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3M (NYSE:MMM)
Q2 2020 Earnings Call
Jul 28, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 3M second-quarter earnings conference call. [Operator instructions] As a reminder, this conference is being recorded Tuesday, July 28, 2020. I would now like to turn the call over to Bruce Jermeland, vice president of investor relations at 3M.

Bruce Jermeland -- Vice President of Investor Relations

Thank you, and good morning, everyone. Welcome to our second-quarter 2020 business review. With me today are Mike Roman, 3M's chief executive officer; along with Nick Gangestad and Monish Patolawala, our chief financial officers. As you may know, Nick will be retiring at the end of July.

Monish joined the 3M team on July 1st, succeeding Nick as CFO. Mike, Nick, and Monish will make some formal comments, and then we'll take your questions. Please note that today's earnings release and slide presentation that accompany this call are posted on our Investor Relations website at 3M.com under the heading Quarterly Earnings. Please turn to Slide 2.

Let me remind you to mark your calendars for our third-quarter earnings call, which will take place on Tuesday, October 27. Please take a moment to read the forward-looking statement on Slide 3. During today's conference call, we'll make 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. Finally, 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 attachment to today's press release. Please note, we have provided segment and total company adjusted EBITDA reconciliations for reference in today's press release attachments as part of our non-GAAP measures.

Please turn to Slide 4, and I'll hand it off to Mike. Mike?

Mike Roman -- Chief Executive Officer

Thank you, Bruce. Good morning, everyone. I hope you and your families are staying safe and healthy, and I thank you for joining us. We continue to fight the pandemic from all angles to ensure the safety of our employees, healthcare workers, first responders, and the public.

In a highly uncertain environment, where economic activity was restricted by global lockdowns, we executed well and delivered another strong operational performance in the second quarter. We posted solid margins and robust cash flow while strengthening our balance sheet, innovating for our customers, investing in the future, and continuing our transformation. Our value model is strong, and we are taking action on a number of fronts to lead through this crisis and emerge even stronger. While there remains a great deal of economic uncertainty, we are seeing an improvement in sales trends in July across all businesses and geographies as we start the third quarter, and Monish will provide additional comments later in the call.

I am proud of how our team is leading through these unprecedented times, and I thank all 3Mers for their tireless efforts to serve those who count on us. Please turn to Slide 5. Our COVID-19 response starts with a steadfast commitment to the health of our employees. We have robust safety protocols in our manufacturing plants and distribution sites, enabling us to effectively protect our people while maintaining supply chain operations.

For remote employees, we have developed a phased approach for their return to the workplace with enhanced safety measures and emphasis on flexibility for individuals. We have had our colleagues return to the workplace in two dozen countries, mainly in Asia and EMEA, along with our global R&D community, and we are adjusting based on government guidelines and the evolution of the pandemic across the world. As we protect employees, we work around the clock to protect the safety of all people, including healthcare workers and first responders. 3M is making and distributing more respirators than ever before, though demand continues to far outpace what the entire industry can supply.

In the first half of the year, 3M manufactured 800 million respirators globally with half distributed in the U.S., primarily to healthcare and FEMA. For the full year, we expect to produce 2 billion respirators globally, more than a threefold increase versus 2019. We continue to make investments and partner with the U.S. Department of Defense and other governments to bring additional global capacity online.

We are also working with federal, state, and local governments to deliver respirators where the need is greatest. At the same time, we remain vigilant in fighting fraud and price gouging. To date, 3M has filed 18 lawsuits and removed over 7,000 counterfeit websites, protecting people from bad actors. Beyond personal protective equipment, 3M Science is fighting COVID-19 in other areas as well.

Our membrane technologies help improve blood oxygenation procedures and our biopharma solutions support the development of needed vaccines and therapeutics. Earlier this month, we announced a collaboration with MIT on a diagnostic COVID-19 test that aspires to make testing faster, more broadly available, and less expensive. The project has received approval from the National Institutes of Health and we are working as fast as we can to develop a low-cost, highly accurate device that can be mass produced. I will now turn to our second-quarter results on Slide 6.

The financial impact of the pandemic remained mixed across 3M during Q2. We continue to see strong demand in personal safety, along with other areas such as home improvement, general cleaning, and biopharma filtration. At the same time, we experienced steep but expected declines in other end markets, including medical and dental elective procedures, automotive OEM in aftermarket, and general industrial. Geographically, while organic sales in Asia Pacific declined 8%, we saw year-over-year improvement in China, up 3% in the quarter versus down 11% in Q1.

Organic trends in EMEA and the Americas remained consistent throughout the quarter, both declining in the mid-teens each month. All in, organic sales companywide was minus 13% with adjusted earnings of $1.78 per share. While growth conditions were challenging, our operational execution was strong. We expanded adjusted EBITDA margins to 26.5%, up 110 basis points year on year.

In the second quarter, we delivered $400 million in cost savings versus last year as we aggressively managed expenses to offset COVID-19 impacts and associated restructuring. This cost discipline, along with effective capital allocation, enabled us to increase our adjusted free cash flow to $1.5 billion in the second quarter, and Nick will walk you through the details. Please turn to Slide 7. Importantly, while we manage near-term uncertainty, we continue to advance our four strategic priorities: portfolio, transformation, innovation, and people and culture to deliver value for our customers and shareholders.

We finalized the sale of our drug delivery business in May, enabling us to focus more on our core healthcare portfolio. We are encouraged that the benefits we are seeing from the new global operating model we implemented this year, a significant step in our transformation. This includes our new enterprise operations team, which is enabling us to reduce cycle times and improve the customer experience. Nearly all of our plants and distribution centers are operational, and we have worked with our partners to ensure consistency of supply.

