3M Company

In today's conference call, we'll be making certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-Q lists some of the most important risk factors that could cause actual results to differ from our predictions. Please note throughout today's presentation we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. With that, please turn to slide three, and I will hand the call off to Bill. Bill?

Thank you, Chinmay. Good morning, everyone. We delivered solid results in Q4, including organic growth of 2.2 percent, operating margin of 21.1 percent, earnings per share of $1.83, and free cash flow conversion of over 130 percent. These results kept a strong year with organic sales growth exceeding 2%, outperforming the macro environment and accelerating from 1.2% organic growth in 2024 and negative growth in 2023. This growth was underpinned by the strong commercial excellence foundation we've established and our focus on reinvigorating innovation. We delivered significant margin expansion with full year adjusted operating margin of 23.4% up 200 basis points year on year at the high end of our guidance range and on top of over 200 basis points expansion in 2024. Adjusted EPS grew double digits to $8.06 and free cash flow conversion was slightly above 100% for the year. Our 2025 financial results reflect the progress we're making and we're tracking ahead of the medium-term commitments we made at the investor day last year. 2025 was an important year for 3M where we implemented fundamental changes in the company, building a foundation for our future growth through commercial excellence and innovation. We previously described the three pillars of commercial excellence, improved sales effectiveness and pricing governance, stronger collaboration with channel partners, including joint business planning and cross-selling, and increased customer loyalty. And we're making progress across all of them. We've implemented greater rigor across our sales force and sales management, tightened pricing controls, and developed over 600 joint business plans and closed on nearly $50 million of annualized cross-selling wins with a robust pipeline of opportunities. Innovation is the lifeblood of the company, and we successfully launched 284 new products in 2025, up 68% versus 2024, exceeding our initial target and more than double the launches in 2023. We expect this growth to continue with 350 launches in 2026. These new products are vital for our long-term growth and are already contributing to our top line. Sales from products launched in the last five years were up 23% in the full year, exceeding our high teens target, and exit Q4 at 44%, giving us momentum into 2026. Our new product vitality index, or NPVI, a measure of the freshness of our portfolio, ended at 13%, about two points above where we started the year. It was also a year where we saw operational excellence become embedded across the enterprise as we drove better service levels for our customers and stronger operating rigor in our factories and across our enterprise functions. And I've been describing our performance across three important metrics, OTIF, OEE, and cost support quality. OTIF ended the year above 90%, 300 basis points above the prior year and the best we've achieved in decades, and we sustained that rate for seven months in a row. This improvement is translating into a better customer experience that's helping us win shelf space and reduce churn. OEE, our asset utilization metric, ended the year at about 63%, up over 300 basis points across assets covering 70% of production volume. Cost per quality also improved considerably last year and is now at 6% of cost of goods, down 100 basis points year on year. We're focused on key areas of inefficiency like frequent or ineffective changeovers and late detection of material defects, leading to raw material yield loss, scrap, and quality credits issued to customers. We're leveraging Kaizen events, visual inspection systems, automation solutions, and AI-enabled models to optimize changeovers to improve quality with a target of 5.4% cost of quality in 2026 and less than 4% over time. Meanwhile, we continue to deploy capital effectively for our shareholders, returning $4.8 billion through dividends and buybacks in the year, progressing well in our commitment to return $10 billion to shareholders as part of our multi-year capital allocation strategy. The key to making this all work in the long run is our relentless focus on building a performance culture and delivering excellence everywhere, every day. This means greater speed and urgency, a deeper sense of accountability, challenging the status quo, and finding ways to get