3M Company (MMM) — Q3 2025 Earnings Call Transcript

Thank you. Good morning, everyone, and welcome to our quarterly earnings conference call. With me today are Bill Brown, 3M's Chairman and Chief Executive Officer; and Anurag Maheshwari, our Chief Financial Officer. Bill and Anurag will make some formal comments, then we will take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at 3m.com. Please turn to Slide 2 and take a moment to read the forward-looking statements. During today's conference call, we'll be making certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-Q lists some of the most important risk factors that could cause actual results to differ from our predictions. Please note through our today's presentation we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. With that, please turn to Slide 3, and I will hand the call off to Bill. Bill?

Thank you, Chinmay, and good morning, everyone. The 3M team delivered another strong quarter in Q3 with organic sales growth of 3.2%, the fourth consecutive quarter of positive organic growth across all 3 business groups against a macro backdrop that is largely unchanged and generally soft. Our 3M eXcellence operating model helped drive operating margins up 170 basis points, earnings per share up 10% to $2.19 and free cash flow of $1.3 billion, a conversion of 111%. Our strong performance through the first 3 quarters of the year enables us to increase our earnings per share guidance to $7.95 to $8.05 and on the back of a strong Q3, we now expect full-year organic sales growth to be greater than 2% with adjusted free cash flow conversion remaining above 100%. Our strategy is working, and our efforts to advance our top 3 priorities are yielding results. Most notable this quarter is our work on Commercial eXcellence. The rigor associated with turning customer opportunities into wins faster is clear, and we are squarely focused on accounts with the highest potential while limiting special pricing actions. Our cross-selling program continues to outperform our expectations, and we have nearly doubled the pipeline since last quarter and closed on nearly $30 million of new business. To reduce churn, we are leveraging predictive analytics to win back business lost or at risk. And the sales organization is stepping up its performance embracing the up-tempo operating rigor and leveraging new tools and processes to win at the customer interface. We launched 70 new products in the quarter and 196 year-to-date, both up about 70% versus last year, and we now expect to launch over 250 new products this year, exceeding our goal of 215 and pacing ahead of our Investor Day target of 1,000 new products through 2027. We continue to shift resources towards new product development, align investment to our priority verticals, and drive accountability for on-time launch attainment. And most importantly, we're beginning to bend the curve on revenue from new products with sales from products launched in the last 5 years up 30% in Q3 and 16% year-to-date, tracking to be up high teens for the full year. I wanted to highlight a few specific product launches this year that contributed to our performance this quarter. Earlier this year, we launched ScotchBlue PROSharp Painter's Tape, a great example of a Class III product in our consumer business that replaces an existing offering in this space, but with a better performance and cost profile. We're now regaining share, growing high single digits and outperforming in the category. Another launch in the consumer business expanded our size offering in our Filtrete business. This has given us broader coverage of the market and led to high single-digit growth in the category in Q3. Last quarter, we launched a new lightweight wire frame self-contained breathing apparatus, which contributed to our high teens growth this quarter in our SCBA business and SIBG. These are just a few examples that individually are not material at the company level, but collectively are beginning to have a positive impact on revenue growth and customer perception that innovation is back at 3M. Our second priority is driving operational excellence across the enterprise. Our efforts here are driving margin expansion, improving customer service, increasing asset utilization, and reducing cost per quality. Our on-time and full metric was 91.6% in the quarter, improving 200 basis points sequentially and 300 basis points over last year, achieving the highest on-time performance we've had in any quarter going back 20-plus years. We've now been consistently over 90% for 4 months in a row. Improved OTIF shows up tangibly in our financial results as lower service fines, but also intangibly through a better customer experience, leading to winning more shelf space and enhancing customer loyalty. Our intention now is a shift to the next stage of