3M (NYSE:MMM) Q3 2026 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by. The conference will be starting in just a few minutes. It is recommended that you use a landline phone if you are going to register for a question. We thank you for your patience and ask that you please remain on the line. © transcript Emily Beynon Thank you for watching!

1:16 © transcript Emily Beynon

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4:08 ¶¶ ¶¶ Ladies and gentlemen, thank you for standing by. Welcome to the 3M Third Quarter Earnings Conference Call.

5:13 During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you do have a question, please press star 1 on your telephone keypad. As a reminder, this call is being recorded Tuesday, October 20, 2026. I would now like to turn the call over to Chinmay Trivedi, Senior Vice President of Investor Relations and Financial Planning and Analysis at 3M.

5:42 Thank you. Good morning, everyone, and welcome to our quarterly earnings conference call. With me today are Bill Brown, 3M's Chairman and Chief Executive Officer, and Anurag Maheshwari, 3M's Chief Financial Officer. Bill and Anurag will make some formal comments, then we will take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our investor relations website at 3M.com. Please turn to slide two 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.

6:32 Item 1A of our most recent Form 10Q lists some of the most important risk factors that could cause actual results to differ from our predictions. Please note, throughout today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. With that, please turn to slide three, and I will hand the call off to Bill. Bill? Thank you, Chinmay, and good morning, everyone.

7:04 We delivered strong performance in Q3, including organic growth of 3.3%, operating margin of 26.2%, up 110 basis points, earnings per share of $2.50, up 12%, and free cash flow of $1.2 billion. We returned $600 million to shareholders in the quarter, including $400 million in dividends and $200 million of share repurchases. These results include Madison Fire and Rescue, which is now fully consolidated into our financial reporting and reflect a change in acquisition amortization reporting. Our updated guidance for the year incorporates both items and Anurag will provide additional details later in the call.

7:50 Based on our Q3 performance and continued strong order trends, we remain confident in achieving organic growth of greater than 3.5% this year. The progress we're delivering reflects the disciplined execution of the strategy we've been implementing over the last two years. As we've discussed, a value creation framework is centered around three phases, building the foundation, driving transformation, and accelerating performance. Our results today are clear evidence that we're making progress across all three. We're strengthening the foundation of the company and rebuilding critical capabilities to position 3M for long-term success. We've invested in Salesforce effectiveness and AI-enabled tools.

8:36 We've sharpened our focus on priority verticals where we can win and improved how we allocate R&D resources. Operationally, we're delivering on our goals to improve productivity, quality, and supply chain performance. In the quarter, we launched 87 new products, up 24%, and we're on track to exceed our target of 350 this year. Year to date, five-year new product sales are up 34% versus last year to nearly $3 billion, resulting in new product vitality in the mid-teens from a low of 11% in 2024. Cross-selling is also gaining traction, with $140 million in wins booked to date, and another $120 million in the pipeline, well ahead of our original $100 million three-year goal.

9:28 And in today's higher inflation environment, our price execution has been particularly strong and fully offsets material and oil cost pressures. Across our manufacturing supply chain network, productivity improvements including procurement savings, higher asset utilization from increased throughput and lower downtime, and improved quality drove gross margins up 230 basis points year over year. Cost support quality improved by 40 basis points and overall equipment effectiveness improved by 20 basis points. We continue to see meaningful opportunities to further simplify and standardize, reshape the portfolio, reduce risk and improve enterprise resilience and predictability.

10:15 We've closed 16 manufacturing sites and distribution centers year-to-date and are taking action on 10 more over the next 12 months, supporting further gross margin improvement beyond 2027. And the Madison Fire and Rescue acquisition, which is now combined with our SCBA business and reported as a separate division within SIBG, is off to a good start. The JV delivered high single-digit pro forma growth, and operating margins ahead of our deal model and 3M overall. And integration is well underway to capture synergies across distribution, international expansion and operational performance. And we continue our efforts to address litigation risk and are actively working with a court appointed mediator for the AFFF Personal Injury MDL.

11:06 And more information is available in our quarterly filing. Moving to slide four, will provide a bit more color on our end market performance. We continue to see strong momentum in general industrial and safety, with second half growth accelerating to high single digits, above our prior expectations. In electronics, we're seeing increasing strength in semiconductors and data centers, which is partially offsetting a weaker consumer electronics market, especially in LCD displays. Auto OE and aftermarket is trending in line with prior expectations with a modest improvement from down low single digits in the first half to about flat in the second and with OE a bit softer and aftermarket a bit better.

11:53 The consumer business which contributes about 20% of sales improve sequentially to about flat in the second half as modest improvement in consumer POS spending is partially offset by channel inventory adjustments at a few specific retailers. Net-net, we still see sales accelerating the second half in our full year above 3.5% organic. Turning to slide five, over the medium to long term, accelerating innovation across our frontier verticals, including aerospace, data centers, and others, will be an important driver of growth. Space materials is a great example how we can take differentiated 3M technologies and extend them into entirely new markets.

