3M (NYSE:MMM) held its second-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.
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View the webcast at https://event.on24.com/wcc/r/5406763/579AFBA7645284C2059D23350AE9A045
Watch the full earnings call below:
Summary
3M reported strong Q2 performance with 5.4% organic growth, 24.9% operating margin, and EPS of $2.40, up 11%. Free cash flow was $1.3 billion with a 107% conversion rate.
The company raised its full-year guidance for sales, EPS, and free cash flow, citing strong execution of strategic priorities and commercial initiatives.
Notable strategic initiatives include ongoing commercial excellence, cross-selling efforts, and an accelerated pace of new product introductions, with 92 new products launched in Q2.
3M is in the process of transitioning to a more integrated operating company model, focusing on simplifying and standardizing processes and enhancing its portfolio.
The company closed the acquisition of Madison Fire and Rescue, forming a new joint venture with Scott SCBA, and announced a strategic partnership with Microsoft for its Expanded Beam Optics technology.
Management noted strong performance in China with double-digit growth and outlined continued focus on key growth areas such as industrial adhesives, safety, and data centers.
3M is optimistic about future growth, aiming for above-market performance through its innovation and commercial excellence, with plans to launch over 350 new products this year.
Full Transcript
OPERATOR
Ladies and gentlemen, thank you for standing by. Welcome to the 3M second quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you do have a question, please press star one on your telephone keypad. As a reminder, this call is being recorded Tuesday, July 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.
Chinmay Trivedi, Senior Vice President of Investor Relations and Financial Planning and Analysis
Thank you. Good morning everyone and welcome to our quarterly earnings conference call. With me today are Bill Brown, 3M's Chairman and Chief Executive Officer, and Anurag Maheshwari, 3M's Chief Financial Officer. Bill and Anurag will make some formal comments, then we will take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our investor relations website at 3M.com.
Please turn to slide 2 and take a moment to read the forward-looking statements. During today's conference call, we'll be making certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-Q lists some of the most important risk factors that could cause actual results to differ from our predictions.
Please note, throughout today's presentation we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. With that, please turn to slide 3 and I will hand the call off to Bill. Bill.
Bill Brown, Chairman and CEO
Thank you, Chinmay, and good morning, everyone. We delivered strong performance in Q2, including organic growth of 5.4%, operating margin of 24.9%, up 4,040 basis points, earnings per share of $2.40, up 11%, and free cash flow of $1.3 billion with 107% conversion. We returned $1.4 billion to shareholders in the quarter, including $400 million in dividends and $1 billion of share repurchases. Since 2025, we returned $8.6 billion to shareholders against our commitment to return $10 billion plus through 2027.
Given our strong first half performance, we're raising our guidance for the year for sales, EPS, and free cash flow. Our results today exceeded our expectations, demonstrate the progress we're making to build a higher-performing company, and continue to give us confidence we're on the right path forward. The strategy we put in place two years ago was delivering results, and we're building momentum in executing against our strategic priorities. Commercial excellence initiatives continue to drive results through improved salesforce effectiveness and stronger account execution supported by AI-enabled tools that enhance planning, prioritize opportunities, and accelerate productivity. Cross-selling continues to outperform expectations with $110 million of opportunities booked, another $120 million in the pipeline, up over 40% quarter over quarter, and putting us ahead of the goal we set at our investor day. We're rebuilding the innovation engine at 3M and significantly accelerating our pace of new product introductions. In the quarter we launched 92 new products, up 44% versus last year, bringing our first half total to 176 launches and putting us on track to deliver more than 350 new products this year.
The benefits are showing up in our results and I'll talk more about our innovation journey in a moment. Our focus on operational discipline and productivity improvement continues to create value across the enterprise. Cost of poor quality improved 60 basis points year over year, while overall equipment effectiveness improved 140 basis points. As asset utilization improves, we're able to consolidate production into fewer assets, optimize our manufacturing footprint, and retire older and less efficient equipment.
While overall utilization remains a long-term opportunity, there are pockets in our manufacturing network today where capacity is constrained and short of demand. One example is our New Ulm facility which produces cable accessories for electrical markets, a product that's facing high and increasing demand. Here, the team ran a multi-week sprint that set a disciplined operating cadence against a locked production schedule, improved material flow, eliminated process bottlenecks, and focused the team on rapidly resolving the underlying constraints holding back output.
As a result, the work center achieved record production levels in June, delivering $13 million of incremental revenue, or nearly 50 basis points at the SIBG level. The actions we've taken across commercial execution, innovation, and operations are part of a broader transition at 3M from a holding company to a more integrated operating company model. The next step in the journey is around transformation, simplifying and standardizing core processes, reducing complexity in our factory and distribution network, and reshaping our portfolio.
Today, many of the activities and support functions like finance, HR, and customer service operate independently across regions and business units, creating unnecessary complexity, inefficiency, and duplication. We're bringing these activities together into a single global service delivery model and partnering with an external provider to run them at scale using automation and AI. This move will increase agility, accelerate technology adoption, and sharpen our focus on the capabilities that are most critical to driving growth and long-term value creation.
We're also continuing to enhance our portfolio. On July 1, we closed on the acquisition of Madison Fire and Rescue, consolidating it with our Scott SCBA business into a new majority-owned joint venture and receiving $700 million in cash as part of the transaction. This JV generates revenue of $800 million, growing at high single digits and with margins above our company average. This is a clear example of how we're reshaping the portfolio towards higher-growth, higher-margin businesses, strengthening a priority vertical while keeping our capital allocation disciplined.
