Ladies and gentlemen, thank you for standing by. Welcome to the 3 ms Investor 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 conference is being recorded, Thursday, May 2, 2019.
I would now like to turn the call over to Bruce Jermeland, Vice President of Investor Relations at 3N.
Thank you, and good morning, everyone. We appreciate your participation today to discuss this morning's announcement that we reached an agreement to acquire Acelity. With me today are Mike Roman, 3 ms's Chief Executive Officer and Nick Gangstedt, our Chief Financial Officer. Mike will make some formal comments, and then we'll take your questions. Please note that today's press release and slide presentation accompanying this call are posted on our Investor Relations website at3m.com.
Please take a moment to read the forward looking statement on Slide 2. During today's conference call, we'll make certain predictive statements that reflect our current views about the acquisition of Acelity and 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 ks also lists some of the most important risk factors that could cause actual results to differ from our predictions. Please turn to Slide 3, and I'll hand it off to Mike.
Mike? Thank you, Bruce. Good morning, everyone, and thank you for joining us. The ongoing review and strengthening of our portfolio is one of our 4 strategic priorities and is critical to maximizing value for our customers and shareholders. As you recall, at our Investor Day in November, we laid out our portfolio management strategies moving forward.
This includes prioritizing M and A opportunities that utilize our fundamental strengths, expand our position in attractive markets and enable our priority growth platforms. Today, we are announcing an acquisition that accelerates our progress in each of those areas. We have entered into an agreement to acquire Acelity, a leading medical technology company with solutions focused on the large and growing Advanced Wound Care segment. Acelity is an excellent complement to our healthcare portfolio, a leader in improving outcomes and lowering the cost of care. The acquisition will further strengthen our ability to offer even more comprehensive solutions to advance the healing process and improve patients' lives.
It will also deliver strong financial returns, including organic growth, margins, cash flow and earnings per share. Please turn to Slide 4. The addition of Acelity will further expand our offerings in Advanced Wound Care, which is an $8,000,000,000 market growing mid single digits. Growth in this market will continue to be driven by a number of macro trends. This includes rising rates of chronic health conditions such as obesity and diabetes, which creates the need to effectively deal with complex and persistent wounds.
Global demographic changes, including the aging population and rising middle class, will also create more demand for advanced health care solutions. And as you see on the right hand side of this slide, we expect strong growth across the entire care pathway. Please turn to Slide 5, and I'll provide some additional background information on Acelity. As we discussed earlier, Acelity is a leading provider of Advanced Wound Care and Specialty Surgical Solutions. With more than 3,000 patents, they are known for their innovation and ability to identify and address unmet clinical needs.
This has resulted in strong financial results that together we are well positioned to build upon. In 2018, Acelity delivered total revenues of $1,500,000,000 with about 75% of their sales in the Americas. They posted constant currency growth of 10%, along with adjusted EBITDA margins of 30%. Please turn to Slide 6. The company's performance is supported by an impressive array of medical innovations, beginning with their groundbreaking negative pressure wound therapy.
This technology accelerates and improves the healing process and represents 80% of their revenue. Their product lines also include surgical solutions that help reduce the rate of complications along with advanced wound dressings. As you see, their broad range of solutions can be used across clinical applications, care settings and clinician groups. Please turn to Slide 7. Acelity's solutions are an ideal fit and complement to our current healthcare portfolio.
Today, our advanced wound care technologies include solutions that prevent the formation of wounds, prepare the wound for the beginning of the healing process and protect the wound while it heals. This acquisition will help us to build out these solutions and expand our offerings, enabling us to provide greater value across the entire care pathway for patients and health care providers. It will also allow us to apply our fundamental strengths to create unique value, especially around our global reach and technology development. Please turn to Slide 8, where I will cover the financial highlights of the transaction. We are acquiring Acelity for a total enterprise value of approximately $6,700,000 We anticipate an 11 times adjusted EBITDA multiple, including expected year 3 run rate cost synergies.