Our new structure streamlines decision-making and allows us to adjust faster than ever to the external environment, all of which help our customers. As just one example, one of our U.S. plants recently pivoted to manufacturing hand sanitizer almost overnight, moving from formulation to production in less than 72 hours. In addition, we're accelerating our efforts on automation and robotics and introducing new digital capabilities such as virtual selling tools to deliver on our promises to customers.

At the heart of 3M is innovation and our ability to apply science to solve critical customer needs. We continue to invest in R&D and drive innovations to solve big challenges like air quality, automotive electrification, and food safety. Just a few of our priority growth platforms, which are performing in the markets they serve. For example, our air quality platform grew double digits in the quarter, as we introduce new indoor air quality solutions through our innovation and increased investments in capital.

We are also finding new ways to engage our people, strengthen our culture and advance in our core values. We continue to step up our leadership in sustainability, and our annual sustainability report released in May includes a comprehensive look at our progress. As part of this commitment, we are proactively managing PFAS, guided by the principles of sound science, corporate responsibility and transparency. For example, in March, we launched a clearinghouse to share research on testing, measurement, and remediation.

A commitment we made at our congressional testimony last fall. You can find this clearinghouse and all the latest information on PFAS on our website at 3M.com. In addition, we provide regular updates in our 10-Q filings. We are also fulfilling our commitment to comprehensive reviews of all 3M manufacturing operations to ensure adherence to environmental requirements, company policies, and our values.

As we shared previously, we continue to work with communities where we manufacture, along with government officials and regulators, including the EPA, to advance our environmental stewardship. Last week, we announced an agreement with the Alabama Department of Environmental Management to resolve matters related to previously disclosed PFAS discharges at our Decatur facility. This is part of our commitment to address contamination at sites where we manufactured or disposed of PFAS. With respect to PFAS litigation, we anticipate the earliest trial date will now be in 2021.

Beyond our environmental responsibility, we know we and others must do more to address injustice and inequality. The death of George Floyd here in Minnesota was jarring for all 3Mers, especially our African-American employees. At 3M, we stand for equity, fairness, and social justice, and we will be part of the solution by listening, understanding and then acting. Based on insights from our employees and communities, we have two focus areas: first, we are identifying the most impactful actions to accelerate inclusion and diversity within 3M.

While we've made good progress in recent years, we have much more to do. At the same time, we are working with other companies on actions that will make a difference here in Minnesota and we've made initial investments as part of these efforts. We are also working with stakeholders to develop a long-term plan to support economic opportunities and development in communities of color, address the education gap, and advance social justice. It is vital that companies step up to lead change to really make a difference this time.

I am personally leading these initiatives, and we will provide you with updates as we move forward. Please turn to Slide 8. Before turning the call to Nick, I would like to make a few comments about our CFO transition. First, I want to thank Nick for his many contributions throughout 35 years at 3M.

He has been an outstanding leader and a great colleague and has created tremendous value for our company and our shareholders. In six years as CFO, Nick's guidance has been especially valuable as he helped to lead our transformation and our work to optimize our portfolio and position 3M for the future. I wish Nick and his family all the best in the future. I'm also excited to welcome Monish to our leadership team.

Most recently, Monish was CFO at GE Healthcare, a $17 billion business. His experience leading healthcare in industrial businesses, along with driving operational transformation, is already making an immediate impact for 3M. Monish is an ideal fit for our enterprise and for our culture. And later in the call, he will make a few comments about our perspective on the third quarter.

I will now turn the call over to Nick for the details on Q2. Nick?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Thank you, Mike, and good morning, everyone. Please turn to Slide 9. Companywide second-quarter sales were $7.2 billion, with adjusted operating income of $1.4 billion and adjusted operating margins of 19.6%. On the right-hand side of the slide, you see the components of our margin performance in the second quarter.

The impact of the pandemic was varied and numerous across the business and operations. The biggest factor negatively affecting Q2 operating margins was the impact of the pandemic on global customer demand, which resulted in nearly a 14% year-on-year decline in organic sales volumes. In addition, during the quarter, we undertook restructuring actions, resulting in a Q2 charge of $58 million due to the impact of the pandemic. These headwinds were partially offset by aggressive cost management during the quarter, which reduced costs by approximately $400 million year on year.

Also providing a year-on-year benefit to operating margins is a restructuring charge in last year's second quarter. All in, these benefits were more than offset by the decline in organic sales volume and restructuring actions resulting in a 100-basis-point reduction to second-quarter margins versus last year. Acquisitions and divestitures reduced margins by 80 basis points due to Acelity purchase accounting impacts. Higher selling prices, along with lower raw material costs, contributed 70 basis points to second-quarter margins.

And finally, foreign currency, net of hedging impacts, reduced margins by 10 basis points. Overall, we effectively managed cost throughout the quarter in a very dynamic and challenging global economy. And as Mike mentioned, we expanded EBITDA margins by 110 basis points year on year to 26.5%. Let's now turn to Slide 10 for a closer look at earnings per share.

Second quarter adjusted earnings were $1.78 per share, down 16.4% year over year. Let me now cover the items that made up our second-quarter earnings performance. Similar to the operating margin discussion on the prior slide, organic sales declines, productivity, and other actions, collectively reduced year-on-year per share earnings by $0.28. Acquisitions and divestitures reduced second-quarter earnings by $0.07 per share versus last year, primarily due to the Acelity acquisition.

