Prepared remarks
Ladies and gentlemen, thank you for standing by. The conference will be starting in just a few minutes. We thank you for your patience and ask that you please remain on the line. Ladies and gentlemen, thank you for standing by. Welcome to the 3M Second Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this call is being recorded. Tuesday, 07/21/2026. 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. 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 2 and take a moment to read the forward-looking statements. During today's conference call, we will 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 will 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. We delivered strong performance in Q2, including organic growth of 5.4%, operating margin of 24.9% up 40 basis points, earnings per share of $2.40 up 11%, and free cash flow of $1.3 billion with 107% conversion. We returned $1.4 billion to shareholders in the quarter, including $400 million in dividends and $1 billion of share repurchases. Since 2025, we have returned $8.6 billion to shareholders against our commitment to return $10 billion-plus through 2027. Given our strong first-half performance, we are raising our guidance for the year for sales, EPS, and free cash flow. Our results today exceeded our expectations and demonstrate the progress we are making to build a higher-performing company, and continue to give us confidence that we are on the right path forward. The strategy we put in place two years ago is delivering results and we are building momentum in executing against our strategic priorities. Commercial excellence initiatives continue to drive results through improved sales force effectiveness and stronger account execution, supported by AI-enabled tools that enhance planning, prioritize opportunities, and accelerate productivity. Cross-selling continues to outperform expectations with $110 million of opportunities booked and $120 million in the pipeline, up over 40% quarter-over-quarter and putting us ahead of the goal we set at our Investor Day. We are rebuilding the innovation engine at 3M and significantly accelerating our pace of new product introductions. In the quarter, we launched 92 new products, up 44% versus last year, bringing our first-half total to 176 launches and putting us on track to deliver more than 350 new products this year. The benefits are showing up in our results, and I will talk more about our innovation journey in a moment. Our focus on operational discipline and productivity improvement continues to create value across the enterprise. Cost of poor quality improved 60 basis points year-over-year while overall equipment effectiveness improved 140 basis points. As asset utilization improves, we are able to consolidate production into fewer assets, optimize our manufacturing footprint, and retire older and less efficient equipment. While overall utilization remains a long-term opportunity, there are pockets in our manufacturing network today where capacity is constrained and short of demand. One example is our New Ulm facility, which produces cable accessories for electrical markets, a product that is facing high and increasing demand. Here, the team ran a multi-week sprint that set a disciplined operating cadence against a locked production schedule, improved material flow, eliminated process bottlenecks, and focused the team on rapidly resolving the underlying constraints holding back output. As a result, the work center achieved record production levels in June, delivering $13 million of incremental revenue or nearly 50 basis points at the SIBG level. Actions taken across commercial execution, innovation, and operations are part of a broader transition at 3M from a holding company to a more integrated operating company model. The next step in the journey is around transformation: simplifying and standardizing core processes, reducing complexity in our factory and distribution network, and reshaping our portfolio. Today, many of the activities and support functions like Finance, HR, and Customer Service operate independently across regions and business units, creating unnecessary complexity, inefficiency, and duplication. We are bringing these activities together into a single global service delivery model and partnering with an external provider to run them at scale, using automation and AI. This move will increase agility, accelerate technology, and sharpen our focus on the capabilities that are most critical to driving growth and long-term value creation. We are also continuing to enhance our portfolio. On July 1st, we closed on the acquisition of Madison Fire and Rescue, consolidating with our Scott SCBA business into a new majority-owned joint venture and $700 million in cash as part of the transaction. This joint venture generates revenue of $800 million, growing at high single digits and with margins above our company average. This is a clear example of how we are reshaping the portfolio towards higher-growth, higher-margin businesses, strengthening a priority vertical while keeping our capital allocation disciplined. Another priority vertical is data centers, and I want to touch on an exciting announcement we made last week. We entered a strategic partnership with Microsoft to become the first hyperscaler to deploy our patented Expanded Beam Optics technology in Azure data centers. This is a powerful proof point of how we are applying 3M's innovation to one of the fastest-growing markets in the world. Our connectors install faster, hold up far better to dust and handling, and help customers stand up AI capacity more quickly. We are rapidly scaling production capacity both internally and externally, and engaging the broader ecosystem of