3M Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2024

Key Takeaways

  • Q2 operational strength: 3M reported non-GAAP EPS of $1.93, up nearly 40%, with 1.2% adjusted organic revenue growth and $1.2 billion free cash flow (109% conversion).
  • New CEO’s top priorities: Bill Brown will focus on driving sustained top-line organic growth through enhanced R&D and commercial excellence, improving operational performance by simplifying the supply chain and boosting lean manufacturing, and deploying capital effectively.
  • Supply chain optimization: Management identified excess complexity in 110 factories and 95 distribution centers and is targeting a $1 billion cash opportunity by cutting inventory days from 102 to about 75 and improving on-time-in-full and OEE metrics.
  • R&D underinvestment: Core R&D spend has been flat at ~$1 billion (4.5% of revenue) and lower real investment over five years has led to declining new product introductions and aging product lines.
  • Raised full-year guidance: The company increased the bottom end of adjusted EPS guidance by $0.20 to $7.00–7.30 (up 16%–21%) and expects operating margin expansion of 2.25–2.75 basis points, with organic growth unchanged at flat to +2%.
AI Generated. May Contain Errors.
Earnings Conference Call
3M Q2 2024
00:00 / 00:00

There are 12 speakers on the call.

Operator

you for standing by. Welcome to the 3 ms 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 Friday, July 26, 2024.

Operator

I would now like to turn the call over to Bruce Jermeland, Senior Vice President of Investor Relations at 3 ms.

Speaker 1

Thank you, and good morning, everyone, and welcome to our Q2 earnings conference call. With me today are Bill Brown, 3 ms's Chief Executive Officer and Mohnish Patelawala, our President and Chief Financial Officer. Bill and Mohnish will make some formal comments, then we'll 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.

Speaker 1

Please take a moment to read the forward looking statement. During today's conference call, we'll be making certain predictive statements that reflect our current views about 3 ms's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10 Q lists some of the most important risk factors that could cause actual results to differ from our predictions. Please note, throughout today's presentation, we'll be making references to certain non GAAP financial measures.

Speaker 1

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'll hand the call off to Bill. Bill?

Speaker 2

Okay. Thank you, Bruce, and good morning, everyone. This morning, we reported 2nd quarter results with non GAAP earnings per share of 1.93 dollars up nearly 40% with 1% organic revenue growth. Adjusted free cash flow was 1,200,000,000 dollars with conversion of 109%. I'd like to thank the 3 ms employees for all their hard work in delivering solid second quarter results.

Speaker 2

Monish will provide further details on the quarter, and then I'll wrap up our prepared remarks with guidance for the year before opening the call to Q and A. I've now been in the job for nearly 3 months and have been busy visiting a number of our factories and labs as well as taking a fresh look at our strategy and how we're executing against it. As you know, 3 ms has been undergoing a lot of change in the past few years following COVID, most recently with the successful spin off of the healthcare business, executing on a significant restructuring effort and working to mitigate risks, including discontinuing PFAS manufacturing by the end of 2025 and settling legal matters. You've also seen a number of changes to our organizational model, shifting from a geographic to a global business unit structure and centralizing our global supply chain activities under one senior leader. Collectively, this has been a massive transformational change for 3 ms and the team has executed really well.

Speaker 2

As a result of these efforts, you're seeing the benefits in operating margin expansion, strong cash generation and a solid balance sheet with low leverage ratios and an incrementally more positive view from the rating agencies. Credit to Mike and Monash for their steady hand in guiding the company through these changes. But my job is to look forward. And while much progress has been made, we have more to do, including navigating PFAS related matters where fortunately, we have a strong, terrific team managing the exit in our ongoing legal matters. As I see it, we're still in the early innings of our operational excellence journey, and we haven't yet cracked the code on organic growth, which I know is essential to creating shareholder value.

Speaker 2

So my top priorities are: number 1, driving sustained top line organic growth number 2, improving operational performance across the enterprise and number 3, effectively deploying capital. On the first priority, I believe that the company has significant organic growth opportunities as we participate in end markets with favorable secular trends and have a strong foundation and long history in material science innovation. However, as you well know, organic growth has been below market indices and peers over several years and up only about 1% year to date. Driving sustained organic growth requires both getting more out of R and D as well as improving commercial excellence. As I've gotten into the details, what I've learned is that ex solventum R and D investment for Core 3M, which is running about $1,000,000,000 per year or about 4.5 percent of revenue, has been flattened nominally over the past 5 years and down on a real basis as the focus was on investing in and strengthening the Healthcare business.

Speaker 2

And within the lower spend, the amount we invest on new product development has declined even further as the company shifted more dollars to efforts to exit PFAS manufacturing and work to reduce supply chain cost and resolve COVID related sourcing constraints. As a result of the decline in investment, along with the strategic shift to fewer but larger innovation opportunities, the number of and revenue from new product introductions has steadily declined over the past decade. The simple fact is that our products are aging. While we've been shifting our portfolio towards higher growth markets like auto electrification, industrial automation, data centers and semis, climate tech and others, these efforts aren't material enough today to offset erosion in our core. They remain, for the most part, attractive growth platforms, and we need to continue to balance investing appropriately in markets that are evolving quickly, while also investing incrementally to sustain the core products we have today.

Speaker 2

But before we make any adjustments to our R and D budget, I want to first explore opportunities to get more from what we currently spend. For example, improving the velocity of our new product development process and increasing the effective capacity of our engineers by eliminating bottlenecks and non value added work and over time redeploying those currently working on PFAS exit activities to growth initiatives. With enhanced data transparency and a more coordinated governance process, we can improve R and D effectiveness by deploying resources on the highest return projects. These efforts are essential to reinvigorating the 3 ms innovation machine, but will take time to bear fruit. So in the near term, we have to focus on commercial excellence to sell more of what we currently offer, And that means better sales force and distributor effectiveness, targeted marketing, optimized pricing and much better execution at the customer interface, in particular, on time in full performance, which is a key part of my 2nd priority, operational performance.

Speaker 2

We have a terrific ops leadership team in place executing on a number of opportunities, and I want to give you some color on what I'm seeing so far. I've been looking at our manufacturing and distribution network to understand our global supply chain and distribution capabilities. I see opportunities to reduce complexity, drive lean manufacturing and logistics, improve supply chain management, lower yield loss and increased service levels with lower inventory. While our network of 110 factories and 95 distribution centers have historically served 3 ms well, it is incredibly complex and interconnected with most SKUs we produce touching multiple factories before reaching the customer. For example, a command strip touches 5 factories and 2 distribution points before it hits the store shelf.

