improvement on our 5-year sales. We talked about 9% up in the first half and quite good for the year going to 15%. So it's actually trending in the right way, I'm really excited about the fact that we're launching more products up 70% in the quarter. And we did more in the first half or about as many in the first half as we did in 2023.

So the progress on that, I think, has been quite good. I think the -- we should be expecting both improvements in growth from new product innovation as well as improving margin as you're bringing a product to market. Certainly, as these things materialize and they stabilize in a factory, we're bringing better benefits to the customers. They should generate better pricing in the marketplace. So I do expect that we should see better margin performance from them. But really, what we're focused on is delivering against customer expectations, beating the competition, regaining share of wallet, and just getting back to that spirit of innovation at the company.

And as I said, I think the progress we've made so far has been fantastic. We're investing more in R&D. We're shifting dollars. We're shifting resources into new product development as we talked a year ago. We're up about 150 people since Q4 of last year. So it takes some effort. It takes focus, takes following the metrics, but we're making good progress, and we should see certainly growth and hopefully some margin benefit as well.

Okay. Bill, that's helpful. And I just want to follow on, on that a little bit. I mean, historically, when you think about some of your customers have been tough to get price with auto, big box guys, I mean just brutally hard. So -- is it -- have you found that new products are really going to be your only avenue of getting price for those guys? Or because of the realities of inflation and tariffs and such, do you find it a little bit easier to capture a little bit of inflation impact from those guys also without new products.

So it's -- what we're seeing so far this year is pretty good progress on pricing and it's mostly coming out of the industrial businesses. I think you're right for auto, where it's a spec in business, as you win a spec, you tend to have some value built into that. It's hard to determine how much is price versus the value that's there.

Consumer, the big box people a little bit harder as you just pointed out, -- so it's a bit -- we're getting better price certainly on the industrial side. And as I've said before, we are covering our inflation typically with a little bit more because of the tariff impacts coming through. So doing pretty well this year on pricing, again, mostly on the industrial side.

Our next question comes from the line of Jeffrey Sprague with Vertical Research.

Maybe just pivot from the growth side to the cost side and what you're working on there. I wonder if you could just elaborate a little bit more on kind of the sources of operational upside in the footprint versus kind of G&A and the like. And I asked the question in the spirit, right? The adjusted margins are moving up pretty nicely. We don't get an adjusted gross margin, for example. So how much of it is at the gross line, how much of it's kind of in G&A? And how do you see that playing out moving forward?

Okay, Jeff. So it's a good question, and I'll start and maybe I'll ask Anurag to jump in on part of this. So for the year, it's about $0.5 billion of productivity. More or less about half is coming out of G&A and about half is coming out of our factories out of our supply chain, which, as we translate it internally, is running about 2% net of inflation, which is about what we had expected.

Inflation in the quarter. Q2 was a little bit higher than 2% and Q1 was at less than 2% for the first half, it's around 2%. For the year, we're expecting about the same and again, we're getting about 2% gross productivity, 2% net productivity on top of inflation. So it's actually been pretty good on the supply chain side. It's the elements that we've been talking about. I alluded to in some of my prepared remarks, of $40 million, $50 million coming out of reduced cost per quality, which has been a good trajectory that we've been on a long journey, a lot more to do. Good movement on procurement savings, net of any inflationary pressures from our suppliers. Really good cost controls on the 4-wall side, so within our factories as well as in the logistics network as well.

So overall, about $250 million, really good progress on driving supply chain productivity. And I'd say the same thing on the G&A side, and I'll turn to Anurag to maybe say a couple of words on what's happening on the G&A side. But overall, about $0.5 billion, half G&A, half in supply chain.

Yes. Thanks, Bill. So Jeff, really raged by the performance and productivity just across both supply chain and on the G&A side. And that gave us confidence to raise the EPS at the midpoint by about $0.13. So Bill spoke to the pieces on supply chain, very consistent to what we communicated and invested across the 4 buckets.