Another priority vertical is data centers, and I want to touch on an exciting announcement we made last week. We entered a strategic partnership with Microsoft, who will become the first hyperscaler to deploy our patented Expanded Beam Optics, or EBO, technology in Azure data centers. This is a powerful proof point of how we're applying 3M's innovation to one of the fastest growing markets in the world. Our connectors install faster, hold up far better to dust and handling, and help customers stand up AI capacity more quickly.
We're rapidly scaling production capacity both internally and externally and engaging the broader ecosystem of suppliers, partners, and customers to support standardization and industry adoption of EBO technology. On slide 4 we show that the positive momentum in Q1 in several growth areas carried into Q2, driving strong performance in the first half across adhesives, abrasives, aerospace, electrical markets, and safety. We continue to see a couple places with pressure including consumer electronics, auto and auto aftermarket, and U.S. consumer spending. We're clearly outgrowing the market in aggregate through better commercial execution including increased cross-selling and improved customer retention and a faster pace of innovation. Overall, our first half performance positions us well for continued momentum in the second half of the year. Innovation has always been one of 3M's greatest competitive advantages, and slide five highlights a significant inflection in launches and new product sales beginning about two years ago.
Our goal is to restore that advantage at an even higher level by combining our unmatched material science capabilities with greater speed and better execution. Over the past couple of years, we've taken deliberate actions to increase rigor, accountability, and focus within our R&D organization, what we've been calling our R&D factory. As a result, we're beginning to see meaningful improvements across the innovation pipeline. We're increasing the pace of innovation and are on track to nearly triple the number of new products introduced this year versus three years ago and launch more than 1,000 products by 2027 while reducing development cycle time by about 20%. We expect performance to continue accelerating as we leverage AI to move more quickly from idea generation to development and production. These efforts are translating into commercial results with five-year new product sales reaching about $4 billion this year and New Product Vitality Index climbing to the mid-teens this year and 20% next year. The right side of the slide highlights several next-generation innovations and showcases the breadth of our portfolio and ability to address emerging customer needs.
From developing new products for new markets like EBO for data centers to adapting existing technologies to new applications like Nextel high-performance fibers for fuel cells and light-reflective films for space satellites, these products demonstrate how we're applying technology to unlock new growth opportunities. Slide 6 pulls it all together. Over the last couple of years we've moved from a decline of 4.4% in 2023 to positive growth of 3% on a trailing 12-month basis through the first half of 2026, while at the same time expanding margins by about 500 basis points.
This is 3M excellence at work and demonstrates that we can both grow the top line and increase margins simultaneously. Our performance is increasingly outpacing underlying end markets, with our growth-to-market multiple improving from roughly in line to 2x and with businesses that declined in 2023 turning solidly positive in ’26. While we're still in the early innings of our journey to create value, the momentum is building. I'm encouraged by the progress we're making and confident in our ability to continue to deliver above-market growth and sustainable margin expansion over the long term.
With that, I'll turn it over to Anurag to share the details of the quarter. Anurag.
Anurag Maheshwari, Chief Financial Officer
Thank you, Bill. Turning to slide 7, we exceeded expectations across all financial metrics in the quarter: delivered mid–single-digit organic growth, margin expansion, double-digit earnings growth, and robust free cash flow, all reflecting strong progress against our strategic priorities. Starting with top line, in an unchanged macro environment, the organic sales growth of 5.4% was driven by successful execution of our commercial excellence initiatives and increasing contribution from new product launches, supported by a strong operating tempo.
Coming into the quarter, we had expected sales conversion from the Q1 order strength to accelerate revenue growth to over 3% in the second quarter. With the sustained order momentum in the quarter combined with good supply chain execution, we were able to grow above expectations. This puts the first-half organic growth at 3.3%. Comfortably outperforming macro by geography, we saw broad-based growth across all the five regions. China grew double digits with strength in industrial adhesives, safety, and auto films as we executed on our key account and local NPI strategies, leading to share gains.
U.S. and Canada industrial businesses grew mid–single digits, partially offset by softness in consumer and auto aftermarket. It was encouraging to see Europe return to growth, up mid–single digits despite a muted auto market. And in Asia we saw double-digit growth led by India, a trend that has continued for seven straight quarters as a result of increased sales coverage in a growing economy. Q2 adjusted operating margins were 24.9%, up 40 basis points, with the business group operating margins up 70 basis points, partially offset by expected corporate headwind of 30 basis points.
Operating profit increased $110 million, or $0.16, including a $240 million benefit from sales growth and broad-based productivity, partially offset by $30 million of investments and $110 million from tariff impact and stranded cost headwind. We have not received any tariff refunds to date. The $0.24 of EPS growth in the quarter is driven by $0.16 of operating profit growth and $0.08 primarily from lower share count as we continue to return capital to shareholders.
The benefit from tax timing and lower pension cost was offset by a prior-year gain on investment. This earnings growth was also reflected in the unadjusted results, with Q2 GAAP EPS of $1.78, growing 33% year over year. This included the impact of costs from ongoing transformation actions, exit of certain PFAS manufacturing assets, and gain from change in value of our Solventum ownership. Free cash flow was robust at $1.3 billion, or 107% conversion, as we benefited from strong earnings and working capital management, including seven days’ improvement over last year in inventory.
We returned $1.4 billion to shareholders via dividends and gross share buybacks. For the half, we generated cash flow of $1.9 billion and returned $3.8 billion to shareholders, including $0.8 billion in dividends and $3 billion in share repurchases. Turning to the next slide, I will provide a quick overview of our growth performance for each business group. Safety and Industrial delivered a standout quarter with 8.2% organic sales growth driven by the continued expansion of commercial excellence initiatives and the ramp-up of new product launches.