With respect to EPS, we expect the deal to be dilutive to GAAP earnings by $0.35 per share and accretive to earnings by $0.25 per share adjusting for purchase accounting and anticipated one time expenses. We also expect cash ROIC to be in the high single digits by year 5. The deal will be financed with available cash along with proceeds from the issuance of new debt. As a result of this transaction, we are adjusting our full year guidance for share repurchases. We now anticipate repurchases in the range of $1,000,000,000 to $1,500,000,000 versus the prior range of $2,000,000,000 to $4,000,000,000 Finally, we expect the transaction to close in the second half of twenty nineteen, subject to customary closing conditions and regulatory approvals.
In summary, we are excited about this acquisition and the value it will deliver to our customers, our shareholders and all of our stakeholders. Acelity is a tremendous company and we look forward to adding their technologies and welcoming their dedicated employees to our team once the transaction has closed. With that, I thank you for your attention and we'll now take your questions.
Our first question comes from the line of Andrew Kaplowitz of Citi. Please proceed with your question.
Good morning, guys. It's Vlad Districh in for Andy.
Good morning. Good morning.
So congrats on the deal. Can you
guys just talk a little
bit about management's capacity to juggle everything that's going on now at 3M? You have business transformation that you're executing, the restructuring you announced and now I believe the largest acquisition 3 ms has ever made. So can you just talk about your confidence in the ability to execute on all of these initiatives simultaneously?
Yes. And I think it's a clear set of priorities in front of us now. 1st and foremost, we are focused on executing and delivering 2019. As we talked about, portfolio is one of our key strategies, and we see acquisitions and Acelity has been our top priority acquisition in this category to really build for the long term. So focus now on delivering 2019 and closing and integrating Acelity.
And we continue to focus on organic growth priorities to really drive our growth near term and for the long term. So we have a pretty clear line of sight and focus. Our teams are aligned to the 2019, and our health care team is well positioned to work through this process with Acelity and to integrate into 3 ms successfully as we go into 2020.
Okay. And then maybe just focusing in a little on Acelity. You mentioned constant currency revenue growth was 10% at Acelity versus the market growing 4% to 6%. So can you talk about a little bit what drove Acelity's outgrowth and the sustainability of that and whether you view Acelity as being accretive to your health care growth forecast, which is at 4% to 6% over the next few years?
Yes. So if you look at the growth, Acelity has delivered strong growth from this portfolio in recent in 2018.
The
earlier changes in growth were driven by pricing and reimbursement declines and some challenges in European distributors, but that is that's behind them and would and they're seeing very strong continued growth in PREVENA. The future growth prospects for negative pressure are really in underpenetrated segments. We see strong growth that's been going through the last couple of years. So we see the recent performance as really an indication of where this portfolio can go as we move ahead. And then complementing our portfolio, we see an opportunity to build on that as part of 3 ms Healthcare.
So, Vlad, this is Nick. We see this growing very much in line with the long term expectations that we've laid out for healthcare. We see this market that of advanced wound care growing in the 4% to 6%. And as far as how we've modeled and projected that, we're projecting growth in that range. Of course, we have aspirations of growing faster than that.
But in our modeling and as we look at the price we were willing to pay for this, we were in very much staying in that 4% to 6% range, mid single digits.
Okay. That's really helpful. Thanks for that. I'll get back in queue.
Our next question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.
Thanks. Good morning, everyone. Good morning, Joe. Mike, can you maybe just expand on your comments on what this acquisition gets to in the Advanced Wound Care market. So, talk about just a little bit about how the business is complementary from a product standpoint?
What does it get you from a channel standpoint? Just want to understand the overlap with your current business and what this does for you strategically? Yes. Thanks, Joe. It really does complement our position across that care pathway today, adding, I would say, strengths now across the entire care pathway.
It positions us to be in a very important position with our customers. And together, I think our reach into the marketplace, our ability to bring that broader set of solutions to marketplace is very much strengthened. The combination of our medical solutions team and the way we go to market there globally, together with Acelity and the way they bring their solutions to market, we get a strong addition there as well. So it's certainly the product offerings, but it's also our ability to really reach the market and do that globally. Okay, Mike.
