Monish Patolawala
Executive Vice President, Chief Financial and Transformation Officer at 3M
Thank you, Mike, and I wish you all a very good morning. Please turn to Slide 17. The 3M team executed well and delivered solid Q2 results by remaining focused on serving our customers while navigating continued supply chain challenges, inflationary pressures, along with the geopolitical and COVID dynamics.
Second quarter, total sales were $8.7 billion, which increased 1% on an organic basis versus last year's 21% comparison. Adjusted operating income was $1.8 billion with adjusted operating margins of 21% and adjusted earnings per share of $2.48. We continue to experience strong demand across most end markets. However, a couple of items had a negative impact on overall Q2 results, which we had highlighted during the quarter.
First as forecasted, we experienced a year-on-year decline in disposable respirator sales of approximately $150 million, and second, the Greater China regions COVID related lockdowns resulted in a sales decline of approximately $140 million year-on-year. The impact was lower than the $300 million headwind we had anticipated as the reopening of our facilities in June went better than anticipated. Our China team did a tremendous job adding additional shifts to ramp up production, distribution and drive productivity to serve our customers.
Adjusting for these two impacts, organic revenue growth was nearly 5% for the rest of 3M in the quarter. Also, the continued strengthening of the U.S. dollar resulted in a foreign currency translation impact of minus 4 percentage points to Q2 total sales growth. This FX impact combined with the China COVID- related lockdowns negatively impacted second quarter operating margins by nearly 1 percentage point and earnings by $0.24 per share versus our expectation of $0.30 as discussed during the conference in early June.
We also continue to support our people and manage the business and supply chain impacts from the ongoing Russia-Ukraine conflict. We also announced additional investments to resolve matters related to our operations in Zwijndrecht and began the process of restarting manufacturing operations which is progressing to plan. And finally, as I will expand upon later, we are updating our full-year expectations primarily to incorporate the impact of the strong U.S. dollar along with macroeconomic uncertainty.
Please turn to Slide 18 where I'll get into more details of the quarter. On this slide, you can see the components that impacted our operating margins and earnings per share performance as compared to Q2 last year. First, we continue to benefit from selling price actions, restructuring savings, and strong spending discipline, which helped drive an improvement to underlying margins of 2.9 percentage points or $0.44 to earnings per share year-on-year. These actions helped to more than offset headwinds, including the forecasted decline in disposable respirator demand, which negatively impacted Q2 operating margins by 40 basis points and earnings by $0.09 a share. The previously mentioned China COVID-related lockdown which resulted in a year-on-year headwind of 70 basis points to operating margins and $0.11 to earnings per share.
And finally, as discussed during last year's second-quarter earnings call, we realized the benefit to both operating margins and earnings in Q2 last year from a Brazilian Supreme Court social tax ruling which led to a 100 basis point margin and $0.12 per share headwind to this year's second quarter. We also continue to prioritize investments in growth, productivity, and sustainability to drive long-term performance and capitalize on trends in large attractive markets including automotive, safety, healthcare, electronics, software, and home improvement.
Moving onto raw materials and logistics. Inflationary pressures resulted in a year-on-year headwind of nearly $270 million in the quarter or a negative impact of 3.1 percentage points to operating margins and $0.36 to earnings. Halfway through 2022, we have experienced approximately $480 million of raw materials and logistics headwinds versus our original full-year expectation of $350 million to $450 million at the start of the year. we now anticipate this year full-year headwind to be in the range of $750 million to $850 million, which we continue to expect to offset through pricing actions.
As I mentioned earlier, foreign currency translation was a negative 4 percentage point impact or a reduction of nearly $340 million in total sales and over $80 million in operating income, net of hedging year-on-year. This resulted in a headwind of 10 basis points to margins and $0.13 to earnings per share. Other financial items increased earnings by a net $0.10 per share year-on-year driven by benefits from a lower share count and tax rate.