12:40 As shown on the left side of the slide, we're combining our capabilities in films, adhesives, and others to solve light, thermal, energy, and weight challenges across multiple parts of a spacecraft, from the satellite chassis to solar arrays. Our current pipeline supports opportunities from low earth to geosynchronous orbits and across a range of commercial and government customers. In Q3, we launched a lightweight reflective film for a commercial constellation to reduce light scattering toward Earth and address light pollution concerns. And we plan to launch another product in Q4 to provide a moisture resistant barrier for solar panels. We have more than 10 other projects in development or in pre-pipeline stage that will follow in the next few years.

13:33 and on the right side of the slide, there's been a lot of interest in expanded beam optics and the opportunity ahead of us. And in light of an AK filing and press release last evening, I wanted to take a minute to highlight the progress we're making. As a reminder, EBO's patented Ferrell technology enables faster installation, greater durability and higher density optical connections for AI infrastructure. The technology is particularly valuable in scale-out and scale-across applications, including optical backplanes, where connectors at the back of a server rack can be difficult to access, install, and maintain. We previously announced a partnership and deployment with Microsoft and said we were also engaged in proof-of-concept work with five additional global hyperscalers, one of whom was Amazon Web Services.

14:27 Last evening, we filed an AK stating we issued a warrant to Amazon to purchase up to 3.2 million shares or approximately 0.6% of 3M common stock based upon the achievement of $6 billion in cumulative sales of optical connectivity and other data center related products over the next seven years and other event-based milestones. We also announced that we signed a contract manufacturing agreement with Genius Electronic Optical Company, or GSEO, and acquired a 4.7 cent stake in the company in a private placement to cement our strategic partnership. GSEO is a credible and proven supplier of premium consumer device components, and they will help us rapidly advance technology development and scale EBO manufacturing on top of our internal capacity expansion plans.

15:22 But as we previously said, success in a space requires building a robust ecosystem of partners. We're actively supporting industry standardization through the EBO Multi-Source Agreement, which started with 17 members and is now up to 63. This MSA brings together hyperscalers, connectivity providers, and chip designers under a common framework to establish industry standards and certify practitioners. EBO was highlighted by many of these ecosystem partners at last week's Open Compute Project Global Summit, including by one other hyperscaler demonstrating EBO in a next-gen rack design running live traffic. And it was headlined in a recent article by Semi Analysis, a well-respected trade journal.

16:11 We believe the combination of industry collaboration through the MSA, growing ecosystem adoption, and differentiated 3M know-how positions us well to benefit as EBO becomes a larger part of next generation AI infrastructure. Overall, we've made meaningful progress in reinvigorating our innovation engine over the last two years. Success requires speed and precise execution, and we're building a stronger, faster, more innovative, and more resilient 3M. As this company-wide effort evolves, I'm confident it will translate into faster growth, higher margins, and stronger free cash flow over time. With that, I'll turn it over to Anurag to share the details of the quarter.

16:59 Anurag?

17:01 Thank you, Bill. Turning to slide six, we delivered another strong quarter across all financial metrics. Solid organic growth, 110 basis points of margin expansion, double-digit earnings growth, and robust free cash flow, all reflecting execution against our strategic priorities. Starting with the top line, we delivered organic sales growth of 3.3%, Driven by General Industrial and Safety, both of which performed better than expected on successful execution of our commercial excellence initiatives, including pricing. We also saw continued strong double-digit growth in semiconductors and data centers as we gained traction from new product launches and good customer positioning.

17:48 Together, these more than offset a weaker consumer electronics market. Notably, the orders trend that we have seen through the year continues and grew high single digits in the quarter, led by industrials, safety, data centers, semiconductors, and aerospace. This resulted in backlog growth of high teens over last year, positioning us well for the fourth quarter. By geography, US and Canada grew approximately 7%, the highest we have seen since the pandemic. Industrials grew double digits as we executed well on pricing, cross-selling, and sales effectiveness in a constructive market which more than offset a soft consumer market.

18:34 Latin America grew high single digits with broad-based growth across all three businesses. It was encouraging to see Europe grow for a second consecutive quarter despite a soft auto market. In Asia, we had positive growth and saw another double-digit quarter in India as we increased penetration in automotive, industrial, and a growing consumer market. Overall, we grew in all regions except China, which was down high single digits on weak consumer electronics demand. As Bill mentioned, following the Madison acquisition starting this quarter, we now exclude the amortization of intangibles from adjusted results to better reflect the underlying performance of the business.

19:21 Historical recasted financials for 25 and first half 26 are shown on slide 13, and as you can see, have an impact of about 40 basis points to margin rate and 4 cents to EPS per quarter. For Q3, adjusted operating margin was 26.2%, up 110 basis points, with the three business groups up 140 basis points, partially offset by 30 basis points from corporate as expected. Operating profit increased $140 million, with $260 million from sales growth and productivity, particularly in supply chain, partially offset by about $120 million of stranded costs and investments.

20:07 The 27 cents of EPS growth was driven by 22 cents of operating profit growth and 5 cents of below-the-line items, including a lower share count net of a higher tax rate, resulting in adjusted EPS of $2.50, up 12% year-on-year. Q3 gap EPS was $2.63, up 70% year-over-year. This included the impact of costs from ongoing transformation actions, exit of certain PFAS manufacturing assets, and gain from change in value of our solventum ownership. Free cash flow was $1.2 billion in the quarter, as higher earnings were offset by working capital timing, which we expect to reverse in the fourth quarter.