And then I guess maybe my follow on there is just really around the cost synergies. Just talk a little bit about where you what you expect the major buckets to be? How much line of sight you actually have on that today? Or whether you're going to need the next couple of quarters to really dig in to really understand where the opportunity is going to
be coming from? Joe, this is Nick. Over the course of about 3 years, we're seeing cost synergies that are going to approximate about 8%
of the total revenue
in this company. And we see it coming multiple places. 1st, bringing our 2 teams together, we think there'll be some organizational cost synergies there. We see opportunities in our sourcing and benefits there. But 8% cost synergy as a percent of revenue is where we've been targeting about 3 years, partly in our sales and marketing organization as we bring those two teams together.
Okay. Thank you, guys.
Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with your question.
Yes, guys. Good morning. Congratulations on the deal.
Good morning, Andrew. Thanks, Andrew.
Yes. Just a question in terms of how many what's the opportunity down the line to consolidate existing Acelity facilities in places like common or Broxtla or your U. S. Facilities. It just seems that I would imagine the basic film and adhesive technology is very similar to what you guys have.
And is there any rationale to retain existing sales facilities in 5, 10 years?
Yes. Andrew, as I highlighted, there's a strong opportunity to really leverage our technology capabilities on both sides of it, bringing together our the kind of intellectual property and technology and people that we have in both companies. As we just announced, we haven't really we don't have specific guidance on how we're going to think about integration. We'll share more information as the transaction closes. The first priority is to really focus on making sure the business continuity that is there and minimizing disruption.
But certainly, we will be leveraging that global reach and that technology synergies that come from combining new companies.
But it's sort of but I'm correct that sort of the basic technology portfolio that Acelity has fits very well with your sort of your table of elements that of underlines your key technologies? Is that the right way of thinking, that the supply chain should be similar, basic technology is very similar?
Yes. Sorry. Yes, absolutely. It's the product portfolios that Acelity brings can leverage our technologies, and I think we can take advantage of some of the capabilities they have. So I think there's opportunities both ways to leverage that.
But our technology platforms, the fundamental strength, that's been a key strategy for us in how we think about portfolio and particular acquisitions. And this is an example where we very strongly leverage those technology platforms.
And I may be incorrect, but just looking at Acelity filings, it seems that revenue has been fairly flat for a while, and I think sort of gross profit has been flat. How do I square this with your statement that this is a growth business? Can you explain what the difference is?
Yes. So some of that is divestitures that Acelity has executed in their portfolio. If you look at the core portfolio that we're that is Acelity today, there's been ongoing volume growth and strong opportunity to continue that. There's an opportunity to drive much greater penetration into the market. So I think looking at the core portfolios and some of the product categories even have very strong growth at this point, we think that's what we're building on here.
And that's been true if you look through some of those divestitures and other changes. Yes, Andrew, one other point I'd make is if you look at their revenue footprint geographically, longer term, we see an opportunity to leverage our international presence to build out growth opportunities internationally with nearly 80% of the revenue coming in the Americas.
Our next question comes from the line of John Inch of Gordon Haskett. Please proceed with your question.
Thank you very much. Good morning, everybody.
Hi, John. Good morning, John. Good morning, guys.
What is the penetration of like this wound care. What do you call it? It's reverse something or sorry, negative pressure wound care. What is the penetration of this? And kind of what sort of share position would Acelity have?
And just actually, Bruce, to your point, you were saying that there's a penetration opportunity internationally. Is this are these procedures a lot more expensive versus kind of plain vanilla, so that's why there's a cost differential, that's maybe why it's so heavily focused on the United States and presumably Canada, where we pay a lot more for health care?
Yes. So John, the penetration, as I was just sharing with Andrew, there's an opportunity for upside in the penetration that we see. And there, Acelity has been targeting underpenetrated segments. There's newer segments such as post acute. This market is growing and a large opportunity and very low penetration there, and we have significant opportunities.
And as Bruce mentioned, geographically, is an opportunity to expand and penetrate as well. And the value of this treatment in this care pathway has been proven across multiple markets, we think the opportunity to drive greater penetration and growth off of that is an important part of the coming few years.
Right. That is negative pressure wound therapy, if you were to look at the market for it. I think you defined the market, right? Is it is that for just negative pressure? Like is it, what, 10% of procedures?
Or is it much greater or lower? Like do you have a sense of that?