Please note that this result includes financing costs associated with the acquisition. Foreign currency, net of hedging, was a $0.05 per share headwind in the quarter. And turning to tax rate, our second-quarter adjusted tax rate was 20.7% versus 22.3% last year, adding $0.03 to earnings per share. And finally, average diluted shares outstanding declined 1% versus Q2 last year, adding $0.02 to per share earnings.

Please turn to Slide 11 for a discussion of our cash flow and balance sheet. As Mike noted, we delivered strong second-quarter adjusted free cash flow of $1.5 billion, up 18% year over year. This increase was driven by effective working capital management, disciplined capital allocation, along with a $400 million benefit related to timing of income tax payments, which will be paid in the third quarter. Through the first half of the year, adjusted free cash flow increased to $2.5 billion versus $2 billion last year as we continue to generate strong free cash flow, demonstrating the strength and resiliency of the business model.

From a capital allocation perspective, our long-term strategy remains unchanged. Our first priority is to invest in our business; second, maintaining our dividend; and lastly, flexible deployment for M&A and share repurchases. Second-quarter capital expenditures were $379 million. For the full year, we now anticipate capex expenses of approximately $1.4 billion versus $1.3 billion previously.

This increase in our full-year capex budget expectations is primarily due to the pace of projects picking back up as economic activity returns. During the second quarter, we returned $846 million to our shareholders via dividends. Share repurchases remain suspended throughout the quarter given this continued global economic uncertainty. Our strong second-quarter cash flow generation and disciplined capital allocation has enabled us to really strengthen our capital structure.

We ended the quarter with $4.5 billion in cash and marketable securities on hand and reduced net debt by $1.7 billion or 10% in the second quarter. Please turn to Slide 12, where I will summarize the business group performance for Q2. I will start with our Safety and Industrial business, which have declined 6% organically in the quarter. Personal safety saw strong double-digit organic growth, driven by continued unprecedented levels of demand for respirators globally in response to the pandemic.

The balance of the Safety and Industrial portfolio declined significantly due to the global slowdown in industrial production activity within the quarter. Also looking geographically, the Americas declined 9% organically, with the U.S. down mid-single digits. EMEA declined 1%, while Asia Pacific was down 4%.

Safety and Industrial second-quarter segment operating margins were 23.8%, up 180 basis points, driven by continued strong productivity, cost actions, and benefits from last year's restructuring. Moving to Transportation and Electronics. Second-quarter sales were down 19% organically compared to last year. Our electronics-related business was down 1%, with strong growth in semiconductor, factory automation and data center, which was offset by continued softness in consumer electronics, particularly smartphones.

Our automotive OEM business was down 44% year on year, in line with the 45% decline in global car and light truck builds. Commercial Solutions declined roughly 30% and while transportation safety and advanced materials were down mid and high teens, respectively. Geographically, Asia Pacific declined 8%, while the Americas declined 29% and EMEA was down 33%. Transportation and Electronics second-quarter operating margins were 19.7%, negatively impacted by the 19% decline in organic sales, which was partially offset by cost actions and benefits from last year's restructuring.

Turning to health Care, which experienced significant pandemic-related challenges and disruptions across the industry, declined 12% organically versus last year. Organic growth across much of our Health Care portfolio was negatively impacted by the effects of COVID, which resulted in many delays in elective medical procedures and closed most dental offices around the world. These impacts were most prevalent in our oral care business, which was down nearly 60%, and medical solutions, which declined mid-single digits in Q2. Food safety declined mid-single digits as the business was impacted by the closure of food processing plants during the quarter due to worker safety concerns.

A positive note, our separation and purification business grew mid-single digits. This business continues to experience strong demand for biopharma filtration solutions in the support of the pharmaceuticals industry's research and manufacturing efforts to develop vaccines and therapeutic treatments for COVID. Looking geographically, the Americas declined 14%, while EMEA and Asia Pacific each declined 10%. Health Care second-quarter operating margins were 16.8% or down nearly 10 percentage points year on year.

Approximately two-thirds of this decline was due to the significant reduction in organic sales, with the remaining one-third related to the Acelity acquisition. Looking ahead, we expect both organic growth and operating margins to improve us as elective procedures return. Lastly, our second-quarter organic growth for our Consumer business was down 5%. Organic sales growth within Consumer was led by our home care business, up high single digits, along with home improvement, which was up low single digits.

Growth in these businesses was driven by strong customer demand for our Scotch-Brite cleaning products and solutions, Scotch Blue Painter's Tape, Filtrete air filtration products and Meguiar's car care products. Stationery and office and consumer healthcare both declined, impacted by the stay-at-home orders and social distancing protocols, which resulted in many offices and schools being closed across the world. Looking at the consumer geographically, the Americas and Asia Pacific were each down mid-single digits, while EMEA declined 10%. Consumer's operating margins were 23.2%, up 250 basis points on strong cost discipline and ongoing productivity.

That wraps up my review of the second-quarter results. And before I turn it over to Monish, I'd like to take this opportunity to make a few comments, given it is my last earnings call. 35 years ago, I started my career at 3M right out of college. I'm humbled and grateful for the many opportunities and experiences I have had throughout my career.

And most importantly, the many wonderful people that I have gotten to know, both professionally and personally, around the world. In the last six years, I've been very blessed to be the CFO of this great company and to lead 3M's global finance organization. As part of my role as CFO, I have also had the opportunity to really engage with many of you in the investor community. I have greatly enjoyed the many interactions with those of you who have covered and invested in 3M.

I've appreciated your support, input, and feedback, and I wish you all the best in the future. And with that, please turn to Slide 13, and I will hand it over to Monish to discuss our thoughts going forward. Monish?