better every day in the spirit of continuous improvement. Our performance is a direct result of the cultural and operational changes we're driving across the enterprise that improve how we develop, produce, and deliver products and build a strong foundation for the future. Slide 4 is a chart we've used for the past few quarters connecting macro trends to our organic growth. The macro remains soft and largely unchanged from Q3, but due to our strong execution, we've outperformed. General industrial, safety, and electronics, collectively about 65% of our business, came in better than expected with exceptional year-on-year strength in the second half in electrical markets, aerospace, and self-contained breathing apparatus, all of which were up low double digits. Abrasives, industrial adhesives and tapes, and electronics were all up mid-single digits, abrasives accelerating from low single digits in the first half, IATD holding steady through the year, and electronics not softening as previously anticipated. Auto and auto aftermarket remained soft as expected, while our consumer segment and roofing granules business were weaker than expected. Despite the macro headwind, organic sales growth accelerated to 2.7% in the second half from 1.5% in the first, due to the breadth of our portfolio and our strong execution. Turning to our outlook on slide five, our team's constancy of purpose and execution rigor allowed us to finish 2025 strong, and we're carrying that momentum forward into 2026. This year, we expect organic sales growth of approximately 3%, adjusted operating margin expansion of 70 to 80 basis points, and earnings per share of $8.50 to $8.70, and free cash flow conversion greater than 100%. We're planning for the macro to be similar to 2025, but it's still early to put too much weight on market forecasts. We expect most of our industrial businesses to continue to perform well in 26 with watch items, including the pace and timing of a U.S. consumer recovery, auto build rates, especially in geographies where we have higher content, and consumer electronics. While we will closely monitor macro trends, we're going to continue to execute our game plan and control the controllables. Lastly, I want to turn your attention to slide six, which is the framework by which we'll create value for shareholders over time. The three phases aren't meant to be sequential, but evolve together with shifting emphasis. They build on what we outlined at Investor Day and reflect how we view these elements as interconnected and essential to building a stronger company operationally and financially. It started with a back to basics, focus on fundamentals approach, which is all about building a sustainable foundation. I've been talking to you about these initiatives and how we track them since I joined 3M 21 months ago and did so again today. These core elements are focused on commercial and innovation excellence, operational excellence, and reinvigorating our culture with accountability and agility, creating a solid platform from which to grow. As we've gained confidence in our execution in this foundational stage, we're beginning to shift our emphasis to the next phase of value creation, which is more transformational in nature. Like we previewed at Investor Day, this phase includes reengineering the structural cost base that underpins our supply chain network and business processes, simplifying and standardizing core activities and embedding an AI-first mentality as we shift from a holding company model to an integrated operating company. We described this program at a high level last quarter as a thoughtful, strategic, long-term effort paced at the ability of the team to execute well. Transformation also includes proactive steps on risk reduction and effectively managing the litigation docket. Anytime we can take care of risk at an appropriate price and with suitable protections, we'll be prepared to act like we did last year with the state of New Jersey. And as our organic machine begins to turn faster and our risk profile comes down, we'll be prepared to execute on our portfolio management strategy to pivot the company towards higher growth and margin potential priority verticals that help us accelerate value creation for the company. This is a multi-year journey, and progress won't be linear. But with a successful 2025 behind us, we're accelerating the transformation of 3M and building the runway for performance beyond 2027. The 3M team is energized and motivated, and I want to thank them for the dedication and focus on delivering improvement day after day. And with that, I'll turn it over to Anurag to share the details of the quarter. Anurag?