I think I'd something I'll let Bruce and Tony follow-up with you on. I don't have that in front of me right now, John. It's the upside is very strong in terms of the penetration globally. I don't have the exact numbers in front of me.
That's fine. Mike, they were going
to this company was going
to go public, I think, just a couple of weeks ago. Did you approach them before they hired their advisor to and file their reds? Or is this something that you saw the filing and said, well, we've always wanted to be interested in this. Let's go approach them?
John, this has been an important priority for us. As we've talked about in our portfolio strategy, acquisitions that complement our fundamental strengths, our portfolio, health care being a very attractive space, has been an important focus for us for some time. And we've been engaged with Acelity for some time as well. And so this has been an ongoing discussion. We see this as an opportunity that now is a great time to be able to move forward with this.
And that's, like I said, number one priority for us in our acquisition strategy.
Got it. And then just lastly, Nick, you said 8% of total revenues for synergies, I guess, what did you say over 3 years? How would you split that between sort of Acelity discreetly as a ring fenced company versus opportunities on the other side at 3 ms? Because obviously, it's not
a public company, so you don't get
the benefit of taking out public corporate costs, etcetera, right?
Yes, John. That benefit is going to come as we bring these two teams together. And what I was stating is 8% of the revenue that we see in Exelity, we see as our cost synergy opportunity there. As we bring these two teams together, that will be happening on both sides where we see cost synergy opportunities. And so a mix between the 2, I don't have that, but it will be coming from both sides.
Still coming from both sides.
Okay, great. Thank you very much.
Yes. Thanks, John.
Our next question comes from the line of Nigel Coe of Wolfe Research. Please proceed with your question.
Thanks. Good morning, guys. Hi, Nigel. So maybe Nick, just if you could please just clarify on the synergy map. We're working up with a bigger number.
So I'm wondering, are you building revenue synergies on top of the cost synergies? So maybe just clarify that with mine.
Simple question
is really on the growth profile for the last 5 years to the S-one. You talked about some disposals, but then you also talked about some channel pressure and distributor churn, I think you called. So maybe just describe what's caused that distributor channel pressure and your confidence level for that now behind the
setup. Yes.
On
the synergy side, of course, we always are looking for where there's revenue synergy. But when we're quoting synergy here, it's only the cost synergy that's 8%. And that cost synergy, along with the EBITDA that we're projecting in the 1st year, that's what puts us at the 11x multiple. Far as the revenue profile over the last 4 or 5 years, Nigel, that you're asking about, a couple of different things happening. In Europe, there were some distribution related issues that Acelity saw in Europe.
They worked through those challenges a couple of years ago and seeing that growth track returning there in Europe, but that impacted their growth a couple of years ago. Also, as far as Medicare reimbursement rates, that was some headwind that Acelity faced over the past 2 or 3 years as the reimbursement rate came down. They've worked through that and that we now see a more stable pricing environment going forward.
Okay. That's pretty helpful, Nick. And then just a quick one on the dividend payout ratio.
And I know this is
a Board decision, but the payout ratio is 60% at the midpoint of your guidance for this year. It looks like Acelity is going to take away a lot of EPS growth from next year, just given the GAAP dilution. Are you prepared to let that dividend pay ratio keep rising in order to keep the dividend growing? Or should we assume the dividend maybe flattens out here for a little while as you integrate Celgene?
Well, Nigel, you're absolutely right on your first point. This is a Board decision. I will point out that we have paid dividends for over 100 years without interruption, 61 years of consecutive increases, and that we expect that to grow in line with earnings over time. So that's been our position. That continues to be our position and we're not prepared to make a statement any beyond that right now, Nigel.
Okay. Thanks, guys.
Our next question comes from the line of Julian Mitchell of Barclays. Please proceed with your question.
Hi, good morning and congratulations.
Thanks. Good morning, Julian.
Morning. Maybe just a first question around the competitive position of Acelity. The impression of 1 or 2 people in the healthcare sector is that it had a very strong collection of patents and IP and so forth in the negative pressure wound care market a few years ago, but maybe that's eroded somewhat over time. So maybe just give an update on if you think that's true and what you think the market share of Acelity is today in its core markets? And also, allied to that point, it's R and D to sales, I think, is only 2.5% or 3%, so less than half of your own rate.