Speaker 2

This extends cycle times, increases goods in transit and drives up logistics and freight costs. In lean manufacturing and logistics, we're developing a consistent metric around operating equipment efficiency, or OEE, to increase equipment utilization and rein in capital spending and mapping modes and flows to lower freight and distribution costs. In supply chain, we have significant opportunities to improve our sourcing effectiveness. We have more than 25,000 direct and indirect suppliers, including nearly 4,000 contract and component manufacturers. Yet more than 80% of our raw materials are sole sourced.

Speaker 2

We haven't been holding our suppliers accountable to the same quality and delivery standards as our customers hold us to, and we're only beginning to leverage our scale to reduce cost. Relative to yield loss, our raw material waste is running close to 5% of cost of goods sold, due in part to how we design and manufacture our products, but also due to inefficient production scheduling and changeovers. And finally, we have too much inventory at about $4,000,000,000 in 102 days at the end of Q2 and yet our service levels are only in the mid-80s. Our bottoms up analysis indicates we should be closer to 75 days of inventory or lower, which would imply about $1,000,000,000 cash opportunity over time, while we drive on time in full above 90%. My third priority is effectively deploying capital and our approach remains the same as it's been, investing in R and D and CapEx to fund organic growth, paying an attractive dividend, which we just recalibrated with the spin of Solventum, maintaining a strong balance sheet and using excess capital for M and A or share buybacks.

Speaker 2

We repurchased about $400,000,000 in stock in the 2nd quarter and have the capacity to do more in the second half and next year. While no acquisitions are on the near term horizon, I'll be taking a fresh, dispassionate look at our portfolio to determine if any assets have greater value owned by others and along the same line, what assets might be a good fit for 3 ms. I don't have anything further to say on that today, but you can expect to hear more from me regarding portfolio prioritization as I deepen my understanding of our businesses and end markets. So for the past 3 months, it's been pretty busy with a lot still to learn. I think we have a good foundation to build upon and believe that this focus on fundamentals back to basics approach will drive value creation.

Speaker 2

I'm encouraging everyone at 3 ms from top to bottom to every day challenge the status quo and the way we've done things in the past to act with speed and urgency and to off board those things that distract us from growing, innovating and executing for customers and shareholders. And with that, I'll turn it over to Manish to cover the quarter and I'll come back to discuss guidance. Manish?

Speaker 3

Thank you, Bill, and good morning, everyone. Please turn to Slide 4. I would like to take a moment briefly remind you of a few items that we highlighted during last quarter's earnings call. Beginning with the 2nd quarter, our results for business segment operating income includes prospectively the impact of dissynergies or stranded costs previously associated with Solventum. Therefore, for historical pre spin periods presented, the dis synergies are reflected in corporate and unallocated.

Speaker 3

In addition, we added a new operating category named other for solventum transition service agreement activity. Other includes a Q1 cost associated with supporting the agreements for which 3 ms started to be reimbursed for in April. And finally, corporate and unallocated incorporates the commercial agreements between 3 ms and Solventum that started on April 1 and retrospectively picks up certain operations of the former healthcare business retained by 3 ms. Turning to our 2nd quarter performance, we posted solid adjusted results including sales of $6,000,000,000 operating margins of 21.6 percent, earnings per share of $1.93 and free cash flow of $1,200,000,000 We delivered adjusted organic growth of 1.2% or up 2.4% excluding geographic prioritization and product portfolio initiatives. These results reflect the trends that we have previously discussed including strong growth in electronics, mixed industrial end markets and continued softness in consumer retail discretionary spending.

Speaker 3

We had another strong quarter of execution with adjusted operating margins expanding 4.40 basis points year on year and delivered adjusted free cash flow of $1,200,000,000 with conversion of 109%. Please turn to Slide 5. On an adjusted basis, we delivered operating margins of 21.6 percent, up 4.40 basis points and earnings of $1.93 per share, up 39% versus last year's Q2. Our Q2 year on year performance was driven by organic growth, productivity, strong spending discipline and restructuring savings, which combined benefited operating margins by 3.10 basis points and earnings by $0.31 per share. In addition, income from the transition services we are providing to Solventum increased margins by 50 basis points and earnings by $0.05 per share.

Speaker 3

These benefits were partially offset by stock based compensation, which was shifted into the 2nd quarter due to the spin of Solventum. This was in line with what we discussed during our Q1 earnings call. This change in timing negatively impacted operating margins by 200 basis points and earnings by $0.18 per share versus last year's Q2. Lower year on year restructuring charges were a benefit of 2 70 basis points to margins and $0.23 to earnings. For the Q2, restructuring charges were $44,000,000 which were lower than anticipated.

Speaker 3

For the full year, we continue to expect pre tax restructuring charges in the range of $250,000,000 to $300,000,000 Foreign currency was a negative $0.04 per share impact as a result of the stronger U. S. Dollar. Acquisition and divestitures were a benefit of 10 basis points to margins and $0.03 to earnings year on year. This benefit is related to last year's Q2 reconsolidation of Aero Technologies along with the commercial agreements between 3 ms and Solventum.

Speaker 3

Below the line items benefited earnings by a combined $0.14 per share. This benefit was primarily due to increased interest income year on year on a higher cash balance due to in part by cash proceeds received from the spin of Solventum. Taking into account our first half of the year performance, we now expect our full year non operating expense to be in the range of $50,000,000 to $75,000,000 versus a prior range of $75,000,000 to $100,000,000 A quick comment on corporate and unallocated and other before moving on to cash flow. Q2 corporate and unallocated sales were $86,000,000 with a $2,000,000 adjusted operating loss. Year to date, corporate and unallocated sales were $112,000,000 with an adjusted operating loss of $73,000,000 This is in line with our full year anticipated sales range of $225,000,000 to $275,000,000 with the forecasted adjusted operating loss in the range of $125,000,000 to $175,000,000 Our other category had operating income of $37,000,000 which reflects the level of activity and effort to support the successful spin out of Solventum.

Speaker 3

Year to date, other had an operating loss of $28,000,000 which is in line with our full year expectation of flat to a loss of $25,000,000 Please turn to Slide 6. 2nd quarter adjusted free cash flow was $1,200,000,000 Our 2nd quarter performance was driven by strong operating income, lower CapEx spending, partially offset by higher working capital. Adjusted capital expenditures were $250,000,000 in the quarter as we continue to invest in growth, productivity and sustainability. During the quarter, we returned a total of $800,000,000 to shareholders, split equally between dividends and share repurchases. And finally, net debt at the end of Q2 stood at approximately $3,000,000,000 These strong results build on our track record of robust cash generation.

Speaker 3

For the first half of the year, we have generated $2,000,000,000 of adjusted free cash flow. Our strong capital structure continues to provide us the financial flexibility to invest in our business, return capital to shareholders and meet the cash flow needs related to legal matters. Please note that in the month of July, we will make total combined payments of 3 point $7,000,000,000 related to the public water supplies and combat arms settlements. Before I move on to our business segment performance, I want to highlight a couple of items for your awareness that were excluded in arriving at our Q2 adjusted results. First, note that we reached settlements of approximately $120,000,000 with insurance carriers related to combat arms.

