3M CO Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Commercial Excellence: Focus on turning customer opportunities into wins faster, cross-selling program with nearly doubled pipeline and $30 million new business closed, leveraging predictive analytics to reduce churn, and sales organization embracing new tools/processes. Launched 70 new products in Q3, 196 year-to-date, with sales from products launched in last 5 years up 30% in Q3.
• Operational Excellence: On-time and full metric was 91.6% in Q3, improving 200 basis points sequentially and 300 basis points year-over-year. OEE at 63%, up 300 basis points year-over-year. Cost of poor quality was 5.7%, down 40 basis points sequentially and 150 basis points year-over-year. Focus on asset utilization, quality improvement via Kaizen events, AI tools, and design for manufacturing.
• Capital Deployment: Returned $900 million to shareholders in Q3 ($400 million dividends, $500 million share repurchases). Sold precision grinding and finishing business within SIBG abrasive division, which was a drag on results.

Segment Performance

• Safety and Industrial (SIBG): Organic sales grew 4.1% in Q3 and 3.1% year-to-date. Growth was led by electrical markets, industrial adhesives/tapes, and personal safety/abrasives.
• Transportation and Electronics (TEBG): Adjusted sales accelerated from 1% in the first half to 3.6% in Q3, with year-to-date organic growth at 1.9%. Drivers included aerospace, electronics, and auto segments.
• Consumer: Grew 0.3% organically in each of the last 3 quarters, driven by strength in Filtrete filters, Scotch tape, and Meguiar's products.

Guidance

• Updated EPS guidance to $7.95 to $8.05 for the year. Full year organic sales growth expected to be greater than 2% with adjusted free cash flow conversion remaining above 100%.
• 2026 guidance to be provided in January 2026, with framework consistent with Investor Day 2025, focusing on growth above macro, margin expansion, and strong free cash flow generation.

Risks

• Litigation: Concerns around personal injury claims, with ongoing vetting of filed cases and potential impact on financials. Also, state AG cases and public water supplier settlements remain in progress.
• Macroeconomic Uncertainties: Soft macro environment with potential impact on sales and margins, though 3M's execution is outperforming the macro.
• Portfolio Divestiture: Challenges in divesting non-core businesses while ensuring value creation for shareholders.

Question and Answer

• Q: You started kind of in the prepared remarks around new products. So I wanted to lean in on that a little bit because every CEO at 3M has talked about new products, but you seem to be delivering and actually getting results. What -- without spending a whole heck of a lot more, really, what do you think -- what do you attribute it to? Is it -- have you changed kind of the culture of compensation? I mean, I don't know, just open-ended question so I'll leave it there.
• A: So good question, Scott. So I'm really pleased with the progress we're making on new product introductions. And I think what I've seen over the last 18 months or so is much greater pace and rigor urgency that I think we've seen in some time. We're tapping into a lot of latent ideas, urgency, desire from the team's product developers, application engineers, business leaders to get back to what's important at 3M, and that's innovating. And we're really trying to support that. Investments coming up a little bit. We're putting some different metrics in place. Certainly, we're watching new product introductions and they're turning around relatively quickly. Keep in mind, a lot of these 80% of these are sort of incremental line extensions, what we call Class III, but that will build over time and become more important. I'm really pleased to see the funnel remain relatively healthy. So while we launched 70 products, we had 130 products coming into the front end of the funnel. So it's actually very, very positive. And the number of ideas that the teams are coming up with are now close to 1,000. So we're tapping into this desire to innovate, bring new solutions to customers. And the whole team is really responding very well to this. We're increasing our speed eliminating non-value-added type activities. We are moving up a little bit on spend. I think in the quarter, it's up by 30 basis points, but it's not substantial. We are shifting more of our R&D dollars towards new product development. A couple of years ago, we dipped below 30%. Now it's running 35%, 36%. That should grow a little bit over time. But overall, I think the team is 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's going to come in '26 and '27 because it takes time to move the needle on that or the growth early on will come from commercial excellence. So Scott, it's a great question. The team is doing a fabulous job, and we're just getting started.
• Q: I wanted to touch on kind of the beginning of this maybe new restructuring journey that you're on. Bill, I know even from the day you started maybe before you started, you had sort of a vision of what should happen with this footprint, and now you've had a lot of time to be inside and really kicked the tires. I just wonder if you could give us a sense of is this the beginning of a 2 or 3-year very large project. Have you even really mapped this out yet. And sort of like what should we expect as we get into maybe 2026 as it relates to these new restructuring actions.
• A: So thanks, Jeff. Look, Anurag talked about in his remarks that it's unlike the prior restructuring effort, this enterprise-wide restructuring effort that was more focused on short-term actions, quick payback. This -- what we're embarking on now is a more longer-term, more thoughtful redesign of our manufacturing network, our distribution network, our business process services, as we've embarked on our operational excellence journey, as we've seen over the course of this year, we're seeing more opportunities in G&A than I would have guessed earlier in the year. And we didn't really say much about this in February at the Investor Day because we've learned a lot since then. So this will be a structured improvement program over time. It won't be a big bang. It will be maybe more of a series of actions that I think will happen over time, more aligned to the long-term growth agenda of the company, more aligned to what the team can go and do. We'll evolve this in a thoughtful way so we don't disrupt the business, disrupt the momentum we're building on new product introductions and driving operational efficiency. So this is something that we're going to continue to work on. We don't size it today. We'll give updates to investors over time. It will not be a big bang. We'll shape more next quarter. This quarter 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. And if anything, I'm seeing more opportunities today than we saw 6, 8 months ago when we had the Investor Day.