Do you think that needs to step up a bunch if the top line growth assumptions are to be realized?
Yes. Thanks, Julian. Acelity is a leader in advanced wound care and negative pressure wound therapy. And that investment in innovation that they've made is got them in a position with a robust offering of new products, products that have been launched and when we look at it, a strong future pipeline as well. And so we feel very good about the position with the new products that have gone out and the performance that they've been seeing and the opportunity to target underpenetrated segments, so expanding not just geographically but across the care pathway.
And so when you look at further investments in innovation that they've obviously been able to leverage their investments to this point. Now we get the opportunity to take advantage of the combination of our technology platforms with them. And I think that's going to be that's where the real opportunity is going to come for getting the right level of investment in innovation. It will be that combination. That's the first big step that we'll be able to take advantage of.
So that's what's in front of us. That's what our focus is on. That's where we can go with that innovation investment right away.
And you think that the R and D to sales of sort of 2.5%, 3%, that's appropriate for the wound care industry?
Well, that's the health care for us has been a strong growth marketplace and portfolio. And so we've been investing in a broader range of technology. Advanced Wound Care has been one of our priority growth platforms. So for it was a priority investment. I think when you bring that together, it will be a combination that will have appropriate investment in that wound care space.
Advancing the portfolio together, we will take a look at what are the opportunities there, and then we'll make adjustments on our investment levels as we bring the 2 companies together.
Understood. And then maybe my second question, just wondered how you're thinking about the bandwidth to do more M and A post this deal? Or is that pretty much it for the rest of 2019? And should we take from the adjustment to the buyback that maybe divestments are equally as likely as acquisitions for the next 12 months?
Julian, the first question I started. 1st and foremost, we're focused on executing and delivering 2019. And we have had an active M and A pipeline. In the near term, we're going to be focused on closing and integrating Acelity. And I would add, driving our organic growth priorities.
So that those are the clear focus for us.
And so based on that, with a focus on that, Julian, I would say the probability of another large acquisition in the near term is less likely as we take the time to focus on those priorities and digesting Acelity. We still have an active pipeline that we're working, but I think it's fair to assume the probability of another large deal in the near term is lower now.
Great. Thank you very much. Our next question comes from the line of Deane Dray of RBC Capital Markets. Please proceed with your question.
Thank you. Good morning, everyone, and congratulations.
Thanks, Dean. Good morning, Dean.
Can we go back to the point about potential revenue overlaps, when you line this up, Advanced Wound Care, dressings has been a strategic priority for 3 ms. I have to think there are revenue overlaps at the most basic level of dressings. Can you size for us? And are there any other places, maybe even along like R and D that you were working on some of these similar products? So if you
could share with us that thinking there.
Sure. So Deane, as I talked about, this is a complementary to what we're doing. And so we see actually synergies less overlap. The advanced wound dressings is a great example where our technologies together can create new opportunities, don't see a lot of overlap there, see the opportunity for future growth. We've had some of our own solutions that will enable greater performance in negative pressure and wound therapy.
Acelity has really been a clear view of us as a partner that can help us realize that. So now we would be able to do that together.
That's good to hear. And then just to go back on the decision to cut buybacks here. With the stock at its lows, might you have been willing to boost leverage a bit more to be able to do more buybacks at this stage?
Yes. Deane, we're always looking at allocation of capital, and what we're doing here is very much in line with the way we lined laid out our strategy around capital structure and capital allocation when we were together last November laying out our 5 year plan. And so we have our priorities around capital allocation, allocating first to our organic business, paying a dividend and then that remaining bucket of discretionary. And we've been clear that in that discretionary bucket, our priority is for M and A opportunities over share buyback that we think builds value over a longer term. And that's also coupled with the plan over the course of the 5 years to be adding between $5,000,000,000 $15,000,000,000 of added leverage.
This announcement today is very much in line with that. And so discussions of what's the right amount of share buyback, we're still in the market, but I'll say at a minimal level right now, and we'll evaluate that going forward. But right now, we think 1% to 1.5% is the right range for us to be in for the balance of this year.
Got it. Thank
you. Yes.
Thanks, Steve. Thanks, Steve.