Speaker 3

We remain in discussion with multiple carriers and anticipate additional future recoveries. 2nd, during the quarter, we incurred a non cash charge of approximately $800,000,000 related to a $2,500,000,000 pension risk transfer on a portion of our U. S. Defined pension obligation with Met Tower Life. This action helps us to reduce risk and administrative fees related to our U.

Speaker 3

S. Pension plan. Please turn to Slide 7. Starting with our Safety and Industrial business, which posted sales of $2,800,000,000 up 1.1% organically. Industrial adhesives and tapes posted mid single digit organic growth driven by strength in bonding solutions for consumer electronic devices.

Speaker 3

Personal safety and automotive aftermarket grew low single digits. Electrical markets was up slightly while roofing granules was flat due to unplanned customer manufacturing challenges. And finally, we experienced year on year organic sales declines in abrasives and industrial specialties. Geographically, industrial markets grew low single digits in the U. S.

Speaker 3

And Asia Pacific, while EMEA was down low single digits. Overall, industrial end market demand continued to be mixed in the quarter as end user and channel remain cautious. Adjusted operating income was $623,000,000 with adjusted operating margins of 22.6 percent, up 40 basis points year on year. This performance was driven by higher sales volume, benefits from ongoing productivity and restructuring actions and lower year on year restructuring charges. These benefits were partially offset by the timing of stock based compensation and cost inefficiencies due to the spin of Solventum.

Speaker 3

Moving to transportation and electronics on Slide 8, which posted adjusted sales of $1,900,000,000 or up 3.3 percent organically. Our electronics business outperformed the market up low double digits organically as we continue to gain spec in wins on consumer electronic devices and in semiconductor manufacturing. Our auto OEM business increased nearly 5% in Q2 versus 0.5 point decrease in global car and light truck builds. Looking at the first half of the year, our auto OEM business was up 9% organically versus a flat global build rate of cars and light trucks as we continue to gain penetration on new platforms. Looking at the rest of transportation and electronics, advanced materials grew mid single digits organically and commercial branding and transportation was down low single digits year on year.

Speaker 3

Transportation and Electronics delivered $426,000,000 in adjusted operating income up 16% year on year. Adjusted operating margins were 22.3 percent, up 2 50 basis points year on year. The team achieved this result through strong leverage on electronics volumes, ongoing benefits from productivity and restructuring actions and lower year on year restructuring charges. Partially offsetting these benefits were the timing of stock based compensation grants and cost inefficiencies due to the spin of Solventum. Turning to Slide 9, the consumer business posted 2nd quarter sales of $1,300,000,000 Organic sales declined 1.4% year on year with continued softness in consumer discretionary spending.

Speaker 3

This included a 2.7 percentage point impact from portfolio and geographic prioritization. Home improvement grew mid single digits, consumer safety and well-being grew low single digits, packaging and expression declined low single digits, while home and auto care declined mid single digits organically. Geographically, the U. S. Was up slightly, Asia Pacific was down mid single digits and EMEA was down high single digits.

Speaker 3

Consumer's 2nd quarter operating income was $219,000,000 down 7% compared to last year with operating margins of 17.4 percent down 80 basis points year on year. Operating margin performance was driven by lower volume and timing of stock based compensation grants along with the cost inefficiencies due to the spin of Solventum. Partially offsetting these headwinds were benefits from lower restructuring charges. Before I turn it back over to Bill, I want to take a moment to thank the 3 ms team for the tremendous progress they have made positioning the company for success. I am very proud of the relentless focus our teams have brought to create value by driving performance through our improved productivity and efficiency, spinning out of our healthcare business and reducing risk and uncertainty by managing legal matters.

Speaker 3

I am confident that under Bill's leadership, the team will continue to build on this momentum to create consistent value for our people, our customers and our shareholders in the years to come. I would also like to thank all the analysts and investors for our rich discussions and engagements over the last 4 years. With that, please turn to Slide 10 and I will turn it back over to Bill for an update on our guidance. Bill?

Speaker 2

Thanks, Manish. Given the strong operational execution in the first half of the year, we're raising the bottom end of our full year adjusted earnings guidance by $0.20 to a range of $7 to $7.30 versus $6.80 to $7.30 previously, now up 16% to 21% year on year. Full year adjusted operating margins are now expected to be up 2.25 to 2.75 basis points. Full year adjusted organic growth remains unchanged at flat to up 2% with expectations for 2nd half organic growth in line with first half performance at the midpoint. While significant macro uncertainty remains, our business segment and market trends are largely playing out as expected.

Speaker 2

Year to date Safety and Industrial organic growth is approximately flat versus a full year expectation of flat to up low single digits. We expect that industrial end markets will remain mixed as channel partners and end customers continue to remain cautious on overall demand trends. On an adjusted basis, Transportation and Electronics is up nearly 5% organically in the first half versus a full year expectation of up low single digits. Strength in the first half was due in large part to consumer electronics along with automotive. We continue to monitor auto build rates along with consumer electronics demand trends for the back to school and holiday season.

Speaker 2

And finally, consumer is down nearly 3% organically through the first half of the year versus a full year expectation of down low single digits. We continue to expect that consumer retail discretionary spending on hardline goods to remain muted in the balance of the year. Before we'd open up to your questions, I would like to take a moment to recognize and thank Mohnish for all his contributions and impact on 3 ms over the past 4 years. While I've only had a short time working with him, he has been a strong partner and has helped me get up to speed on the company, and I've enjoyed working with him. I appreciate everything he has done to navigate through a number of challenges and to make 3 ms stronger along the way.

Speaker 2

With that, let's open the call to your questions.

Operator

Our first question comes from Jeff Sprague with Vertical Research Partners. Please proceed with your question.

Speaker 4

Good morning, everyone. Hello, Bill and Mohnish, thanks for all the help up until this point. Bill, thank you very much for that very thorough and detailed kind of deconstruction of the history on organic growth and the like. And I appreciate your comment that it will take some time to kind of get after these things. But are you actioning some of these ideas already?

Speaker 4

Can you give us a sense of how some of these changes on the front end of the business as it relates to organic growth maybe kind of put in action?

Speaker 2

So good morning, Jeff, and thanks for the question. So as I mentioned in my remarks, there's 2 major thrusts here on driving organic growth. 1 is certainly to spur innovation and driving innovation to turn the top line up, drive organic revenue. And so part of it is we've got to sort of bottom out on how much we're spending on new product development and start to turn to ship. First half of this year, we launched about 75, 76 new product introductions.