Monish Patolawala -- Senior Vice President and Chief Financial Officer

Thank you, Nick, and good morning, everyone. First, I would like to recognize and thank Nick, not only for his 35 years of outstanding service to 3M, but also for his partnership, counsel and guidance over the past month in helping me to learn 3M and ensure a smooth transition. Like Nick, I am humbled to be a part of this outstanding company. I have had great admiration of 3M and its vast scientific capabilities to positively impact the world, including and across industry, healthcare and consumers' lives.

It's great to be a part of the leadership team and to lead the company's global finance organization. And over this past month, I have spent time meeting with leadership, key finance members and also participated in strategic and operating reviews and discussions. While I've only been on the job for a few weeks, this past month has given me a great opportunity to personally engage with our leadership team and learn the company. I want to thank all 3Mers for their warm welcome.

With that, let me make a few remarks regarding our thoughts on the coming quarter. As we start the third quarter, we are seeing sequential improvements in end markets, including automotive, healthcare and general industrial. While the strength and pace of recovery remains uncertain, we currently are expecting the global economic activity to be stronger in Q3 as compared to 2Q. Turning to our business.

We are seeing a broad-based pickup in growth across our businesses and geographies as we start the third quarter. With one week left in July, total company sales are currently up low single digits year on year. With respect to respirators, we anticipate continued strong demand, which we estimate will contribute approximately 300 to 350 basis points to companywide Q3 organic growth. As we did throughout Q2, we will continue to provide monthly sales information.

And therefore, we will provide an update on July sales once we have finalized results in a few weeks. From an operational standpoint, though we anticipate some pickup in cost as sales growth improves, we are maintaining our aggressive cost discipline, while also continuing to invest in future growth and productivity. Therefore, looking at margins, we currently anticipate our third-quarter adjusted operating income margins in the range of 20% to 21%. Finally, with respect to free cash flow, we will continue our efforts to drive improvements in working capital and prioritize capex spend.

Our ongoing focus on cash flow, along with disciplined capital allocation, are central to enhancing our financial flexibility and strengthening our capital structure. While the uncertainty remains, we are confident in our ability to continue to execute on our priorities, respond to changes in the marketplace and invest in future growth and productivity. With that, I thank you for your attention. We will now take your questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Scott Davis with Melius Research. Please go ahead.

Scott Davis -- Melius Research -- Analyst

Hey. Good morning, guys.

Mike Roman -- Chief Executive Officer

Hey, Scott.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Good morning, Scott.

Scott Davis -- Melius Research -- Analyst

Congrats, Nick, on your retirement and enjoy. Well done.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Thanks. Thank you, Scott.

Scott Davis -- Melius Research -- Analyst

Manish, good luck to you.

Monish Patolawala -- Senior Vice President and Chief Financial Officer

Thank you.

Scott Davis -- Melius Research -- Analyst

Anyways, I -- two questions here. One, on the cost out, how much of the $400 million would you guys say is kind of permanent, you can hold on to, versus the more temporary fashion?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Scott, I'd say the vast -- the majority of the $400 million is temporary, that much of what we were doing in second quarter was reducing expenses through disciplined holding down of expenses. There were some other things we did of restructuring actions that we think -- that we know will benefit us going forward but the majority of this $400 million, we see as temporary spending reductions and not permanent spending reductions.

Scott Davis -- Melius Research -- Analyst

OK. And then as a follow-up, the July month to date, I mean, I know we're only -- we're not totally through the month yet, close. But that seems pretty positive based on the sequential -- I mean, I wouldn't have expected positive toward later in the year -- until later in the year. Is there -- can you give us a little bit of color on that? Is there any particular snapback or inventory rebuild or back discretionary healthcare has started up again, things like that, that perhaps was driving that growth?

Mike Roman -- Chief Executive Officer

Yes. Scott, maybe I'll characterize it a little, really in line with what Monish said in his remarks. It's pretty broad based across businesses and geographies. And we are seeing positive growth in China coming out of Q2, and that continues but we -- it's really broad based.

It is related to some of the things you highlighted. Elective procedures coming back. The automotive build rate sequentially getting better, still negative but getting better. So we're seeing it.

I wouldn't say we're seeing the signs of a snapback in the inventory in the channel yet but it's -- we're certainly early days benefiting from that broader improvement across -- really across businesses and geographies.

Operator

And our next question comes from the line of Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell -- Barclays Investment Bank -- Analyst

Hi. Good morning, and I'll echo the thanks to Nick, and welcome to Monish. Maybe just a question on the adjusted operating margin, first of all. So I saw the guidance of 20% to 21% for Q3.

It is up slightly sequentially. But I guess year on year, it's still a very heavy decline, maybe heavier even than what you had seen in Q2 even with a better revenue trajectory. So I just wanted to try and understand if that's right, if maybe a three-point decline in the adjusted margin year on year and maybe what's driving that to offset the better volume performance?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Julian, yes, with the guide that we're putting out for third quarter margin, 20% to 21%. We've been looking at it from a sequential perspective and seeing it up 50 to 100 basis points over where we finished Q2 of this year. Now as you're doing and looking at last year, you got to remember, last year had some one-off things benefiting that. We had a gain on the sale of a building that's included in that.

We also have the impact of Acelity year on year with Acelity, not in our third quarter results last year, but they're now in there. Those are the two biggest things impacting our year-on-year number.

Julian Mitchell -- Barclays Investment Bank -- Analyst

That's helpful. Thank you. And then maybe my second question, if we look at the healthcare business, specifically, I know the comments around improving margins in the prepared remarks. Maybe just put a finer point on the, I suppose, in Health Care. Help us understand the pace at which the elective surgery-related businesses are coming back.

