As a reminder, this call is being recorded Tuesday, October 20th, 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 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. 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 are delivering reflects the disciplined execution of the strategy we have been implementing over the last two years. As we've discussed, our 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 sales force effectiveness and AI-enabled tools. 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. In today's higher inflation environment, our price execution has been particularly strong and fully offsets material and oil cost pressures. Across our manufacturing and 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 of poor 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. 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.
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. We continue our efforts to address litigation risk and are actively working with a court-appointed mediator for the AFFF personal injury MDL, and more information is available in our quarterly filing.
Moving to Slide 4, I'll 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. The consumer business, which contributes about 20% of sales, improved 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 and our full year above 3.5% organic.
Turning to Slide 5. 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.
As shown on the left side of the slide, we are 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.
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. On the right side of the slide, there has been a lot of interest in Expanded Beam Optical and the opportunity ahead of us.
In light of an 8-K filing and press release last evening, I wanted to take a minute to highlight the progress we are making. As a reminder, EBO's patented ferrule 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 back planes, 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. Last evening, we filed an 8-K 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% 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. As we previously said, success in this space requires building a robust ecosystem of partners. We are 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 SemiAnalysis, a well-respected trade journal. 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 have 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. Anurag?
Thank you, Bill. Turning to slide 6, 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 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 gain traction from new product launches and good customer positioning. Together, these more than offset a weaker consumer electronics market.
Notably, the order 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, U.S. 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 force effectiveness in a constructive market, which more than offset a soft consumer market. 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 Fire acquisition, starting this quarter, we now exclude the amortization of intangibles from adjusted results to better reflect the underlying performance of the business.
Historical recasted financials for 2025 and first half 2026 are shown on slide 13, and as you can see, have an impact of about 40 basis points to margin rate and $0.04 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.
The $0.27 of EPS growth was driven by $0.22 of operating profit growth and $0.05 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 GAAP 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. Turning to the next slide, I will provide a quick overview of our growth performance for each business group. Safety & 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 to reduce customer churn, expand sales coverage, increase sales effectiveness, and drive cross-selling. Though repair claims market remains soft, Auto Aftermarket grew mid-single digits, driven by the new products and wins with large multi-shop operators.
Year to date, SIBG sales are up 6.1%, and importantly, orders and backlog are up double digits, giving us good visibility into the fourth quarter. Turning to Transportation & Electronics. 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 build rates, and growing demand for space films. Commercial branding continued its first half momentum, growing mid-single digits, driven by graphics and personal auto demand, while auto was down mid-single digits on softer 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. 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 digit. 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. 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%, and free cash flow of $3.1 billion.
Year to date, we returned $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 2026 guidance. Order 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.
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-$9.10 on the new basis to a range of $9.10-$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 million-$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 passthrough is dollar neutral, it dilutes margin rate by about 20 basis points, which we will mitigate through better productivity. 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 9. 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. 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.
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 *1 on your telephone keypad. If your question has been answered and you would like to withdraw, please press *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. Please proceed with your question.
I want to ask about Amazon in a second, but before I do that, you mentioned price several times. 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? You still seem to be a little bit behind PPI, so do you see an acceleration there?
Scott, good question. First of all, it is pretty well publicized in the marketplace around what is happening in oil and gas prices and general inflation. I think that is well covered.
But I think our ability to drive price right now is partly from the new products. I think importantly, it is from just significantly better responsiveness, service, delivery rates, product availability that we are delivering to our customers, and I think that is a very important part of it. I would not discount that we are being, I would say, a bit more aggressive here on price, holding our ground on this one.
I think all of those things come together in what is driving price. We will see our sales for the year to be slightly above a point and a half. We were saying last time about 1.5%.
It will be a little bit better than that because oil price continues to come up. Back half of the year will be slightly above 2. Front half was 1.
We are doing better. We are executing well on price. We are covering material and oil cost inflation, and we feel pretty good about the trajectory we are on right now on pricing.
Okay. That is helpful, Bill. Look, it was not clear to me in the 8-K what Amazon is.
We know the investment they are making, but are they helping to pay for capacity or take-or-pay contracts, anything that kind of locks them in to de-risking a bit of your capacity adds?
Look, this is a very important step we have taken here with Amazon. There is no disclosure right now on other parts of the commercial agreement, but it has been in the works for some time. It is a very important strategic commercial relationship.