Speaker 2

This year, we'll do probably less than 150. And as I reflect back over the last 8 or 9, 10 years, at one point in time, we did over 1,000. So we've really got to turn that around. It's going to take some time to do that. We continue to invest some of our precious R and D dollars on cost reduction and PFAS exit, stabilizing our supply chain.

Speaker 2

I made a comment about 80% of our raw materials coming in are source source. We've got to qualify other vendors to be able to reduce cost over time. So that's going to take some time. What I'm really working on as well in R and D is ideas for how we can offload non value add activities from our researchers. It really comes in 2 themes.

Speaker 2

1 is both efficiency as well as effectiveness. I think there's an opportunity to drive effective capacity of our engineering team. I think we have an opportunity to drive velocity through the new product development pipeline. We have an opportunity to think differently and how we govern differently on R and D, where we place our precious dollars so that they can move across the company to the highest ROI investment. So that's what I'm focused on, on R and D.

Speaker 2

But again, it's going to take a little bit of time. So we've got to sell more of what we have on the market today. That's simply commercial excellence. I'm digging into a number of different factors. We've got a sales force today is just over 5,000 people.

Speaker 2

We know over the last 4 or 5 years is down about 25%. That's partly because of the export model we've moved to. But we have an opportunity to take a look at our coverage, our incentives, our training around our sales force. I think there's some opportunities there. We distribute to almost 30,000 distributors.

Speaker 2

I think we have opportunities there. It's probably some opportunities in pricing. At a high level, we've done a very good job at covering inflation and we'll see some incrementally positive pricing this year. But when you get down to a granular level, there's some disconnects between pricing and discounts and margins to the volume or size of the customer. We have an opportunity to take a harder look at that.

Speaker 2

We're looking very hard at advertising and merchandising. It's a lever that's important in our consumer business. We were down quite substantially from where we were before relative to consumer packaged goods type companies, we're down. So we have an opportunity to think differently and very tactically around advertising and merchandising. I think lastly, we're looking at cross selling.

Speaker 2

There's certain examples, certain places where we sell products into a distributor or into a customer, but those customers, they should be buying a different product from us, but they don't. For example, for customers that do surface condition by surface conditioning products to polish metals and woods, You always use a respirator to do that. When we look at our customers, there's a bunch that don't buy the respirators from us. So there's an opportunity there. All of those things are levers that we're going to be pulling here in the short term, Jeff, and we'll keep updating analysts and investors as we learn more about how do we really drive the top line, which is so crucial to driving value creation at 3 ms.

Speaker 4

Great. And maybe just one other quick one, maybe it's not a quick one. I appreciate the detailed answers. On kind of the operational excellence side of the equation and a lot of these kind of KPIs that you're speaking to on delivery, quality and the like, Does this require sort of a heavy lift on restructuring? The company has gone through a lot of recently, including just coming to the end of a big program.

Speaker 4

Or do you kind of view these as just more kind of process improvements and things of that nature?

Speaker 2

So you're right. We've been through and are actually getting through a very substantial restructuring program. We're about 75% complete. It'll drag into 2025. I think the team is executing very well on that.

Speaker 2

A lot of the things I'm talking about in terms of improving OpEx, they're incremental pay as you go type of opportunities. You almost get the savings as you're covering investment. There are potentially over time some bigger bites. If you think about the complexity of our broader network, a few years out, there could be additional restructuring, but can't size it today. Right now, the opportunities that I'm seeing are almost pay as you go, reducing waste and inefficiency in factories are things you can do and just execute against without substantial charges to get there.

Operator

Our next question comes from Nigel Coe with Wolfe Research. Please proceed with your question.

Speaker 5

Thanks. Good morning, everyone. Hello, Bill. It's been a while and I wish you good luck.

Speaker 2

Thank you, Nigel.

Speaker 5

So I think you might well have answered my question, but I do want to just kind of ask about the plants and the distribution center footprint. I think you mentioned 105 plants and 95 DCs 110 plants, 95 DCs. So are we talking here about over time a significant shrinkage in that footprint? Or is it more a reconfiguration to reduce the complexity of the product velocity around those around that network? And then thinking about the opportunities around sort of investing to drive growth versus efficiency, how should we think about margins beyond 2024?

Speaker 5

But you can't tell if we can still grow margins beyond 2024 even though it sounds like you're going to be investing. Okay.

Speaker 2

So a couple of good questions, and I'll try to hit on pretty quickly. You're right, 110 factories, 95 distribution centers. The fact is, if you go back in time, the team here has actually been reducing the number of factories, the number of DCs in our network. And there is some in flight that in the restructuring program we have today. Looking forward, I don't we don't think we necessarily need 110.

Speaker 2

I can't decide what it exactly is when that cadence might happen, but we're taking a hard look at it. But it's not just factories, it's also cells within factories. When you look at what we have in assets and cells within these factories, we have 250 coating assets that are spread almost through half of our factories. And you have to sit back and ask, as we drive operating equipment efficiency, do we really need all those assets in all those factories? Or do we have an opportunity to increase effective capacity?

Speaker 2

So these are things that we're working on. Peter Gibbons and the team are doing a great job at this. This is going to happen over time. I can't really size how many factors of the restructuring that's required to get there. Relative to margins, the team has done an outstanding job.

Speaker 2

You see in the first half of this year up almost 500 basis points. So the margins have come up quite substantially. We've got more we can do here in terms of basic blocking and tackling productivity. Volume clearly as it comes back, volume clearly is going to be a high leverage ratio for us. So where they can go from here, I can't size it today.

Speaker 2

Certainly, as we get to the balance of the year into 'twenty five, we'll give you some more outlook on But there's lots of levers here, including driving organic volume.

Speaker 5

Great. Thanks, Bill. That's great color. And then Manish, quick follow on. On the insurance recovery, that's obviously great news on the combat arms recovery.

Speaker 5

Can you just disclose how many carriers are you negotiating with on combat arms? And maybe just bring us up to speed in terms of what's the opportunity within the water segment?

Speaker 3

Yes. So Nigel, as you know, there's a tower insurance here. So we are dealing with multiple insurance providers. We were pleased with what Kevin Rhodes and the legal team have done on getting the $120,000,000 this quarter. And as I mentioned in my prepared remarks that we believe that there is more to be had here, and we'll definitely keep you all informed as these things happen.

Speaker 5

Okay. That's great. Thank you.

Operator

We'll go next now to Scott Davis with Melius Research. Please proceed with your question.

Speaker 4

Hey, good morning, Bill. Welcome, Bill, and we'll miss you, Mohnish.

Speaker 3

Thank you, Scott.

Speaker 4

Good morning, Bruce. Thank you. Bill, is your I don't want to read too much into this, but is it your view that 3 ms is just too diversified and needs to kind of narrow down even a little bit more than what we've already seen with the Cementum spin?