And did the comment mean that margins could grow even in the second half or is it more just a much narrower decline than what you've seen in Q2?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Yes. Julian, I won't take the comments to say that we expect the margins to be up year-on-year in our Health Care business. My comments there were in regards to compared to where we saw margins in the second quarter, and we anticipate those continuing to expand as we see elective procedures coming back and our own volumes going up. And if I use oral care as an example, each month of the second quarter, we were seeing improvement in our year-on-year growth rates in that.

And we expect some -- that to continue going forward. We're also seeing improvements on the month in our Medical Solutions business. So we are seeing signs that these elective procedures are coming back, we're starting to see the start of that later in the second quarter, early into the third quarter. And as that continues, we expect that to have a positive impact on the sequential operating margins for healthcare.

Operator

And our next question is from the line of Andrew Obin, Bank of America. Please go ahead.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Yes. Good morning.

Mike Roman -- Chief Executive Officer

Good morning.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Good morning, Andrew.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Just a question. As things improve for you guys, what do you need to see? What are the goalposts? Oh, I apologize. Before I go into my question, I do want to thank Nick, and welcome, Monish. I apologize for skipping that.

Nick, good luck and thank you. And Monish, welcome. Apologies for that.

Monish Patolawala -- Senior Vice President and Chief Financial Officer

Thank you.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

So just going back to capital allocation. What do you need to see in terms of things getting back to normal? To go back to share buybacks, to go back to looking at M&A, what does it take? What are the goalposts?

Monish Patolawala -- Senior Vice President and Chief Financial Officer

Thanks for the question. The way we look at it is, we have said before, it's an extremely uncertain environment. So for us to look at the, what you call stability, we'll have to figure out what our end markets look like. When you think about a big end market, whether it's healthcare, automotive, and personal safety.

So until we see that stability, it's just going to be really hard for us. So I would call those as the goalpost. And of course, how the coronavirus cases play out in the world will be the other big factor in this and how the economy start opening up. So those are just some of the macro indicators that we'll have to look at before we feel comfortable.

And that's why we're taking this day by day and we're going to continue providing you monthly guidance on the revenue. And then as that stabilizes, I think we'll be in a better position to have a stronger view on capital allocation.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

So when you stop providing monthly guidance, I should expect buybacks? Sorry, that was a joke. And another question. You guys have some of the strongest presence in China of anybody we cover. And we've been reading about possible supply chain disruptions related to sort of Yangtze River flooding.

Are you seeing any impact on your customers in China? I mean, I know where you guys are but are you seeing any impact from flooding on your supply chain or are you making any contingency plans? Just trying to figure out how real that thing is. Thanks.

Mike Roman -- Chief Executive Officer

Yes. And Andrew, through the entire COVID experience, we really have validated the model that we've had around the world. And as you know, we manufacture in China a majority of what we sell in China. So we really are closely connected with the supply chains there.

I would say, at this point, we don't see an impact from the flooding. I mean, we're watching it closely. We're staying connected to our customers as they see interruptions as -- if it worsens or their businesses are interrupted, we will. We will certainly adjust in the supply chain, but at this point, we don't see a material impact on the China results.

We're seeing fairly broad-based improvements really across electronics and industrial and transportation markets leading the way. Like the U.S., the elective procedures in healthcare are a little slower to recover, but it's fairly broad based in that growth that we saw in Q2. So not at this time, but we'll stay close to it and update you as we go.

Operator

And our next question is from the line of Steve Tusa with JP Morgan. Please go ahead.

Steve Tusa -- J.P. Morgan -- Analyst

Hey, guys. Good morning.

Mike Roman -- Chief Executive Officer -- Analyst

Good morning, Steve.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Good morning.

Steve Tusa -- J.P. Morgan -- Analyst

Can you just discuss where you stand on some of the cost actions for second half? I know you said you've got $400 million out in second quarter, but maybe just discuss what you're getting in second half. And then how that temporary versus structural kind of plays into next year, just assuming flat sales, for example, even though they probably won't be flat. Just what you see kind of as temporary and structural now, just an update there.

Monish Patolawala -- Senior Vice President and Chief Financial Officer

Sure, Steve. So as Nick mentioned in his prepared remarks and the prior question, most of the actions that were taken in the second quarter were temporary in nature. We have taken some structural actions through a restructuring charge but most of them were temporary in nature. I would say we're going to continue our strong cost discipline that we're doing.

But at the same time, as the economic recovery starts coming back up, we are going to see investments in both growth and productivity as well as some of the timing items in 2Q will play back out in Q3 and Q4. So that's our current view right now. And as I said, uncertain environment, but depending on which way our world plays out, we are ready to act whether in both investing in growth and productivity at the same time.

Steve Tusa -- J.P. Morgan -- Analyst

So I guess that sounds like for -- I guess, that sounds just pretty -- performance next year will be pretty consistent to kind of normal incremental margins on growth with maybe just the 2Q temporary actions as kind of the key item to call out?

Monish Patolawala -- Senior Vice President and Chief Financial Officer

So as of right now, I would say that, Steve. But again, as I said, let's see how the world plays out and we'll act both on growth and productivity as required. But for Q3, again, looking at the cost actions, just to reiterate, we are looking at -- as sequential revenue goes up, margin rate is going to go up to 20% to 21%, which is 50 to 150 bps better than Q2.

Steve Tusa -- J.P. Morgan -- Analyst

Right, right, right. OK. Thanks a lot. I appreciate it.

Mike Roman -- Chief Executive Officer

Yes. Thanks to you.