20:55 Turning to the next slide, I will provide a quick overview of our growth performance for each business group. Safety and Industrial delivered another standout quarter with 7% organic sales growth driven by the continued expansion of commercial excellence initiatives and the ramp up of new products. Electrical markets division continued to grow double digits as they deepened penetration with key customers in the data center market. Safety, industrial adhesives, abrasives, and industrial specialties collectively grew high single digits driven by targeted commercial initiatives Thank you for joining us. Turning to transportation and electronics.

22:05 Third quarter sales grew 0.5% due to weaker than expected consumer electronics, which was down mid-teens. Outside of consumer electronics, the business grew about 5% across semiconductors, aerospace, commercial branding, and auto. In addition to data center and semiconductor, aerospace grew double digits, driven by continued strength in defense, sustained civil aviation bill rates, and growing demand for space films. Commercial branding continues its first half momentum, growing mid-single digits, driven by graphics and personal auto demand, while auto was down mid-single digits on software builds. Despite the weak consumer electronics and auto market for the first nine months, TEBG sales grew 2.1%, with orders up high single digits and backlog up double digits, supporting acceleration in the fourth quarter.

23:04 SIBG and TEBG, which together represent 80% of our business, delivered about 4% growth in the quarter and 4.5% year to date. Finally, consumer was flat in the quarter, Improving sequentially as the rate of decline in the U.S. moderated, while international continued to grow mid-single digits. U.S. point of sale grew over 2% through the quarter, but continued inventory adjustments at a few large retailers resulted in U.S. sell-in being down low single digits. As retailer inventories stabilize and POS continues to show positive momentum on the back of NPI and retailer-specific programs, we expect the growth trend to improve in the fourth quarter.

23:51 Overall, we are delivering on a commitment with strong year-to-date results, including organic sales growth of 3.3%, operating margin expansion of 60 basis points to 25.2%, Earnings growth of 12% in free cash flow of $3.1 billion. Year to date, we return $4.4 billion to shareholders, including $1.2 billion in dividends and $3.2 billion in share repurchases. Please turn to slide 8 for an update on our 26 guidance. Auto momentum, a healthy backlog, and easier comparisons give us confidence in organic growth of just over 4% in the fourth quarter, keeping us on track for more than 3.5% for the full year.

24:39 On the back of strong year-to-date performance, continued momentum, and focus on productivity, we are raising our earnings guidance from a range of $8.95 to $9.10 on the new basis to a range of $9.10 to $9.15 or $0.10 above the midpoint, resulting in growth between 11% and 12% for the year. On oil, we now estimate the inflation impact at $185 million, up from the $150 to $175 million range we communicated in July. We expect to fully offset the increase through disciplined execution of the pricing actions we implemented in the second quarter. While this pass-through is dollar neutral, it dilutes margin rate by about 20 basis points, which we will mitigate through better productivity.

25:29 For the year, we expect margin of about 24.6% on the new basis in line with our prior expectations. Free cash flow remains at approximately $4.8 billion and adjusted tax rate at about 20%. Turning to slide nine, we will provide formal 2027 guidance in January, but our framework to drive profitable growth remains consistent and are confident that we will exceed all of our investor day targets. We expect good growth in line with our second half exit rate with more contribution coming from new product launches as we sustain commercial excellence including pricing discipline. Alongside growth, we will continue to drive productivity largely from supply chain and transformation actions as we more than offset investments and stranded costs resulting in margin rates exceeding our investor day target of 25.4% on the new basis.

26:27 For EPS, we expect operational performance to be the primary driver of earnings growth like this year. Non-operational performance will be influenced by changes in interest rates and FX, while the tax rate should remain stable and share buybacks will continue to be accretive. Finally, we expect robust free cash flow driven by earnings growth and working capital improvements and will continue disciplined capital deployment. Having returned $9.3 billion since the start of 2025, we are well on our way to exceeding the $10 billion target. Before we open the call for questions, I would like to thank the 3M team for their commitment, resilience, and responsiveness to drive value to all our stakeholders.

27:16 Our performance to date and opportunities ahead provide us with increased confidence in delivering on our updated 2026 guidance and exceeding the commitments we laid out at Investor Day. With that, let's open the call for questions. Ladies and gentlemen, if you would like to register a question, please press star 1 on your telephone keypad. If your question has been answered and you would like to withdraw, please press star 2. If you are using a speakerphone, please lift up your handset before entering your request. Please limit your participation to one question and one follow-up. Our first question today comes from the line of Scott Davis with Melius Research.

28:01 Please proceed with your question.

28:05 Hey, good morning, guys. Good morning, Scott. I want to... I want to ask about Amazon in a second. But before I do that, you mentioned price several times. And is it easier to get because inflation is so well telegraphed that the customer is extraordinarily well aware of what's going on out there? Or is it the new product introduction side of it that is kind of driving that? And you still seem to be a little bit, I mean, behind PPI. So do you see an acceleration there?