I do believe it is a validation of the technology. It is an important milestone in this broader relationship that we have had with Amazon. It is very clear in the agreement that it is for optical connectivity, EBO, and other data center-related products.
They do have faith in our broad material science capabilities for acoustics, vibration, thermal kind of things inside the data centers. We are very excited about where we happen to be. As you would note, there is at least something in the 8-K. Its cumulative $6 billion is where the warrant vests over seven years.
It is in increments. It is not ratable. It'll start to ramp towards the back end of next year, is what our expectation happens to be, and become more meaningful as we get into 2028.
But as we sit here today, that's as far as I think we'll be able to disclose as this continues to ramp. What's important right now is we execute well, we scale well here with Amazon. We build out the ecosystem, which they and other hyperscalers believe is very important.
A very important step is combining that with the GSEO announcement, where we have solidified the supply side, the ramp up we expect to get to support Amazon and other hyperscalers. Collectively, we think it's a very important milestone that we're at today on EBO.
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.
Thanks, operator. Good morning, everybody. Bill, the trajectory of organic growth has been good, +1% in 2024, +2% in 2025, +3.5% at least this year.
You're making a lot of progress on pricing and NPI. 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 2027, but if you want to talk about 2027, great, but sort of where you think structurally you're taking the growth algorithm for this business over the next one, two, three years.
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've struggled to do over time. It comes back to what we were focused on very originally. It was around reinnovating innovation and driving new products to the marketplace, and we continue to progress that very well, and it is becoming more impactful.
We're clearly driving a lot of commercial excellence activities, improving our capability at the front line, building a better relationship with our channel partners, more cross-selling, better performance so we have less churn, pricing. All these things come together to kind of make this machine run better, and you went through the numbers. We'll end the back half of the year.
We'll be close to 4%. Q4 will be touching just over 4%. As we look into 2027, we continue to see growth momentum here.
There are some economic tailwinds here on the industrial side. We feel pretty good about that. But more importantly, this is a self-help story.
We're showing that we can grow organically, even in a choppy macro environment, and 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 I'm very excited about where the future holds here.
Okay. Thank you, Bill. 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 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're raising the margin guidance for longer term next year.
So can you just talk about productivity? Because the 2027 framing's 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? Maybe fill in some of that color for us, please.
Okay, great. Thanks, Amit, and you're absolutely correct. At the Investor Day, 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. We obviously were able to offset all of that, plus more, which is why we are ahead in terms of our margin expansion so far and will be next year as well.
As Bill mentioned, we're going to exit the year close to about 4% in terms of organic growth. As we go into next year, that will accelerate because of new products, commercial excellence, and pricing, which we've done a very good job this year and continue to kind of sustain that next year and drive for more pricing to offset oil. So with the volume growth on the margin side, we will have good incrementals.
Historically, we said it is between 30%-40%. I think we are more closer to the 40% right now in incrementals, given the progress that we made over the past couple of years. I will 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.
While we drive volume with high incrementals, productivity will much more than offset the step-up in investments and stranded costs. So expect good margin expansion as we go into next year and feel very confident to be ahead of the 25.4%, the new Investor Day target, despite all the other headwinds we had. So feeling pretty confident.
Got it. Great. Thank you very much.
Appreciate it, guys.
Our next question comes from Joe O'Dea with Vertical Research Partners. Please proceed with your question.
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 have announced, how much revenue altogether you think that will be able to support?
Joe, look, for this year, EBO is in the $40 million range, plus or minus. We have 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, we have doubled our manufacturing capacity.
So we will be north of, say, 10 million ferrules a year. It will be a little bit better than that, and we expect to increase that over time. The contract manufacturing agreement with GSEO, given their size and what they currently do for consumer devices in similar spaces, they could do potentially multiples of that per month.
So I believe, if we scale them as we know we will over the course of the fourth quarter into early next year, that we will see our ability to actually satisfy the market demand. Hopefully it is not a capacity issue. Becomes more in comfort of hyperscalers.
It is developing the ecosystem, and I just want to reiterate, one of the key factors here is making sure we have diversity of supply, not just from 3M, but other partners here, because that is going to be quite important for hyperscalers to sign on. So I believe with GSEO will be in pretty good shape to scale to the market requirements as we see them now.