Operator

Our next question is from the line of Nigel Coe, Wolfe Research. Please go ahead.

Nigel Coe -- Wolfe Research -- Analyst

Hi. Good morning. Nick, good luck, and Monish, good luck with your new role as well. I just wanted to just to touch quickly on July versus June.

I mean, I wasn't on the whole prepared remarks, but what caused the big snap in -- it looks like mid-ish teens declines in June on a daily basis and then snapping into positive growth in July. And is that positive growth, is that inclusive of acquisitions or was that purely organic? Just wondering what changed between the two months.

Mike Roman -- Chief Executive Officer

Yes. So the growth was all in sales, Nigel. So it's both acquisitions and organic. We are -- I would say we're -- that broad-based view of businesses and geographies.

It's adding up everywhere a little bit. That's what's making the difference. And we're seeing that -- and we're seeing demand come back. There's a lot of, I think, a lot of optimism that we were seeing economic recovery at the end of second quarter.

And we saw pretty consistent organic growth across months in the quarter. We're seeing it come through now in July. So it's just -- I would say the timing of it and that broad based across businesses and geographies is adding up to improving trends. I'm encouraged by what I see.

It's still early days in the third quarter, but we're really off to a good start, and I think it's a start of a trend in those markets is the cause of it.

Nigel Coe -- Wolfe Research -- Analyst

Yes. I'd be curious if there's any channel impacts that's causing that but my follow-on question is really on healthcare margins. And we saw -- I mean, I think the best way to think about this is on an EBITDA basis, and we saw sequentially EBITDA margins declining from 20% down to 24.1%. And I mean, obviously, volume took a big step down in 1Q versus 2Q.

So is that just purely a volume impact that we're seeing there or are there some mix impacts that we need to figure in as well?

Mike Roman -- Chief Executive Officer

Nigel, before I give it to Nick, maybe just a comment about the channel at the end there. We did see some strong point-of-sale as we came through second quarter. So there was expectation that sell-in would follow. That's probably contributing some of it, but we aren't seeing it a big, as I said earlier, a big snap back in the channel, but there is -- has been stronger point of sale, so that's also contributing.

Nigel Coe -- Wolfe Research -- Analyst

OK. Thanks.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

And Nigel, to your question on the EBITDA margins for healthcare. And yes, we're seeing that down and your presumption is correct. What we are seeing there is almost all volume related when we look at it on an EBITDA basis because we -- then we're pulling out the impact of the Acelity purchase accounting impact. It's almost all volume related.

And then, again, as we see volumes coming back up, and we also expect that to abate and come back to more normal operating margins for our healthcare business.

Operator

Our next question is from the line of John Walsh, Credit Suisse. Please go ahead.

John Walsh -- Credit Suisse -- Analyst

Hi. Good morning.

Mike Roman -- Chief Executive Officer -- Analyst

Good morning, John.

John Walsh -- Credit Suisse -- Analyst

And thank you to Nick, and welcome to Monish.

Mike Roman -- Chief Executive Officer

Thank you, John.

John Walsh -- Credit Suisse -- Analyst

I wanted to go back to the Q3 margin guidance. I was trying to calculate the year-on-year decline if I make adjustments for the flame detection gain last year, the property gain, which you kind of sized in the prepared remarks you made last year, and it just seems like the year-on-year delta actually gets worse in Q3 versus Q2. So I wanted to know, one, if my math was right and if -- or if we missed something there.

Monish Patolawala -- Senior Vice President and Chief Financial Officer

So the way I look at it, John, I think the reason we went to incremental quarter-over-quarter sequential is because it's so hard to do math year on year. There were some gains last time as well as we've got the impact of the Acelity acquisition this year. And that's why I would just request that focus on the sequential, and that's where we are showing margin improvement of the 50 to 150 basis points as we go forward as volume starts getting better.

John Walsh -- Credit Suisse -- Analyst

OK. Thank you for that. And then maybe just a follow-up, thinking about price raws for the back half year, price ticked up. I was just curious where you're actually seeing an acceleration in getting price maybe by the segment units because we already have it by the geography.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Yes, so we're at 50 basis points of price growth in the second quarter, and we don't foresee that having a material change in the second half of the year. What we've been experiencing for price growth both for the first and the second quarter, we think, is a pretty indicative of where we'll be for the total year. So John, there's really not any big trend change going on there that -- to highlight. And it's been a really stable number, and we think it will remain stable.

John Walsh -- Credit Suisse -- Analyst

Great. Thank you.

Operator

And the next question is from Joe Ritchie, Goldman Sachs. Please go ahead.

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks. Good morning, everyone. And I will echo all the comments. We'll miss Nick, and we look forward to working with you, Monish.

Monish Patolawala -- Senior Vice President and Chief Financial Officer

Same here, Joe.

Joe Ritchie -- Goldman Sachs -- Analyst

So maybe just my first question, maybe following up on Nigel's question on healthcare margins. So if we were to take out the Acelity acquisition from 2Q, what were the core decrementals in 2Q in healthcare?

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Yes. Joe, the core decrementals in healthcare, once I pull out Acelity, then we're in 60% or a little higher than 60%, which is not unusual given the makeup of our cost structure in healthcare. So once I pull out Acelity, that's -- then we're in that range.

Joe Ritchie -- Goldman Sachs -- Analyst

That's helpful. And then just, Nick, just following up on a comment you made earlier. So none of that is mix related, like elective procedures isn't exacerbating that decremental. It's just basically volume oriented, and that's it?

Monish Patolawala -- Senior Vice President and Chief Financial Officer

Yes. When we look at the mix impact, we have pluses and minuses. It really nets out to very little change on our overall healthcare margin.