28:34 So Scott, good question. I mean, first of all, it is pretty well publicized in the marketplace around what's happening in oil and gas prices and general inflation. I think that's well covered. But I think our ability to drive price right now is partly from the new products. I think importantly, it's from just significantly better responsiveness, service delivery rates, product availability that we're delivering to our customers. And I think that's a very important part of it. And I wouldn't discount that We're being, I'd say, a bit more aggressive here on price, holding our ground on this one. So I think all of those things come together and what's driving price. So we'll see ourselves for the year to be slightly above a point and a half. We were saying last time about 1.5%.

29:20 It'll be a little bit better than that because oil price continues to come up. Back half of the year will be slightly above two. Front half was one. So we're doing better. We're executing well on price. We're covering Thank you for joining us.

29:56 Take or Pay Contracts, anything that kind of locks them in to de-risking a bit of your capacity ads?

30:03 So, look, this is a very, very important step we've taken here with Amazon. You know, there's no disclosure right now on other parts of the commercial agreement, but it's been, you know, in the works for some time. It's a very important strategic commercial relationship. I do believe it's Thank you for joining us. As you note, there's at least something in the AK.

30:51 It's cumulative $6 billion is where the warrant vests over seven years. It's in increments. It's not ratable. It'll start to ramp towards the back end of next year is what our expectation happens to be. Thank you for joining us. solidify the supply side, the ramp up we expect to get to support Amazon and other hyperscalers. So collectively, we think it's a very important milestone that we're at today on EBO.

31:41 Makes sense. Thank you. Best of luck, guys. I'll pass it on. Our next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question.

31:55 Thanks, operator. Good morning, everybody. Bill, you know, the trajectory of organic growth has been good, you know, plus one in 24, plus two in 25, plus three and a half at least this year. You're making a lot of progress on pricing and NPI. Now you're maybe leaning into some growth verticals through these sort of creative solutions, which is fantastic. But I guess the question that everybody's asking is, where do you think this ultimately goes to from a through-cycle growth perspective? Because you've got a consumer business that's a little bit more difficult. T&E is obviously a little bit difficult. Maybe just talk about not just 27, but if you want to talk about 27, great, but sort of where you think structurally you're taking the growth algorithm for this business over the next one, two, three years.

32:49 So, Amit, you went through some of the numbers. I appreciate you doing that and recalling the trajectory we're on. It's a pretty broad portfolio. Not everything kind of flows positively every quarter, but you've laid out appropriately the steps that we're taking to drive organic growth in the company, something I think we struggle to do over time. It comes back with Thank you for joining us. Thank you for joining us.

34:03 Even in the choppy macro environment, you know, end drive margin expansion quite substantially. So the combination of what we're trying to do, I think, is what's really turning this 3M company around. And, you know, I'm very, very excited about where the future holds here.

34:19 Okay. Thank you, Bill. And then, Anurag, if I could just have a follow-up, because if we go back to Investor Day, there might be sort of $400 million to $500 million of extra costs involved. That you guys have incurred since investor day, whether it's tariffs or oil inputs. And here we are. Not only are you offsetting that with price, but there's obviously clearly productivity there because, you know, the margin, you're raising the margin guidance for longer term, you know, next year. Can you just talk about productivity? Because the 27 framing is helpful, but it's a little bit vague relative to what you did last year. Are we going to get $500 million, $600 million more of net productivity next year? Do you still expect 35% incremental margins on the growth you expect to achieve?

35:05 Maybe fill in some of that color for us, please.

35:08 Okay, great. Thanks, Amit. And you're absolutely correct. You know, at the Invest Today, what we laid out was that we had about $300 million of stranded costs at that point in time. But since then, we've had tariffs of about $280 million. We have oil now, which is $185 million. Thank you for joining us. So with the volume growth on the margin side, we have good incrementals.

35:54 Historically, we said it's between 30 to 40 percent. I think we are more closer to the 40 percent right now in incrementals, given the progress that we made over the past couple of years. I'll combine that with productivity on both supply chain as well as some of the transformation actions we are taking. And it should continue at the same rate as it has over the past couple of years. And while we drive volume with high incrementals, productivity will much more than offset the step up in investments and strata costs. So expect good margin expansion as we go into next year and be very confident to be ahead of the 25.4 percent, the new invested target, despite all the other headwinds we had. So feeling pretty confident.

36:34 Got it. Great. Thank you very much. Appreciate it, guys. Our next question comes from Joe O'Day with Vertical Research Partners. Please proceed with your question.

36:45 Hi, good morning. I wanted to start on just sizing of EBO. Can you talk a little bit about where you expect the revenue to be this year, how much revenue your current capacity can support, and then with the manufacturing collaboration that you've announced, how much revenue altogether you think that will be able to support?

37:08 So Joe, for this year, EBO is in the $40 million range, plus or minus. We've got another quarter to go here. We do expect that to ramp considerably next year, likely will double, could be maybe a little bit better than that, depending upon progress through the year. Internally, Thank you for joining us. Thank you for joining us.

38:21 Not just from 3M, but other partners here, because that's going to be quite important for hyperscalers to sign on. So I believe with GSEO, we'll be in pretty good shape to scale to the market requirements as we see them now.