On just 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 is a tremendous amount of focus out there, just given kind of all the headlines, and any risk that poses for pause. Just kind of overall macro, how you have seen demand trends over the course of the last several months.
Okay. Look, for us, our order rates have been pretty good. For the quarter, they were up about 7%.
We see good backlog going into the fourth quarter year to date, a little bit better than eight. It is better on the industrial side, but generally good order trends, good momentum here as we head into the back end of the year. Just from a macro perspective, we continue to see the broader industrial markets improving, especially in the U.S., and I know that part of it is driven by data centers, but it is quite a lot of other factors that go behind that.
Auto build rates are likely to be down. They are down modestly in the quarter and likely for the year as well. We see the consumer electronic space worsening a little bit in the back end of the year, more like down mid-teens from the consumer electronics market.
Those are the broader pieces. IPI is about where we were before, slightly better globally. U.S. IPI, U.S. GDP is slightly better from where we thought in July.
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 sell out 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's pretty good, kind of mixed outside of that.
Our next question comes from Julian Mitchell with J.P. Morgan. Please proceed with your question.
Hi. Good morning. Maybe 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.
Strong growth Q2. It evaporated in Q3. You're talking about a re-acceleration in the fourth quarter despite a worsening consumer electronics market backdrop.
I think you said down mid-teens. 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?
Sure. So, as we exited the third quarter, Julian, the backlog in TBG was up quite double digits. 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, plus all the commercial excellence that we are driving in the commercial branding business. This along with auto.
We have had some couple of good wins in auto as well. That kind of coming through, I think gives us confidence that we will accelerate the growth in the fourth quarter from third quarter in TBG.
Thanks very much. Then just my follow-up, I think, Anurag and Bill, your tone on the margin expansion is very confident, I think. Looking at slide 9, and you are talking about very likely exceeding that 80 basis points of sort of margin expansion next year that is guided on that slide 9, and that is even with what is going on with cost inflation and everything else.
So I suppose is the sense that, 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 is a fairly sensible sort of run rate for the time being, given inflation and productivity and stranded costs and so forth? There is nothing sort of one time benefiting the degree of margin expansion you are seeing today.
Correct. There is no one-time benefit in terms of the margin expansion. It is all about controlling our cost base, driving productivity across both supply chain and G&A. Bill did mention in his prepared comments about gross margin being up 230 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 is 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. 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.
Yeah, Julian, I think the thing to keep an eye on is as we keep talking more about transformation and the changes that we are making, a lot this year has been around G&A. There has been investment to transform the G&A functions. It is 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 is going to be impacting us into 2027. And certainly, with the factory consolidation, given a typically would be 3, 4, 5-year payback, that will start to become more meaningful in 2028. So when you take a step back and think about all of the work that we have done, we have seen gross margins come up from the low 40s to now touching close to the mid 40s.
Again, up to potentially the high 40s over the next 4 or 5 years through some of the transformation that is happening.
Our next question comes from Andrew Obin with Bank of America. Please proceed with your question.
Hey, guys. Good morning. How are you?
Just a question on Madison Fire. Are we putting, now that it's organic, are we putting any accretion into 2026 on that, just from modeling perspective? Do I need to put something in?
Yeah. It's EPS neutral to us. I mean, it does grow higher than company average and margins better, but given the size of the business, it doesn't really move the needle much on the top line.
There 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.
Thank you. Going back to optical and data centers. The headline numbers, I think in the 8-K are pretty robust, and you're saying you have multiple other hyperscalers that you're talking to.
Just order of magnitude relative to what you have, how big could that be? Could you also remind me overall, what was your exposure to data centers last year, and what is it this year? Thank you.
On that last part, data centers this year will be about $700 million. Last year was around $550 million, in that range. Part outside, the bigger part would be outside, so electrical connections, and part is inside around optical connections, copper, other parts with inside the data center.
But most of it was on the outside. There's been a lot of conversation with really all of the other hyperscalers. Obviously, Amazon is quite substantial in that space.
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 in Azure data centers. These things will continue to evolve.
Again, we've got to continue to work the ecosystem, build the scale, continue to advance the technology because each hyperscaler has some uniqueness in their configuration and architecture. There's some work that has to happen there. But I think we have very good momentum here.
I think this was a very important step that we've taken in the last couple of days with Amazon, and I hope in the coming months, others will follow suit.
Our next question comes from Joe Ritchie with Goldman Sachs. Please proceed with your question.