suppliers, partners, and customers to support standardization and industry adoption of Expanded Beam Optics technology. On Slide 4, we show that the positive momentum in Q1 in several growth areas carried into Q2, driving strong performance in the first half across adhesives, abrasives, aerospace, electrical markets, and safety. We continue to see a couple of places with pressure, including consumer electronics, auto and auto aftermarket, and U.S. consumer spending. We are clearly outgrowing the market in aggregate through better commercial execution, including increased cross-selling and improved customer retention, and a faster pace of innovation. Overall, our first-half performance positions us well for continued momentum in the second half of the year. Innovation has always been one of 3M's greatest competitive advantages, and Slide 5 highlights the significant inflection in launches and new product sales beginning about two years ago. Our goal is to restore that advantage at an even higher level by combining our unmatched material science capabilities with greater speed and better execution. Over the past couple of years, we have taken deliberate actions to increase rigor, accountability, and focus within our R&D organization—what we have been calling our R&D factory. As a result, we are beginning to see meaningful improvements across the innovation pipeline. We are increasing the pace of innovation and are on track to nearly triple the number of new products introduced this year versus three years ago, and launch more than 1,000 products by 2027, while reducing development cycle time by about 20%. We expect performance to continue accelerating as we leverage AI to move more quickly from idea generation to development and production. These efforts are translating into commercial results with five-year new product sales reaching about $4 billion this year and a new product vitality index climbing to the mid-teens this year, and 20% next year. The right side of the slide highlights several next-generation innovations and showcases the breadth of our portfolio and ability to address emerging customer needs—from developing new products for new markets like Expanded Beam Optics for data centers, to adapting existing technologies to new applications like Nextel high-performance fibers for fuel cells and light-reflective films for space satellites. These products demonstrate how we are applying technology to unlock new growth opportunities. Slide 6 pulls it all together. Over the last couple of years, we have moved from a decline of 4% in 2023 to positive growth of 3% on a trailing 12-month basis through the first half of 2026, while at the same time expanding margins by about 500 basis points. This is 3M excellence at work and demonstrates that we can both grow the top line and increase margins simultaneously. Our performance is increasingly outpacing underlying end markets, with our growth-to-market multiple improving from roughly in line to 2x, with businesses that declined in 2023 turning solidly positive in 2026. We are still in the early innings of our journey to create value; momentum is building, and I am encouraged by the progress we are making and confident in our ability to continue to deliver above-market growth and sustainable margin expansion over the long term. With that, I will turn it over to Anurag to share the details of the quarter.
Thank you, Bill. Turning to Slide 7. We exceeded expectations across all financial metrics in the quarter: delivered mid-single-digit organic growth, margin expansion, double-digit earnings growth, and robust free cash flow—all reflecting strong progress against our strategic priorities. Starting with the top line: in an unchanged macro environment, the organic sales growth of 5.4% was driven by successful execution of our commercial excellence initiatives and increasing contribution from new product launches supported by strong operating tempo. Coming into the quarter, we had expected sales conversion from the Q1 order strength to accelerate revenue growth to over 3% in the second quarter. With the sustained order momentum in the quarter, combined with good supply chain execution, we were able to grow above expectations. This puts the first-half organic growth at 3.3%, comfortably outperforming the macro. By geography, we saw broad-based growth across all five regions. China grew double digits with strength in industrial adhesives, safety, and auto films as we executed on our key account and local NPI strategies, leading to share gains. U.S. and Canada industrial businesses grew mid-single-digits, partially offset by softness in consumer and auto aftermarket. It was encouraging to see Europe return to growth, up mid-single-digits despite a muted auto market. In Asia, we saw double-digit growth led by India, a trend that has continued for seven straight quarters as a result of increased sales coverage in a growing economy. Q2 adjusted operating margins were 24.9% up 40 basis points, with the business group operating margins up 70 basis points partially offset by an expected corporate headwind of 30 basis points. Operating profit increased $110 million or $0.16 including $240 million benefit from sales growth and broad-based productivity, partially offset by $30 million of investments and $110 million from tariff impact and Strata cost headwind. We have not received any tariff refunds to date. The $0.24 of EPS growth in the quarter is driven by $0.16 of operating profit growth and $0.08 primarily from lower share count as we continue to return capital to shareholders. The benefit from tax timing and lower pension costs was offset by a prior-year gain on investment. This earnings growth was also reflected in the results with Q2 GAAP EPS of $1.78 growing 33% 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 robust at $1.3 billion with 107% conversion as we benefited from strong earnings and working capital management including seven days improvement over last year in inventory. We returned $1.4 billion to shareholders via dividends and gross share buybacks. For the half, we generated cash flow of $1.9 billion and returned $3.8 billion to shareholders—$800 million in dividends and $3 billion in share repurchases. Turning to the next slide, I will provide a quick overview of our growth performance for each business group. Safety and Industrial delivered a standout quarter with 8.2% organic sales growth driven by the continued expansion of commercial excellence initiatives and the ramp up of new product launches. We delivered double-digit growth across four industrial businesses: electrical markets, industrial adhesives and tapes, abrasives, and industrial specialties. This growth was driven by targeted commercial initiatives to reduce customer churn, strengthen sales coverage and effectiveness, and increase cross-selling. Safety grew high single-digits on the back of new product launches and continued international expansion. It was encouraging, however, to see roofing granules return to growth and we expect that trend to continue in the back half on a recovering market and easy comps. For the half, SIBG grew 5.7% demonstrating sustained acceleration over the last two years. Transportation and Electronics grew 5.9% in the second quarter from the expected backlog conversion combined with stronger commercial execution and account management. The first-half growth of 2.9% reflects strength in approximately half of the business segments more than offsetting end-market weakness in the other half. Semiconductor, aerospace, and data center business segments comprising approximately 20% of sales grew double digits as we gain traction from new product introductions. And commercial branding and transportation, at about one-third of the business, grew approximately 5%. On the other hand, auto was flat in a soft market and consumer electronics was down low single-digits, performing better than the broader consumer device market. SIBG and TEBG, which together represent 80% of our business, delivered 7% growth in the second quarter and approximately 5% growth for the first half. Finally, Consumer, which makes up the remaining 20% of our sales, was down 2.1% for the quarter and 1.7% for the half. Point-of-sale growth in the U.S. remained healthy and has been positive in 18 of the 26 weeks year-to-date versus seven positive weeks in all of last year. However, tightening of inventory levels at several key retailers in the second half of June more than offset this positive momentum. The second-quarter performance caps a strong first half including organic sales growth of 3.3%, operating margin of 24.3%, and earnings growth of 12%, giving us confidence to raise our full-year guidance across all financial metrics on Slide 9. We are raising organic growth expectations from 3% to greater than 3.5% for the year. This is a result of strong commercial momentum in our industrial businesses supported by increased sales contribution from new product launches which will more than offset the slight weakness in the consumer business. EPS guidance is increasing from a range of $8.50 to $8.70 to $8.80 to $8.95, a growth of 9% to 11% year-over-year. This increases both the low and high end of the guidance and reflects about a $0.27 increase at the midpoint. The increase in earnings versus the prior guidance is coming from stronger sales growth, productivity gains, and our capital deployment strategy. We now estimate oil inflation at $150 million to $175 million up from $125 million previously. This impact is expected to be fully covered by the price actions we implemented in Q2. Though oil price cost is dollar neutral, it impacts margin rate by 20 basis points which we will mitigate through higher volume and better productivity resulting in operating margin expansion in line with our prior expectations. Given the higher earnings growth and progress in working capital, we have increased our free cash flow guidance by $100 million to $4.7 billion to $4.9 billion implying conversion greater than 100%. The updated guidance implies second-half organic sales growth of high-3s or better—over 2x macro—and margin expansion of about 100 basis points from the prior year resulting in EPS growth of approximately $0.30 at the midpoint. Sequentially, we expect operating profit to follow typical seasonality with similar phasing between the halves while earnings will see an impact from tax timing. Turning to Slide 10, I want to take a minute to highlight the progress we have made since our Investor Day last year. We are at the halfway point with the strong 2025 foundation and the updated 2026 guidance; we are tracking ahead of Investor Day commitments across all metrics. Our growth trajectory continues to accelerate from commercial excellence and innovation, and is on track to exceed the $1 billion above macro commitment. Along with growth, we are seeing good operating margin expansion and are tracking ahead of the approximately 25% margin rate by 2027. For earnings, we are trending to a double-digit CAGR reflecting strong operational improvements coupled with below-the-line efficiency. And on cash, we expect to continue the strong trajectory exceeding our cumulative cash commitment and $10 billion return to shareholders. Overall, we are pleased with the progress we are making and want to thank the team for their relentless focus, determined pace, and strong execution to drive long-term value for our shareholders. With that, let's open the call for questions.
