3M Company's (MMM) CEO Mike Roman on Credit Suisse's 7th Annual Industrials Conference (Transcript)

3M Company (NYSE:MMM) Credit Suisse's 7th Annual Industrials Conference December 5, 2019 9:30 AM ET

Company Participants

Mike Roman - Chairman and CEO

Conference Call Participants

John Walsh - Credit Suisse

John Walsh

All right. Welcome back, everybody. We are very excited to have 3M here again with us this year. Up on stage with me, we have Mike Roman, 3M's CEO. And I think before we get into Q&A, he has a couple of remarks he's going to make. And then, obviously, if you have questions, if you could please wait for the microphone just for the benefit of everybody on the webcast. Thank you.

Mike Roman

John thanks for having me here today. It's great to be here. So, maybe just to frame up our discussion a little bit. Looking back at 2019, certainly, 2019 was a challenging year and we saw some particular focused challenges in key end markets, China, automotive, and electronics. That's really framed up some of the things that we did during the year, it's really changed dramatically in first quarter, the outlook for the year.

We took actions. We Q2 cost restructuring actions. We've driven a focus on reducing inventory, realigning our manufacturing operations, our vertical integrated model enable us to do that. We've gotten on top of that; we've continued to drive productivity and cost.

Really strong cash flow. We've actually increased our cash flows as we come through the year because of that kind of focus. And then at the same time, we invest in the future. We -- our first priority in capital allocation is organic growth. And we continue to invest in the future. We have tremendous synergies at the center of 3M, unique technologies, advanced manufacturing, global reach, and capability, our brands. And so we continue to invest in those.

And I would say the 3M model is strong. We're well-positioned for the challenges that we've seen as we come through even the second half of the year, well-positioned as we go into 2020. We have -- we have outstanding businesses, business leaders that know how to manage through this environment.

And we tend to see changes in the market early, if as a slowdown. We see it earlier; we tend to lead back out of it. One of the reasons we lead back out of it as we stay focused on our customers and we stay close to them, driving new opportunities, that investment in the future is an investment in winning with them.

And I really -- I'd really like the focus that we have and the relationship we have with customers and the things that we've been this year, how that's helped that, and we're well-positioned as we go into 2020.

Question-and-Answer Session

Q - John Walsh

Great. Thank you. Maybe, obviously, we were just discussing, you've been on a tour around the world. Maybe first question is just kind of what are you hearing as you've gone through Asia and just most recently through Europe?

Mike Roman

Yes, it's -- and I spent time in China over last month, a couple of different times. I was over there. I just came back from Europe. I would say there's still a lot of uncertainty out there. You've seen a lot of economic data this week, hasn't really pointed to a definitive change going forward.

There's a few places where there's some hopeful outlooks. Electronics, some theories electronics where I think companies are starting to be hopeful that it gets a little better. Many places, it's less bad is the way to -- whether you look at PMI or ISM kinds of data. Those are the -- in general, what it paints. It's very difficult to have a definitive view of how things are going to change significantly as we go into 2020. So, still a lot of uncertainty.

We set it at the end of our Q3 earnings call that Q4 looks a lot like Q3. And even the data this week suggests Q4 looks a lot like Q3 with some hopefulness around some of the end markets and so as I come back without definitive, but we need to change dramatically. I think we're well-positioned and what we've been putting ourselves in a place to be able to do is serving us well.

John Walsh

And you mentioned electronics, right? And obviously, there are multiple ways you touched that market. Can you maybe talk about what you're seeing in the electronics market, maybe between some of the semi stuff that we're all tracking, but then also on the consumer device side as well?

Mike Roman

Yes, I would say there's -- where there are a few areas of hopefulness, there has been a little bit of hopefulness around factory automation coming back in the China market and you see that in some of our Japanese customers.

Semiconductor manufacturers see some uptick and, hopefully, a better outlook as they go forward. We haven't seen that play through our value chain too dramatically yet. Consumer electronics, everybody's pointed at 5G? And when does that make a difference? And when do you see that in the devices and it hasn't played through into OEM ramp-up plans necessarily at this point.

So, there's, I think, a more positive outlook, but not necessarily playing through in the numbers. So, that's the big areas of consumer electronics. This -- there are continuing to be greater penetration in areas like factory automation, we'll keep going. But it still depends on the end market volume and production to really see a big step-up.

John Walsh

And then thinking about the consumer device side, when would 3M typically get specked in on when those devices are going to get launched, right? So, when would you actually get visibility into that?

Mike Roman

If you look at the 3M model, we work very closely with customers. We're bringing our technology to solve problems for them. We -- 70% of our revenue is designed in or specified at end users or in regulated marketplaces. And electronics is a great example of that. And that doesn't happen in one design cycle. That's not just for the current design cycle. We are working on multiple generations, typically, whether it's electronics or automotive or factory automation, any of these areas where there's a lot of innovation happening there.