Bill, I just wanted to follow up on that thread, right? The warrants are a pretty unique structure. I am just curious, how did that even come about?
I think you just mentioned that you are hoping that potentially some of the other hyperscalers will follow suit. Any other clarification around that would be helpful.
At this conference last week, it's the Open Compute Project, which is in San Jose. I was out 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 could be used, how it could be scaled, how do we manufacture it, partners that want to be part of it.
There's just a ton of activity happening there. It's pretty broad-based, but again, it's evolving. Each quarter, each month, we're taking steps forward here.
We have to keep executing and doing all the things that I've been very carefully talking about around scaling and technology development and ecosystem. All of these things are critically important. For Amazon, look, I think the warrants conversation is really important because it cements what I believe is a very strong strategic partnership we have with Amazon.
It's an agreement, it's a union, if you will, with Amazon, where we both see win-win. We see opportunity to drive shareholder value on both sides. For us, the warrants are going to be accretive to, significantly accretive to the company.
We thought that was prudent and the right thing to do. Again, it's about 0.6% of our shares, so it's not hugely meaningful, but it's very symbolic in terms of the overall relationship we have with Amazon.
That's helpful, Bill. I guess just my follow-on 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 model to trends. Just any expectations on volumes already for next year?
Yeah, Joe, absolutely. As I was mentioning when Amit was asking the question that the volume, which typically has been a 30%-40% incrementals for us, is now getting closer to the 40% 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 Coe with Wolfe Research. Please proceed with your question.
Great. Thanks for the question. So just going back to the Amazon agreement.
Is this a framework agreement, Bill, that is structured as a minimum? The $6 billion 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 closer to $1 billion in 2028? Just trying to sort of frame expectations here.
Look, I think we will sort of get through the quarter here, and then we will go through next year. Your numbers next year are roundabout about right. It is sort of $80 million, $100 million of EBO.
Again, look, we have got to continue to execute and scale here. We are not going to size it beyond that. But when we talked last time, we said the total addressable market here for EBO is around $2 billion in the 2028 time period.
This year we will do, again, $40 million roughly. This is an important initiative for us. We are maturing the technology.
I think this step with Amazon, last quarter with Microsoft, others that are in conversation gives us a greater right to win in that space. So I feel better about our ability to go after that market. We believe it will continue to grow over time as people get comfortable with EBO, with a contactless sort of connection device as opposed to physical contact point-to-point devices today.
I think it's going to continue to evolve, but won't comment on anything beyond 2027. But I do believe it's going to continue to grow and grow meaningfully. Otherwise, we wouldn't have talked about where we happen to be with Amazon and the size of the contract manufacturing agreement with GSEO.
All these are very important to us.
Yeah. $6 billion divided by 7 is close to $1 billion. That's why I just thought I'd throw that out there. Then just on the S&I-
There's no volume commitments here. We got to earn a right to that. It's going to happen over time.
But that's the number they put out there, is what is expected over the course of the next 7 years, so we think that's an important target for us.
And then, 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 am getting to math closer to $100 million of EBITA contribution, which feels too high, but was wondering what kind of margin Madison Fire is coming in at, and what is a good number for 2027?
Yeah. So Nigel, I would say the number is not that high as you are 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 line. So 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. As you model into next year, I would say it is 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. Okay, thank you.
Our next question comes from Steve Tusa with Wells Fargo. Please proceed with your question.
Hey, good morning, Steve.
As far as the fourth quarter is concerned, can you maybe I know a couple of these businesses you said are going to accelerate, and that's great color, but maybe just how you're seeing things play out versus normal seasonality. Maybe seasonality really is like there is no normal seasonality with the last few years, but how you're thinking about those kind of daily sales trends. Then just lastly on that, the backlog.
You mentioned the backlog with maybe just a little more color. I think you gave some in the second quarter.
Yeah. 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%.
That, I guess, would get you to greater than 3.5% for the year, so it's got to be more than 4%. Again, it's off of a bit of a 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, just again, very good order trends. The backlog going into the quarter is up about 18%, so it's high teens percent year-over-year going into the quarter.
We have about 25% of the revenue that's in backlog, which is pretty good and a little bit better than we typically see. But again, based on where we see it today, we feel pretty good about coming in north of 4% and more than 3.5% for the year.
And then just one last one on stranded costs still. Is it still, and investments, is it still $375 million for the year? Does that step up a little bit?