Thank you, Bill. Turning to slide seven, we had a strong finish to the year across all financial metrics. We delivered another quarter of sales growth above macro, continued margin expansion, strong earnings growth, and robust cash flow generation. Starting with top line, in a continued muted environment, we delivered organic sales growth of 2.2% driven by our commercial excellence initiatives and new product launches. The growth was driven by strength in safety, electronics, and general industrial, which more than offset the softness in consumer, roofing granules, and auto markets. All three of our business segments delivered sustained auto momentum, which contributed to a higher ending backlog compared to last year, giving us confidence as we go into 2026. Fourth quarter adjusted operating margins were 21.1%, up 140 basis points, and operating profit increased double digits, or $125 million, driven by continued disciplined operational performance. This included a $275 million benefit from volume growth, broad-based productivity, and lower restructuring costs, partially offset by approximately $50 million of growth investments and headwind of $100 million from gross tariff impact and stranded costs. Collectively, this contributed $0.17 to earnings, which was partially offset by $0.02 from non-operational below-the-line items. Our strong operating performance resulted in adjusted EPS of $1.83, an increase of 9%, and exceeded the top end of a guidance range. I also want to mention that we took a $55 million charge in the quarter. as we continue to make transformation investments to redesign our manufacturing, distribution, and business process services and locations. Similar to last quarter, these charges will be excluded from our adjusted results. Adjusted free cash flow in the quarter was $1.3 billion, with a conversion of approximately 130% as we benefited from strong earnings growth and working capital efficiency. Turning to slide 8, I will provide an overview of our business group performance for both the fourth quarter and full year 2025. First, in safety and industrial, we delivered another quarter of strong organic growth as we continued to gain traction on commercial excellence initiatives and realized benefits from new product launches. Fourth quarter organic sales increased 3.8%, driven by strong performance and safety, which grew high single digits through enhanced channel engagement and new product launches. Industrial adhesives and tapes growth accelerated to high single digits as we continue to win share globally in electronics and general industrial from new product introductions and improved manufacturing throughput. Abrasives continue to improve, delivering another quarter of mid-single-digit growth, benefiting from sustained focus on sales force effectiveness. Collectively, this strong growth more than offset known weakness in automotive aftermarket and incremental weakness in roofing granules due to the slow housing market and weak consumer sentiment. For the full year, SIBG grew 3.2%, with growth accelerating from 2.5% in the first half to 3.9% in the second half on the back of strong execution. Turning to transportation and electronics, fourth quarter organic sales increased 2.4%, driven by continued momentum in electronics and aerospace. These gains more than offset weakness in auto, which in our organizational structure includes commercial vehicles, which was down high teens in the quarter. Electronics continue to gain share, supported by commercial excellence initiatives and strong demand for our film technologies and optically clear adhesives. We also expanded our presence in the mainstream market by partnering with leading consumer electronic brands to deliver solutions aligned with their portfolio needs. Aerospace delivered another strong quarter, given by growing demand for space materials and continued strength in defense-related markets. We have seen sustained growth in this portfolio, where sales have doubled over the last four years. For 2025, transportation and electronics grew 2%, with second-half growth of 3% versus the first-half growth of 1%, driven by continued focus on commercial excellence and the ramp-up of new product launches. Finally, consumer fourth-quarter organic sales were down 2.2%. For the first nine months of the year, the business was up 0.3%, and we had expected the fourth quarter to be similar. But weaker consumer sentiment and sluggish retail traffic in the U.S. resulted in lower point-of-sale trends on discretionary categories where we compete. This market weakness was partially offset by new product introductions, increased advertising and promotional investments in the U.S., and overall business growth in Asia and Latin America. As a result of the fourth quarter weakness, CBG revenue declined by 0.3% for the full year. On slide nine is a summary of the full year 2025 performance. Overall, a strong fourth quarter capped a successful 2025 with organic sales growth of 2.1%, margin expansion of 200 basis points, an EPS increase of 10%, and free cash flow slightly above 100%. Sales growth strengthened from 1.5% in the first half to 2.7% in the second, exceeding the 2.5% we mentioned in our July earnings call. This momentum underscores the impact of our commercial excellence initiatives, enhanced service levels, and successful new product launches, positioning us well to accelerate our performance going forward. By geography, all areas delivered growth in the year. China grew