Questions and answers
If you are using a speakerphone, please lift up your handset before entering. Our first question comes from the line of Jeffrey Sprague with Vertical Research. Please proceed with your question.
Bill, I was wondering if you could unpack the top line a little bit more. There is some great detail on these slides. Looking at the new product launches, you're closely on track to what you thought, I believe, right? But the revenues are coming in better. So do we have a combination of upside in new product revenue relative to plan, and it sounds like cross-selling is a little bit better? Then maybe what role reduced churn is playing in all this? And I guess what I want to get to at the end is: an algorithm of roughly 2x macro—do you view that as sort of a sustainable model for 3M going forward?
Good morning, Jeffrey. That's a great question. We are very confident in where the growth is coming from. We came in stronger than we had expected in the quarter. It really is a combination of both commercial excellence and innovation excellence. The journey that we have been on for two years is maturing very rapidly. It is not really a macro tailwind; the macro on the industrial side looks pretty good, but there are some headwinds in the market. It is mostly internal performance. When you look at the last 12 months, we have been a little better than we had expected. We are clearly trending above the macro. Mostly driven in the first half from commercial excellence activities: the things we have laid out in the past around sales force effectiveness, better performance at the front end, pricing governance. We are pushing a lot with our channel partners, joint business plans, and cross-selling is much better. On loyalty, we are getting better on attrition. We have been tracking this carefully over the last couple of years. We have seen about 200 basis points of improvement in attrition primarily coming out of our SIBG business. That takes some time for that to turn, but it is starting to turn. It is still too high, but it is making good improvements. As we look to the back half of the year, we do see the innovation engine contributing even more in the back half and into 2027 based on the momentum we are building. So we feel pretty good this year. We think we will be about $450 million above macro in the full year— a little bit better than we thought last quarter at about $340–$350 million. That is largely on the back of good commercial excellence but with the machine churning faster on innovation. So all good signs and we expect our momentum to continue.
Jeffrey, Madison is not included in the guide, although it is closed. We wanted to provide an apple-to-apple guidance from our last earnings call so investors can see how our organic performance has impacted revenue, EPS, and cash. We have a page at the back of the webcast that has revenue, margin, and other information on Madison. It does not have a material impact to the EPS guidance range or the numbers, and we will incorporate that in our third-quarter call. And on tax, we still plan to be around 20% for the year.
Next question comes from the line of Scott Davis with Melius Research. Please proceed with your question.
The Expanded Beam Optics technology seems interesting. I'm trying to get a sense of materiality and how that scales out. It looks like it was launched with Microsoft as a partner. Is there an opportunity for that to scale across more hyperscalers and how do you think about that upside?
Scott, thanks for the question. Yes, it is generating quite a bit of excitement internally as well. It is a technology developed several years ago. In a nutshell, it is very durable, dust-resistant, and vibration-resistant fiber optic connection technology. We have proven with a hyperscaler that it can reduce by about 85% the time to revenue—time to install circuits in a data center. We have about 100 patents in this space and 50 pending, so it is well protected and we are excited. It has been in testing for several years with Microsoft, and we are pleased they have qualified us as a technology for Azure data centers. The revenue this year was in the $40–$50 million range. We do think it will scale over time—could be 4x or 5x that or even more over the next several years, depending on our progress and adoption of optical technologies in data centers. A couple of things are happening: each hyperscaler has some uniqueness in their architecture, so adaptations are required; we have to scale both internally and externally. Earlier this year, we announced we would double our capacity on Expanded Beam Optics this year and another doubling over the next 12 to 18 months. Even that is nowhere near potential volume demand in the marketplace, so we are also working with contract manufacturers who are developed in this area. The third item is that we will not be successful as a sole provider; this is about enabling an ecosystem of partners. We formed a multi-supplier agreement—there are 44 players in this agreement throughout the ecosystem. There are multiple hyperscalers, chip manufacturers, and connector manufacturers. It is about enabling the whole ecosystem. We are deep in trials with other hyperscalers, though I won't say more today. The TAM for Expanded Beam Optics technology is around $1 billion this year, and we think it will grow to $2 billion by 2028. It could be beyond that over time. We have to be successful in scaling the product and delivering quality on time. We are encouraged by progress and optimistic about growth in the space.
