3M Company (MMM) — Q2 2025 Earnings Call Transcript

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.

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 three 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 tempo 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, five-year new product sales bottomed last year and were 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 compactness 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 one with a reusable filter frame that can be refilled by a collapsible depleted 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 to 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 the 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 closure rates 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 our 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 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 six 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 effectiveness 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, highlighting potential capacity consolidation opportunities. For example, a core manufacturing process at 3M is adhesive coating, and we have about 250 different types of coders throughout the network, some quite old and 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 improve 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, including 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 of 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.

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 three 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 industrial 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 foreign exchange and $0.06 from non-operational 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 four factors: first, continued G&A efficiency as we make progress on IT optimization and lower indirect expenses. Second, metering of increases in year-over-year investments in response to a lower demand environment and evolving tariff landscape. Third, weakness 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 $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 six out of seven 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 PRO, Shark Painter's Tape, and Command, along with continued service improvements and an 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 three business groups to grow low single digits for the year with a similar profile to the first half. On the back of 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 foreign exchange 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 non-operational 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-operational 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 costs 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.

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 five-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 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. I want to follow up on that a little. Historically, dealing with some of your customers, particularly in the auto and big box sectors, has been quite difficult in terms of pricing. Have you found that the introduction of new products is your primary means of achieving price increases with these customers? Or, given the current factors like inflation and tariffs, are you finding it a bit easier to pass on some of the inflation costs without relying solely on new products?

What we're experiencing this year is good progress on pricing, primarily coming from the industrial businesses. In the automotive sector, winning a specification often includes some inherent value, making it challenging to differentiate between price increases and the value provided. The situation is more complicated with big box retailers, as you've mentioned. Nonetheless, we are seeing improved pricing, mainly in the industrial sector. As I've noted previously, we are typically managing our inflation effectively, often with an additional margin due to tariff impacts. Overall, we're performing well on pricing this year, especially on the industrial side.

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 four-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 pleased 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 the supply chain, very consistent with what we communicated and invested across the four buckets. On the G&A, similarly, at the Investor Day, what we said is there are three 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 two buckets. I think on the IT side, the team has done a really, really good job. We take our IT expenses, it's broken into three categories, which is protecting, maintaining investments, maintenance, which is about two-thirds 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 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 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 in advertising and merchandising, 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.

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 glad 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 the company. Look, as I mentioned in my script, the macro is sluggish, it's moving laterally. I went through some of the numbers there on what's happening with IPI at around 2%. It's sort of flattish. GDP is about the same, it's in 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 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 and 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 two businesses. So as abrasives, 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 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 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 and 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 it 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.

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.

Thank you for the question, Amit. We recently reached a settlement with the state of New Jersey concerning a specific site that we do not own, which is related to Chemours DuPont. This included some liability as well as claims at the state level. We believe this was the right choice for the company and our shareholders as it removes some risks. The settlement involves cash payments spread over the next 25 years, which we find manageable. You are correct that we have just over 30 Attorney General cases in other states, both within and outside of the multidistrict litigation, and we are handling them one by one. There are numerous discussions happening with the Attorney Generals and in the MDL across different states, indicating a lot of ongoing activity. I want to emphasize that we plan to exit PFAS manufacturing by the end of this year, which means we will not produce any new PFAS molecules that could impact the environment. We are focused on addressing these legacy issues as effectively as possible. Personal injury cases are also on the horizon, with a bellwether case scheduled for October, where we expect to try one to three cases around October 20. There are many discussions taking place regarding this as well, including a science day held last month. We are actively managing the situation to ensure we maintain cash flexibility while still investing in the company's growth. Our balance sheet remains very strong, giving us various options to address these issues. We are keeping open communication with our investors, and you can find more details in the 10-Q report.

Okay. That’s helpful. I’d like to ask Anurag about the difference between the first and second halves of the year. If I look at the projected margins, the company achieved 24% in the first half and is guiding for a little over 23% for the entire year. This suggests a decline in the second half compared to the first half. However, revenue is expected to increase sequentially. I'm trying to understand the factors that lead to lower margins in the second half despite the rising revenue.

Yes. Thanks, Amit. So yes, our first half margin is 24%. We are guiding between 150 and 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 two 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 a pickup in investments and stranded costs. So that's a big delta between the first half and the second half, but volume productivity is better. But if you take a step back and you look at it year-on-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 tariffs, after absorbing increased stranded costs and higher investments. 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.