mid single digit from strength in general industrials and electronics bonding solutions, supported by a strong focus on key accounts. This momentum more than offset the fourth quarter shift in smartphone manufacturing from China to other parts of Asia. In the rest of Asia, we grew low single digit, led by strong performance in India, which grew mid-teens on account of progress in commercial excellence across all businesses. After a couple of years of decline, Europe grew low single digits due to strength in general industrial and safety, which more than offset the weakness in consumer and auto aftermarket. Despite soft consumer and auto aftermarket, the U.S. grew low single digit for the year on the back of commercial excellence initiatives in the general industrial and safety businesses. Productivity initiatives drove strong margin expansion every quarter in 2025, resulting in full-year operating margins of 23.4%. Operating profit growth of approximately $650 million at constant currency was driven by $200 million from volume growth and $550 million of net productivity across supply chain and G&A. This was partially offset by $100 million in headwinds driven by $185 million in growth and productivity investments, in addition to ongoing stranded costs and tariff impacts with year-on-year lower restructuring costs. The strong operational performance contributed 96 cents of earnings, which was offset by approximately 20 cents of non-operational items for a total EPS of $8.06. This 10% EPS growth was better than our expectations and above the initial guidance at the start of the year. And we returned $4.8 billion to shareholders in 25, including $1.6 billion in dividends and $3.2 billion through gross share repurchases. Overall, 2025 laid the foundation for a strong operating culture. grounded in excellence, accountability, and a faster operating tempo, enabling us to overcome external factors to drive profitable growth. We have momentum as we enter 2026, and I will walk you through the guidance on slide 10. We expect organic sales growth to be approximately 3%, earnings per share ranging from $8.50 to $8.70, and free cash flow conversion of greater than 100%. We expect sales to accelerate for all business groups. SIBG and TEBG grew 2.7% combined in 2025, and we expect this growth rate will accelerate in 2026, supported by ongoing commercial excellence initiatives, strong service levels, and continued new product introductions. And we expect consumer to return to growth in 2026. The business groups combined will expand margins over $450 million or 100 basis points, including $875 million from volume growth and net productivity across supply chain and G&A. This will be partially offset by headwinds from PFAS stranded costs and tariff impacts, as well as an increase in growth and productivity investments to $225 million. This is on top of the incremental investment over the past two years, bringing the total investment from 2024 to over half a billion dollars. Corporate and other income will be lower by $50 to $75 million, or 20 to 30 basis points, largely from wind-down of transition services agreements related to Solventum. Overall, we expect total company income to grow by $400 million at the midpoint of our 70 to 80 basis points margin expansion guide. Adjusted free cash flow conversion is expected to be greater than 100% driven by strong operating income growth and a focus on working capital management. And we plan to deploy capital effectively, including a gross share repurchase of approximately $2.5 billion in 2026. Slide 11 provides a look at earnings growth drivers, which is primarily driven by strong operations consistent with our 2025 performance. Regarding cadence, we expect the rate of sales growth to increase through the year, with margin and EPS equal between the two halves. In the first quarter, the sales growth in SIBG and TBG combined is expected to be higher than 3%, and we will continue to monitor the recovery in our consumer business. Volume, productivity, and slight favorability in FX will more than offset the stranded costs, gross tariff impact, and increase in investments, resulting in high single-digit year-on-year earnings growth. Before we open the call for questions, turning to slide 12, I want to take a minute to highlight the progress we have made so far. We are trending ahead of our investor day targets we laid out a year ago. Our organic sales growth is accelerating due to our investment in growth and commitment to commercial excellence and innovation. Our relentless focus on operational excellence is resulting in strong operating margin expansion and sustained earnings growth despite pressures such as soft macro, tariffs, and stranded costs. We continue to be a consistent generator of cash that allows us to effectively return capital to shareholders while maintaining a healthy balance sheet. Not too long ago, our growth rates were trailing the macro, and now we are progressing ahead of our medium-term commitments of $1 billion growth over macro and a 25% operating margin by 2027. While we are focused on executing these commitments, we are also broadening our horizons to the out-years. Ensuring our transformation efforts position the company not only for the short term, but for sustained profitable growth well past 2027. This strong performance is a credit to the expertise and the commitment of the 3M team, and I thank them for the hard work and dedication. With that, let's open the call for questions.