Speaker 2

Well, I'm not sure I would say that today, Scott. In fact, as I think about it, it's a big business, a complicated business, a lot of different end markets, different business segments, different ways to go in the market. A lot of the stuff that we make goes across all of these factories. So there's a lot of interconnection across the business. But as I've done in my past, I'll do the same thing here, which is take a fresh hard look at what businesses that we're in.

Speaker 2

And as Mike said in my prepared remarks, dispassionately do that, really look hard at what is better owned by us and we'll make some determinations over time on that. At the same time, as we think about the kind of business that we want to be in over time, whether assets that aren't owned by 3M that are better owned here and we'll take a hard look at that piece there as well. So I wouldn't draw any specific conclusion from my remarks other than we're going to take a hard look at it. And if we determine that something is better owned elsewhere, then we'll move forward. And that's all about value creation for owners.

Speaker 4

Fair enough. And I guess when I look at your long your list of priorities, operational excellence, all these things are kind of basic. I don't want to minimize, but this is it almost feels like you're walking into a situation where a lot of things weren't done right. And I don't want to point fingers, but just point being is what was the fail? Was it just compensation and kind of where people's priorities were placed and you need to change your compensation plan?

Speaker 4

It just that a lot of these things like lean manufacturing were just not ceded or ceded early enough? I'm just trying to get my arms around follow through them for a long time and we've had a number of different CEOs who've come in and had kind of a similar tick list that we want to fix this, this and this, but have struggled to kind of get there. And I'm trying to just get my arms around what do you think was the main sale that led us to where we are today? And is there one main thing that you can tick the box first and work on through the list? Well, I know that's a little bit of a tough question, but and again, not trying to point fingers, just saying that it's a pretty heavy lift.

Speaker 4

I think some of these things, a lot of people try pretty hard to fix.

Speaker 2

No. Look, I'll just say it's not about fail or success or right or wrong. It's I come in with a different set of experiences, different background, fresh look at the way we do business from the things that I've done in the past. I think the team here has done a marvelous job in managing through a lot of complex situations. I was a CEO of a company through COVID, and what we dealt with is well short of the challenges that 3 ms has faced.

Speaker 2

And you bring on top of that a lot of the liabilities that Mike and the team have managed through, the structural changes, there's been an enormous transformation effort. And as I said, they launched the restructuring program, we're 75% complete. It's gone very, very well. And you can see that in the margins. That's gone very well.

Speaker 2

I come in, I just look at it the way it is today with sort of looking at the cold hard facts and it's a back to basics focus on the fundamentals approach does sound basic, but at the end of the day, I do think that there's a lot of value that can be created from the raw materials that we have here. Just focusing on just how do you turn the business to top line growth through the things that I've talked about, commercial excellence, driving growth from R and D and driving a real culture of operational excellence to the company and move at these things with speed and with urgency. I've been in a situation like this before. It's easy to fall into a trap of this is the way things have been done. And as I said in my remarks, I'm encouraging people to challenge the way we've done things in the past every single day.

Speaker 2

That's what continuous improvement is really all about, and that's what I'm encouraging people to do. So I'm looking from here forward, and I see a great opportunity for value creation.

Operator

Our next question comes from Julian Mitchell with Barclays. Please proceed with your question.

Speaker 6

Thanks very much. Welcome to Bill and Manish. Thanks for all the help down the years. Maybe just the first question around the reinvestment point and organic growth. So Bill, it sounds as if you can reinvest sufficiently in the business in the medium term to get growth moving but still see reasonable margin expansion.

Speaker 6

Just wanted to confirm that, that is what you're saying. And then on that growth rate point, I wondered sort of what your initial thoughts were on the growth entitlement for 3 ms, maybe what you think its addressable markets are growing at, how you view the growth rate of its aggregate peer set. Just the context, I suppose, is 3 ms has grown around 1% to 2% the last 5 to 10 years ex solvencym. Wondered what you thought the market growth rate was versus that?

Speaker 2

So a couple of good questions. I mean, first, we do expect that we have some capacity business. I think, Mohitj and Mike have talked about this in our guidance model. We still see some opportunities to incrementally invest. We'll talk more about where that might be in the back half.

Speaker 2

But we always said with the savings that we're generating from restructuring, some of that savings would be reinvested back in the business. That's been the case so far, and we see some additional opportunities in the back half of the year. My comments around sales force, my comments around advertising, merchandising, at least a couple of different items. I can't say much about R and D today. I want to look harder at how do we free up capacity of the investment we make already today and can that be more streamlined and redeployed effectively on top line growth.

Speaker 2

And that's really a big focus of mine. In terms of entitlement growth, certainly, we should be growing better than we have. I mean, we're guiding 0 to 2, midpoint of 1%. We know there's 1% headwind because of exiting certain geographies and parts of our portfolio. But still, on an adjusted basis, 1% to 3% organic, it probably should be a bit more than that.

Speaker 2

GDP is in the 2.5% range. IPI, I would think this year is around 1.7%, 1.8% or thereabouts. We should be growing at least at the level of the economy, if not perhaps slightly better. But more comments as we get towards the back end of the year and into 'twenty five and give you some longer term outlook for where the company might go.

Speaker 6

That's helpful. And then just maybe toggling back to the short term, as a lot has been asked about the medium term. If we're just thinking about the sort of framework for the second half guidance, I think it's implying an operating margin in the second half of maybe 21% or so, a little bit better perhaps, and that's fairly flattish year on year and half on half. Just wondered if I had that right because it looks like restructuring charges are shrinking year on year on half on half and the top line is pretty steady. So just wondered if that was the correct assumption and any drivers behind that.

Speaker 6

And if there was any preliminary thoughts on sort of 3rd versus 4th quarter dynamics here.

Speaker 2

So yes, you've so so let me offer a couple of comments here, and I'll ask Manish to maybe fill in a little bit of the blanks on the quarterly progression. But just you're right in terms of the cadence here. We do expect revenue to be very similar in the second half to the first half, and that does reflect historical trends. We continue to see strong operational execution and spending discipline, just like we saw in the first half. We'll see some tailwinds from the benefit of lower restructuring cost, which is now sixty-forty first half, second half.

Speaker 2

Last time, we thought it was seventy-thirty. So some has shifted to the back half, but you do see a bit of a step down. And we do see reimbursement of transition services agreement with Solventum, which began in April. But at the same time, we have higher wages in the back half of the year. We have 2 full quarters with a wage increase.

Speaker 2

Our wages went out on April 1, so not in the Q1, but in the second. So that's a bit of headwind. That's offset by some lower stock comp. As you know, we made our grants here in the Q2. We do see some headwinds in our factories.