I know it was up $0.17 in the quarter. Does that step up a bit in the fourth quarter?
Yeah. I believe when you said 375, you meant $225 million of investments and $150 million of stranded costs for the year, Steve?
That's probably what you alluded to.
It is still the same. In the fourth quarter, you will have probably 125 of that because of the $50 million of stranded costs and $75 million of investment. No real change from the cadence that we had laid out from the beginning of the year.
That stranded cost next year is $50 million. It goes from 150 to-
Great. Thank you so much. Really appreciate it.
Our next question comes from Andy Kaplowitz with Citigroup. Please proceed with your question.
Hey, good morning, everyone.
Bill, can you give a little more of an update on your overall progress and innovations as we start thinking about 2027? 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?
First of all, I am very pleased with what is happening right now in NPI innovation. We are accelerating. I gave some of the numbers here, about 87 in the quarter, up about 24%.
For the year, we will be at 350 or more, so that would be up 23% year over year. Early last year, at the Investor Day, we said we would be 1,000 products over three years, and we should be above that, is what my expectation would be. I think what is important is we have seen the funnel remain very healthy.
So we are bringing more projects into the funnel, into our development pipeline that we are launching. I think that remains very encouraging. Cycle time has been pretty good, actually.
We will be down 20%. It will move around a little bit, but I think we have already proven that so far. As we bring more Class IVs, Class Vs into the funnel, which will drive more incremental growth over time, they are a bit of a longer development cycle, so that could push things a bit in the other direction.
But the cycle time continues to come down. Our on-time launch attainment remains around 80, 81%, so that is all very good. As you mentioned about AI, I do believe that this is going to be a meaningful way for us to accelerate innovation.
Again, from 20% compression on cycle time, just by bringing AI in, you are ideating faster, you are eliminating some of the steps of developing and making prototypes in labs, getting out to a factory. So instead of doing physical prototypes, you can do virtual modeling and simulation. All those opportunities are happening now.
So that could further compress cycle time. What that means is we should be accelerating the numbers of new product launches without accelerating the cost to go and make that happen. So I am very encouraged.
We are pushing very hard on this. A lot of the effort to date has been codifying this vast treasure trove of information that resides at 3M in terms of all of the patent information, all the technical papers, all the material specs, safety sheets, all of this information, process informatics, all the how you make it. It all needs to be codified.
That is now being done. When you have all that and you lay AI on top of that, it can really accelerate our journey in bringing new products to market. So, I am encouraged about the progress we are making here.
To your point, I think there is a great opportunity to accelerate that into 2027 and beyond.
It is helpful, Bill. 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? You mentioned still some select retail destocking, so maybe a little more color on what you are seeing there.
In consumer, we expect will turn slightly positive in the back end, in the fourth quarter of the year. Of course, 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 its size and where we expect it to be in the fourth quarter. But the trends are positive. POS was basically up a little bit in Q1, improved a bit more in Q2, around 2%-2.2%, a little bit better in Q3.
So POS has been pretty good. What happened over the course of this year is the inventory in the channel, especially with a couple of retailers, has been pulled down a little bit, about a half a week in Q3. It was about a half a week in Q2.
We find that to be stabilizing here a little bit going into the fourth quarter. But again, it's hard to predict what some of these retailers are going to do. But when we take a step back and look at the way the portfolio is evolving, we see it to be slightly better in Q4, but again, not a big meaningful driver for the growth as a company.
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.
Appreciate all the color.
We'll go next to Varun Govindaraj with Bernstein. Please proceed with your question.
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 Tushar coming in. How are you driving continuity in the R&D strategy with that change? Just because these kinds of changes during transformations are tricky, so curious how you're handling it.
Varun, thanks for the question. 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. Tushar has been with the company for 25 years.
He's PhD. He's got a lot of experience both running a business as well as developing technology, more than 40 patents to his name. I like the combination.
He's been running the IATD business within SIBG for the last number of years, leaning forward on AI, digital tools. I think that combination is going to be very important to us, and having somebody that knows the players internally, know the technology, importantly knows our customers, that combination I think will drive good continuity in what we're trying to do on innovation at 3M.
Super helpful. Thanks for the color. Just as a quick follow-up.
We've talked a lot about EBO 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 accretive that could be either next year or do we expect that to come in more 2028 onwards?