38:37 And then on current demand tracking, can you talk a little bit about what you saw over the course of the quarter into this month? With respect to acceleration, any caution? There's a tremendous amount of focus out there, just given all the headlines. And any risk that that poses for pause? Thank you for joining us.

39:21 You know, it's better on the industrial side, but generally good order trends, good momentum here as we head into the back end of the year. So just from a macro perspective, you know, we continue to see the broader industrial markets improving, especially in the U.S. And I know that's part of it is driven by data centers, but it's quite a lot of other factors that go behind that. Auto build rates are likely to be down. They're down modestly in the quarter and likely for the year as well. We see the consumer electronics space worsening a little bit in the back end of the year, more like down mid-teens from the consumer electronics market. You know, those are the broader pieces. You know, IPI is about where we were before, slightly better. Globally, you know, U.S. IPI, U.S.

40:09 GDP is slightly better from where we thought in July. So that's getting, I'd say, a little bit better. Those are the key pieces. The U.S. consumer is sort of still a little bit soft, although what I would say is we continue to see good POS growth, which is sellout for us. It's north of 2% growth on POS, which is pretty good. So I feel like it's getting at least more stability in the U.S. consumer behavior, if not maybe a little bit of improvement. So overall, I'd say the industrial is pretty good, kind of mixed outside of that. Thank you. Our next question comes from Julian Mitchell with JP Morgan.

40:56 Please proceed with your question.

40:57 Hi, good morning. Maybe I just wanted to follow up on the TEBG revenue outlook, because that's where you've seen, I suppose, the most volatility in recent quarters, you know, strong growth Q2, it evaporated in Q3, you're talking about a reacceleration in the fourth quarter, despite a worsening consumer electronics market backdrop, I think you said down, you know, mid-teens. So, Please sort of flesh out a little bit the confidence in that TEBG acceleration and is it something where it's just month to month that the numbers are kind of swinging around in that business?

41:41 Sure. So, you know, as we exited the third quarter, Julian, you know, the backlog in TBG was up quite a double digit. So that gives us good visibility as we go into the fourth quarter. You are correct about the consumer electronics being pretty consistent between third and fourth quarter. But where we do see is the good backlog getting converted, plus continued strength in the aerospace defense, the semiconductor and data center, which continues to accelerate in the fourth quarter. Thank you very much. And then just my follow up. I think

42:31 Anurag and Bill, you know, your tone on the margin expansion is very confident, I think, you know, looking at slide nine and you're talking about, you know, very likely exceeding that 80 basis points of sort of margin expansion next year that's guided on that slide nine. And that's even with what's going on with cost inflation and everything else. So I suppose is the sense that, you know, I think right now in the second half operating margins are growing about 100 basis points year on year in the guide. Is your sense that that's a fairly sensible sort of run rate for the time being given inflation and productivity and stranded costs and so forth? There's nothing sort of one time benefiting the degree of margin expansion you're seeing today?

43:22 Correct. There is no one-time benefit in terms of the margin expansion. It's all about controlling our cost-based driving productivity across both supply chain and G&A. Bill did mention in his prepared comments about, you know, gross margin being up to 130 basis points. A really good work around all the buckets being the cost of poor quality, which was better by 40 basis points, driving more productivity and automation in the factories that we have today. And even in this environment, driving procurement savings. So I think it's all fundamental drivers in terms of expanding our margins. As we go into next year, you are right. We said we had $300 million of stranded costs. We had 100 last year, 150 this year, incremental 50 next year.

44:08 But just on where we are in the momentum in terms of supply chain and making some structural cost changes, I think we are confident on continuing the productivity into next year as well.

44:18 Yeah, Julian, I think the thing to keep an eye on is as we keep talking more about transformation and the changes that we're making, a lot of this year has been around G&A. There's been investment to, you know, transform the G&A functions. It's starting to occur within our supply chain network and data center and distribution center network as well. I talked a little bit about some of the changes there. That's going to be impacting us into 27 and certainly With the factory consolidation, you know, given a typically be would be three, four or five year payback, that'll start to become more meaningful in 2028. So when you take a step back and think about all of the work that we've done, you know, we've seen, you know, gross margins come up from the low 40s to now touching close to the mid 40s, you know, again, you know, up to potentially the high 40s over the next four or five years through some of the transformation that's happening.

45:14 Great.

45:15 Thank you. Our next question comes from Andrew Obin with Bank of America. Please proceed with your question.

45:25 Good morning. How are you?

45:26 Good morning, Andrew.

45:28 Just a question on Madison Fire. Just are we putting, now that it's organic, are we putting any accretion into 26 on that? Just from a modeling perspective, do I need to sort of put something in?

45:44 It's EPS neutral to us. I mean, it does grow higher than company average and margins better, but it's given the size of the business, it doesn't really move the needle much on the top line. It obviously comes with operating profit, but there's a step up in interest because of the leverage and NCI. So overall, it's EPS neutral for this year and next year.

46:05 Thank you. And just going back to sort of optical and data centers. The headline numbers, I think, in 8K are pretty robust, and you're saying you have multiple other hyperscalers that you're talking to. Just the order of magnitude relative to what you have, how big could that be? And could you also remind me overall, what was your exposure to data centers last year and what is it this year? Thank you.