We delivered double-digit growth across the four industrial electrical markets, industrial adhesives and tapes, abrasives, and industrial specialties. This growth was driven by targeted commercial initiatives to reduce customer churn, strengthen sales coverage and effectiveness, and increase cross-selling. Safety grew high single digits on the back of new product launches and continued international expansion. It was encouraging to see roofing granules return to growth, and we expect that trend to continue in the back half on a recovering market and easy compares.
For the half, SIBG grew 5.7%, demonstrating sustained acceleration over the last two years. Transportation and Electronics sales grew 5.9% in the second quarter from the expected backlog conversion combined with stronger commercial execution and account management. The first-half growth of 2.9% reflects strength in approximately half of the business segments more than offsetting end-market weakness in the other half. Semiconductor, aerospace, and data center business segments, comprising approximately 20% of sales, grew double digits as we gained traction from new product introductions and commercial branding.
And transportation, which is about a third of the business, grew approximately 5%. On the other hand, auto was flat in a soft market and consumer electronics was down low single digit, performing better than the broader consumer device market. SIBG and TBG, which together represent 80% of our business, delivered 7% growth in the second quarter and approximately 5% growth for the first half. Finally, Consumer, which makes up the remaining 20% of our sales, was down 2.1% for the quarter and 1.7% for the half.
Point-of-sale growth in the U.S. remained healthy and has been positive in 18 of the 26 weeks year to date versus 7 positive weeks in all of last year. However, tightening of inventory levels at several key retailers in the second half of June more than offset this positive momentum. The second quarter performance caps a strong first half, including organic sales growth of 3.3%, operating margin of 24.3%, and earnings growth of 12%, giving us confidence to raise our full-year guidance across all the financial metrics.
On slide 9, we are raising our organic growth expectations from 3% to greater than 3.5% for the year. This is a result of strong commercial momentum in our industrial businesses, supported by increased sales contribution from new product launches, which will more than offset the slight weakness in consumer business. EPS guidance is increasing from a range of $8.50 to $8.70 to a range of $8.80 to $8.95, or a growth of 9% to 11% year over year. This increases both the low and high end of the guidance and reflects about a $0.27 increase at the midpoint.
The increase in earnings versus the prior guidance is coming from stronger sales growth, productivity gains, and our capital deployment strategy. We now estimate oil inflation to be $150 to $175 million, up from $125 million previously. This impact is expected to be fully covered by the price actions we implemented in Q2. Though oil price cost is dollar neutral, it impacts margin rate by 20 basis points, which we will mitigate through higher volume and better productivity, resulting in operating margin expansion in line with our prior expectations.
Given the higher earnings growth and progress in working capital, we have increased our free cash flow guidance by $100 million to a range of $4.7 to $4.9 billion, implying conversion greater than 100%. The updated guidance implies second-half organic sales growth of high threes or better, over two times macro, and margin expansion of about 100 basis points from the prior year, resulting in EPS growth of approximately $0.30 at the midpoint. Sequentially, we expect operating profit to follow typical seasonality with similar phasing between the halves, while earnings will see an impact from tax timing.
Turning to slide 10, I want to take a minute to highlight the progress we have made since our Investor Day last year. We are at the halfway point, and with the strong 2025 foundation and the updated ’26 guidance, we are tracking ahead of Investor Day commitments across all metrics. Our growth trajectory continues to accelerate from commercial excellence and innovation, and is on track to exceed the $1 billion above-macro commitment. Along with growth, we are seeing good operating margin expansion and are tracking ahead of the approximately 25% margin rate by ’27.
For earnings, we are trending to a double-digit CAGR, reflecting strong operational improvements coupled with below-the-line efficiency. And on cash, we expect to continue the strong trajectory, exceeding our cumulative cash commitment and $10 billion return to shareholders. Overall, we are pleased with the progress we are making and want to thank the team for their relentless focus, determined pace, and strong execution to drive long-term value for our shareholders.
With that, let's open the call for questions.
OPERATOR
Ladies and gentlemen, if you would like to register a question, please press star one on your telephone keypad. If your question has been answered and you would like to withdraw, please press star two. If you are using a speakerphone, please lift up on your handset before entering your request. Please limit your participation to one question and one follow-up. Our first question comes from the line of Jeff Sprague with Vertical Research. Please proceed with your question.
Jeff Sprague, Analyst at Vertical Research Partners
Hey, thanks. Good morning, everyone. Nice to see the top line here. Bill, I was wondering if you could just even unpack this a little bit more. There’s some great detail on these slides, but just kind of looking at the new product launches and the like. Closely on track to what you thought, I believe. Right, but the revenues are coming in better, so do we have a combination of just upside in new product revenue relative to plan, it sounds like cross-sell’s a little bit better, and then maybe what role kind of reduced churn is playing in all this?
And I guess really what I want to get to at the end of the question is, you know, an algorithm of roughly two times macro. Do you view that as sort of a sustainable model for 3M going forward?
Bill Brown, Chairman and CEO
Good morning, Jeff. That's a great question. Thank you for that. Yeah, we're very confident in where the growth happens to be. We came in stronger than we had expected in the quarter. It really is a combination of both commercial excellence and innovation excellence. The journey that we've been on for two years, that is maturing very rapidly. It's not really macro tailwind. The macro on the industrial side looks pretty good, but there are some headwinds in the marketplace.
It's mostly just internal performance. And you know, when you look at just the quarter, a little bit better than we had expected; over the last 12 months at 3%, it's clearly trending above the macro. We think it's pretty good. Mostly driven in the first half from commercial excellence activities. You know, a lot of the things we've laid out in the past around salesforce effectiveness, better performance at the front end, pricing governance. You know, we're pushing a lot with our channel partners, joint business plans.