operational excellence, sustained or improved OTIF while simultaneously tightening delivery lead times and lowering inventory. We continue to roll out our operating equipment effectiveness metric, which is now being systematically tracked on 229 of our most important assets, representing about 60% of our production volume, an increase of 32 assets since last quarter. Year-to-date, OEE is about 63%, up 300 basis points versus last year. This focus on better asset utilization is both reducing changeover time and unplanned downtime and increasing run length and run rate, unlocking incremental volume opportunities. For example, in our optical adhesives line at our Jinshan plant in China, we were able to increase utilization from 63% to 81% by optimizing visual defect controls and reducing curing system downtime, freeing up enough capacity to double our share of an electronics customer's business. Quality is another critical aspect of operational excellence and is a company-wide priority. Our cost of poor quality in the quarter was 5.7%, down 40 basis points sequentially and 150 basis points year-over-year. Our focus on quality has driven yield launch reductions across all 3 business groups as we leverage Kaizen events and AI tools to optimize changeovers, use automation to replace manual visual inspection, and deploy design for manufacturing in our new product development efforts to reduce scrap during scale-up. While we're making progress, we have a long runway for improvement toward our target of achieving less than 4% cost of quality as a percentage of cost of goods sold. Our third priority is capital deployment. We returned $900 million to shareholders in Q3, $400 million in dividends and $500 million of share repurchases. Year-to-date, we returned $3.9 billion to shareholders. Consistent with what we said at Investor Day and since then, we continue to evaluate our portfolio at a profit center level to shift our businesses towards higher growth, higher profit potential markets. Addressing this portfolio will not only be accretive to earnings over time, but importantly, we'll free up management time to focus on higher-value opportunities. We previously communicated that 2% to 3% of revenue was under review for being divested. In the quarter, we made progress with an agreement to sell our precision grinding and finishing business within our SIBG abrasive division. While this business is small at less than 1% of company sales, it's been a drag on results with over a decade of sales declines in 7 dedicated underutilized factories across the U.S., Europe, and China. As such, we do not expect this divestiture to be dilutive to earnings. This is a good outcome for shareholders, and it's indicative of the portfolio shaping we spoke about at Investor Day that enables us to be a more focused and higher-performing enterprise. On Slide 4, macro trends remained soft and largely unchanged from Q2. But due to our strong execution, we are outperforming. Looking at our end markets, in Q2, we said general industrial and safety would improve off its low single-digit growth in the first half, and that is what happened despite a surprisingly weak roofing granules market. Electronics was up mid-single digits and flat to the first half and was a bit better than expected. Consumer was flat as expected, while auto and auto aftermarket were down mid-single digits, with performance improving modestly in auto OE and weakening in commercial vehicles. Slide 5 pulls it all together and puts a spotlight on our 3M excellence framework in action in SIBG. On the right shows 11 quarters of organic growth at SIBG from minus 6% in early 2023 to the most recent quarter at 4.1%, aligned with the key factors driving this improvement. Over this period, new product launches more than doubled. OTIF improved by 12 percentage points while age backlog declined by 13 points. Cross-selling has accelerated, and more rigor and management focus was implemented across the sales force. But while progress is evident, we're still in the early innings as we execute on the fundamentals and extend the 3M excellence framework to other parts of the company. I'm really proud of the team. Our third quarter performance gives us confidence we're on the right track and reflects the culture of excellence we're building inside the company as we continue to drive the rigor and operational tempo necessary to deliver on our strategic priorities. As we navigate these uncertain times, we're focused on what we control, innovating for our customers, embedding commercial excellence across our businesses, improving service, optimizing capacity, reducing waste, and effectively deploying capital all with a renewed sense of urgency that defines our new performance culture. And with that, I'll turn it over to Anurag to share the details of the quarter. Anurag?