46:35 So just on that last part of me, data center this year will be about 700 million. Last year was around 550 in that range. Part outside, the bigger part would be outside, so electrical connections, and part is inside around optical connections, copper, other parts inside the data center, but most of it was on the outside. You know, yeah, there's been a lot of conversation with, you know, really all of their other hyperscalers. Obviously, Amazon is, you know, quite substantial in that space. So that's a very important one. You recall last quarter we talked about a strategic partnership we announced with Microsoft where they'll be using EBO and Azure data centers. You know, these things are continuing to evolve. You know, again, we've got to continue to evolve.

47:21 Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Please proceed with your question.

47:59 Hey, guys. Good morning. Good morning, Joe. So, Bill, I just wanted to follow up on that thread, right? The warrants are a pretty unique structure. I'm just curious, like, how did that even come about? And then also, I think you just mentioned that you're hoping that potentially some of the other hyperscalers will follow suit. Just any other clarification around that would be helpful.

48:21 So at this conference last week, it's the Open Compute Project, which is in San Jose. I was on the West Coast and had a chance to walk around the show for a few hours. And there were many other hyperscalers and a lot of ecosystem partners that were there. There's a lot of conversation around EBO, how it can be used, how it could be scaled, how do we manufacture it, partners that want to be part of it. So there's a ton of activity happening there. So it's pretty broad based, but again, it's evolving. I mean, each quarter, each month. Thank you for joining us. Thank you for joining us.

49:36 You know, for us, the warrants are going to be, you know, a creative to significantly creative to the company. So, you know, we thought that was prudent and the right thing to do. Again, it's about point six percent of our of our shares. So it's not usually meaningful, but in terms of it, it's very symbolic in terms of the overall relationship we have with with Amazon.

49:58 That's helpful, Bill. And then I guess just my following question, Anurag, you gave some parts of the framework for 2027, just the expectation for at least 80 basis points of margin expansion. Is there a volume assumption that you're embedding? I know that you guys typically will kind of like model to trends, just any expectations on volumes already for next year?

50:21 Yeah, Joe, absolutely. As I was mentioning when Amit was asking the question that, you know, the volume, which typically has been a 30 to 40 percent incrementals for us, is now getting closer to the 40 percent incremental. So there will be uplift from volume plus productivity, and both of them combined will drive the margin expansion for next year. Our next question comes from Nigel Koh with Wolf Research. Please proceed with your question.

50:53 Great. Thanks for the question. So just going back to the Amazon agreement, so is this a framework agreement bill that's structured as a minimum? The $6 million is very specific, so is that a minimum purchase agreement over that seven-year timeframe? And you seem to indicate that next year is more like $100 million or so. of revenues from EBO. Should we then expect that to step up to close to a billion dollars in 2028? Just trying to sort of frame expectations here.

51:21 So, look, I think we'll sort of get through the quarter here and then we'll go through next year. You know, your numbers next year, roundabout about right. I mean, it's sort of $80, $100 million of EBO. I mean, again, look, we've got to continue to execute and scale here. We're not going to size it beyond that. But, you know, when we talked last time, we said the total addressable market here for EBO is around $2 billion in the 28-time period. You know, that this year will do, again, 40 million roughly. This is an important initiative for us. We're maturing the technology. You know, I think, you know, this step with Amazon, last quarter with Microsoft, others that are in conversation, you know, gives us a greater right to win in that space.

52:08 So I feel better about that. Thank you for joining us. Thank you very much. There's no volume commitments here. We've got to earn a right to that. It's going to happen over time.

52:56 But that's the number they put out there is what was expected over the course of the next seven years. So we think that's an important target for us.

53:07 Okay. Thanks, Bill. And then just Anurag, maybe for you, the S&I margins were very strong this quarter. Looking at the NCI line, it looks like the contribution from Madison Fire was very strong this quarter. I'm getting to math closer to $100 million EBITDA contribution, which feels too high, but just wondering what kind of margin Madison Fire is coming in at and what's a good number for 2027?

53:31 Yeah, so Nigel, I would say the number is not that high as you're citing it out to be. The margins are, we finished the quarter at 26.2% margins. They are a little bit higher than that, I would say. But that does get offset on the NCI lines. Overall, it was EPS neutral to us. So the NCI was just a couple of pennies compared to last year, so it was not close to that. And as you model into next year, I would say it's again going to be EPS neutral. There will be incremental $200 million of revenue coming from Madison. You can assume a margin rate higher than the company, and the offset will be high interest in NCI.

54:09 Okay, thank you. Our next question comes from Steve Tusa with Wells Fargo. Please proceed with your question. Hey, good morning, guys.

54:20 Hey, good morning, Steve. As far as the fourth quarter is concerned, I know a couple of these businesses you said are going to accelerate, and that's a great color, but maybe just how you're seeing things play out versus normal seasonality, maybe seasonality really is... Thank you for joining us.