On the G&A, similarly, at the Investor Day, what we said is there are 3 areas where we would expect G&A savings to come out of IT optimization, where we spent close to $1 billion. Second is indirect expenses, where we spent more than $3 billion and then our shared services. So where we're seeing more of the opportunities coming in the first 2 buckets, I think on the IT, the team has done a really, really good job. We take our IT expenses, it's broken into 3 categories, which is protecting, maintaining investments, maintenance, which is about 2/3 of it. The team has done a good job in terms of cloud mainframe network optimization, also looking at staff augmentation, the number of applications we have. So there's a whole bunch of tactical efforts that the team has gone through and done a good job.

And what's also shown is not only is these savings, which we can take in the quarter, but also long-term structural savings that we can see, and we are well down on that path. On indirect, I mentioned in the last call as well, we have more visibility in terms of the data, where the spend is going. So first, we look at whether it's aligned with our strategic priorities or not. If it is not aligned, then we don't need to spend. If it's aligned what's the best way for us to procure and use the leverage of the enterprise.

So I think it's moving quite well in that direction. And shared services will take a little bit more time as we go down that path. But overall, I would say, very good performance on productivity.

And then, Bill, maybe just back to growth as my follow-up. Just maybe your philosophy on sort of metering the best investments. I get it the macro is not great, and you're managing a complex P&L, but it's $0.07, right? I think we all would have been perfectly happy with the guide $0.07 lower than what you put out today and you're telling us say, we're keeping our foot on the gas on the investment. So are these just kind of longer term things that weren't going to bear fruit in the near term anyhow. And again, maybe just your philosophy on that.

No. So Jeff, it's a good question. I mean, we look at this very, very carefully. And we are leaning in on making growth investments where we think there's a a prudent payback in the near to medium term. And if we see the macro not as strong as we had anticipated, we're pulling back a little bit, but still we're significantly investing in growth investments this year. The number is about $175 million. And when you parse that, there's significant more an ad merch, there's more in the sales force. There's more going into R&D. As I mentioned, we're up 150 people there. We're pushing people from PFAS into R&D, into new product development as well.

So we're pushing up our R&D spend as a percentage of sales. All those pieces, I think, are going in the right direction. And there are some things that are happening on the IT side that are systems related to driving growth. So all of those things we're trying to be smart and prudent and invest in to actually stimulate long-term growth by recognizing where the macro happens to be today. So I think we're being balanced here, Jeff. We look at it very carefully. To the extent that things look a little bit better in the back half into '26, then we'll let it a little bit more out. But we watch it very carefully.

Our next question comes from the line of Julian Mitchell with Barclays.

Maybe just wanted to start with the Slide 4 where you run through some of those macro buckets. I'm just trying to understand within General Industrial and Safety, the improvement there based on sort of self-help market share efforts at 3M. It sounded like that, but I wondered what you're assuming for the sort of core macro environment in the back half? And maybe just give us any understanding of how recent demand trends have evolved across different markets in the last couple of months?

Okay, Julien, I'll start here and Anurag can jump in as well. I'm god you pointed that chart out. We spent a lot of time putting it together to make it as clear for investors as we can on what's happening in the macro as we see it and the impacts on on the company.

Look, as I mentioned in my script, the macro, just -- it's sluggish, it's moving laterally. I went through some of the numbers there on what's happening with IPI is around 2%. It's sort of flattish. GDP is about the same. It's the mid-2s and about to be the same, maybe a little bit softer in the back half. PMI, I mentioned, is below 50%, is at 49%, but it's so it's still contracting but not as much. So again, things are just moving laterally. Consumer remains relatively sluggish. And what you see on that slide is momentum building inside the company on self-help on new product introductions many of which will come out in the market. It came in the first half of the year will start to impact sales in the back half. And the benefits of commercial excellence, which is really starting to take hold inside the company.