Helpful. And on China: it sounds like China could potentially be a growth engine for you again. Is that an exaggeration or how do you view the short-, medium-, and long-term China market today versus when you took over the job?
We have been pretty consistent that China is a very important market for us and it is performing well. We have a strong team on the ground. We organized a hybrid model there and in India, with a team focused on China based in China. In Q2 we were double-digit growth in China; first-half about 8%. Our performance there is driven by localizing NPI and commercial execution on the ground. We have more than 5,000 people there and six factories, and we are developing more localized technology. About half of the business in China is domestic production and half is export. The domestic industrial economy remains pretty solid and we feel good about our position and the team executing in China. We will continue to press it each quarter, and long-term we are optimistic about the future in China.
Next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question.
Good morning. Bill, can you give more color on NPI in terms of when you typically expect these new products to inflect? Does it take a few quarters or a year or two? Are these truly new products increasingly versus refreshes? And is the expectation of roughly $600 million of outgrowth next year on year 3 of the plan still how we should think about the outgrowth from these actions?
Amit, several good questions. On the growth next year: this year we originally said we would be a billion above macro across 2025 to 2027, and clearly we've done better than expected. This year we will do more than $300 million to around $450 million above macro. We'll come back early next year and talk about next year. On NPI, the progress has been fantastic. The chart in the webcast shows a deep inflection and we are clearly on the right track. Typically, launch from beginning of development to launch is around 250 days and that is down substantially from two years ago. By 2027 we expect about a 20% reduction in overall cycle time. There are nuances: we are launching more Class 3 products which are shorter in duration and more incremental, but we are pivoting more to Class 4s and Class 5s. Class 4s move into adjacent markets and Class 5s are completely new products for new markets. The team is focusing more on 4s and 5s. You will see more impact in the back half of this year as products we started to work on a few years ago start to launch and become meaningful, and they will be even more meaningful in 2027. The engine is moving, momentum is building, and the pipeline health is very good. This will continue to build momentum in the back half and into next year.
As a quick follow-up, when we started this process you talked about getting gross margin from the low-40s back to the high-40s. Given tariffs and recent developments, is there an opportunity structurally to get back to high-40s on gross margin? How should we think about gross margin prospects?
Margins: we've expanded about 500 basis points over the last couple of years, driven by gross margin improvements but also SG&A, IT, and other indirect costs. We've done a good job taking costs out. On gross margin we are tracking to close to mid-40s right now. Productivity is solid; we had great productivity in the quarter. We'll continue to build momentum. We're reducing costs of poor quality, improving overall equipment effectiveness, driving procurement savings even after inflation, and increasing Kaizen events. There is a lot of opportunity by running the network and distribution better. The next step in transformation is simplifying, standardizing, and automating processes across SG&A and factory operations. There is headroom in front of us and we see a path to the high-40s over time; the roadmap is relatively clear and along the same lines we've been talking about for the last couple of years. As we progress with transformation, margins should continue to expand.
Next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.
Good morning. How did the 5.4% growth look across April through June? Did you start the quarter stronger and weaken, or was it relatively consistent? Any color on orders and backlog exiting the quarter would be helpful.
Nigel, it was quite good throughout the quarter and more linear than we've typically seen. We started the quarter with very good backlog. If I look at April and May, they were probably about 600 basis points better relative to the first two months of prior quarters. June order momentum sustained as well; we had price increases effective May 1st. Through the course of the quarter, we saw very good linearity and the team executed to post 5.4% growth. Orders were up about 10% for the quarter and backlog was about 20% up year-over-year. So as we get into Q3, we feel good visibility for the quarter and the second half. Obviously, about 75% of our business is booked and shipped, so we monitor as we go along, but the first two weeks of Q3, orders and backlog look good.