Thank you, Bill. Turning to Slide 6, we had a strong quarter across all financial metrics. We delivered sales growth acceleration, continued solid margin expansion, double-digit earnings growth, and strong cash flow. Starting with the top line. In a consistently muted macro environment, we accelerated organic revenue growth from 1.5% in the first half to 3.2% in Q3, driven by successful execution of our commercial excellence initiatives and contribution from NPI, underpinned by a strong operating tempo, which resulted in growth above macro. By geography, our growth was led by China, which was up high single digits, with strength in industrial adhesives, films, and electronics bonding solutions driven by strong commercial execution that led to share gains. The U.S., where we first focused our commercial excellence initiatives, grew nearly 4% in the quarter compared to 1% growth in the first half, with strength in general industrial, safety, and demand for Filtrete filters, partially offset by market-driven weakness in the auto aftermarket and roofing granules. It was encouraging to see Europe return to growth in the third quarter, up low single digits due to strength in personal safety communication solutions, which more than offset the weakness in auto. Q3 daily order trends were up 3% year-on-year with growth across all business groups. Though our sales came in better than expected, and aged backlog continues to decline, the strength in orders resulted in a year-over-year increase in backlog, providing 20% to 25% coverage of fourth-quarter sales. Q3 adjusted operating margins were 24.7%, up 170 basis points year-on-year, driven by continued strong operational performance. Operating income grew by approximately $175 million in constant currency, including an approximately $325 million benefit from volume growth, broad-based productivity across supply chain and G&A, and lower restructuring costs, partially offset by about $50 million of growth investments as planned and $100 million from tariff impact and stranded costs. Collectively, this contributed $0.25 to earnings, which was partially offset by $0.04 from FX and nonoperational below-the-line items. Our strong operating performance resulted in an adjusted EPS of $2.19, an increase of 10%. Relative to expectations, our operational outperformance was driven by higher volume and productivity as the team continued to execute our strategic priorities. I also want to mention 2 items highlighted in our press release issued this morning that are excluded from adjusted results. First, we recorded a pretax charge of $161 million related to the agreement to sell our precision grinding and finishing business. Second, we took a $14 million charge as we begin to invest in the long-term transformation efforts to redesign our manufacturing, distribution, and business process services and locations. This initiative is different from the traditional restructuring programs we have previously undertaken, like the recently concluded enterprise program, which focused on short-term actions for quicker paybacks. Accordingly, the charges related to these actions will be excluded from adjusted results going forward. Adjusted free cash flow in the quarter was $1.3 billion with conversion of 111% as we benefited from strong earnings and capital expenditure efficiency. I will provide a quick overview of our growth performance for each business group on Slide 7. We started commercial excellence initiatives in Safety and Industrial, and as a result, we are seeing early gains with organic sales up 4.1% in Q3 and 3.1% year-to-date. Growth in SIBG was led by electrical markets, up low teens, as we prioritized service performance and capitalized on growth in construction of data centers. Industrial adhesives and tapes added another quarter of mid-single-digit growth as they continue to win share in bonding solutions for electronics, auto, and appliances from new product introduction and better order conversion. Both personal safety and abrasives accelerated to mid-single-digit growth, up from low single digits in the first half driven by increased sales effectiveness and new product introductions. Collectively, this strong growth more than offset known weakness in automotive aftermarket and emerging weakness in roofing granules from the slow housing market and weak consumer sentiment. Overall, our focus on commercial and innovation excellence helped SIBG grow 4.1% for the quarter, the highest growth since 2018 excluding COVID. Transportation and Electronics adjusted sales accelerated from 1% in the first half to 3.6% in Q3, bringing year-to-date organic growth to 1.9%. While there was some discrete timing between Q3 and Q4 in our transportation safety business due to a large pavement marking project, the main drivers of growth were double-digit growth in aerospace, continued momentum in the electronics business, and automotive being flattish after a down first half. In electronics, we're expanding from the premium segment into the mainstream with new product introductions and better sales coverage. This quarter, we won content with a major mainstream player to supply optically clear adhesives for smartphones and low sparkle film for notebooks. In our auto business, the weak commercial vehicle sales were offset by growth due to spec-in wins and increased penetration with Chinese OEMs. Finally, in a relatively weak consumer market, our consumer business has demonstrated the ability to grow 4 quarters in a row, including 0.3% organic growth in each of the last 3 quarters. Though consumer sentiment remains soft, we experienced strong demand for Filtrete filters, Scotch tape, and Meguiar's products supported by new product introductions, continued service improvements, and increased advertising and merchandising investment. Overall, we are delivering on our commitments with strong year-to-date results, including organic growth of 2.1%, operating margin expansion of 220 basis points to 24.2%, earnings growth of 11%, and free cash flow generation of $3.1 billion. We also returned $3.9 billion to shareholders, including $1.2 billion in dividends and $2.7 billion in share repurchases. Please turn to Slide 8 for an update on our '25 guidance. Our year-to-date sales growth of 2.1% gives us confidence we will deliver growth of over 2% for the year. Our focus on productivity has enabled us to deliver strong margins every quarter. And on the back of this performance, we are updating our margin expansion expectations to 180 to 200 basis points for the year. As a result, we are raising our earnings per share guidance for the year from a range of $7.75 to $8 to a range of $7.95 to $8.05, representing an approximately $0.12 increase at the midpoint or 10% growth for the year. We continue to expect free cash flow conversion of greater than 100%, with absolute free cash flow dollars being higher reflecting the increase in earnings. Please turn to Slide 9. This updated 2025 guidance is ahead of the initial guidance set at the beginning of the year and positions us well to achieve the financial commitments we made at our Investor Day earlier this year. For 2026, we will provide formal guidance on our Q4 earnings call in January, but our framework remains consistent with what we communicated at our Investor Day in February. Growth above macro, continued margin expansion, earnings growth, and strong free cash flow generation. While the macroeconomic outlook is uncertain, we will outperform by scaling commercial excellence across all business units and leveraging new product launches. Alongside growth, we will improve productivity in our supply chain and G&A to more than offset investments, stranded costs, and anticipated tariff impacts, resulting in margin expansion in 2026. For EPS, we expect operational performance to be the primary driver of earnings growth, similar to this year. Non-operational performance will be influenced by changes in interest rates and FX while tax rates should remain stable, and share buybacks will continue to be accretive. Finally, we continue to expect to deliver cash flow conversion that exceeds 100%. Before we open the call for questions, I would like to acknowledge and thank the 3M team for their strong commitment to operational and commercial excellence and focus on delivering improvement day after day. Our performance to date and opportunities ahead of us provide us with increased confidence in delivering on our updated 2025 guidance and commitments we laid out at the Investor Day. With that, let's open the line for questions.