So general industrial includes parts of both SIBG and TEBG, so parts of those 2 businesses. So as abrasive industrial specialties, roof and granules, electrical markets, a piece of the tapes business that goes into industrial products. And then from TEBG includes Advanced Materials, aerospace and defense, which actually we expect to grow pretty decently in the back half. Consumer branding, so it's got commercial branding and transportation safety. So you've got all those pieces in there. It's about 38% to 40% of the company. So it's a pretty big part of it.

Again, industrial IPI is moving somewhat laterally, but -- generally speaking, the opportunities we're seeing here are principally coming from self-help. There's some in the markets. We know A&D is going to be picking up for us in the back half. It wasn't as strong in the first as we had expected, some internal, some external issues, but we see that picking up for us in the back half. Electrical markets remain very robust for us. Again, we expect that to be high single digits going into the back half. So that's kind of a nutshell on the safety side on or on the general industry side.

On safety, we had a good start to the year. We see some acceleration in the back half. Part of it is from new product introduction, in fire safety, SCBA. We've launched a new product that and we've had some big wins with government customers. So we do see the back half on safety accelerating there as well because of both a couple of wins that we've had, but some new product introductions.

That's great. And then just focusing a little bit on the second half guidance. Often your third quarter earnings are up a little bit sequentially, but I understand you had that $0.06 gain moving into the second quarter. Maybe help us understand how we should be thinking about third quarter versus fourth quarter dynamics. Anything to call out on sales or the margin progression?

Yes. Thanks, Julian. It's Anurag here. So listen, within the second half, let's just first start with the top line. Our guidance for the full year is approximately 2% organic growth. In the first half, we grew 1.5%. So that would imply a 2.5% growth in the back half. And we're expecting probably Q3 and Q4 to grow at similar levels around there.

In terms of EPS, Q3 is historically higher than Q4, and -- that's what is is because seasonally, our revenue is higher in Q3 than in Q4 and also on the margin side, it's higher. The ratio has been, if you look at the second half, 52% of the EPS of the second half is in Q3, about 48% is in Q4. So we kind of expect the same trend this year as well.

Our next question comes from the line of Amit Mehrotra with UBS.

I guess maybe just a separate topic, talk about PFAS. I think there was obviously a nice settlement or not a nice settlement, but a decent settlement size, with the state of New Jersey, I think you have 30 more states still pending. There's obviously a personal injury suit still outstanding. But just given the development in New Jersey and kind of the structure of that and then you're obviously year-to-date exceeding your full year share buyback target. But maybe, Bill, talk about your freshest most updated thoughts on that because I still feel there's this overhang on the value of the company based on these pending liabilities. So I think it would be great to hear your thoughts on maybe how you view the progress on these and when you expect to maybe gain a little bit more full clarity on it.

So Amit, thanks for the question. And yes, so we did have a settlement with the state of New Jersey, both for a specific site, which we did not own. It's a Chemours DuPont site, but there was some liability there as well as statewide claims. And we believe it was the right decision for the company and the shareholders to take risk off the table. It spread cash out -- cash payments out over the next 25 years through -- so we thought that, that was quite manageable. You're right, there's just over 30 other states AG cases, both within the MDL and some outside of the -- we're taking them piece by piece.

There's obviously lots of conversation going on with the AGs and the MDL in individual states. So there's a lot of activity there. And we're -- I just want to remind you, we're exiting PFAS manufacturing by the end of this year. So there'll be no new molecules that the company has produced on PFAS going into the environment. These are all settling legacy issues, and we're going to deal with this as best as we can. Personal injury is on the horizon. It is scheduled for -- in October, there's a bellwether case. It does -- it will be kidney cancer, there'd be 1, 2 or 3 cases that we tried around October 20.

There's a lot of conversation that's happening there as well. There's a science day on other things last month. So there's a lot of activity here. We're managing as best that we can. We -- it's important for us to make sure that we maintain the cash flexibility to handle these issues as they come, yet still invest in the growth of the company. And that's what we're trying to do. Our balance sheet is very, very healthy. We have a lot of optionality on things that we can do and we're dealing with this and we communicate with investors with what we know as we know it, and you see a lot of it in the 10-Q.