Cross-selling is much better. And on loyalty we are getting better. On attrition, we've been tracking this very carefully over the last couple of years. We've seen about 200 basis points of improvement in attrition, primarily coming out of our SIBG business, which would take some time for that to turn, but it's starting to turn. It's still too high, but it's actually making some good improvements here. As we look to the back end of the year, we do see the innovation engine contributing even more in the back half and, in fact, even greater into 2027 based on just the momentum that we happen to be building here.
So we feel pretty good this year. We think we'll be about $450 million above macro in the full year — a little bit better than we thought last quarter, around $340–$350 — and that's largely on the back of good commercial excellence, but the machine churning faster on innovation. So all good signs and, you know, we're very pleased with the performance in the quarter and we expect our momentum to continue.
Jeff Sprague, Analyst at Vertical Research Partners
Great. And then maybe just unrelated follow-up for Anurag Maheshwari — not included in the guide, although it's closed. Is there some peculiarity we need to work through before we dial this in? Just curious on why that wasn't included. And we're looking at a lower tax rate for the year. Thanks.
Anurag Maheshwari, Chief Financial Officer
Great. Thanks for the question, Jeff. We just wanted to provide an apples-to-apples guidance from our last earnings. Call so that we can see how our organic performance has impacted all revenue, EPS and cash. We have a page at the back of the webcast that has the revenue, margin and other information on Madison. It does not have a material impact to the EPS guidance range or the numbers and we'll incorporate that in our third quarter call. And just for tax, we still plan to be around 20% for the year.
OPERATOR
Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question.
Scott Davis, Analyst at Melius Research
Hey, good morning guys.
Bill Brown, Chairman and CEO
Good morning, Scott.
Scott Davis, Analyst at Melius Research
This expanded beam optical thing seems interesting, but I'm trying to get a sense, I guess of a couple of things and one is really materiality and how that scales out and, you know, it looks like it was launched with, you know, with Microsoft as kind of the partner. So is there an opportunity for that to scale across more hyperscalers and, you know, and how do you think about that? I'll just leave that as a little bit open-ended to help us understand where the upside is in that market.
Bill Brown, Chairman and CEO
So Scott, thanks for the question. Yes, it's getting quite a bit of excitement and we're excited internally as well. It's been a technology that's developed several years ago. You know, just in a nutshell, it's very durable, dust-resistant, vibration-resistant, you know, fiber-optic connection technology. We've proven with a hyperscaler that it can reduce by about 85% the time to revenue, time to install circuits in a data center. You know, we've got about 100 patents in the space, 50 pending.
So it's very well protected and we're very excited about this. You know, it's been in testing for several years with Microsoft. We're very pleased that they have qualified us as a technology for the Azure data centers. That's very encouraging. The revenue this year, it was in the $40 to $50 million range. You know, we do think it will scale over time — could be 4 or 5x that or even more over the next several years depending upon our progress here as well as the adoption of optical technologies in data centers.
That transitions, you know, a couple of things are happening here. One, as we continue to develop the technology, each hyperscaler has some uniqueness in their architecture. So that's got to be developed. We've got to scale it both internally and externally. And earlier this year we announced that we would double our capacity on EBO this year and another doubling over the next year to 18 months. But even that isn't anywhere near the volume demand in the marketplace.
So we're also working with various contract manufacturers, are pretty developed on one. You know, the third item of this is that we will not be successful as a sole provider here. This is about enabling an ecosystem of partners. So we formed a multi-supplier agreement. There's 44 players in this agreement, all throughout the ecosystem. There's multiple hyperscalers, chip manufacturers, connector manufacturers, and it's about how do you enable the whole ecosystem.
So all of those things are in place. We're deep in the trials with other hyperscalers. I won't say much more about that, you know, but the TAM this year for EBO technologies is around $1 billion. We think it'll grow to $2 billion by 2028. It could be beyond that over time. But again, we've got to be very successful in how we scale this product and make sure we've got good quality, deliver on time — all those basic pieces. But we're very encouraged about the progress that we're on, the results that we're seeing.
The team's done a great job here and we're optimistic about the growth in the space.
Scott Davis, Analyst at Melius Research
Okay, that's helpful. And then just a quick follow-up. I'd kind of given up on China, but it sounds like China could potentially be a growth engine for you guys again. Is that an exaggeration or how do you view the short, medium, long term kind of China market today versus maybe when you took over the job?
Bill Brown, Chairman and CEO
Yes, good questions. I mean, look, we've been pretty consistent that China has been a very special market for us. It's performing really well. We've got a great team on the ground. We've organized a little bit differently and uniquely there as well as in India — sort of a hybrid organizational model. We have global business groups, but we stood up a team focused on China, based in China, same thing in India. And we're seeing the results. You know, in the second quarter we were double-digit growth, first half about 8%.
A lot of the performance there — keep in mind, again, we're 50/50 between domestic production and export. The domestic economy from an industrial perspective remains pretty solid in China and we're performing well. A lot of it is localizing NPI and a lot of it is commercial execution on the ground. The team is doing a fantastic job. We have more than 5,000 people there, six factories and, again, we're developing more localized technology. The export is the other 50% of the business.
That part of the economy has done pretty well and we feel pretty good about the results. And, you know, we'll continue to press it every quarter as we were in Q3 in the back end of the year. But long term, we like our position in China, we like the team that's executing in China, the strategy, and we're pretty optimistic about the future in China.
Scott Davis, Analyst at Melius Research
Sounds good. Best of luck, guys. Thank you.
Bill Brown, Chairman and CEO
Thank you.
OPERATOR
Thank you. Our next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question.
Amit Mehrotra, Analyst at UBS
Thanks. Morning, Bill. Just hoping to get a little bit more color on NPI in terms of when you typically expect these new products to sort of really inflect. I'm sure it takes a few quarters or maybe a year or two. And then anything within the NPI in terms of are these truly new products or increasingly so new products, or I know what you call Class 3 products or refresh products — and stop there. And then I think there was this expectation that maybe $600 million of outgrowth next year on year three of the plan.