On consumer channel destocking in the second half of June: inventory levels in SIBG and TEBG are normal; there is no discernible trend one way or another and not a concern. On Consumer, point-of-sale growth or sell-out growth was about 2.5% in the quarter, which was positive. The destock was isolated to a couple of retailers who stepped back a bit in weeks of supply—about a one-week delta. As we come into July and Q3, we expect this to normalize, especially as retailers stock for back-to-school season. We will continue to monitor and communicate as needed, but our expectation is consumer will be flat to up slightly in the back half.
Next question comes from the line of Chigusa Katoku with JPMorgan. Please proceed with your question.
Congrats on the great quarter. My first question is on organic growth: you raised the guidance but it still implies some deceleration in the second half from the strong second-quarter levels. Pricing should come through when you have some new delivery schedules in the back half. What is driving this outlook—consumer and electronics pressure, timing of deliveries, or prudence?
Good question. The second half will accelerate from the first half overall. We continue to see good momentum in Safety, semiconductors, data centers, and aerospace remain strong. Roofing granules should improve in the back half on easier comps. We expect pricing for the year to be about 1.5%, implying about 2 points in the back half. The watch items are consumer electronics—which market data indicates a deteriorating production volume of devices such as PCs and tablets in the back half, expected to be down high-teens—and auto, which is stabilizing for us but still expected to be down year-over-year in the back half. Auto aftermarket and repair claims are expected to be soft in the back half and U.S. consumer remains cautious and value-focused. We anticipate being above 3% in Q3 overall and we expect good momentum into the back half.
On what drove margin strength this quarter: we finished the quarter at 24.9% operating margin, the highest we've ever been, and that was about 40 basis points higher than our expectation. A large part was volume performance relative to the 3% we had assumed versus over 5% actual. It was also continuation of productivity, a combination of G&A and supply chain productivity which was very strong this quarter. So it was broad-based between volume and productivity.
Next question comes from the line of Christopher Snyder with Morgan Stanley. Please proceed with your question.
Following up on the data center EBO opportunity: you said this could be a $2 billion market by 2028. What is the competitive environment and how should we think about potential share for 3M in that market?
We already play in data center networking with products like TwinAx on the copper side and there is a gradual transition from copper to fiber. Optical connections are more difficult because fiber ends have to be polished and that requires specialized labor and time. With billions of fiber strands being connected in data centers, the market is looking for better solutions. Expanded Beam Optics allows faster, more reliable connections and is an important differentiator. We have substantial patent protection around the technology and will license ecosystem players to manufacture it because no single supplier can provide all the demand for hyperscalers. We have a small share today—$40–$50 million in a $1 billion TAM this year—but given our technology, momentum, and our ability to scale, we expect our share in that segment to grow materially over time.
On price-cost: there might have been some lag in Q2 given commodity inflation. Can you talk about Q2 price-cost and whether price-cost gets better in the back half given incremental price actions and easing petrochemical inputs?
In Q2 our price was about 1.6%, roughly in line with expectations in the first half. We see pricing increasing in the back half to about 2%. The embedded impact of oil-based increases for the year is $150–$175 million, up from $125 million previously. There is a bit of lag as that rolls through, but we are being adaptable and are adjusting as we go. We expect to offset the higher oil cost dollar-for-dollar through pricing. It will impact margin rate by about 20 basis points, but we will mitigate that through higher volume and better productivity. Overall, price-cost on oil is roughly neutral for the year and price will be slightly positive overall from where we stand today.
Next question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.
On productivity, stranded costs, and growth investments: has anything shifted in that outlook, and any material highlights to consider in cadence between the first half and the second half?
Nicole, nothing has changed significantly in terms of cadence. Static costs are still $150 million for the year, more in the second half versus the first half. Investments remain at about $225 million for the year—spread over growth, productivity, and foundation—with about $75 million in the first half and $150 million in the second half. What has gotten better is productivity, particularly on supply chain. So cadence is consistent with prior guidance but productivity performance has improved.
On buybacks: we will continue to be opportunistic and disciplined in capital allocation. We started the year at $2.5 billion in buyback guidance and found the opportunity to buy more stock. We've done about $3 billion at an average price of about $153 in the first half, and we'll continue to be opportunistic going forward.
Next question comes from the line of Piyush Avasti with Citi. Please proceed with your question.