Okay. Helpful. And then maybe just one for Anurag, just circling back to the first half to second half cadence. If I -- if I just kind of unpack the implied margin, I mean I think the company did 24% in the first half, guiding to 23%, a little over 23% for the full year. So obviously, that implies a step down in second half versus first half. But obviously, revenue should be higher sequentially. So I'm just trying to kind of square that circle a little bit and understand why -- what are the puts and takes that actually take margins down 2H versus 1H when revenue is building sequentially.

Yes. Thanks, Amit. So yes, our first half margin is 24%. We are guiding between $150 million to 200 for the year. So that would imply at the midpoint that the second half guidance would be around 22.5%. And the delta between the 2 is you clearly see a pickup in volume, productivity should do well. It's essentially the tariff impact that we are seeing in the second half, which is more than 120, 130 basis points. and also pick up investments and stranded costs. So that's a big delta between the first half and the second half, but volume productivity better. But if you take a step back and you look at it year-over-year, you're still seeing the second half margins go up by 110 basis points at the midpoint of our guidance.

And that's after absorbing tariff after absorbing increase in stranded costs and higher investment. So it's pretty encouraging in terms of the performance of the second half, which is, obviously, as we go into next year, mitigate more of the tariff impact, there's more productivity that will come through. So overall, the momentum in the second half operationally is similar to where we are in the first half.

Our next question comes from the line of Steve Tusa with JPMorgan.

Just a quick one to start. What's the embedded assumption on ForEx? I would have thought there was maybe a little bit more upside just given your exposure on the euro.

Yes. So on ForEx, our headwind on the EPS for the year is about $0.05. On revenue, we think it's about flattish. And the reason there is a disconnect between the flattish on the revenue and the $0.05 headwind is just the impact of the year-on-year hedge benefit that we had last year. As you know, we hedge our nondollar currencies, which create a hedge benefit or a loss, which lagged to the currency movements. So last year in Q2, it produced a significant hedge benefit because of the strength of the dollar. Now the dollar weakened in the second quarter, so the hedge benefit is modest. So which is why you see all of our FX headwind in the first half of the year, which is about $0.05. As you go into the second half, you should see that kind of normalize. And for the full year, it will be about $0.05 headwind on the FX side.

Okay. And then just a follow-up on the consumer electronics side, I think you guys are maybe a little bit more bearish. It seems like on the trend there. Can you maybe talk about specifically where that weakness is on electronics.

So we see electronics, it's still up in the back half. It's just not as strong in the front half. When we look at the across all things, TVs, tablets, phones, notebooks, everything is sort of softening towards the back end of the year, at least that's what's been expected. We had a very strong year last year. So part of it is year-over-year comps, but started pretty good in the first half, up mid-single digits, still up in the back half, but softening versus in terms of a rate basis versus the first.

Our next question comes from the line of Andrew Obin with Bank of America.

Just a question. Can we just sort of say in terms of on time in full, I know that this was a big drag on top line in Safety and Industrial. What kind of impact to top line does it have as it's improving and you're sort of regaining traction with your medium and smaller customers? Can you quantify that? Are you seeing any discernible impact yet?

So we're not going to quantify it specifically because there's a lot of factors into why customers may not buy from us because of OTIF, but improving it, delivering on-time-in-full to customers is quite important. We know from talking to our end customers. It is an element of churn why customers leave us. That number is across the company is pretty substantial. We're focused on this. We're trying to bring it down. One element is responsiveness and customer service, it's quality, but importantly, it's on time in full.

So clearly, Andrew, as we get better on that, that's going to allow us to reduce churn grow, and we're starting to see benefits of lower churn in the back half. I think part of it probably is related to OTIF. It's hard to say exactly what part of it is though.

Okay. Got you. And just sort of going back to the guidance. Just very simplistically, I think generally right, seasonality is a little bit different and it seems second half is weaker, despite the normal seasonality, despite accelerating top line into the second half, right, and I would imagine, based on what we're hearing actually pricing dynamic all in is not that bad on the industrial side. So can you just highlight onetime items related to your footprint consolidation and changes in -- what are the headwinds in the second half that are sort of messing with the seasonality. Could you just quantify them for us again? I really appreciate it.