Speaker 2

We built inventory through the Q2 that caused some positive absorption. We'll see inventory coming down in the back half of the year. That's going to cause some negative absorption or some headwinds there. And then some higher non operating expenses driven by pension and higher interest costs. We had a lot of cash balance here in the Q2.

Speaker 2

Cash went out the door in July for some legal payments, legal settlements. So we are our interest cost interest expense is going to go up or interest income will come down in the back half of the year. And then of course, as I mentioned before, we do see some step up in some investments we have in the back half of the year. So those are the biggest drivers, a little bit of tax geography, but those are the biggest drivers. Maybe I'll ask Monash to comment on Q3, Q4 cadence.

Speaker 3

Sure. And just Julian, to add on to Bill's points on first half. 2nd half, just data points. We spent $165,000,000 in the first half on restructuring and at the midpoint that would be another $110,000,000 in the second half. So that's the tax rate will be around 19% in the second half versus 20% in the first half.

Speaker 3

If you now go to just the guidance between 2Q, 3Q or 3Q, 4Q, 3Q revenue trends will be very similar to what we saw in 2Q. I think Bill already talked about what it looks like in the market. So that's where the team is seeing right now. I would say continued strong operational execution and spending in 3Q also. You will get a tailwind from the timing of stock comp, which we announced in 2Q.

Speaker 3

Approximately 100 of it that comes back as a tailwind between in Q3. But at the same time, as matures in its ability to execute independently, we also believe that they will keep exiting their TSAs. As I've told you, the TSA, some are short term, some are as long as 2 years that could go up to 3 years. We will see lower fees, as Solventum begins to exit and that's an impact of approximately $0.09 from headwind on an EPS perspective, which is overall still in the range. 2Q was heavier than 3Q and 4Q.

Speaker 3

Bill talked about the seasonal impact in our factories as we bleed down inventory in Q3. Restructuring costs based on what the team sees right now is flat Q2 to Q3. So the balance will go into Q4 as we talked about. And then you will see we talked about 0.1 1 dollars EPS impact for the second half on combat arms and PWS. As you know, we have made payments by the end of July, we would have made $3,700,000,000 of payments under our agreements, under the settlements, under combat arms and PWS, which means you have a lower cash balance in Q3 and that impacts our $0.06 of EPS.

Speaker 3

So between pension and interest costs, that's a headwind Q2 to Q3. The team continues to believe that they can step up to drive long term growth to step up investments. And then tax rate for the Q3 will be in the range of 20% to 21%. And the Q4 is the whole year is I mean, the second half is 19%. So you can back into the Q4, which should be lower.

Speaker 3

Hopefully, this is helpful to get your models right.

Speaker 5

That's great. Thank you.

Operator

Our next question comes from Steven Tusa of JPMorgan. Please proceed with your question.

Speaker 7

Hey, good morning. And Mohnish, thanks for all the help. It wasn't always easy for you guys, but really appreciate you being front and center with the details and always doing your best to give us visibility to things. So we really appreciate the help there.

Speaker 3

Thank you, Steve.

Speaker 7

And Bill, my first question is will you get any summer vacation at some point because it sounds like I'm not sure I've seen a new CEO in the 1st 3 months be shot out of a cannon like this and have this kind of detail. Usually supposed to wait for about a year or so you can reset and get the options before you get the long term target. So we really appreciate the detail here. It sounds like you've been busy. Just the elephant in the room though, you talked a lot about capital allocation and I think the narrative obviously around PFAS is that there's negative optionality from the balance sheet if you will that it's a drag.

Speaker 7

You're talking about being a little bit more on your front foot from that perspective. And the only place PFAS has mentioned is in slide 2 which is in the legal disclaimers. You didn't talk about it really at all in the slides. What's your take there? And what's do you have any perhaps pivot and strategy around PFAS in that liability?

Speaker 2

Well, thanks for the question. Look, the first of all, we've got a great team of advisors, legal inside and outside that are managing PFAS and other liabilities. When I step back and look at just where we've been, the public water supply settlement was a great step, important first step really in managing some of the risk, but there's more to be done. We're continuing to manage litigation from some of the opt outs. Other cases within the MDL, there's Europe that's sort of hanging out there.

Speaker 2

We continue to control what we control in that area. We've got very exhaustive disclosures in the Q and the K. And we just again, we have a great team that are really focused on managing that. Where I think I'm best putting my time are the things that drive value creation for our owners and that's driving the top line and driving operational excellence in the business. We do have a we generate great cash flow.

Speaker 2

We see it in the quarter. We saw in the first half 90% to 110% free cash flow conversion for the year. I've got ideas on how we can drive that further over time. We're at 0.3 leverage ratio. So when I sit back, I think we actually have a very strong balance sheet.

Speaker 2

We can manage appropriately the risks that we see in front of us. And even through that, we have options here to do things with our balance sheet. So I'm focusing on the things we can control and really getting the team pivoted back to what do we do to drive growth and operational excellence.

Speaker 7

What do you think the market is missing in its pretty harsh and negative narrative around this PFAS overhang from what you've heard?

Speaker 2

I can't really comment on what the market may or may not be missing on that, Steve. What I'm focusing on, the things that we control, I read the queue very, very thoroughly like all of our investors do. It takes a long time to get through it. I think we've done it. We do a great job at the disclosure there.

Speaker 2

But again, we've got a great team that's managing this. It's a dynamic situation, and I trust what they're doing. I'm involved in that. Mike's been very helpful. He has a lot of expertise in this area because of the time he had to spend on it.

Speaker 2

I'm relying on him here as well. And again, I think where my time is best placed is what do we do to drive the other 64,000 of the 65,000 employees, what are they going to do to drive value creation? We've got a lot of people focused on PFAS. We have to get people focused back on the core things and what makes 3 ms great.

Speaker 7

Right. It's good to know you're reading the queue, some time in your travels to sit back with a nice scotch and read the queue. Thanks a lot. Good luck and looking forward to connecting. Likewise.

Operator

We'll take our next question now from Andrew Obin of Bank of America. Please proceed with your question.

Speaker 8

Yes, good morning. Good morning.

Speaker 4

Good morning.

Speaker 8

Manish, thank you for all the help over the years. It's been a pleasure.

Speaker 3

Thank you, Andrew.

Speaker 8

Just a question on just follow-up on capital allocation. It seems that with a lot more visibility on PFAS, sort of operational focus, the market is clearly reacting to the message very positively. What are the thoughts about maybe front loading share buyback, particularly as you release working capital, right, improving on time delivery? What is and I know you sort of highlighted buyback as one of the key opportunities. But in transformational stories like this, right, buying stock at the bottom tends to pay off longer term.

Speaker 8

What's your view and the view of the Board on buybacks? Thank you.