Please turn to Slide 19. Second quarter adjusted free cash flow was $1 billion with conversion of 68%. Our year-on-year conversion performance was the result of a higher than expected increase in working capital, along with the cash impact from capitalization of R&D for U.S. tax purposes. Working capital improvement is a big piece of how we keep generating good strong cash flow for 3M. The global supply chain and logistics environments remained challenging. The data analytics platform that we have created will help us to reduce inventory levels through better demand planning, SKU rationalization, and use of visualization tools. We expect the benefits of these efforts will start showing up in the second half and years to come.
Capital expenditure were $384 million in the quarter and $808 million year-to-date or up 15% year-on-year as we continue to invest in growth, productivity, and sustainability. For the full year, we continue to anticipate capex investments in the range of $1.7 billion to $2 billion. During the quarter, we returned $848 million to shareholders through cash dividends. As we have communicated previously, share repurchases remained suspended in Q2 due to the pending food safety separation. We intend to complete the separation through a split-off at the closing date of September 1 subject to Neogen shareholder approval and other customary closing conditions. Net debt stands at $13.3 billion up approximately 4% as we continued to invest in the business.
Please turn to Slide 21 for our business group performance for Q2. I will start with our Safety and Industrial business which posted sales of $2.9 billion or up 0.7% organically compared to last year's second quarter. This result included headwinds from the decline in disposable respirator sales of approximately $150 million year-on-year, which negatively impacted Safety and Industrial's organic growth by 5.7 percentage points along with the COVID-related lockdowns in the Greater China region.
Our Personal Safety business declined high single-digits organically, primarily due to the decline in COVID-related disposable respirator demand. We continue to anticipate that COVID-related disposable respirator demand will decline as we move through 2022. However, we remain prepared to respond to changes in demand, as appropriate.
Turning to the rest of Safety and Industrial. Abrasives, electrical markets, and closure and masking businesses all grew low double-digits organically. Roofing granules, automotive aftermarket, and industrial adhesives and tapes all delivered low single digit organic growth.
Safety and Industrial second quarter adjusted operating income was $630 million down 12% versus last year. Adjusted operating margins were 21.5%, down 2.1 percentage points. Adjusted operating margins were impacted by China lockdowns and manufacturing productivity headwinds, which were partially offset by spending discipline and benefits from restructuring actions.
Moving to Transportation and Electronics which posted sales of $2.3 billion up 0.5% organically compared to last year. Organic growth was held back by the lockdowns in China along with the ongoing impacts of the semiconductor supply chain constraints on the automotive and consumer electronics end markets. Organic sales in our auto OEM business were up low-single digits versus flat global car and light truck builds as we continue to gain penetration on automotive platforms.
Our electronics-related business declined low single digits organically with decreases across consumer electronics particularly smartphones, tablets and TVs. These declines were partially offset by continued strong demand for our solutions in semiconductor, factory automation, and automotive end markets.
Turning to the rest of Transportation and Electronics, advanced materials and commercial solutions grew organically mid single digits, while transportation safety was down high single-digits. Second quarter operating income was $476 million down 7% year-on-year. Operating margins were 21% down 80 basis points year-on-year. Operating margins were impacted by manufacturing productivity headwinds due to China's lockdowns and the continued shut down during Q2 of certain operations in our Zwijndrecht factory. These impacts were partially offset by the strong spending discipline and benefits from restructuring.
Looking at our Health Care business which delivered strong quarter sales of $2.2 billion with organic growth of 4.4%. Our medical solutions and oral care businesses increased low-single digits organically. Second quarter U.S. elective medical procedures and oral care volume were approximately 90% to 95% of pre-COVID levels, up sequentially from Q1 levels.
Health information systems grew mid-single digits, driven by strong growth in revenue cycle management. The separation and purification business increased high single digits with sustained demand for biopharma filtration solutions for COVID-related vaccines. And finally, food safety was flat year-on-year.