Thanks, Andrew. There is nothing on the footprint on any onetimers in the second half. which is doing it. Operationally, we grew the first half at $0.50 to $0.55. And second half, we grow around the same rate as well. So volume and productivity where we see the impact is more on the tariff. We have $0.20 for the year. We had a couple of pennies in second quarter. So $0.18 of that is in the second half. That is the major impact.

On top of that, stranded cost is picking up in the second half versus the first half and a pickup in investments. So I would say those are the big factors. There's no -- not much of a onetimer over there. The only thing on the EPS between first half and second half is obviously the sale of the investment that we had in Q2, which is below the line, which impacts the second half.

And what are the ones can you quantify the stranded costs again? I apologize.

Was it stranded cost? Yes. So it's $100 million for the year. It's about $30 million in the first half and $70 million in the second half.

Okay. So that hasn't changed.

No.

Our next question comes from the line of Deane Dray with RBC Capital Markets.

I was hoping you could take us through the changes in your tariff assumptions the benefit of the pause that was implemented. But did you make any specific mitigation actions in the quarter? And kind of what was the decision about including it in guidance on a go-forward basis?

So the last time we said it was $0.60 gross. Now it's [ $0.20. ] The biggest change really is going to be around China last year -- last quarter, it was about 80% of the tariff impact. At the time, the rate was 125%, 145%, so US 145%, China was 125%. They've come down dramatically to 10% and 30%. That was the biggest source of change. Things are moving around still a little bit, but we included it in the guidance mainly because we're more than halfway through the year. things have stabilized at least a little bit. And any changes from here, we only have a couple of months in the balance of the year that would impact '25. The rest would roll into 2026. So we feel we're pretty well calibrated.

Of course, we're watching very carefully what happens in the EU. We've got to watch against any reescalation and trade tensions with China. -- that could be a change. But from the way we see it today, I think we know enough about it in terms of the gross and net impact to roll it through into guidance, which I think is cleaner for investors. So we're offsetting $0.20 of gross tariff with both cost and sourcing changes, which is about half of the offset and the other half is coming through price.

So the gross amount is about $140 million, nets around $70 million, about half of that, say $35 million, $40 million is price. The other half $35-ish million is going to be cost savings as well as sourcing. And the pricing piece of it that's one of the elements that's helping us push second half growth a little bit because that's mostly a second half item.

Great. And then in your answer, you just put the spotlight on China and there might have been an expectation there would be some fallout because of tariffs and maybe some pushback on your business there, but up single digits look pretty healthy. So just -- have you seen much of a fallout? And how much is embedded in the second half?

So no, we actually had a very good first half, up mid-single digits. It was -- frankly, it was better than we expected coming into the year. Early in the year, we were thinking it's low single digits, it's been mid-single digits in the front half. We do expect it will slow down in the back half. That's embedded in our numbers. For us, it's roughly half is domestic, half is export. And both were performing very well. It's some of the local stimulus happening in China for appliances, white goods, which we sell a lot of tape products into as well as their export market, a lot of which was electronics.

Again, that for us has been pretty healthy. But again, we do see it softening in the back half of the year. We're committed to China. It's a big part of the company in 7 factories, 5,000 people there. And we have a great team, great business, really driving a great job on commercial excellence there in China. And again, it will slow down, but still be up for the year.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

Maybe just starting with the demand trends through the quarter. I guess there's still been some concern out there that we've heard about like whether there was any sign of tariff prebuy, it seems like we're kind of on the verge of tabling that. So I just wanted to hear your thoughts, Bill, and if what you've seen through July kind of gives conviction that prebuy wasn't really a factor.