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 non-dollar 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 a $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 in terms of a rate basis compared to the first.

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, I understand. Going back to the guidance, it seems that seasonality is a bit different this time, with the second half appearing weaker even though we typically see a stronger performance then. Despite the accelerating top line into the second half, the pricing dynamics on the industrial side don't seem too negative. Can you clarify the one-time items associated with your footprint consolidation and the specific headwinds affecting the second half that are impacting seasonality? Could you provide that information again? I would really appreciate it.

Yes. There is nothing on the footprint or any one-timers in the second half doing it. Operationally, we grew the first half at $0.50 to $0.55. In the 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 not much of a one-timer over there. The only thing on the EPS between the 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.

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 discussed it, the gross amount was $0.60, and now it's approximately $0.20. The most significant change is related to China; in the last quarter, it accounted for about 80% of the tariff impact. Previously, the rates were 125% for the U.S. and 145% for China, but they've significantly decreased to 10% and 30%. That was the primary reason for the change. While things are still shifting a bit, we've incorporated this into our guidance since we're more than halfway through the year and things have somewhat stabilized. Any further changes will only affect the remaining months of this year and may impact 2025, with the rest rolling into 2026. We believe we’re well adjusted for this. We are closely monitoring developments in the EU and any potential re-escalation of trade tensions with China, which could lead to changes. However, from our current perspective, we have enough information regarding the gross and net impact to include this in our guidance, which simplifies it for investors. We are offsetting $0.20 of gross tariff with cost and sourcing adjustments, covering about half of that, while the other half comes from price increases. The total gross impact is around $140 million, resulting in a net of about $70 million. Approximately $35 million to $40 million is attributed to price changes, and the remaining $35 million is expected to come from cost savings and sourcing improvements. The pricing adjustments are also contributing to our anticipated growth in the second half, as they mostly apply to that period.

Great. You mentioned China, and there might have been an expectation of some negative impact due to tariffs and potential pushback on your business there, but seeing single-digit growth looks quite strong. Have you experienced much of a negative impact? And how much do you anticipate for the second half?

We had a strong performance in the first half, with an increase in the mid-single digits, which exceeded our initial expectations for the year. While we anticipated a low single-digit growth, the results have been better than expected. We do foresee a slowdown in the second half, which is factored into our projections. Approximately half of our business is domestic and the other half is export, both of which are performing admirably. Local stimulus in China for appliances, particularly white goods, has positively influenced our tape products, alongside a healthy export market largely tied to electronics. However, we expect to see some softening in the latter part of the year. We remain committed to our operations in China, which is an integral part of our company, supported by seven factories and a workforce of 5,000. Our team there is doing an excellent job in driving commercial excellence. While we anticipate a slowdown, we still expect growth for the year overall.

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.

It's difficult to identify the exact impact of any prebuy. There might be some residual effects, but nothing significant is expected transitioning from Q2 to Q1; we anticipate Q3 coming from Q2. I don't believe prebuy is a concern. For the quarter, our orders increased slightly, with a bit of improvement in SIBG, remaining flat in TEBG, and a slight decline in consumer orders, which accelerated as the quarter progressed. June performed better than May, and May better than April, indicating some positive momentum. Although it's still early in July, we have noticed similar trends continuing. However, we only have a couple of weeks’ data, making it hard to spot any clear patterns. Q2 orders rose by low single digits, while our backlog increased by approximately 1% sequentially, equating to about $2 billion. As mentioned by Anurag, we are not primarily a backlog-driven business but rather operate on a book and ship basis. Nonetheless, we have observed some sequential backlog growth, with 20% to 25% of Q3's covenant backlog being a strong position. Overall, I'm pleased that our orders are stable, and our backlog is either maintaining or slightly growing 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?

We are optimistic about Europe in the second half of the year, as it is a key market for us. However, we need to keep an eye on the automotive sector. Overall, IHS builds globally have remained relatively stable, moving from a slight decline to a small increase recently. A significant part of that growth is coming from China. Both Europe and North America are showing declines, which negatively impacts 3M. We expect auto builds in Europe to be down in the latter half of the year, which is critical for us. That said, other areas of our business are displaying some growth, particularly SIBG, which saw an increase this quarter in Europe. There are indications that we might see growth in that sector, but we are closely monitoring the automotive situation in Europe for the second half.