You mentioned new products in your prepared remarks, and I want to focus on that because while every CEO at 3M has discussed new products, you appear to be achieving results. Without significantly increasing costs, what do you believe is driving this success? Have there been changes in your culture of compensation? This is an open-ended question, so I’ll pause here.

So good question, Scott. So I'm really pleased with the progress we're making on new product introductions. And I think what I've seen over the last 18 months or so is much greater pace and rigor and urgency than I think we've seen in some time. We're tapping into a lot of latent ideas, urgency, and desire from the team's product developers, application engineers, business leaders to get back to what's important at 3M, and that's innovating. And we're really trying to support that. Investments are coming up a little bit. We're putting some different metrics in place. Certainly, we're watching new product introductions, and they're turning around relatively quickly. Keep in mind, 80% of these are sort of incremental line extensions, what we call Class III, but that will build over time and become more important. I'm really pleased to see the funnel remain relatively healthy. So while we launched 70 products, we had 130 products coming into the front end of the funnel. So it's actually very positive. The number of ideas that the teams are coming up with is now close to 1,000. So we're tapping into this desire to innovate and bring new solutions to customers. The whole team is really responding very well to this. We're increasing our speed and eliminating non-value-added type activities. We are moving up a little bit on spend. I think in the quarter, it's up by 30 basis points, but it's not substantial. We are shifting more of our R&D dollars towards new product development. A couple of years ago, we dipped below 30%. Now it's running 35%, 36%. That should grow a little bit over time. But overall, I think the team is responding very, very well. We're starting to bend the curve on revenue. You'll see some of the numbers coming in Q3. We'll see more in Q4. But this is something that's going to sort of accelerate as we get into '26 and '27. Keep in mind, we said we grow $1 billion over the macro. Half of that will be in new product introductions. But a lot of that is going to come in '26 and '27 because it takes time to move the needle on that or the growth early on will come from commercial excellence. So Scott, it's a great question. The team is doing a fabulous job, and we're just getting started.

That makes sense. The natural follow-up is that historically, new products have been focused on maintaining or driving margin in the new product flow rather than creating new product categories, which was more common in the past. In the 1980s and 1990s, 3M was known for creating new categories. Do you have an idea of the potential upside? Can 3M grow beyond its historical growth rate of about 2% to 3%? Could it reach 4%, 5%, or even 6% by going back to creating new categories and driving that top line above traditional new product innovation?

So about 80% of the launches are in Class 3, but there are 20% in Class 4 and Class 5, which represent adjacent markets or new product entries. This year, we’ve observed a few interesting developments, particularly in our electrical market, including a cable preparation system, which is classified as a Class 4 or Class 5 product and is showing significant growth. As the team continues to innovate, I believe we’ll uncover additional opportunities. We're noticing improved growth in the broader market this quarter, which is currently in the 1% to 2% range. Achieving a 3.2% growth rate this quarter is commendable. This growth is expected to continue over time. While we won’t reach a 50-50 split between Class 3 and Class 4 or 5 products, we will see an increased number of Class 4 and 5 products entering the pipeline next year and into 2027.

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

So thanks, Jeff. Look, Anurag talked about in his remarks that it's unlike the prior restructuring effort, this enterprise-wide restructuring effort that was more focused on short-term actions, quick payback. What we're embarking on now is a more longer-term, more thoughtful redesign of our manufacturing network, our distribution network, our business process services. As we've embarked on our operational excellence journey, we are seeing more opportunities in G&A than I would have guessed earlier in the year. We didn't really say much about this in February at the Investor Day because we've learned a lot since then. This will be a structured improvement program over time. It won't be a big bang. It will be maybe more of a series of actions that I think will happen over time, more aligned to the long-term growth agenda of the company, more aligned to what the team can go and do. We'll evolve this in a thoughtful way so we don't disrupt the business, disrupt the momentum we're building on new product introductions, and driving operational efficiency. So this is something that we're going to continue to work on. We don't size it today. We'll give updates to investors over time. It will not be a big bang. We'll shape more next quarter. This quarter of $14 million next quarter. It will be in that same range, about $15 million. As we get to early next year, we'll sort of frame it up for 2026. But this is something that will happen over time. We'll provide some updates on what we want to do. But this is all about how do you grow and accelerate our margin expansion journey beyond 25% by '27; that's not where we're going to stop. A lot of the ideas we're seeing here today are going to be important ways of both returning earnings to owners as well as reinvesting back in the business. If anything, I'm seeing more opportunities today than we saw 6, 8 months ago when we had the Investor Day.