There -- yes, they're working on scaling up the current model, the next year's mobile device. But they are also the year after and what else do we need to drive. So, we are working with them in each of those. We have long-term research and development efforts going on with our key customers in all of those markets to really solve the problems they're trying to drive, a solution to that gets us specified in at the platform level.

And then in the year we're in, we're very focused on following through on scaling our own production of the new solutions that are going into the devices. We would get a layout of the year as you go into the peak seasons, you will get a pretty good view from the OEMs of what their demand is going to be, what they think their build rate is. They'll flex around that. And you see that in the news, and they say, we're increasing by 10%. We're decreasing by 10%. We see that maybe a few days early, not once early because that's a very dynamic environment as you go through the year.

Longer term, you have a smoother curve of here's how many units we expect to produce of this kind of device. A few years ago, we talked a lot about the shift from LCD to OLED. And what does that mean to us? We have different solutions in OLED than we did in LCD. We have to be thinking about our supply chain to be able to support that, they would have a plan we even shared with our investor community. What we thought those numbers would look like. We were off; it was more LCD than OLED earlier on. So, it does flex around that. There's a long-term plan.

The volumes long-term don't change the things we're working on. We're working on them with our customers on their critical needs, not our -- necessarily our plans. We're working on their plans, but the volumes will shift in a given year. So, we'll get information, whether it's automotive or electronics, we'll get information month-to-month. And usually, a rolling outlook of a few months at a time that are practical to be able to plant it.

John Walsh

Got it. And then maybe just hitting on the other big end market. You talked about earlier on automotive. I think this year, obviously, there were some channel dynamics, particularly in China that you had to navigate. But kind of what is your view of kind of the traditional 3M outperformance relative to the build rates, typically done that?

Mike Roman

Yes, we have had a history of outperforming the build rates by now for a decade and it's really a reflection on our ability to be a global supplier to these OEMs. That's a big part of it that as the global OEMs build out their regional production, we're there and we can take advantage of that. And the way we then I'll go the build rates as we continue to drive new penetration.

We are in many aspects of an automobile. We've been in the automobile industry for more than 100 years. We're between $15 and $20 a car in our bill of materials presence, and we keep adding to that. And we build out new opportunities to drive that. And that's been the outgrowth. We see with where the innovation is going in automobiles, electrification, greater electronics, emphasis on weight reduction, new materials going into automobiles that require different assembly methods. Those are all big opportunities for us to drive penetration. So, I see that continuing.

The near-term, you really are -- there's a denominator, which is the build rates themselves. And in 2019, as you alluded to, there was a slowdown. There was a significant reduction in the build rate -- negative build rates and the inventory in the channel wasn't planning for that. Planning for more of a moderate growth or flattish kind of year and so they reacted. So, we saw a multiplier effect. But as you move forward, that inventory comes out. It gets more to a reflection of the build rates, we'll outgrow those build rates, I'm confident, as we drive greater innovation.

John Walsh

I think that number has been 300 to 500 basis points. So, that's--

Mike Roman

Yes, it will -- there are some interesting things to look at. In fact, the markets that I talked about at the beginning, the three markets, China, automotive electronics. They've been challenging us this year, but long-term, they are attractive spaces for us. They're growth markets. Maybe the build rates of consumer electronics and automobile are going to be more modest, but they're highly innovative spaces where we can deliver on penetration, which will give us that ability to outgrow.

I see the innovation growing significantly. The amount of innovation going in automobiles. The percentage of the bill of materials that is electronics and value is going up significantly every year. That's a place where we bring together our electronics and automotive capabilities and it's new penetration. It's -- it wasn't there before.

Electrification, still a relatively small portion of the build rate, but promising to ramp up, that even increases the opportunity space for us. So, it's -- I think it will depend a little bit on how fast some of those innovations penetrate the OEMs around the world and the tier suppliers. Those are additive to what we've been historically had as an opportunity.

John Walsh

And then maybe that's a way to transition into talking a little bit about the realignment, right? You just realigned your segments, focused on the customer and the way you go to market. How do you think we should expect to see the benefits of the realignment manifest it also in the numbers?

Mike Roman

Yes. Well, it is a start of focus on customers. We -- our model, 3M's model is we take those synergies that we have, those fundamental strengths, our technology, how we combine them. Manufacturing capabilities, intellectual property there, our global reach, and we take that to get specified in at customers. And we do that in the markets that are most attractive to our value model. We end up in many markets.