54:50 Yeah, so look, Q4 typically is a lighter quarter, but there's nothing unusual about seasonality here in the fourth quarter. We do see it being up with the 4%. I guess what gets you the greater than 3.5% for the year, so it's got to be more than 4%. Again, it's off of a bit of an easier compare. The prior year in Q4 was a little bit softer as opposed to Q3. We had a tougher compare here in Q3, but it gets a little bit better in Q4. Look, we've had, you know, just again, very good order trends. You know, the backlog going into the into the quarters up about about 18 percent. So it's high teens percent year over year going into the quarter. You know, we have about 25 percent of the revenue that's in backlog, which is which is pretty good and a little bit better than we typically see.

55:39 So but again, you know, based on where we see it today, you know, we feel pretty good about coming in north of 4 percent and more than 3.5 for the year. And then just one last one on stranded costs still. Is it still an investment? Is it still $3.75 for the year? And does that step up a little bit? I know it was up $0.17 in the quarters. Does that step up a bit in the fourth quarter?

56:01 Yeah, so I believe when you said 375, you meant 225 of investments and 150 million of stranded costs for the year, Steve? Correct. Yes, correct. And it is still the same. And in the fourth quarter, you'll have probably 125 of that because of the 15 million of stranded costs and $75 million of investment. So no real change from the cadence that we had laid out from the beginning of the year. And that stranded cost next year is $15 million. It goes from 150 to incremental 50. Great. Thank you so much. Really appreciate it. Thanks, Steve. Our next question comes from Andy Kapowitz with Citigroup. Please proceed with your question.

56:41 Good morning, everyone. Good morning, Andy. Bill, can you give a little more of an update on your overall progress in innovation as we start thinking about 27? I think you previously have mentioned your cycle time of innovation target is at least 20% better, but can you use tools such as AI to push greater innovation much faster and with better margin? I think you'll do greater than 350 new products you just said, but you've also said that 3M used to do 7,800 per year. Can you get back to those levels faster than you thought and with greater improvement in design to cost?

57:13 So look, first of all, yeah, I'm very pleased with what's happening right now on NPI innovation. We're accelerating. You know, I gave, you know, some of the numbers here, you know, about 87 in the quarter, up about 24%. For the year, we'll be at 350 or more. So that would be up 23% year over year. You know, early last year at the investor day, we said we would be 1,000 products over three years. And, you know, we should be, you know, above that, you know, is what my expectation would be. Thank you for joining us. which will drive more incremental growth over time.

58:12 They're a bit of a longer development cycle, so that could push things a little bit in the other direction, but the cycle time continues to come down. Our on-time launch attainment remains around 80%, 81%, so that's all very, very good. As you mentioned about AI, look, I do believe that this is going to be Thank you for joining us. Thank you for joining us. Thank you for joining us.

59:40 It can really accelerate our journey bringing new products to market. So, you know, I'm encouraged about the progress we're making here. And, you know, to your point, I think there's a great opportunity to accelerate that into 27 and beyond.

59:53 Self-fulfillment. Maybe just delving a little bit more into consumer. I know you said point of sales is continuing to improve, but consumer, as you know, has been a bit slow to turn. Do you see a more definitive turn coming in that business, or can increased self-help drive a more definitive turn? And you mentioned still some select retail, destocking, so maybe a little more on what you're seeing there.

1:00:14 So, yeah, I mean, consumer we expect will turn slightly positive in the back end in the fourth quarter of the year. Of course, you know, we thought Q3 was going to be positive. It didn't happen. But we're on the right trajectory here. It's not necessarily going to be a big driver of growth for the company given, you know, its size and where we expect it to be in the fourth quarter. You know, but the trends are positive. You know, POS was fantastic. Thank you for joining us. Thank you for joining us.

1:01:26 One of the things that's interesting is the international has been pretty good. The business is mostly U.S., about 70%, but international for us has been up mid-single digits, and the trends there continue to be pretty strong. So I think if we put all together, U.S. can improve and international holds in at mid-single digits, we can actually be positive in the fourth quarter.

1:01:46 Appreciate all the color. We'll go next to Varun Govindaraj with Bernstein. Please proceed with your question.

1:01:58 Morning, everyone. Thanks for the question. Quick one from my end. You've had a leadership change on the R&D side with John retiring and Dushar coming in. How are you sort of driving continuity in the R&D strategy with that change just because These kinds of changes during transformation are tricky, so curious how you're handling it.

1:02:17 So, Varun, thanks for the question. I mean, look, John was here for a number of years, close to 30, and was CTO for quite a long time and was a fantastic partner to me in reestablishing, reinvigorating innovation to Shara. Thank you for joining us. Leaning forward on AI, digital tools, I think that combination is going to be very important to us. Having somebody that knows the players internally, knows the technology, and importantly knows our customers, that combination I think will drive good continuity in what we're trying to do on innovation at 3M.

1:03:10 Super helpful. Thanks for the color. And then just as a quick follow up, we've talked a lot about EVO sizing, but you've also flagged stuff like the Nextel ceramic fibers, space, got a lot of real estate in today's presentation. Any rough sense of how creative that could be either next year or do we sort of expect that to come in more 2028 onwards?

1:03:30 Thank you for joining us. But there's a lot of other different technologies you point out in XTEL, which goes into a couple of different behind-the-meter-type solutions outside of the data center. And, you know, we continue to have momentum there. You know, we're expanding capacity to meet the demand of that space. So I think that could be a step up into 27 and perhaps even better than that in 2028. So I think very good momentum both inside as well as outside the data center of a room.