Joe Ritchie -- Goldman Sachs -- Analyst

OK. All right. And then maybe one follow-on question. Just going back to the comments around capital deployment and when you could potentially get more aggressive with a buyback or M&A.

The question I have is like, and how are you thinking about your balance sheet and your leverage going forward? There are a lot of moving pieces, clearly, from a PFAS perspective. And so I'm just wondering whether you're thinking about your leverage to be a different way when we start thinking about you getting a little bit more aggressive in the future.

Monish Patolawala -- Senior Vice President and Chief Financial Officer

Sure. So I would just start by saying the hallmark of 3M has been a strong capital structure, and our plan is to continue doing that. Deleveraging has been a priority for 3M, and we're going to continue that journey. I think the pace of deleveraging will depend on how economic activity recovers.

And also our ability to continue driving strong cash flow and to control our working capital. So that's what I would just say for the time being is our current view. So, to reiterate capital allocation, our first priority has always been to invest in the business. It's R&D, organic growth, best return right there.

Dividend is our second, which has been a big hallmark of 3M. That's our second priority. And M&A is third, and then share buyback would be our last priority. So that's the way we are looking at it right now.

Operator

Next question is from the line of Jeff Sprague, Vertical Research Partners. Please go ahead.

Jeff Sprague -- Vertical Research Partners -- Analyst

Thank you. Good morning, everyone. Nick, 35 years, you look so young. I thought maybe you started out of middle school, but best of luck to you.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Jeff, you're kind. Thank you.

Jeff Sprague -- Vertical Research Partners -- Analyst

Yes. Hey. Just two business-related questions for me, if I could. First, on electronics, can you just provide a little more color on what you saw there? It sounds like kind of a tale of two markets, right, consumer electronic versus the other buckets.

If you can give a little more color on what you saw in the quarter in those pieces and what the trajectory looks like into the third quarter?

Mike Roman -- Chief Executive Officer

Yes. Jeff, electronics for us was down 1%, and as you said, it was kind of a mix of different stories. There was strength in semiconductor data centers, factory automation. Those were all up double digits for us.

Those have been part of our focus on where we invest for growth in electronics. It was offset by softness in consumer electronics. The broader transportation electronics was impacted more heavily by automotive, and I would say, on our commercial solution business. But in electronics, the strength were in those categories.

We see those trends continuing. Semiconductor fabrication continues robust growth. Consumer electronics still soft as we start third quarter but the benefit of being in those higher growth segments has -- gave us some strength in electronics in this quarter.

Jeff Sprague -- Vertical Research Partners -- Analyst

Then secondly, unrelated, on the consumer side, obviously potentially a very peculiar back to school or maybe we don't even have back to school this year. What is going on in retail in terms of planning for this channel fill, that sort of thing? And what are you expecting in the third quarter?

Mike Roman -- Chief Executive Officer

Well, our retail partners are planning for back to school. And as you said, there's a lot of uncertainty around it. It's another one of those things that's almost day by day. We are -- we built a little bit of inventory even as we went through the first half in anticipation of back to school where we see that being something that is going to add to some of the growth as we move forward.

But it's a lot of uncertainty around how it's going to play out. The strength in the consumer for us has been around home improvement and our cleaning products. Stationery office had been declining as schools were closed, of course. And we're really hoping to see an uptick in demand as schools open, but it still remains to be seen.

Operator

And our next question is from the line of Deane Dray, RBC Capital Markets. Please go ahead.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone. And echo best of luck to Nick, and welcome to Manish.

Mike Roman -- Chief Executive Officer -- Analyst

Good morning, Deane.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Thanks, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, I'm not surprised that air quality is one of the priorities for 3M. You've got such a big presence on the residential side with Filtrete. Where and how do you see opportunities on the commercial building side on filtration as people start venturing back to work? Are there new products that you're expecting to launch?

Mike Roman -- Chief Executive Officer

Yes, Deane, you hit it. Our innovation and our -- and really the core of what we do in filtrate has been focused on residential, both indoor air quality, and I would say, residential HVAC together with room air purifiers being part of that. And our innovation goes into the Filtrete filters that are part of that. The commercial side is, while we contribute some of our nonwoven technologies, it's not a big part of our air quality growth.

It's one of those areas that -- it's still nascent in how the innovation is going to make a difference there. We work in our innovation on opportunities there. But -- so when we talk about the outlook for the strength in this area and the growth that we're seeing in our priority growth platform. It's really in that residential side of the marketplace.

Deane Dray -- RBC Capital Markets -- Analyst

Got it. And then for 2020, how does new product introductions shape up? Again, this is a strange year, but in terms of product launches and contributions?

Mike Roman -- Chief Executive Officer

Yes. It's still -- the heart of 3M is our innovation, it comes through in those new product launches. We highlighted a little bit the benefit we're seeing in these priority growth platform, but it's much broader than that. We continue to launch these new products.

And like everything else, we're adjusting in the middle of COVID, prioritizing where we see market opportunities. And I would say, in some cases, you see in our capex delaying some of the investments as we see slowness in markets. So, now we have plans for robust new product launches in the second half of the year. It's going to be still a critical part of our growth driver.

So it's -- it doesn't change. We just have to adjust to the market opportunities, and I would say to the pace of investment as we go through the rest of this year.

Operator

Our next question is from the line of Andy Kaplowitz, Citigroup. Please go ahead.

Andy Kaplowitz -- Citi -- Analyst

Nick, thanks for all your help. Much appreciated. Monish, welcome.

Monish Patolawala -- Senior Vice President and Chief Financial Officer

Thank you.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Thanks, Andy.