Is that still the way to think about the outgrowth from a lot of these actions?
Bill Brown, Chairman and CEO
Thank you. So, Amit, a bunch of good questions. First, on the last piece around the outgrowth next year — I mean, look, this year we originally said we would be a billion over the macro: 125, 326 and 627. And clearly last year we did a bit better than 100. This year we'll do more than 300, around 450. So that continues to ramp. So we'll come back early next year and talk about next year. But clearly we're performing better than the macro, and it's both commercial excellence as well as innovation or NPI.
Look, on NPI, the progress has been fantastic. And the chart that we put into the webcast is a very important one — this very deep inflection, and we're clearly on the right track here. You know, we typically would launch a product within about — from the beginning of development to launch is running around 250 days. It's down substantially from where it was two years ago. By '27 it's going to around a 20% reduction in overall cycle time. But there's some nuances in the data here.
You know, we're launching more Class 3s, which are shorter in duration — they're more incremental, you know. But the company is pivoting more to what we call Class 4s and Class 5s. And Class 4s are those that move into adjacent markets and Class 5s are completely new products for new markets going into. So the team is focusing more on the 4s and 5s. You'll see more impact in the back half of the year as those products that we started to work on a few years ago start to launch this year and become meaningful in the back half.
They'll be even more meaningful into 2027. But the engine's moving, the momentum is really building. The executing, I think, fantastically well across all these various dimensions. We're launching more, but there's more ideas coming into the front end of the funnel. So the health of the pipeline is very good. So I think this will continue to build momentum in the back half into next year. It's what we're known for — material science and using material science to make differences in the world.
And I think we're doing a good job with that.
Amit Mehrotra, Analyst at UBS
Okay, that's very helpful. Thanks, Bill. And just as a quick follow-up, you know, when we started — I remember at the analyst day — I mean the story originally was really about sort of getting the gross margin, you know, from the low 40s to the high 40s where you guys used to be. And obviously with tariffs and all the developments that have happened, you've still been able to move the needle on the operating margin line, much to your credit, despite sort of gross margin being sort of stuck in the very low 40s.
Is there an opportunity, do you think, structurally — at least with all that we know now — we can still get back to the high 40% on gross margin? If you can just sort of talk about that, just given all the structural dynamics that have occurred over the last couple of years.
Bill Brown, Chairman and CEO
Look, on margins, you see the chart — up 500 basis points from a couple of years ago. So we are making really strong progress here. And it's both gross margin, but also importantly in SG&A, IT and other kinds of expenses — indirect costs. We've talked about that quite a bit. There was more to squeeze in that area, more cost to take out than we'd anticipated, and we've done a good job on gross margins. We're tracking to close to mid-40s right now.
I mean, the company has done a good job. Productivity is really solid. We had great productivity in the quarter. You know, we continue to build momentum. I gave you sort of the metrics around that. We are reducing our cost of poor quality — that came down again. Our operating equipment effectiveness is coming up. You know, we're driving hard on procurement, receiving net savings even after inflation. You know, four-wall spend. We've doubled the number of Kaizen events inside the company.
There's a ton of opportunity here just running the network — the distribution side — better than as it exists today. The next step really as we transform is simplifying, standardizing, automating more of our processes both on our SG&A side — I talked a bit about that in the prepared remarks — but also on the factory side, the network side. There is plenty of headroom here in front of us. We see ourselves marching ahead with an ability to hit the high 40s over time.
But the roadmap is relatively clear. It's along the same lines we've been laying out and talking about over the last couple of years. As we get into transformation, we'll see margins continue to expand. So we feel good about the performance and optimistic about the future on margins.
Amit Mehrotra, Analyst at UBS
Great. Thank you very much. Appreciate it.
OPERATOR
Thank you. We'll go next to the line of Nigel Koh with Wolfe Research. Please proceed with your question.
Nigel Koh, Analyst at Wolfe Research
Thanks. Good morning, everyone. So, quite a different quarter, I think. Bill, you mentioned last quarter you started off quite weak and got better through 1Q. I'm just wondering how the 5.4% looked from April through June. Did we start off stronger, get weaker — any kind of... And then any updates on how orders and maybe backlog exited the quarter?
Bill Brown, Chairman and CEO
Hey, good morning, Nigel. It was quite good throughout the course of the quarter. It was more linear than we've typically seen. We, as you said, we started the quarter with very good backlog. You know, if I look at April and May, it was probably 600 basis points better relative to the first two months of prior quarters. So it was quite good. As we went into the first two months of the quarter and June, the auto momentum kind of sustained as well because we did have price increases which came into effect from May 1st. But just through the course of the quarter we saw very good linearity and the team executed very well to post the 5.4% growth. We did see similar, as I said, auto momentum in the second quarter, like the first quarter, with strength on the industrial side of the business. So our orders were up about 10% for the quarter and backlog about close to 20% up year over year. So as we get into Q3 we feel good visibility for Q3 and the second half of the year.
Obviously 75% of our business is book and ship so we have to monetize as we go along. But so far the first two weeks, orders and backlog look good.
Nigel Koh, Analyst at Wolfe Research
That's great. That's really encouraging. And my next question is, you mentioned the consumer channel destock in the second half of June. So just wondering how long do you think this destock will happen? Any intel on how images look for 3M products, and then any color on how inventories are looking in SIBG and TBG and T&E, and, you know, sell-in to sell-through color would be helpful as well.