Focusing on Safety and Industrial: growth in Q2 was very strong. Can you dig in a bit deeper on the drivers—how much was healthy end markets versus your commercial excellence and innovation initiatives? Was there any pull-forward? And do you see a path to sustaining this high-single-digit growth in the second half despite tougher comps?
SIBG is running around 8.2% in the quarter and we are growing well above the macro. This performance is driven by the organization—commercial excellence and innovation. The underlying drivers across SIBG were broad-based: electrical markets, industrial adhesives and tapes, abrasives, and specialties all contributed. Auto aftermarket was light, which is a large business, but overall momentum is strong. Orders in Q2 were strong; SIBG orders were up mid-teens and backlog is up year-over-year. The SIBG team began commercial excellence work early in 2024 and has made great progress: churn has come down, sales force effectiveness improved, AI tools for sales are helping, and cross-selling is stronger. This is largely back-to-basics execution and the momentum should continue into the back half.
On Q3 and Q4 cadence: you should see normal seasonality through the course of the year. Our guidance implies being over 3.5% for the year; the first half was 3.3%, so the second half will accelerate. You should see more coming from productivity in supply chain and transformation projects, which will more than mitigate the pickup in stranded costs and required investments. EPS growth in the back half is expected to be about $0.30 at the midpoint, split between Q3 and Q4 in line with normal seasonal phasing.
Next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.
Significant upside in free cash flow versus your five-year average—any one-timers? You referenced tax timing and improvement in days of inventory—how sustainable is that and do you have targets?
It was a strong cash flow quarter driven by strong operational performance: good earnings and improvements in the cash conversion cycle. Inventories improved by seven days year-over-year. This is fundamentally good operational performance driving free cash flow, not a one-time benefit.
On consumer electronics and memory: consumer electronics was down low single-digits in the quarter and we expect the market to be weaker in the back half—memory-related impacts have contributed to that weaker market. We expect to outperform the market, but the market is getting weaker because of memory dynamics.
Next question comes from the line of Brett Linzey with Mizuho. Please proceed with your question.
On utilization and footprint rationalization: what is your current capacity utilization across the footprint? As organic growth accelerates in the back half, how are you balancing rationalization versus expansion? Are there further actions into 2026 and 2027 or are you revisiting plans given the improvements?
We measure utilization across about 100 assets across our network. More than half our volume is running around 63.5%–64% utilization, so there is plenty of upside in aggregate. However, there are specific constrained assets, like New Ulm producing electrical connectors, where demand is spiking and we have to unlock capacity through better line operations, material flow, and sometimes targeted capital. Understanding utilization at the individual asset level allows us to consolidate between cells and factories, which is the transformation we will pursue over the next three to five years. It is a longer-term journey, but we are starting to ring out capacity and will have opportunities to rationalize the network over time.
On new product launches: 92 in the quarter is the pace for 350-plus. What portion is incremental share or TAM expansion versus replacing or cannibalizing existing SKUs? Do you have a metric for net new contribution versus gross NPI that helps bridge opportunity over the next few years?
In short, much of the growth will be net new. When we talk about classes: Class 3 launches are running around 75% of the launches, while Class 4s and 5s—adjacent market entries and new products for new markets—make up about 25% today. Over time, that will increase, and we expect TEBG and SIBG to get to 40% or beyond for Class 4s and 5s. As a company we are around 25% today. So there is a growing portion of launches that are net new and address new TAMs or expand share in adjacent markets.
Our last question today comes from Laurence Alexander with Jefferies. Please proceed with your question.
High-level assessment of margin profile in the new product mix relative to core businesses: is the gap stable as overall margins rise, or will new product margins converge over time so the mix shift is what drives margin lift?
We expect margins on new products to rise over time and lift the overall margin threshold. At launch, new products often come in at lower volumes, which affects absorption, but over time new features can drive better pricing and design-to-cost efforts reduce manufacturing costs. The team is focused on design-to-cost so new products both drive price and reduce cost, and that combination should allow us to unlock margins through new product introductions.
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.
Thanks everybody for joining us today and thanks again to all the 3Mers for delivering another outstanding quarter of great execution and delivering value for our customers and our shareholders. I want to thank them all for their efforts. Thank you for joining the call 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.