So it's not -- so it's hard to discern that. There's probably a little bit hanging out there, but it's not substantial, anything that might happen from Q2 into Q1, we see Q3 coming into Q2. So it's -- I don't think the prebuy is an issue. For the quarter, our orders were up low single digits as we described in the materials a little bit better in SIBG, about flattish in TEBG down a little bit in consumer, but consumer accelerated over the course of the quarter. So June was better than May. May was better than April. So we saw some acceleration there. July, it's still very, very early. It's -- we saw some similar progress here in July. But again, it's only a couple of weeks, so it's hard to discern a pattern over that. But Q2 orders were up low single digit.

Our backlog grew, it's about 1% sequentially, so about $2 billion. And as Anurag mentioned in his comments, I mean, we're not really a backlog-driven business. We're more book and ship. But we saw some backlog growth sequentially and 20%, 25% of Q3's covenant backlog, which is a pretty good place to be. So what I'm pleased about is orders are hanging in there and backlog is hanging in, if not growing a little bit sequentially.

That's helpful. And then on Europe, I feel like there's definitely been a little bit of excitement building about the potential course of recovery there. I know you guys were flat in the quarter, but have you seen anything when you look at those orders and backlog that suggest green shoots in Europe?

So we're hopeful for Europe in the back half. It's an important market for us. The thing -- the watch item for us is going to be auto, Nicole, actually what we've seen overall is IHS builds globally are sort of flattish. So it moved from down a little bit to up a couple of tenths in the latest drop a couple of days ago. A lot of that's China. -- which is driving that growth. Europe and North America, both down, which adversely affects 3M. Europe is expected to be down in the back half on auto build, and that's 1 that's important to us.

Other parts of our business are showing some signs of growth. We saw SIBG up in the quarter in Europe. And I think there's signs that there could be growth on that side, but auto is a watch area for us in Europe in the back half.

Our next question comes from the line of Chris Snyder with Morgan Stanley.

I wanted to ask about back half organic growth to 2.5%, so up from the 1.5% in the first half. The comps do get a bit tougher. It sounds like you guys think the macro continues to go sideways. So is that lift really all just price that's coming through and maybe some help from the NPI. And is there any buffer in that guide for maybe some volume pressure should there have been first half channel build?

So Chris, thanks for the question. Look, there is some price in there. It's probably 40 basis points, let's say, of price in that 2.5%. So -- if you look at just comparable to Q1, it's 1.5% to 2.1%. So it's up in terms of growth rate sequentially first half in the second half, but there is some pricing benefits. I went through some of the drivers on the general industrial side, the safety business. The one area I talked a little bit about electronics, softening a little bit in the back half, but still up, there is some end markets that are up. We do see some larger orders that have come through on the government side on electrical product side.

The one area that I didn't speak about was on the automotive side, even though automotive will remain weak. We are working hard on repositioning our business there and driving growth with new models. We do expect us to be flattish in the back half from being down in the front half, even though the builds are still weak in the back half. Part of it is really aggressive commercial excellence efforts to go back and recapture opportunities in the tiers, particularly bonding and joining in acoustics and other things.

There's some model switchovers happening where we're spec-ed in, we're hopeful that we can continue our position on those new models as they get into production later on this year. So auto is a watch area for us. We do expect that to be better in the back half and more flattish versus down in the front, but that's an important driver of the second half performance, Chris.

I appreciate that. And if I could follow up on maybe competitive tailwinds that could support demand. I imagine, particularly in consumer, there's a lot of low-cost competitors from Asia, I mean, if we look at the online marketplaces. Have you seen any impact here from tariff costs on those competitors that could maybe give you guys some pricing in consumer, which I know it's typically difficult or even some share gain opportunity.

Chris, thank you. some, but it's not going to be price. It's more volume. And there's -- all of the U.S. retailers are looking very carefully at where their source of supply is, if it's coming from non-U.S. markets, it's important. Obviously, the tariff impact makes them a little less economic and makes us a little more attractive. So on the margin, yes, there are some opportunities there, and the team in CBG are really pushing that. It's not going to come through necessarily in price is more likely to be in volume, and those are some of the opportunities that are embedded in the back half of the year for CBG.