Bill Brown, Chairman and CEO
So inventory levels in SIBG and TBG are normal. There's no discernible trend one way or another. Not a concern on CBG. Look, I think what was encouraging is to continue to see the point of sale growth or sell-out growth around 2.5% in the quarter, which was very positive. We felt good about that. It was really isolated to a couple of retailers and we saw them step back a little bit in the U.S. channel, step back a little bit in terms of weeks of supply.
It was about a one-week delta. You know, as we come into July and into Q3, we think this will normalize here, especially as retailers stock for back-to-school season, but we'll keep monitoring it and communicate with investors as we need. But we feel it's going to normalize here and help us in the back half of Consumer to be flat to up slightly, which is what our expectation would be in the back half of the year.
Nigel Koh, Analyst at Wolfe Research
That's great. Thanks, Bill.
Bill Brown, Chairman and CEO
Thank you.
OPERATOR
Our next question comes from the line of Chigusa Kotoku with JPMorgan. Please proceed with your question.
Chigusa Kotoku, Analyst at JPMorgan
Good morning. Congrats on a great quarter and thanks for taking my question. My first question is on organic growth. So you raised your organic growth guidance nicely, but it still implies some deceleration in the second half from the strong second quarter levels. I think the pricing should come through and you have some delivery scheduled on the back end. So what's driving this? Is this Consumer and Electronics, or the timing of deliveries, or is this prudence?
Bill Brown, Chairman and CEO
Thank you. I mean, look, it's a good question. You know, the fact is the second half will be accelerating from the first half. You mentioned specifically Q2, but it does continue to accelerate. You know, there are some positives here. We continue to see good momentum in general industrial, safety. We see semis, data center. A&D remains pretty strong. Anurag communicated about the roofing granules business — it's not very big — but we see some improvements in the back half on easier comps, and we do see some tailwind on pricing for the year.
We'll be at about a point and a half, which implies about two points in the back half. So all those things give us encouragement in the back half. Look, the watch items are, number one, consumer electronics. The market data indicates a deteriorating production volume of devices — PCs, tablets — in the back half of the year, expected to be down high teens, lower than it was in the first half. So that's a watch area. Auto is stabilizing in general for us, but it's still expected to be down on the build rate year over year in the back half.
The auto aftermarket business we still think is going to be soft; repair claims still expected to be down in the back half of the year. And look, the U.S. consumer remains cautious. As I just commented, we do expect flat to up growth in Consumer in the back half, but the consumer remains cautious and value-focused. So those are the things that we're more cautious about. But at the end of the day, we had anticipated being above 3 in Q2; we came in above 5.
We do expect good momentum going into the back half of the year.
Chigusa Kotoku, Analyst at JPMorgan
Great, thanks so much for the color. Then as a follow-up, I just was wondering if you could give a little bit more color on what drove the strength in margins this quarter. Is it mix, price, costs, or productivity? You're pretty much at your 2027 margin target right now in the second quarter, so when should we expect to hear about updated targets?
Anurag Maheshwari, Chief Financial Officer
Okay, thanks for the question. So we finished the quarter at 24.9% margin, which is the highest we've ever been, and this was 40 basis points higher than we thought we would be. A large part of it was the volume performance relative to the 3% — we came in over 5% — but it was also a continuation on the productivity side as a combination of both G&A and on the supply chain, which had actually very good productivity for the quarter. So I would say it's broad-based between volume and productivity.
Chigusa Kotoku, Analyst at JPMorgan
Okay, great. Thanks for the color.
OPERATOR
Thank you. Our next question comes from the line of Chris Snyder with Morgan Stanley. Please proceed with your question.
Chris Snyder, Analyst at Morgan Stanley
Thank you. I wanted to follow up on the data center conversation, specifically the EBO opportunity. I think you said that this could be a $2 billion market by 2028. I'm just kind of curious, what is the competitive environment here? Just as we try to think about what share of that $2 billion market could accrue to 3M, it feels like a new technology that I would think the company is well positioned for from a share perspective. But just any color on that.
Bill Brown, Chairman and CEO
Thank you. Yeah, Chris, look, it's a good question. You know, we do play today inside the data center in a couple of ways. We play on sort of copper networking with our Twinax product sold into data centers. There is a gradual transition from copper to fiber that's happening across the data center, across the racks. It eventually will start to move down to the chip, which today is mostly copper-based solutions. So we've been playing on the copper side, and optics is going to become a bigger share over time of networking in the data centers.
Typically, fiber optic connections are point to point. It's very difficult to do that: the ends have to be polished; it's specialized labor; it takes time; it takes effort. And when you think about billions of individual fiber strands being connected in data centers, the market is looking for better solutions here. And EBO connections allow them to do this more quickly and seamlessly and more reliably. And I think that's an important differentiator.
As I mentioned earlier, we've got substantial patent protection around the technology — 100 patents today with another 50 that are pending. But we have and we will continue to license other ecosystem players to manufacture that EBO — expanded beam optics — technology, because that's required by hyperscalers. There's no one company or supplier that will provide all of the demand for these hyperscalers, whether it be servers or chips or racks or whatever it happens to be, including EBO connectors.
That's the path that we're on. We've got a small share today — again, it's in the $40–50 million range of a $1 billion market — but over time, given our technology, the momentum we think we're building here, and our ability to scale, we think our share in that segment will grow materially, and that's what we would expect.
Chris Snyder, Analyst at Morgan Stanley
Thank you, I appreciate that. And then maybe if I could follow up on price/cost. I would imagine there was some lag on Q2 price/cost just given how quickly the commodities inflated. And then when we think about the timing of your price actions in April and May, can you maybe just talk about price/cost in Q2, and is it fair to assume that price/cost gets better as we look into the back half just with the incremental price coming through? And while commodity inflation is still certainly persisting, it does seem like a lot of these petrochemical inputs have eased a bit versus what we saw earlier in the spring.