No. We think 2027 will be a step up on that. So it's a couple of different things.
We continue to see very good growth in our Electrical Markets Division with connectors, medium voltage connection coming into data centers. That has been a good grower for us all year, double digit, and we can see that continuing into next year. There's a lot of other different technologies.
You point out Nextel, which goes into a couple of different behind the meter type solutions outside of the data center, and we continue to have momentum there. We're expanding capacity to meet the demand of that space. So I think that could be a step up into 2027 and perhaps even better than that in 2028.
So I think very good momentum both inside as well as outside the data center, Varun.
All right. Appreciate it. All the best for the rest of the year.
Our next question comes from Brandon Knutson with Morgan Stanley. Please proceed with your question.
Hey, 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 NPVI over time?
We haven't really talked much about what we do on pricing. Sometimes when you bring new products, it's creating a new space, so you really don't have a good vantage point. But I think our ability to drive value-based pricing is becoming a lot better.
We see it across a number of different product portfolios. So, I would say when we bring in new products to the marketplace, once you start to hit volume ramp, we do see those products generally being margin accretive to the company. So price is an important part of that.
Great. Thank you. And then last one on just data center.
EBO's 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 D.C. content scaling?
We manufacture a ferrule. The fibers have to be terminated into the ferrule. They have to be put into a connector, and then installed in a data center.
So all those pieces are quite important. But hyperscalers have an important. They design their own architecture.
The server designer, 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, is developing standards and then certifying players in the space to install EBO.
So that needs to happen side by side with technology development and scaling.
Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is now open.
Yeah, good morning. Thanks for squeezing me in, guys. 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.
Yeah, no. Consumer electronics, yeah, we've seen some pressure here in the quarter. We'll see some additional pressure going into Q4 as well in consumer electronics.
In consumer electronics, we provide films primarily for LCD displays. We do conductives, we do OCA, eBonding a lot for phones and tablets, notebooks, et cetera. 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 LCD displays.
That's one area. And the other is with China OEMs. Not a very big part of our business, but that market is down quite substantially in the quarter and then for the year. But we're performing very well with premium device manufacturers where performance, where thermal management for AI devices, for foldable devices, for all these new innovations, we're performing very well there.
As I look forward, that kind of innovation, with those premium manufacturer, I think will allow us to return to growth going into next year and beyond.
Thank you. I'll pass it on.
Our next question comes from Brett Linzey with Mizuho. Please proceed with your question.
Hey, good morning, all. Wanted to come back to slide 5, 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 specced in on or working on designs.
We can't talk about the latter part of that, which is who we're getting specced in on. But I was very careful, and I said it's a pretty broad space. It's LEO and GEO, it's low Earth orbit, 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 these satellites, build more capability, bring more protection, so there's no light reflecting back to the Earth.
Removing a glass solar panel as they get bigger, they replaced it with films that allows it to work, to be a lot lighter. So there's a lot of capability here. Our content is growing in that space.
Our innovation, I think, is quite important. But we expect that that's going to grow over time, which is why we want to keep highlighting it. Don't want to say too much more than that, but it's a great opportunity for us to grow our business.
I appreciate the detail. Then just a quick follow-up on the $185 million of oil inflation you said fully offset by price. Is there carryover lag into 2027 we should be thinking about or modeling?
How much of that price is go get versus in the market a little bit more surgical?
Yeah. So 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 carryover going into next year, definitely on the oil cost piece.
At the same time, you should also see the price carryover. So we will be neutral between price and oil cost for next year. 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 going out with price increases, and that's what the team did. I think we did a very good job by offsetting it.
Last year tariff, we did not offset the entire price increase, but oil we did, and the discipline has been really good.
Our last question comes from Jeff Reive with RBC Capital Markets. Please proceed with your question.
Good morning. Thanks for squeezing me in. I will keep it to one question.
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?
No, it should be sufficient. It gets back to this diversity of supply. We are scaling internally, but we will never be able to, within 3M, to be able to accommodate the market demand.
GSEO has an incredible capacity, but likely over time there may be other players here, other manufacturing sources that just give that satisfaction of diversity of supply. We are confident we can ramp with GSEO, but there may be others that we will have to bring on board over time.
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.
Okay, thank you everybody, and I know we're over a little bit. I appreciate everybody joining the call today. I want to thank again all of the 3M-ers 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 lines.
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