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

Let me comment on 2 pieces. One, on just the growth in the quarter, we're really pleased at 3.2%. We had guided, if you will, to 2.5% in the back half. We said it would be similar in Q3 and Q4. And obviously, we did quite a bit better than 2.5%. So of that 70 basis point improvement, at least 50 basis points is what we would consider to be self-help. It's both commercial excellence and NPI. The other 20 basis points is sort of net discrete items that shifted from Q4 into Q3, as Anurag talked about in his script. But relative to the macro, look, IPI is running around 2%. We see our blended macro around 1% so in that 1% to 2%, we're seeing around 150 basis points more or less of outperformance versus the macro. I think at least 100 basis points of that is commercial excellence and new product introduction. So I think it's very good performance from the team, doing what we said we would do over the last year, 1.5 years. Now on pricing, just to be clear, we are achieving what we said we would do on pricing, which was generate 70 basis points of price for the year, 50 basis points in the first half, about 90 in the back half so 70 for the year. We typically get about 50 basis points of price to offset material cost inflation that has been running around 2%, maybe a tick above that. The incremental 20 basis points is to cover a piece of the tariffs. Keep in mind, the net tariff impact for the company is around $0.10, gross is $0.20. So that $0.10 delta split 50-50 between price actions and costs. So hopefully, that answered the question. In short, we're getting price almost exactly as we said we would do at the Q2 earnings release.

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

Sure. Thanks for the question, Amit. So the intent of that page was twofold. One was obviously to see how we are performing versus the Investor Day targets that we laid out in February of this year in the spirit of transparency and how we are performing. Second, was to give a little bit more of a framework for 2026, but the formal guidance will come out in January. If you look at the first 9 months of our performance, it's been really good across margin expansion, EPS, and even free cash flow conversion. We thought we were going to be 100% free cash flow conversion at the beginning of the Investor Day, but now we're going to be over 100%. So what we laid out at Investor Day was that we'll get to 25% by 2027. Last year, we finished at 21.4%. So that means 360 basis points over 3 years. If you look at our guidance this year, it's about 180 to 200 basis points. So really, really good work that we've done in terms of our margin expansion. Clearly, productivity across supply chain, across G&A has really been good through the first 9 months of the year. So where we sit today, we actually feel very good about the 25% target that we set out for '27. We're moving absolutely in the right direction around there. And come January, we'll probably provide a refresh on where we stand on our 3-year targets. So as we get into '26, Amit, I think what we are going to see is continued outperformance versus the macro. What we laid out in Investor Day was $1 billion over 3 years, $100 million this year, $300 million next year, and $600 million a year after, cumulative of $1 billion. Just at our second-half performance, you'll see that we have about $100 million for this year. Next year, we see a line of sight because of commercial excellence, NPI to get there. On the margin side, supply chain. We've done some good work this year. There are still other areas in terms of the factory spend, whether we see more opportunities. We can kind of drive that harder, and G&A will continue. Overall, you will see next year again to be strong operating performance here. From where we sit today, we feel pretty good about what we laid out at the Investor Day targets and provide more of a refresh in January.

Okay, great. Bill, I wanted to ask about the divestitures. You mentioned the 2% to 3%, but if I recall correctly, that was part of the 10% within the 120 profit centers that you thought might be better managed by others. Do you believe you can focus more on that 10%, or are we still looking at the 2% to 3% range? Also, while I understand this latest divestiture is not dilutive to earnings, I'm curious about how you balance the size of divestitures with their potential impact on EPS for the company.

So Amit, look, let me be really clear about this. The process is ongoing. We're going to remain disciplined. You referenced appropriately the comments we made back at the Investor Day and in several forums since then about how we're thinking about the portfolio. We have 120 profit centers. We've analyzed them to identify those businesses which we believe have high growth, high margin potential, our technology-driven businesses that are consistent with the 3M heritage and DNA, we have a strong right to win versus others that aren't. We concluded that about 10% of that portfolio are in more commodity areas where they may no longer be a strong fit for the company and where we don't have a clear right to win in this material science, technology-driven business. We're only going to be selling businesses where there's clear value to shareholders above what it would be as value to selling it to somebody else as opposed to what we would have by running it on our own. Certainly, we're taking into account as we think through that, the lost earnings, the stranded cost dilution, and the management time and effort and focus that happens on small businesses that don't perform well. We did one in the quarter here, and it was important to get that over the line. I'll just take you back to my comments in the script; we're less than 1% of the revenue in 7 factories. So you can imagine what the profitability of that business happens to be. There are other opportunities like that. We'll analyze them individually. We'll be very smart and disciplined about this. This will be a process that will unfold over time. This is the process we're embarking on to build a 3M that's a higher performance, higher growth, higher margin potential overall entity. Not every business we're in today will be part of that journey going forward, Amit.