Speaker 2

Well, thank you. I mean, you're right. I mean, I was very purposeful in the 4 top priorities for capital deployment. And number 4 was around excess cash for repos or M and A. There's just not M and A on the horizon.

Speaker 2

So you saw a step into the market in the Q2 that was under Mike and Monish's leadership, $400,000,000 worth of buyback. We do have capacity. Our balance sheet looks very strong. We have an open authorization with our board that's close to $4,000,000,000 We'll we keep evaluating this as we sort of manage the risks that happen to be out there, our ability to generate cash, drive down working capital in the back half. And through all those levers, we'll look hard as to what we do with excess cash in the back half as well as into next year.

Speaker 2

Nothing more to say about that than that today.

Speaker 8

Sure. And historically, 3 ms has been one of the companies that investors would buy towards the bottom, towards the economic bottom as things reaccelerate. I guess 2 part question. First, do you think 3 ms has still has this cyclical leverage because you talked about new product introduction being down quite a bit? But generally, do you think this fundamental quality of the business to really reaccelerate into improving industrial and maybe one day consumer fundamentals is still there?

Speaker 8

And B, second question is how far away do you think we are from sort of industrial bottom because it just seems like there is no end. We just can't PMIs can't find a bottom. If you could just sort of provide us with your view if and when there's any visibility on things bottoming out? I know a long question, but appreciate your answer.

Speaker 2

No, no, good question. I mean, I do hope that we're bouncing along interest rates and what's going on with inflation. There's a lot of geopolitical questions around the world. So I'm optimistic that the market is going to start to recover. But again, I don't have a crystal ball like nobody on the call really does.

Speaker 2

So at the end of the day, I sit back and I look at what do we do with the assets that we have. And I think about the long history that 3 ms has in core innovation, new to the world ideas. And I think as we reground ourselves back on that long term mission, that culture, that spirit of innovation, and we reignite that across the thousands of employees in this company that drive it every single day. To me, that's what I'm focused on. That's what I can control.

Speaker 2

There's lots of great markets out there. There's lots of different pockets of places where we can invest in to innovate, to penetrate, to grow, to differentiate offerings versus our competitors. So that's what I'm focusing my time on. The economy is going to do what it's going to do. I'm just watching where the trends happen to be and investing in places where we think we can drive some differentiation and grow higher than the market.

Speaker 2

So long answer to your question, but that's the way I think about it.

Operator

Bill, really appreciate it. Look forward to working with you. Likewise. Thank you. Our next question comes from Andrew Kaplowitz at Citigroup.

Speaker 4

Good morning, everyone.

Speaker 7

Good morning.

Speaker 2

Good morning.

Speaker 9

Manish, thanks for all your help. Bill, look forward to working with you. So maybe Bill or Manish, you mentioned that growth across your businesses has generally been in line with your expectations. But just focusing on Transportation and Electronics, I know comps get a little more difficult in Q4, but would you say there's some upside versus your original low single digit growth forecast there? Do you see consumer electronics holding up in the second half?

Speaker 9

And have you seen any improvement yet in semiconductors?

Speaker 2

Well, thanks for the question. We actually had a very good first half. It's partly due to consumer electronics. There was some spec in wins that we happen to have there. We had a pretty good first half in auto.

Speaker 2

As Manish mentioned in his prepared remarks, company wide, we're up 9%. A lot of it's going to be in that TEBG segment. We were outgrowing the build rate. But as we watched over the last 90 days, the build rate for the year, which was down 50 basis points, now down 200 basis points for the year. A lot of it is going to be in the back half of the year.

Speaker 2

So we've got a little bit of caution on auto builds in general, which is factored into the guidance that we've provided. Maybe I'll ask Manish to offer a little more commentary on that if there's any more.

Speaker 3

No, same thing. I think we'll have to Andy, as you know, this is cyclical, so we'll have to watch what happens in the second half. Bill mentioned that even in the prior question. And that's what the team is watching. We are watching all the trends that all of you watch, which is build rates on cars, build rates on consumer electronics, what the holiday season turns out to be, I think are all factors the team will they have watched in the past and will continue watching.

Speaker 3

And based on what we know right now, the team feels that guide that we've given you, which is for the company as a whole, is fair.

Speaker 9

Helpful. And then Bill, maybe can you talk about 3M's ability to price across its portfolio? When I hear the conversation regarding limited new product intros and R and D, obviously, the thought is that can all impact price. So how structurally, how effective can you be and how fast in sort of impacting pricing? And then it's hard not to notice consumer, for instance, remains pretty muted.

Speaker 9

Think that there's just a market, but is it particularly challenging to price in that segment?

Speaker 2

That's a very, very good question. From what I can tell, last year, we had pretty significant price increases and we did cover inflation. This year, in our sort of 1% center point of our 0% to 2% guidance, we have positive price within that. So we continue to see pricing. It's certainly lower than on a year over year basis than it was last year.

Speaker 2

So on a macro basis, our ability to price has been pretty good with capturing back inflation. But what I'm looking at is the more details around how we price by customer, by segment, by product, not just gross price, but net price, so discounts, market development funds, all those things between gross and net price. And is there an opportunity at the real micro level to price better? My instinct is that there is an opportunity here and this is an area that I'm going to focus a lot of time and attention on that. Sometimes it's training, sometimes it's systems, sometimes it's data visibility.

Speaker 2

But there's an opportunity to, on a much more granular level, take a look at how we price. And I'll know more in the next number of months and couple of quarters as we go through the analysis, but I do believe we'll find some opportunities to do better job on pricing there. And to the other point, you had mentioned about new product development, you're exactly right, which is as we innovate and develop differentiating features, we should be able to get better margin and better pricing on those new products that are coming out. So as we reinvigorate the NPI engine, which I expect to do, hopefully, that does drive price improvement, margin improvement over time as well.

Speaker 4

Appreciate the color. Sure.

Operator

Our next question comes from Joseph O'Dea of Wells Fargo Securities. Please proceed with your question. Hi, good morning. Thanks for taking my question. Good morning.

Operator

In the interest of time, I'll just keep it to 1. But Bill, just curious if you could expand a little on the dispassionate portfolio review comments. I understand sort of no specifics today. But if you could just talk about your timeline for completing reviews? And then as you do these, what are the key metrics that you ask business leaders to present on in the reviews as you sort of focus on decision making there?

Speaker 2

So good question. Look, 90 days in a job. I'm trying to learn the business, learn, meet the team, understand what's going on in the business. So there's a lot that's happening right now, and I'm really focused there. I'm not to the point of any particular occlusions.

Speaker 2

I'm not necessarily near that, but it is something that's on our mind. We're going to look hard at. The teams are looking at this as well, is how are we growing in each segment versus competitors? What's the growth earnings growth outlook? Are we able to expand margins or not?