Thank you, Bill.
Bill Brown, Chairman and CEO
Look, it's a great question, Chris. You know, Q2 our price was at 1.6%, so it was about in line with what we'd expected. In the first half it was around a percent. You know, we started the year a little bit lighter. We do see that increasing in the back half of the year to be about 2%. As Anurag mentioned in his commentary, the impact for us this year embedded in our year is $150–175 million from oil-based increases. That is up from where we were earlier in the year at $125 million.
So to your point, there is a bit of a lag in that kind of rolling through the system, and we're being adaptable here. We're adjusting as we go. We are trying to offset that dollar for dollar. It will impact margins, but we do expect we'll offset the higher price of oil on a dollar-for-dollar basis through pricing. We're executing this a little bit better. We got on it faster this time earlier in the quarter. We're being very careful with the watch on volume here.
But at the end of the day I think we're capturing it. So price/cost on oil is sort of neutral overall. With the other price increases, it'll be slightly positive from where we stand today.
Chris Snyder, Analyst at Morgan Stanley
Thank you, Bill. Appreciate all that.
OPERATOR
Thank you. Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.
Nicole DeBlase, Analyst at Deutsche Bank
Yeah, thanks. Good morning, guys.
Bill Brown, Chairman and CEO
Good morning, Nicole.
Nicole DeBlase, Analyst at Deutsche Bank
Maybe just on productivity and stranded costs and growth investments, did anything shift at all in that outlook and anything major to highlight as we consider the cadence in those items between the first half and the second half?
Anurag Maheshwari, Chief Financial Officer
Yeah, overall, Nicole, I would say nothing has changed significantly in terms of the cadence. What's gotten better is productivity, which I'll come to in a second. Just on the stranded cost, it's still $150 million for the year, more in the second half versus the first half. And on investments we said it's going to be $225 million, and the investments are spread over growth, productivity, and foundation — stock of about $225 million, $75 million in the first half, $150 million in the second half.
So I wouldn't say anything has changed on those two items. But clearly on the productivity side, as Bill earlier mentioned, on supply chain it's definitely better than what we have seen through the course of the year.
Nicole DeBlase, Analyst at Deutsche Bank
Okay, got it. Thanks, Anurag. And then just, I think you guys did like $3 billion of buybacks in the first half and the prior guidance was for $2.5. You've already exceeded that. How are you thinking about buyback cadence, if there is any, in the second half of the year?
Anurag Maheshwari, Chief Financial Officer
Listen, we'll continue to be opportunistic and disciplined in just an overall capital allocation framework. As you correctly said, we started the year at $2.5 billion. We found the opportunity to buy more stock. We've done about $3 billion at an average price of about $153 for the first half. And we'll just continue to be opportunistic going forward.
Nicole DeBlase, Analyst at Deutsche Bank
Thank you. I'll pass it on.
OPERATOR
Thank you. Our next question comes from the line of Piyush Avasti with Citi. Please proceed with your question.
Piyush Avasti, Analyst
Good morning, guys. Thanks for taking my questions. I wanted to focus on Safety and Industrial. Segment growth in 2Q was very strong. Maybe if you can dig in a bit deeper on the drivers, like how much is healthy end markets versus your own commercial excellence and innovation initiatives. Not sure if there was any pull-forward. Ultimately, I want to get a sense of second-half dynamics. Comps get slightly tough, but do you see a path to sustaining this high single-digit growth?
Bill Brown, Chairman and CEO
So, just in a nutshell, look, IPI is running around 1.82%. U.S. is a little bit less than that, around just over 1%. So clearly we're growing well above the macro. So I believe it's the performance of the organization, both in terms of commercial excellence as well as innovation. Anurag went through some of the underlying drivers across the divisions of SIBG. It was pretty broad based. It was strong across all of what they're in, except for auto.
Aftermarket was a little bit light, which again, it's a big business, so they've had to overcome that. But I think the momentum there is pretty good to go into the back end of the year. There's nothing that indicates the industrial market is getting softer. We feel pretty good. As Anurag said, the orders in Q2 were pretty strong. SIBG was up mid-teens, and the order growth rate there is pretty good. Backlog is up year over year, so I think the momentum continues, and again it really is just a balance of really good commercial excellence.
Keep in mind that team jumped on commercial excellence very early in the process, early into 2024, and have made great progress. I commented earlier about attrition coming down, or churn coming down, which has been great. Working hard on the sales force, providing sales AI tools which make them more effective and efficient. A lot of work on cross-selling that's dropping through to the bottom line. I would characterize this as a lot of really good back-to-basics hustle that's happening in SIBG, but also in other businesses.
So we feel good about the momentum, and even with the tough compares we think the second half will be pretty strong growth as well.
Piyush Avasti, Analyst
Helpful, Bill, and maybe taking a step back, any additional color on how we should think of 3Q and 4Q in terms of top-line growth and operating margin? Based on your 2026 guidance, should we expect normal seasonality? Not sure if there are any other dynamics we need to be aware of.
Anurag Maheshwari, Chief Financial Officer
Sure. Let me take that question. You should see the normal seasonality through the course of the year as well. Our guide says we're going to be over 3.5% for the year. The first half was 3.3%, so clearly there's going to be acceleration in the second half. You should see a lot more coming from productivity as well, both in the supply chain as well as some of the transformation projects that we have undergoing. We see the benefits of that come through, and both of them will more than mitigate the pickup in stranded costs and investments that we are going to make to ensure that this is sustainable for the future.
So I would say it's normal seasonality with the EPS growing by $0.30 in the back half, equal between Q3 and Q4.
Piyush Avasti, Analyst
I appreciate the color. Thank you.