Just on this fourth quarter, I mean, you did the $2.19 million. I think your implied is like less than $180 million in the fourth quarter. I mean, I know there's some seasonality there, but I don't recall that kind of drop. I think you mentioned there was some discrete item pull forward into the third. But then you mentioned that backlog provides actually some pretty good coverage for the fourth. I think the 25% coverage was a positive comment, maybe it wasn't. Could you maybe just provide a little more color on why the more than seasonal drop-off from Q3 to Q4?

Sure, Steve. Thanks for the question. It's common to see a decrease in volume and margin between the third and fourth quarters, typically around $250 million lower due to the back-to-school season in Q3 and factors in the industrial sector. Additionally, there are factory shutdowns in Q4 that affect absorption. This year, however, we're seeing a slight increase in investments and tariffs between the two quarters. Initially, we expected investments to be $175 million for the year, but we are raising that to $185 million, mainly in Q4. We're encouraged by our revenue trends, and the increased investment will mainly support sales force training as we enhance our commercial operations, expanding our sales team globally and hiring more engineers, as Bill mentioned earlier. There's a noticeable increase in investment and tariffs in Q4, which is still in line with typical patterns. When comparing year-over-year, we believe we will outperform the macro environment again in Q4. Looking at the first 20 days of the month, along with our backlog and revenue from orders, our trends appear strong. Revenue growth is expected to improve, and we anticipate good incremental gains from this. We will also continue to focus on productivity. Over the past nine months, we have made solid progress, and we plan to enhance productivity and manage general and administrative expenses effectively. All of this will offset the rise in investments, tariffs, and stranded costs. At the midpoint of our guidance, we anticipate a margin expansion of 100 basis points. If we maintain our current performance, whether through increased volume similar to Q3 or improved margins, we could reach the higher end of our guidance range, which would suggest a margin expansion of 150 basis points in Q4.

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

About the growth above macro $1 billion?

Yes.

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

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

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

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

On the macroeconomic front, we presented a chart in the webcast indicating the current situation, which remains relatively weak and unchanged from around 90 days ago. We've noticed some softness in roofing granules, as Anurag pointed out in his comments. The housing market is experiencing some weakness; consumer spending is also subdued, leading to fewer roof replacements in the past three months. Additionally, sales of commercial vehicles have decreased, with a decline of just over 20% expected in the latter half of the year. This decline is primarily attributed to emissions trends, tariffs, and other factors affecting Class 5 to 8 vehicles in North America. On a more positive note, the automotive sector is showing slightly improved trends. We remained flat in the most recent quarter despite a slight overall market increase, with year-over-year auto production showing modest gains. For electronics, we experienced mid-single-digit growth in the first half of the year and continued that trend in Q3. This segment, comprising about 10% of our sales, is performing well, especially compared to the low double-digit growth we saw last year. Our products such as adhesives, films, and polarizers are gaining good traction in the mainstream market, which represents around 80% of the market share. We're pleased with our progress in electronics, which is slightly better than we anticipated 90 days ago.

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

The U.S. showed positive signs, improving from the first half where we saw a growth of 1%. In Q3, growth reached 3.7%, nearly 4%, which is quite promising. We're also seeing Europe pick up a bit; after a decline of about 1 point in the first half, it’s now increased by around 2 points this quarter, which is encouraging. China presents an interesting situation. Last year, we experienced growth in the low double digits. In the first half of this year, growth was in the mid-single digits, while Q3 saw a rise of about 8%, which exceeded our expectations. We had anticipated a slowdown in the latter half of the year, but it actually showed some acceleration in Q3. There may be a slight dip in Q4, but we expect it to remain positive. We're really pleased with the trends we're observing. China accounts for about 10% to 12% of our company, split evenly between domestic and export. Exports from China in September increased by around 8%. The resilience of China in many aspects is notable, thanks to our strong team there. We've implemented significant changes to our organizational structure in both China and India, resulting in improved performance driven by operational excellence enhancing our commercial effectiveness, much more than in the past. A significant portion of the growth in China can be attributed to our own initiatives, alongside market conditions; however, I believe a lot of it stems from our proactive measures.

I just want to go back to sort of the point that Jeff was getting into on the NPI. I think you mentioned 16% growth year-to-date from new products, Bill, and 19% in the quarter. I might have got those numbers wrong. But it does suggest that pretty much all your growth is coming from new products. Number one, is that correct? And then secondly, is it too early to judge how the margin contribution is tracking for this NPI?