Our next question comes from the line of Nigel Coe with Wolfe Research.

Obviously, a lot of my questions have been answered already. Just want to make sure, Bill, I heard the price contribution in the second half. I think you said 40 basis points. Is that 40 basis points absolute price that a 40 basis point improvement versus the first half?

No, it's 40 basis points of absolute year-over-year improvement. For the look, it's -- let me just step back on the whole thing. Just because for the year, we're getting about 70 basis points more or less of price. We typically would see about 50 basis points, which is what is required to offset material cost inflation. So 2% on $6 billion of materials, $120 million that's -- and if we pass it through in price, which we've done, that's 50 basis points. We're getting about 70 basis points. So it's a little bit of an extra lift. Part of that is coming because we're offsetting tariff headwind and a lot of that's going to happen in the back half of the year.

But part of it is going to come from some of the pricing discipline that we're putting in place. What we see very different processes on price governance in SIBG and now moving to TEBG as well. So in SIBG, we used to have about 60% or more of the deals were less than $20,000. So very small. Today, that's less than 20%. So we're trying to be more strategic on where we give pricing discounts. The larger customers and make sure we get the volume for it.

So that's showing an effect in some price as well. So long-winded way of saying, yes, it's 40 basis points year-over-year and it's 70 basis points for the full year of price.

Okay. That's helpful. And then I find it curious or maybe a little bit ironic that SIBG growth is actually superior despite the fact that OTIF is lagging the other 2 segments. So number one, are you still on track to get OTIF within SIBG to 90% by year-end. And if you were to guess, if you can improve OTIF from 83% to 93%, what kind of growth uplift would you expect to see?

Again, the question gets back to like sort of trying to get as an OTIF to revenue. It's very difficult to do that. But we do know that not delivering on time is a source of churn and reducing churn implicitly drives growth. So look, 83% just over that was a good result, not what we had expected. We expect more from that as we transition into July, we're a little north of 85%. We expect to be in the high 80s now by the end of the year. The team tells me they want to exit the year at 90%. I think that's a stretch goal. You may notice our inventories are running a little bit higher than last year. So part of it is we're making up for lower OTIF with higher inventory, so we've got to make sure that we both drive OTIF improvement in the back end, which we're really, really focused on -- at the same time, we bring down inventory.

So that's what we're trying to do. The team is focused on it. We're making progress. I would say I wish it would be faster. I think Chris would expect it to be faster, but good progress. And we know that's going to drive growth in the back half.

Our next question comes from the line of Andy Kapowitz with Citi Group. Please proceed with your question.

I get a nice jump in margin afterwards seen with a few quarters of pressure in TPG. So -- could you talk about what, if anything changed? I know you talked about the metering of the investments that you're making for the company? Does it hit that segment a bit more than others or maybe you're getting closer to fully absorbing fastening costs or maybe just better mix? Any color would be helpful.

Thanks for the question, Andy. It's driven by volume and productivity. It's not so much of the investment. I think all the 3 segments, the margin expansion was very, very good. specifically in TEBG. There was -- volume was about 1 point higher than last year. But just the productivity, which we did both on the supply chain and on the G&A side, it's spread across all the 3 business groups also in TB which more than mitigated the stranded cost that they had. So when we -- the past couple of quarters, TEBG margins have been down, we see this pick up. And as we go through the course of the year, in our current margin guide of 150 to 200 basis points. You should see all 3 business groups doing well. SIBG and CPG will definitely do better. TEBG a little bit lighter because of the stranded cost that you pointed out, but the productivity is flowing through well there.

And Bill, I think it might be helpful to hear about your thoughts on the fiscal environment here in the U.S. Maybe a little bit of color on how is thinking about the big beautiful bill. I think it does put money in industrial companies pockets, given bonus depreciation, et cetera, but it doesn't seem like you're reacting to it at all. Is it just too early? How do you think about it, how might companies react to it moving forward?