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 from 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 are 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 and acoustics and other things. There's some model switchovers happening where we're spec'd 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.

Thank you, Chris. It's not primarily about price; it's more about volume. All U.S. retailers are closely examining their supply sources. If those sources are from non-U.S. markets, it becomes significant. The impact of tariffs makes those imports less economical, allowing us to be more appealing. So, there are indeed some opportunities emerging there, and our CBG team is actively pursuing them. While we may not see immediate price changes, we're more likely to notice an increase in volume, which represents some potential opportunities for the second half of the year for CBG.

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 is a 40 basis point improvement versus the first half?

No, it's a 40 basis point absolute year-over-year improvement. For the year, we're seeing about 70 basis points in price. Typically, we expect around 50 basis points, which is necessary to offset material cost inflation. With 2% on $6 billion of materials, that amounts to $120 million, and if we pass that through in price, as we have, that represents 50 basis points. We're achieving around 70 basis points, providing a little extra boost. Some of this is compensating for tariff headwinds, which will mostly occur in the latter half of the year, and part of it comes from the pricing discipline we are implementing. We're seeing a significant shift in price governance processes in SIBG, which is now moving to TEBG as well. In SIBG, we previously had over 60% of deals under $20,000, which were quite small. Today, that figure is less than 20%. We're focusing on being more strategic with pricing discounts for larger customers to ensure we secure the necessary volume. So, in summary, it's a 40 basis point year-over-year improvement, and we're looking at 70 basis points for the full year regarding 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 two 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.

I noticed a significant improvement in margins after experiencing several quarters of pressure in TPG. Could you clarify if there were any changes? I understand you've discussed the allocation of investments for the company. Does this impact that segment more than others, or are you closer to fully handling fastening costs, or is it simply a result of a better mix? Any insights would be appreciated.

Thank you for your question, Andy. The improvement is primarily due to volume and productivity rather than a significant investment. All three segments have shown strong margin expansion, especially in TEBG. The volume was approximately one point higher than last year, and our productivity enhancements in both the supply chain and G&A have positively impacted all three business groups, including TB, which helped offset the stranded costs they experienced. While TEBG margins have been down in recent quarters, we anticipate a recovery. As we continue through the year, based on our current margin guidance of 150 to 200 basis points, we expect all three business groups to perform well. SIBG and CPG are likely to see even better results, while TEBG may be somewhat lighter due to the stranded costs you mentioned, although productivity is being effectively realized 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, etc., 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?

It's a good question, and it's quite broad. Regarding the tax bill, it works in our favor as well as for other companies. It helps us keep reasonable GILTI rates, which is crucial for us, and maintain our effective tax rate in the 20% range, as we had anticipated. It's a positive development because it could have turned out differently. However, bonus depreciation and R&D expenses won't benefit us in the next couple of years due to some PWS costs and other factors, though they will assist us in the long run. Currently, Filtrete rates are around 14%, which, since it has been made permanent, is good news for the company. I won’t comment on the overall fiscal environment, but from a tax perspective, this is certainly beneficial for us.

Just wanted 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 right. Both SIBG and TEBG are expected to improve in the second half, and consumer behavior may see a slight increase as well, though this depends on actual consumer actions. However, it’s worth noting that while it's a smaller segment, its performance is closely tied to the first two.

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 trickled through to the consumer business.

I have two quick questions. First, how do you view the impact of your investment metering on operating leverage if demand exceeds expectations in the latter half of this year or next year? Second, regarding the PFAS issue, I want to clarify something from your earlier comments. How are you approaching the property damage aspect of PFAS litigation? When do you expect to have clearer visibility on the legal strategy to address those liabilities?

Yes, I'll start with the operating leverage first. We expect that to flow through. Currently, our operating leverage is around 35%. This should remain the same or potentially increase as volume rises. We're investing $175 million more this year compared to last year, and this was influenced by demand calibration. If demand softens, we might reduce spending on advertising and merchandising. We will prioritize projects based on the tariff landscape and other factors. However, we've added resources in R&D and sales. For the second quarter, we had planned an investment increase of about $85 million, but we exceeded $40 million. This is still a considerable amount, and we believe this investment is well-timed. In the second half, we will continue our usual level of investment, and if volume increases, I anticipate that our operating leverage could exceed 35% in the second half or in the near future.

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.