So Nigel, just to clarify, the numbers we focus on are new product sales over a 5-year period, which includes everything launched in the last 5 years. Some products from earlier quarters have rolled off. We're using this as a measure of vitality by calculating the 5-year new product revenue as a percentage of total revenue. At times, we've been in the high 20s or even 30% vitality. We began the year at about 10%, will close at 12%, and aim for 20% by 2027. This metric converts into revenue each quarter. In the first quarter, 5-year new product sales increased by 3%, followed by a 15% rise in Q2, resulting in a 9% growth for the first half. In Q3, we saw a 30% increase, bringing the year-to-date total to 16%. Overall, we'll finish the year with growth in the high teens, and this will continue to grow on a 5-year basis. Some of that revenue is being realized in this quarter. Most of the significant growth above the macro environment this quarter is attributed to commercial effectiveness rather than new product introductions. As Anurag has mentioned before, this will build over time, initially focusing on commercial excellence, followed by new product introductions. However, it's evident that launching more products is changing the conversation with our customers. Even with typical replacements or some level of cannibalization, we are having different discussions with customers. We're expanding our shelf space, which is encouraging for our customers, and we are winning business simply because we are introducing more products.

Okay. That's very clear. And then Anurag, maybe on 2026. Can you maybe just give us a bit more definition on some of the margin puts and takes as it relates to the tariff roll forwards, stranded costs, and then some of the productivity savings? And then maybe a tricky one on the EPS. You talked about high single-digit growth per year planning for '26 and '27. I'm just wondering if you have confidence that that's a decent place order for '26.

Thanks, Nigel. Regarding the margin challenges and benefits for next year, we anticipate they will remain similar to this year. On the volume front, as previously mentioned, our performance compared to the macro environment should improve next year. We expect to see increased volume growth with additional gains from that compared to this year. Concerning the supply chain, we've committed to achieving $1 billion in productivity over the next three years. We performed well this year and are uncovering more opportunities, as I noted earlier. Looking at our factory spending, which is nearly $6 billion, along with logistics, we anticipate slightly higher productivity next year. We’ve made a strong start with G&A this year and are discovering further opportunities. Our IT improvements and indirect expenses have been positive. As we head into next year and the following year, we'll evaluate our IT strategy, particularly for shared services and indirect expenses, with more potential in facility management and MRO. We expect favorable conditions next year, particularly with volume, ongoing supply chain improvements, and stable G&A. Regarding EPS, we'll provide more details next year. Initially, for 2025, we indicated a target of mid- to high single-digit EPS growth. Currently, our guidance suggests we are aiming for close to double-digit EPS, around 10% at the midpoint. We’re starting off strong, and we’ll offer further insights on EPS projections for 2026 and 2027 next year.

I would like to get a better understanding of the margins. In the TEBG business group, margins decreased slightly in the third quarter, even with several productivity measures in place. Can you help clarify what factors contributed to that? Looking ahead to the next 12 months, should we expect most segments to experience similar margin growth, or are there any particular changes in the mix or adjustments in investment spending that we should be aware of?

Both SIBG and CBG margins were up about 200 basis points in the quarter. TEBG was down about 20. It's a large portfolio of businesses; mix really matters in that area, but also that's the business that's going to be most impacted by stranded costs. That was the biggest part of the headwind. We'll talk more as we go forward as to the margin trajectory in each of the businesses, but that's really what went on here in the quarter.

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

Yes, Julian, you mentioned the injury claims related to personal injury. We are focusing on three main areas as we work to manage and mitigate risk moving forward. The public water supplier issue has been settled for $12.5 billion a couple of years ago, with very few opting out. We have discussed some of the attorney general cases before, including the one in New Jersey last quarter, and Vermont will progress over time. We expect developments in Illinois around September next year, along with some cases being outside of the multidistrict litigation. Regarding personal injury, there was originally a trial date set for October, but the judge has postponed that to allow for more unfiled cases to be submitted. This decision was made to help manage the cases more effectively. Currently, we are assessing the filed cases, which are just under 14,000, each with multiple claims. We are in the process of vetting them all. We will provide updates to investors through SEC filings and these calls as we gain more information.

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

Well, Andy, that's exactly how we're identifying the priority verticals that we're focused on. A good part of the company is aligned to the priority verticals. You specifically mentioned data centers. We're exposed to data centers, both inside the data center as well as outside. That business for us is on the order of about $600 million, $100 million inside the data center and $500 million outside, which is connecting power to the data centers through terminations, through splices or a variety of other things. That business is growing pretty well; it's probably mid-teens. We've got really good exposure, not as much as we would like, but certainly, it's growing over time. That's how we came up with the thinking around the priority verticals was we aligned our technologies versus mega trends in the marketplace and capabilities of the company. That's how we came up with a strategy we laid out back at the Investor Day in February.