So it's a good question. It's a very broad question. I think specifically to the tax bill, it's favorable to us. It's favorable to other companies. In the sense, it helps us with maintaining reasonable fit GILTI rates, which is important to us, helps us maintain our effective tax rate in the 20% range, which is what we had anticipated and hoped for. So it maintains where we happen to be. It's good news because it could have gone the other way. Bonus depreciation and the R&D expense doesn't really work for us for the next couple of years because of the some of the PWS costs and other things. But that will help us in the out years. But right now, Filtrete rates hovering around -- maintain around 14%, which I think they made permanent. -- is good news for the company for sure. So I won't comment on any relative fiscal environment, but that's certainly, from a tax perspective, help for the company.

Our next question comes from the line of Joe O'Dea with Wells Fargo.

Just wanted to make sure I just want to make sure I'm thinking about the back half organic constructs across the segments. -- where if there's roughly 100 basis points better year-over-year growth in 2H versus 1H that we would see a stronger than average improvement in SIBG, TEBG, improving growth a little bit and consumer, maybe that growth rate is more consistent with the first half? Is that a reasonable framework?

Yes, that's exactly what it is. Yes. So both SIBG and TEBG should be a little bit better in the back half and consumer in line with that, maybe a tick or 2 up, but -- but again, it depends on the consumer behavior, but it's really going to -- and it's a smaller business, but it hinges on the first 2.

Got it. And then actually, I thought the consumer margin was the most impressive. I think organic was up 30 bps year-over-year and op profit was up north of 20%. And so just any unpacking of the bridge there, the self-help side of things, absence of any items that were a drag last year? Any color would be helpful.

Yes. So we finished over 21% on CBG on the Consumer business group, which is very good. Last year, we ended on the 19% level. So this was really good. I think where you'd see the benefit more is around the productivity side. In fact, the investments actually did go up in the consumer group relative to last year. The one compared from Q2 of last year was obviously the equity comp timing, which did impact consumer as well. But I would say more of the outperformance on the margin is driven by the productivity that we're driving both on the supply chain side as well as the G&A side, which trickle through to the consumer business.

Our last question comes from the line of Laurence Alexander with Jefferies.

Just 2, hopefully, very quick ones. One is, how do you think about the effect of your metering of investments on operating leverage if demand surprises on the upside either back half of this year or next year? And secondly, can you -- on the PFAS question, I just want to follow up on kind of if I understood one of your comments. How are you thinking about the property damage side of PFAS litigation. When do you think you'll have visibility around the legal strategy to ring fence the liabilities there?

Yes. Maybe I'll just start off with the operating leverage first. On the operating leverage piece, we should see that flow through. Okay. Today, our operating leverage is about -- I mean, incremental is about 35%. That will probably be the same, if not go higher. -- as volume picks up on the upside. Because if you look at the metering of investments, I mean, we're spending $175 million of a step-up in investment this year relative to last year. The metering was more because of the demand calibration. If demand softens up a little bit and you don't spend so much on advertising and merchandising. You look at the tariff landscape, then you look at different projects and you say, okay, let's prioritize them. But when it comes to R&D comes to sales, we've added it.

For the second quarter, we had envisioned about $85 million of pickup in investment, we did more than $40 million. So it's still quite a significant amount. So that investment is probably going in the right stage -- second half, we're still maintaining the investment that we always had. And if volume comes up, I think the operating leverage should be north of 35% in the second half or in time to come.

And on the PFAS question, a lot of the environmental natural resources property issues are encompassed in the AG cases, part of which was resolved in New Jersey, Vermont is coming up and moved out to November and the rest are in the MDL, and we'll handle them as they come forward. Won't circumscribe any particular number on that. There's plenty of disclosure in our 10-Q.

Okay, everybody. Well, thank you very much for joining the call for all the questions we got through every analyst, which was good. I also want to thank all the 3Mers for their continued drive towards excellence in the company, improving every single day and delivering value to customers and to our shareholders. We're laser focused on our priorities. -- and we'll be through the next number of quarters, and I look forward to speaking with you at the end of our third quarter. Thank you so much. Have a good day.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line at this time.