Speaker 2

What's our NPI pipeline look like? And based on who we compete against, do we have an opportunity through better execution, through better operations, through new products coming down the path to improve our positioning in certain segments. At the end of the day, are an innovation driven company. Technology differentiation is the lifeblood of how we compete. So I'll be looking hard at businesses where we can bring technology differentiation into the business and provide value to customers that's different than our competitors.

Speaker 2

And I contrast that with commodity like businesses that perhaps don't really fit so well. So no specific lens other than that, but we'll take a hard look at this and make some conclusions in the coming quarters next year as we get our arms around what's the business we should be in and also which businesses that we ought to be looking at outside the company.

Operator

I appreciate the thoughts. Thank you. Thank you. Our next question comes from Joe Ritchie of Goldman Sachs. Please proceed with your question.

Speaker 4

Joe, are you there?

Operator

Mr. Ritchie, your line is open. Please proceed with your question. We are not hearing your question at this time.

Speaker 1

Yes, operator. Mr. Ritchie, please. Operator, let's move on.

Operator

We'll take our next question now from Brett Linzey with Mizuho Securities. Please proceed with your question.

Speaker 4

Hi, good morning all. Welcome to Bill and best of luck to Manish.

Speaker 3

Thank you.

Speaker 4

Yes, Bill, appreciate the rundown on the priorities. I thought the example on the command strips was quite striking. As you're thinking strategically about optimizing some of these touch points, do you think you have the personnel resources internally, the incentive structure internally to drive these changes? Are you looking 3rd parties? Just trying to understand the timeline and what needs to be done here.

Speaker 2

Thank you. Yes, this is a complicated problem. It's a lot of products, a lot of SKUs across a lot of factories and distribution points. If you look at this on a global basis, you map all the DCs and all the flows, all the factories. It's a spider's nest.

Speaker 2

I mean, it's a lot going on here. And we do have a great team in operations that are looking hard at this. We have outside advisors that are have been involved. And this will take some time. It's not a quarter, 2 quarters away.

Speaker 2

We'll continue to take a hard look at optimizing the networks and the flows. So we do have we have the right people at the top level. And I do think that we've got the right incentive structures around as well and motivations for the team.

Speaker 10

Okay, great. Appreciate the color. I'll leave it there. Okay.

Operator

We'll take our next question now from Nicole DeBlase of Deutsche Bank. Please proceed with your question.

Speaker 11

Yes, thanks. Good morning, guys, and welcome, Bill, and thanks Manish for all the help. Maybe, Bill, you could talk about the level of employee response and engagement. I suspect that you've probably been making a bit of a world tour in your 1st few months. All of this change sounds really exciting and just love to hear to how employees have been responding to what you'd like to do.

Speaker 2

Look, I think employees here are excited, they're engaged, they want to make a difference, they want to see 3 ms grow, they want to see share price come up, they want to see recognition for doing great things in the world and developing new products. That's the message I'm providing to you today. That's the message I'm offering to our employees. My priorities, as I explained to you, is what I've explained in some more detail with employees in town halls. So this is I think it's resonating well.

Speaker 2

I think hopefully it's energizing people. But again, we've got a lot of strong people here, been here for a while that really want to make a difference. And I'm appealing to that. So I think the response has been good so far, again, 90 days in.

Speaker 11

Thanks, Bill. In light of time, I'll pass it on and let someone else ask.

Speaker 2

Thank you, Nicole.

Operator

We'll take our next question now from Deane Dray of RBC Capital Markets. Please proceed with your question.

Speaker 10

Thank you. Good morning and welcome Bill and all the best to Manish.

Speaker 2

Thanks Dean. Thank you.

Speaker 10

Lots of impressive game plan in terms of all the different operational initiatives Bill. And it just raises the question for me is how you can't do everything at once. So what's the element of triage? And also this is not a one man show. Talk about your team.

Speaker 10

Are you deputizing internal folks? Do you have an army of consultants? You got a CFO search you've got to do? And then how much change can the organization handle at once? Is there any element I mean, lots of stuff needs fixing, but is there a sense of how you can layer these in?

Speaker 10

And can change be too disruptive?

Speaker 2

No. It's a great question. I mean, look, these are all important priorities, and I do think we can both try to drive growth through the mechanisms that I mentioned as well as operational excellence. I think it's fundamental. I've been through this before.

Speaker 2

It's not my first rodeo on these things. I can see a path to getting this work done. We have a great team of employees here. We have engaged outside advisors to help us across these different pieces and focus in some of these dimensions. This is yes, it's a busy start, but I think we have the right team to deliver it.

Speaker 2

I think we have the right focus and priorities. We're going to have to sort of manage it and manage the capacity of the team to respond to all these pieces. But yes, I'm optimistic. I think we'll look at these pieces individually as we go forward. I've laid out a pretty full laundry list of things we want to do, but we'll prioritize these things as we get towards the back end of the year.

Speaker 2

But at the end of the day, we're not going to be able to invest to grow unless we drive operational excellence. And I would say operational excellence is, in fact, a growth driver. When you're running your on time and full out of your factories at mid-80s, 86% and change percent was our 2nd quarter results, we should be above 90%. The fact is when you're below 90%, we're missing sales. So by getting our operations to run better, we actually that is a growth lever.

Speaker 2

As we drive productivity in our factories and create savings there that we can reinvest in growth initiatives, that's a growth lever. So I think you've got to do both of these two pieces at the same time and work the pedals. And that's what I plan to do.

Operator

We'll take our next question now from Laurence Alexander with Jefferies and Company. Please proceed with your question.

Speaker 4

Hi, good morning. This is Kevin Estlock on for Laurence. So I was just wondering if you could give a little bit more granularity on what you're seeing in terms of Chinese demand and whether you're seeing any green shoots there? And I'll leave it there just because of time.

Speaker 2

So thank you for the question. Look, China for us is about 10% of our revenue. We had a good first half. We're up about 13% in the first half. Part of that's electronics.

Speaker 2

When you look at the piece that's sort of local for local, if you will, it's about 1%, so flattish and pretty similar to what other multinationals, maybe even a little bit better than what a lot of other multinationals are seeing in China. So again, it's about 10% of our business, an important market, and we've seen good growth in the front half of the year simply because of the consumer electronics and auto builds.

Speaker 4

Thank you.

Operator

This does conclude the question and answer portion of our conference call. I will now turn the call back over to Bill Brown for some closing comments.

Speaker 2

Okay. Well, thank you, everybody, for joining and participating today and for the thoughtful questions. I want to again thank all 3 Emers around the world for their hard work and their dedication, and I want to wish, Monash well in his future endeavors. So thanks again for joining the call, and I wish everybody a good day. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation and ask that you please disconnect your line at this time.

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