OPERATOR
Thank you. Our next question comes from the line of Dean Dre with RBC Capital Markets. Please proceed with your question.
Dean Dre, Analyst at RBC Capital Markets
Thank you. Good morning, everyone.
Bill Brown, Chairman and CEO
Good morning, Dean.
Dean Dre, Analyst at RBC Capital Markets
Hey, significant upside in free cash flow, especially compared to your five-year average. Can you talk about any one-timers? There was a reference to benefit of tax timing, but also some nice improvement in days, in inventory days. So is that also sustainable, and do you have some targets that you can share?
Anurag Maheshwari, Chief Financial Officer
Yes, thanks. Listen, very strong cash flow just on the back of very strong operational performance. We obviously have good earnings, and the cash conversion cycle continues to do better on the back of lesser inventory. Our inventories improved by seven days year over year. So just fundamental good operational performance that's driving the free cash flow.
Dean Dre, Analyst at RBC Capital Markets
Great. And you didn't call it out exactly, but can you reference any of the impact on memory chip pricing, availability, and how is that rippling through your consumer electronics?
Bill Brown, Chairman and CEO
Well, the consumer electronics, you know, was down low single digits in the quarter. And we do expect the market in the back half of the year to be down, I think it was like high teens. So. And I think that's largely related to memory shortages, a high cost of memory. So I think that's rolling through the marketplace. In the quarter, we're performing better than the macro — again, down low single digits versus where the market happens to be. We expect to outperform in the back half of the year, but the market is getting weaker because of memory.
Dean Dre, Analyst at RBC Capital Markets
Great. Thank you.
OPERATOR
Thank you. Our next question comes from Brett Lindsey with Mizuho. Please proceed with your question. All right, going.
Brett Lindsey, Analyst at Mizuho
Hey, good morning. My question's on utilization and footprint rationalization. So there's a bit of a tug of war here, right? You've got the secular and cyclical accelerating, but some other areas a little bit more cautious. What's your current capacity utilization across the footprint? And as you look at some of the organic growth potentially accelerating here in the back half, how are you balancing rationalization versus expansion? Or are you thinking there's further actions as we look into '26 and '27, or are you revisiting some of the plans currently given the improvements?
Bill Brown, Chairman and CEO
So look, the way we measure utilizations across about 300 assets across the organization, we continue to increase that, that we're systematically tracking. There's more than half our volume. It's running around 63.5–64%. So there's plenty of upside capacity across the overall network in aggregate. As I mentioned in my remarks, there are certain assets in our network that are constrained, and I mentioned one in particular in New Ulm. There's others in New Ulm which make electrical connectors — that volume is spiking.
So we've got to find ways to unlock capacity. A lot of it's kind of basic in how you run the lines and the workflow and material flow. Over time there might be some capital there, but overall utilization is an upside opportunity for us. But fundamentally, understanding utilization, how it's measured across individual assets across the hundred plants we have in the network, allows us to then start to look at how do you consolidate between individual assets, cells within a factory, and factories themselves.
That is the unlock — what we call transformation — that's going to occur over the next three to five years. It's a longer-term journey. But clearly as we start to wring out capacity, increase capacity utilization here, we have an opportunity to rationalize the network as well.
Brett Lindsey, Analyst at Mizuho
Understood, thanks. And then just to follow up on the new product launches — so 92 in the quarter, pace for the 350-plus — what portion is incremental share or TAM expansion versus replacing or cannibalizing existing? Is there a metric you guys are looking at that looks at net new contribution internally versus gross NPI that might help us bridge some of the opportunity here over the next couple years?
Bill Brown, Chairman and CEO
Yeah, Brett, let me look. When we talk about growth above the macro, a lot of it is going to be net new growth, and that's sort of what we articulate. But Class 3 for us is running around 75% of the launches. Class 4s and 5s, which is more new, adjacent — adjacent markets or new new, if you will, new product for new markets — that's running around 25%. Over time that could go up to 30%, maybe a little bit better than that. It'll be a little bit higher on the industrial side.
So we do expect TEBG and SIBG to get to 40% or beyond 40% Class 4s and 5s, but we're still running as a company around 25% today.
Brett Lindsey, Analyst at Mizuho
Thanks, Bill. Congrats on the quarter.
Bill Brown, Chairman and CEO
Thank you.
OPERATOR
And our last question today comes from Lawrence Alexander with Jefferies. Please proceed with your question.
Lawrence Alexander, Analyst at Jefferies
Can you give a high-level assessment of the margin profile in the new product mix relative to your core businesses? Used to be that was a significant gap, and I'm curious if the gap is stable. That is, as your overall margins are rising, is the margin embedded in the new products pipeline also rising? Or should we think about it more as over time you're just having a mix shift where the higher mix is what's driving the margin lift, but eventually the two would converge to some equilibrium?
Bill Brown, Chairman and CEO
Look, in a nutshell, we expect and we do see that margins on new products over time raise the overall margin threshold. As they start at launch, lower volumes — you'll see just absorption that may not come in at the higher margin — but they do over time, because new features can drive better pricing. Also, new products can come into the marketplace at lower cost. One of the things the team is really focused on is design-to-cost. So we are looking to both bring new features which help us drive price but also drive cost down in the designs themselves.
And that combination should allow us to unlock, and does allow us to unlock, margins through new product introductions.
Lawrence Alexander, Analyst at Jefferies
Thank you.
OPERATOR
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.
Bill Brown, Chairman and CEO
Well, thanks, everybody, for joining us today, and thanks again to all the 3Mers for really, truly delivering another outstanding quarter of great execution and delivering value for our customers and our shareholders. And I want to thank them all for all their efforts. Thank you for joining the call and have a good day.
OPERATOR
Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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