Our next question comes from the line of John Walsh of Credit Suisse. Please proceed with your question.
Hi, good morning.
Good morning, John. Hi, John.
Hi. I guess maybe just a real high level question here. Thinking about the customers of both your business and the Acelity business, I mean, are the same people at the customer purchasing both of the negative wound care and what 3 ms is doing today around your dressings and everything else.
But then I guess maybe a follow on to
that is when you think about how each company goes to market through the channel, Are the distributors the same? Or how do we think about the overlap there as these products make it through the channel?
Sure, John. As I highlighted, this is a complementary portfolio across the care pathway. And there are customers across the care pathway, but it's very much a solution and value based care that is driving the decisions here. So we actually become more relevant in that conversation. And so it's an opportunity.
And so we're focused on common customers and decision makers. And so that's the ability to bring stronger capabilities and value across the entire care pathway will position us even stronger there. And I think we can leverage both positions from the 2 companies. In distribution, the distribution partners, there's a lot of overlap there as well, and we'll be able to take advantage of our relationships and add to it, become more relevant there as well.
John, just to add a little bit. There are places where there is overlap. So if we think in a hospital setting, clearly, both 3 ms and Acelity have a clear presence there today and as we bring that together. But one of the things that this helps complement for us in terms of market coverage is as we go more into the post acute market where wounds are being treated at places at rehab clinics and at other facilities beyond the hospital. Acelity brings a lot of sales coverage opportunity there that we've been looking for, And this is partly why we see this as a very good coverage opportunity for us.
All right. Thank you.
Our next question comes from the line of Jeff Sprague of Vertical Research Partners. Please proceed with your question.
Maybe just circle back to one item that got probably lost in just somebody's earlier multipart question. But Mike, just thinking about the portfolio overall, obviously, you've got an important addition that we discussed in detail this morning. But how about the other side of the portfolio, kind of the divestiture side? Obviously, when Ingo was at the helm, they went through kind of that bubble matrix and did a little housecleaning. But with your fresh set of eyes and kind of given the challenges in some of the businesses, should we expect maybe more activity on the divestiture side of the portfolio?
And maybe give us some sense of how much, if any, what percent of revenues of the portfolio perhaps aren't meeting the criteria that you'd like to see? Jeff, it's something we talked in length about at the Investor Day last November. The portfolio management and the portfolio priority is multiple strategies. It's 1st and foremost about prioritizing where we invest in organic growth in the most attractive parts of our portfolio. It's about making complementary acquisitions in the most attractive spaces like we're talking about today with Acelity.
And then it's about maximizing value across the portfolio and taking actions up to and including divestitures where it makes sense. And so that broader portfolio strategy, that's an ongoing process. And as we talked about, we assess all of our businesses for strategic and financial attractiveness, and we're going to continue to do that, and we have an active process of doing that. Can you give us some sense though, Mike, what percent of the portfolio is at least from kind of your watch list? Yes, Jeff, we haven't talked about it around that.
It's not we haven't identified percent of the portfolio. We certainly have opportunities across the portfolio to drive greater value and not just in organic priorities and acquisitions, but just how we manage that part of the portfolio. So we'll talk about specifics as we move forward and are ready to take action. Okay, great. Thank you.
Thanks, Jeff.
Our next question comes from the line of Laurence Alexander of Jefferies and Company. Please proceed with your question.
Hi, guys. This is Dan Rizzo on for Laurence. How are you? Hi, Dan. Hey, you mentioned that you can get some sourcing synergies.
I was just wondering if you could provide color on what sourcing synergies you're talking about and what that kind of comprises? Often when
we acquire a company, what we find is once we bring that company into 3 ms and the power of 3 ms sourcing organization and our capabilities there, we often find that one of the synergy into that. So that's it's based on our track record with other deals as we look at the opportunities of what sourcing can do from us, ability to lower the cost of things that, that company has been procuring.
From an internal standpoint or just dealing with your suppliers?
The vast majority with our suppliers.
Okay. And then I apologize if I missed this, but have you quantified what the revenue synergy targets are for this?
We have not. We've only quantified cost synergy that we're estimating cost synergy of about 8% of total revenue.
Our next question comes from the line of Steve Tusa of JPMorgan. Please proceed with your question.