Health Care second quarter operating income was $494 million down 10% year-on-year. Operating margins were 22.7%, down 2.6 percentage points with strong adjusted EBITDA margins of nearly 30%. Year-on-year operating margins were impacted by manufacturing productivity, investments in the business and costs related to the food safety separation. These impacts were partially offset by the benefit from leverage on sales growth, strong spending discipline and benefits from restructuring actions.
Lastly, our consumer business posted second quarter sales of $1.3 billion or down 2.5% year-on-year on an organic basis versus last year's 18% comparison. The home improvement business was down high single-digits organically while consumer health and safety declined low single digits as both businesses were up against strong comparisons from a year ago. Our stationery and office business performed well up mid-single digits year-on-year and home care was up low-single digits.
Consumers operating income was $247 million down 15% compared to last year. Operating margins were 18.5%, down 2.2 percentage points year-on-year. Our Consumer business operating margins were impacted by ongoing supply chain constraints and manufacturing productivity impacts. These headwinds were partially offset by strong spending discipline and benefits from restructuring actions.
Please turn to Slide 23 for a discussion on our 2022 outlook. As you know, the macro environment remains uncertain with mixed trends and signals across geographies and end markets. For example, improving build rate trends in automotive, continued strong demand in semiconductor data center and factory automation, increasing healthcare elective procedure volumes and a strong bounce back in China following April and May COVID-related lockdowns. However, there are also continued challenges and areas of concern that we're monitoring, including the stubborn and evolving impacts of COVID, global supply chain and logistics challenges, persistent and broad-based inflation which is pressuring consumers' purchasing power and shifting spending patterns, softening trends in consumer electronics, and geopolitical uncertainties, particularly in Europe.
We are working through these challenges and are taking actions such that we expect to offset the majority of these headwinds. However, as I mentioned earlier, the strength of the U.S. dollar is having an increasing impact on our top and bottom line which is the primary factor driving our update to full-year guidance. Foreign currency translation is now expected to be a full year headwind of minus 4% versus minus 1% previously. This FX headwind is resulting in a reduction of over $1 billion in annual sales and is also accounting for nearly 80% of the adjustment in our full year earnings expectations. Therefore, we now expect full year earnings in the range of $10.30 to $10.80 versus our prior range of $10.75 to $11.25.
Given our first-half performance, along with the continued uncertain environment, we also believe it is prudent to adjust our organic growth expectations. Therefore, we now expect full-year organic growth in the range of 1.5% to 3.5% versus our prior range of 2% to 5%. And finally, we expect adjusted free cash flow conversion to be in the range of 90% to 100%.
Before I wrap up, let me make a few comments regarding the third quarter. First, we currently anticipate an approximate 5 percentage point headwind to total sales from foreign currency translation. While build rate forecast for automotive have moderated, we see easier comps here in Q3 versus last year. U.S. medical elective procedure volumes are expected to be in the range of 90% to 95% of pre-COVID levels while oral care volumes are estimated at approximately 90%. We expect a headwind of $100 million to $200 million year-on-year from the ongoing decline in disposable respirator demand. We continue to closely watch weakening consumer electronics demand trends and overall consumer sentiment and spending. And finally, looking at raw materials and logistics costs, we anticipate a Q3 year-on-year headwind of approximately $225 million, which we expect to be able to navigate an offset through price actions.
To wrap up, our team delivered 1 percentage organic sales growth in the quarter, 21% adjusted margins and generated $1 billion in adjusted free cash flow. I want to thank our customers and suppliers for their partnerships and the 3M employees for their hard work and dedication, as they continue delivering for our customers.
While the macro environment continues to be extremely fluid, the 3M team remains focused on serving our customers and delivering a strong second half of the year. We will remain focused on investing in favorable macro trends, increasing operating rigor through a focus on deep root cause, and driving working capital intensity to further strengthen cash flows. I'm excited about the future of New 3M and our Health Care business. We believe that today's announcements position the company to drive significant long-term value for our customers, employees and shareholders. Our businesses and capital structure are strong and we are well positioned for success.
That concludes my remarks for the second quarter. With that, we will now take your questions.