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

It's really good execution. It's really not pricing. It's the strategy that the CBG team has laid out to focus on 4 priority brands beyond the portfolio, SKU rationalization, they're focused. They're launching a lot of new products. I mean, they're up more than double year-to-date and in the quarter. Their NPI is really good. Their commercial excellence is really good. We're pushing more ad merchant to that space. The team is performing exceptionally well. It's pure execution, and I would say 0.3% in the quarter. They've grown positively in the last 4 quarters, it's 0.3% in Q1, Q2. So it's a pretty consistent story in what I would say is a relatively weak consumer market. So purely execution, they're doing a great job.

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

So thanks for the question, Chris. Look, I'm really, really pleased with what the team is doing in China. It doesn't feel to me like it's overheating, at least from our perspective. I think what we're seeing is a more resilient economy. More importantly, just the execution by the team. As I mentioned earlier in the call, about half of the businesses are going after the domestic market. There is some stimulus going into the market, but the execution of our local China team to go after and attack new opportunities is quite substantial. Half the market is on the export side, and we continue to perform really well in that space as well. One of the key growth themes for our TEBG business in China is going after China OEMs. To capture those opportunities, you have to innovate. You have to innovate at a pace consistent with the pace at which these OEMs are launching vehicles in a year or in 18 months or even less than that. In the quarter, we saw our ability to launch a new product offering into China to capture share with a China OEM in 10 months. We're seeing a lot more hustle, a lot more speed, and more eagerness. I'm really pleased with what's happening in China. We thought it would soften; it did not; it actually accelerated a little bit in Q3. We think it might soften a little bit in Q4; I don't know what's actually going to happen because the team is pushing pretty hard. But I'm encouraged by the trends, our position there, the footprint, the team, the leadership, and I think we're doing a great job.

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

On the second one, there's no restriction. On the former one, look, we're going to be very thoughtful, very methodical. We're going to execute transactions as we're able to do it effectively driving value for owners. It's a portfolio management; it's not something you think about once a year or once in the strategic plan, but it's an ongoing effort. We've clearly identified a piece of the company that doesn't appear to fit, and we're executing against that while also, and really importantly, building the muscle inside the company on how we execute through the basics, the fundamentals, which is the strategy we laid out in the middle of last year. It's a focus on fundamentals, operational excellence, commercial excellence, and innovation excellence. That's really what we're spending a lot of our time on. As we think about how the portfolio should move as we pivot the business into these higher-growth verticals aligned to the question that came up earlier around mega trends in our priority verticals. This is the path we're on. Again, we'll be thoughtful and very methodical.

I'll keep it to one as well. But I just wanted to circle back on commercial excellence and clearly some traction that you're seeing there. But trying to understand the timeline? If you could put it in the perspective of what inning you're in, in Safety and Industrial? Talk about how long it's taken to get to that $100 million pipeline? Because really, what I'm trying to understand is I think your earlier days on T&E and don't know where you are on consumer, but trying to think about how repeatable what you're doing in Safety and Industrial is in these other segments and the timeline to see traction there?

Joe, thank you for the question. It's a great one. We're really proud of what the team is doing in commercial excellence. We have great momentum here, and we did start mostly in SIBG, and within SIBG, started in the U.S. Then it went to Europe and Asia, the rest of the world. Wendy and the TEBG team are fast followers, learning from those lessons and drafting right behind them, again starting in the U.S. then going internationally. Karina has our effort going on in CBG. It's actually building terrific momentum. It's in 3 areas, the pillars we call them. One is commercial management. It's how we improve our processes and capacity at the front end. It's standard tools, improving our sales force, and basic execution between our sales reps, sales manager, and how they execute at the customer interface. Part of it is a second, which is channel effectiveness; it's all about how we engage with the customers joint business planning. That's what gave rise to these great ideas on cross-selling and the pipeline that we have that's over $100 million of cross-sell opportunities, which we now have captured $30 million on an annualized basis. That number is going to be bigger than what Chris laid out at the beginning of this year at the Investor Day. We're actually seeing even opportunities for cross-sell between TEBG and SIBG and consumer. This is gaining traction. We're clearly in our early innings, and this will build over time for sure. I'm really pleased with the progress so far on our commercial effectiveness work. Okay. I think that brings us to the end of the call. I wanted to thank again all the 3Mers for their continued drive towards excellence, improving every day, executing against our priorities, and delivering value to shareholders and to customers. Thank you very much for joining the call today.