1:04:19 All right. Appreciate it. All the best for the rest of the year. Thank you. Our next question comes from Brandon Knutson with Morgan Stanley. Please proceed with your question.

1:04:34 Good morning. Thanks for taking the question. You guys have been highlighting new product introductions. Can you quantify for us a little bit how much better pricing or margins are on these new products and how high you think you can get that MPVI over time?

1:04:46 Thank you so much for joining us. We do see those products being margin accretive to the company, so price is an important part of that.

1:05:19 Great, thank you. And then the last one on just data center, EBO has gotten a lot of focus. I know the production capacity has been important there, and the GSEO deal will help with that significantly. What else is key to the ecosystem to drive growth here? And then outside of EBO, how do you see your other DC content scaling?

1:05:37 So we provide, you know, we manufacture a ferrule. The fibers have to be terminated into the ferrule. They have to be put into a connector, you know, and then installed in a data center. So all of those pieces are quite important. But, you know, hyperscalers have an important – they design their own architecture. The server designers, server manufacturers – have views of where they're taking their product line, how they're shifting from copper to optics over time. So all of those various pieces, you've got to work with that broad set of players to establish EBO and then to grow it. So that's what the MSA is really for. It's developing standards and then certifying players in the space to install EBO. So that needs to happen side by side with companies.

1:06:25 Technology Development and Scaling. Our next question comes from Nicole DePlace with Deutsche Bank. Your line is now open. Yeah, good morning.

1:06:41 Thanks for squeezing me in, guys. Maybe I'll just ask one since I know we're at time. Just wanted to dig in a little bit more on consumer electronics and understand what's going on there with respect to memory. I guess, Bill, when you kind of look out into 2027, are there any green shoots that make you feel like maybe this business could turn positive again, or is that being too optimistic? Thank you.

1:07:05 Yeah, no, so consumer electronics, yeah, it was, we've seen some pressure here in the quarter. We'll see some additional pressure going into Q4 as well in consumer electronics. I mean, we do in consumer electronics, we provide films for, primarily for LCD displays. We do conductives. We do We're primarily a premium player here, so 70% of our business roughly is with premium device manufacturers. Overall, I'd say we're tracking kind of in line with or maybe slightly better than the market. We've seen pressure in two particular areas. One is in Thank you for joining us. Thank you. I'll pass it on. Our next question comes from Brett Lindsey with Mizuho.

1:08:07 Please proceed with your question.

1:08:36 Hey, good morning all. Wanted to come back to slide five. So on the space portfolio, was hoping you could put a finer point on the TAM or anything you can share regarding content opportunity per satellite. And if there's any constellations or customers you're currently spec'd in on or working on designs.

1:08:55 So we can't talk about the latter part of that, which is, you know, who we're getting spec'd in on. But I was very careful and I said, you know, it's a pretty broad space. It's both, it's LEO and GEO. It's, you know, low Earth orbit, you know, geosynchronous orbit. commercial customers, some government contracts we're working on. But it's a broad opportunity for us. And you can see some of the challenges here. It's around how do you lightweight the satellites, build more capability, bring more protection so there's no light reflecting back to the earth. Thank you for joining us.

1:09:54 I appreciate the detail. And just a quick follow up on the 185 million of oil inflation, you said fully offset by price. Is there carryover lag into 27 we should be thinking about or modeling? And then how much of that price is go get purse in the market a little bit more surgical?

1:10:13 So yeah, we implemented the price increase starting May this year, and we started seeing the increase in our cost probably a month earlier than that. So you should see about some value we're going into next year, definitely on the oil cost piece. and at the same time you should all see the price carry over. So we will be neutral between price and oil cost for next year. And the strategy was actually to be a little bit more surgical. It wasn't peanut butter spread across the entire businesses. It was looking at areas where there was either higher cost or where some of the peers were Thanks for the detail. Our last question comes from Jeff Reeve with RBC Capital Markets. Please proceed with your question. Good morning. Thanks for squeezing me in. I'll keep it to one question, and I'll keep it to one question.

1:11:19 On the EBO business, if the four hyperscalers currently in proof of concept convert, is the combined internal plus GSEO manufacturing footprint sufficient or should we expect further capacity investments?

1:11:33 No, it should be sufficient. But again, it gets back to this diversity of supply. So we are scaling internally, but we'll never be able to within 3M to be able to accommodate the market demand. You know, GSEO has incredible capacity, you know, but likely over time, there'll be maybe other players here, other manufacturing sources to just give that satisfaction of diversity of supply. So we're confident we can ramp with GSEO, but There may be others that we'll have to bring on board over time.

1:12:08 Great, thanks. Thank you. This concludes the question and answer portion of our conference call. I will now turn the call back over to Bill Brown for some closing comments.

1:12:21 Okay, so thank you, everybody, and I know we're over a little bit. I appreciate everybody joining the call today. And I want to thank, again, all of the 3Mers for delivering another strong quarter. of great execution, great value to customers and our shareholders. I'm proud of what we've achieved together and I'm excited for what the future holds at 3M. Thank you all and have a good day. Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.