Andy Kaplowitz -- Citi -- Analyst

So just focusing on safety and industrial for a second. The margin performance in the quarter was strong. Can you give us a little more color in terms of what led to the margin improvement in the quarter. Is the big increase in mask sales actually helping mix? Is it realignment that's now helping that segment and would you expect to see this kind of performance we saw on safety and industrial moving forward?

Nick Gangestad -- Chief Financial Officer -- Analyst

Yes, Andy. In total, the fact that our revenue was down year on year, we're not seeing a benefit margin in our safety and industrial business from the combination of the higher respirator sales in the lower sales and the rest. That -- those we look pretty much as a push to us. So this 180-basis-point margin expansion, some of that's coming from that $400 million of cost actions that we're doing that Safety and Industrial had its share of that.

But we -- this was also a business where we were taking actions last year in restructuring. So we're -- the lack of repeat of that expense, plus the positive benefit of that restructuring, all of those things in combination led to that 180-basis-point margin expansion. And so it's really not a mix or a respirator story. And then going forward, we do see continued margin expansion potential in this business going forward.

Possibly not on the same scale as what we saw here in regards to the margin guidance that we provided. But it's still a business where we see that upside on the margin on a year-on-year basis.

Andy Kaplowitz -- Citi -- Analyst

Thanks for that, Nick. And then just focusing geographically again. China seems to be continuing to improve, but Japan looked worse and Latin America looked expectedly weak. So can you talk about Asia and some of the other emerging markets? It seems like China continues with more of a V-shaped recovery for you guys.

Is that what you're seeing? And then why did Japan turn down in Q2?

Mike Roman -- Chief Executive Officer

Yes. And Andy, we are seeing that recovery in China. And as I highlighted earlier, it's really across safety and industrial, transportation and electronics, leading kind of the improvements there as we move ahead. Health Care is still slow as elective surgeries, even -- or elective procedures come back in China as well.

So we are -- we see that, as I highlighted, continuing as we start the third quarter. Japan was down 12% in the quarter, really seeing declines in safety, industrial and consumer, transportation, electronics as well. So it's a broad-based slowness there. I think we're seeing that across geographies that there's kind of a sequence to things that -- you've seen the earlier recovery in China, and then you see EMEA, Americas and Japan, other parts of Asia, kind of going through kind of a step behind that, and we saw some of that in Japan as we went through the second quarter.

Operator

And the last question is from Markus Mittermaier, UBS. Go ahead.

Markus Mittermaier -- UBS -- Analyst

Hi. Good morning, everyone. And again, welcome, Monish. Thanks, Nick, for all your help and all the best.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Thanks, Marcus.

Mike Roman -- Chief Executive Officer

Good morning, Marcus.

Markus Mittermaier -- UBS -- Analyst

Yes. If I can maybe come back to just the monthly data. Sorry for that. Mike, Nick, when we spoke intra-quarter, we talked about the sort of billing day adjustments that we would have to make in May and June.

And to -- if I do that arithmetic, I actually see June was down significantly more than May was, which surprised me a bit. And then correct me if I'm wrong, but did you say July, the low single-digit number, was that all-in or was that organic? Maybe let's start here.

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Yes. When we look at on a per billing day sales, from April to May to June, we saw an improvement each of those months. However, that's a normal pattern for us. It's a normal pattern as we go through the second quarter that May and the June sales per billing day goes up.

And we saw that again this year. So in a year-on-year growth comparison, what we saw on a per billing day was very comparable about the same growth on a sales per billing day in May as what we saw in June. So, what we're seeing now in July is now a more noticeable direction change, where on a sales per billing day and on an absolute basis, we are also seeing it up low single digits versus where we were in July of last year.

Markus Mittermaier -- UBS -- Analyst

OK. Maybe I'll come back to that after the call just to make sure. And then on the interim content order that you mentioned with ADM on the -- in your prepared remarks, is that something that you have already provisioned for before? Because in the special items, if I look at it, there were no sort of litigation-related charges in the quarter. Is that something that's still coming up or is that something that was already provisioned for in the past?

Mike Roman -- Chief Executive Officer

Well, Marcus, the announcement on ADM, we -- that's something that we had previously disclosed, and it's -- we've reached an interim consent order with -- in partnership with ADM. So there's -- we'll have requirements as we move ahead. The -- what we know about remediation that's probable and estimable as part of our reserve, but there will also be capital and operating costs that go along with complying with the consent order. It's not expected to be material for 3M, but it is something that will become part of our operational costs as we move ahead.

Operator

And that concludes the question-and-answer portion of our conference call. I will now turn the call back over to Mike Roman for some closing remarks.

Mike Roman -- Chief Executive Officer

To wrap up, the 3M team delivered another strong operational performance in the second quarter. In a challenging environment, we posted robust cash flow, managed costs and continued to invest for the future. We will continue to fight COVID-19 from all angles, and we are well positioned to deliver value for our customers and shareholders during the pandemic and as the economy recovers. Thank you for joining us.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Bruce Jermeland -- Vice President of Investor Relations

Mike Roman -- Chief Executive Officer

Nick Gangestad -- Senior Vice President and Chief Financial Officer

Monish Patolawala -- Senior Vice President and Chief Financial Officer

Scott Davis -- Melius Research -- Analyst

Julian Mitchell -- Barclays Investment Bank -- Analyst

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Steve Tusa -- J.P. Morgan -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

John Walsh -- Credit Suisse -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Jeff Sprague -- Vertical Research Partners -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Andy Kaplowitz -- Citi -- Analyst

Markus Mittermaier -- UBS -- Analyst

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