Hi, good morning. Hey, Steve. Good morning, Steve.
So just to put a finer point on the buyback commentary, you're not really commenting on kind of the go forward. Is this a big enough deal to change your view on like next year's level of buybacks?
Yes, Steve. I'm not going to comment on next year's level of buyback. But from the pace that we've been at over the last few years, I do think it's reasonable to think it's going to be a lower pace than what we've been at as we digest this deal. But certainly, by the time we get to late this year, early next year, we'll be providing guidance on 2020 share buyback and a number of factors that will go into that. And again, I'd
remind you, Steve, this is
in line with our 5 year plan about capital allocation for in the discretionary bucket, a balance of both M and A and share buyback. And what will you see from us for share buyback will continue to be in line with that overall guidance.
Okay. And then just a follow-up on capital allocation. How would kind of be a bit more visibility into some of these environmental liabilities? How are you balancing the unknown there set against bigger deals like this? How do you sit through that equation from a risk perspective?
Is it in the back of your minds when you're making these capital allocation decisions? Because that's something that obviously wasn't very clear on the capital allocation chart from the outlook. But seemingly it's a little bit of a bigger issue than maybe we all appreciated or is it not? Just curious as to how you're balancing that risk in the context of these bigger capital allocation moves.
So as we look at our capital allocation plans over the 5 years, the expenses that we've taken already is one of the factors that go into that. The potential of future liabilities there can have an impact, but we don't see it having a material impact on the capital allocation strategy. So
we
still see it as a fairly minor mover on the total capital allocation
plan.
Our next question comes from the line of Josh Pokrzywinski of Morgan Stanley. Please proceed with your question.
Hi, good morning guys and congratulations.
Hi, Jeff. Good morning, Jeff.
So I know we've covered a lot of ground already. I guess just two more questions on the deal. I guess first, there's an awful lot
of rental revenue associated with this business.
It seems like a little bit of a different business model relative to what 3 ms normally embarks on. Maybe just talk about how that gets integrated and managed relative to more of a product centric portfolio? And I guess related to that, in their S1, they talked about a bit more competition in the negative pressure wound care space. So maybe kind of mesh those 2 and if you can talk to rental rates or anything that's happened that maybe speaks to competition or lack thereof, that would be helpful.
Sure, Josh. Maybe let me talk about the first part. This is, to us, an attractive business model. It includes an installed base of equipment that helps drive consumable sales and other revenues. And it's actually similar to our patient warming solutions within Medical Solutions.
So our business knows how to operate and run this kind of model. As I talked about, Acelity is a leader in Advanced Wound Care and has a robust offering of new products as well as a strong pipeline. So we see the ability to build on that and then, of course, complement it with our own wound care offerings and brands. So this is I think it's a good business model for us and it will be an opportunity to build on what's already out there. Rental rates, we don't have that in front of us.
I think that's another one of the areas that Bruce and Tony can follow-up with you and talk about installed base of that. But it's a model that we know how to operate and we see it as attractive and a good way to help build a broader business and product sales.
Got it. Thanks, Mike, for that color. And then I guess just only somewhat related to that. On the Medicare side, I think Nick mentioned that there had been some pricing changes there over the past few years driving some of that flatness since 2014 among a few other things. How much of the healthcare portfolio today has some level of sensitivity to Medicare pricing changes?
I'm just wondering, as this goes on or if there are kind of future changes down the road, is it something that could kind of rise in terms of the risk profile of the portfolio from here?
Josh, looking across the portfolio, we are an important part of our innovation is reducing the cost of care across the care pathways for both providers and payers as well. And so that's built into our innovation. That's part of our the value that we create, and that's part of this marketplace. So I would say that's something that and that's not new. That's something that's been true across our markets globally.
And so
this part comes into
a business where we know how to manage that, and our innovation will be the differentiator there. And the combination of the 2 companies will be an even bigger opportunity to differentiate ourselves.
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 comments.
To wrap up, we are focused on executing our plans to deliver 2019, while also building for the long term. The addition of Acelity is exciting for our future, and we are confident it will deliver tremendous value to our customers and our shareholders. Thank you for joining us, and have a good day.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please your lines.