And we have really four go-to-market models that we've built up around. There is a health care model. There's a retail model, whereas we take our solutions into consumer. There's an industrial B2B kind of model. Think of it as the long tail of industrial customers out there around the world, manufacturing, general manufacturing, met fab, those metal fabrication and then you get into these big OEMs, automotive electronics.

And we -- in our business transformation journey, we saw an opportunity to really become even better servers of our customers by aligning around those go-to-market models, taking the capabilities we've been putting in, in place with business transformation and optimizing them through go-to-market model.

So, it's a focus on customer, the service requirements for an electronics OEM and an automotive OEM, they have a lot of similarities. The specification process is similar. And now they're emerging in terms of technology. The automobile is becoming a big electronics device in some ways. So, it made a lot of sense to put transportation electronics together and really optimize end-to-end in 3M to deliver for those customers, including the innovation, multiplying the electronics and automotive capabilities and innovation, but it will also serve those other customers well, too.

We're bringing together our sales and commercial models in B2B industrial like never before and leveraging the digitization of 3M, the capabilities that we can add there. And we've always had, I would say, a more separate focus on healthcare and retail, but it just reinforces that globally as the right model.

John Walsh

And you hit on digital transformation; I think one of the other initiatives you talked about last year was around portfolio and portfolio optimization. Does the realignment helped that? Is -- do you think that in terms of the portfolio, when you look out the markets, are there things to accelerate? How should we think about your view of the portfolio optimization, obviously, given your technology focus, there's nothing big, right, but there could be a continuation.

Mike Roman

Maybe I'll start back to the value model of 3M, taking those fundamental strengths, building out growth and penetration across those different go-to-market models. It's been a strength that we built over 100 years at value model, but it doesn't entitle you to always have it as a strength. You have to take it forward. And so there are four priorities for taking it forward, managing our portfolio is one of those. We -- you may have a space or a marketplace where your technology is very relevant.

But over time, it isn't going to be a great fit for those synergies or it has less value from it. And so you've got to manage that. You might also have opportunities to overweight other areas. You've got to think in portfolio, how do you optimize fundamental strengths through to the market opportunities to deliver returns for shareholders, to deliver value for customers.

So, that's the framework of our portfolio strategy. And it really has three big levers. It's prioritizing our organic investments to the most attractive spaces and managing a portfolio around differentiated investment strategy. It's taking a look all the time at what parts of our portfolio are less able to leverage the fundamental strengths or maybe or structurally, the markets aren't as attractive for our fundamental strengths over time. And we should be doing something different.

Maybe we manage those more for cash flow because we're the best owner of them. But maybe there's a better natural owner out there. And we've -- a number of divestitures that we've made, that's where they come from. There's a better natural owner out there. We can create more value for 3M shareholders by divesting those assets. We can also make acquisitions to complement what we do organically. Our capital allocation priority is still, first and foremost, organic, R&D and CapEx.

But as we go forward, there's an opportunity to complement that with acquisitions. So, Acelity in the health care space this year that we've closed recently, is a great example, leveraging those fundamental strengths, putting together two companies, 3M and Acelity, to be greater than the sum of the parts. So, that's the portfolio strategy. There's an enterprise view of it. There's a go-to-market business portfolio view of it, and they come together in those three strategies.

John Walsh

So, I guess another way to ask that, if we think about your kind of 3% to 5% longer term view. If at the end of that time period, we end up with a 5%. What would you have expected went right or to get you to the high end of that range and maybe the low end? I'm assuming that's probably more macro, but--

Mike Roman

Well, that's the organic side of it. So, I would set acquisitions aside for a second. And there's -- when we look at our promise to investors at a simple level. It's our innovation model, our 3M value model. It delivers premium margins, premium ROIC because we manufacture with strong intellectual property and growth above macro through the business cycle.

And that growth about macro has been the more challenged aspect of it recently because of the end markets I was talking about. There -- it's broader than just those three end markets, but they're the most prominent part of that. There's two drivers of that outgrow the macro that make a difference. One is our innovation and bringing new penetration opportunities, new market opportunities, new customer solution opportunities like outgrowing the build rate in automotive as it reflects.

And then it's being in markets that are accretive to your overall growth rate. If you're in markets that are growing slower than the macro gets to top in that growth. And that's been the tougher challenge this year. Our innovation continues to deliver some growth as we move ahead. It's important that, in your innovation model, you're prioritizing new markets, new penetration as we can we can deliver tremendous value through line extensions. And we do, we're a line extension machine with our customers. We're close to them. We solve problems. But you got to drive new penetration, if you want to outgrow the macro. So, as we go forward, that's the focus for us in driving that growth. And we have to continue to choose those more attractive markets.

And then, I guess, as you get to 5%, maybe I'll just wrap it up to get back to 5%, we need both of those. We need the markets be in the right markets. Now, we've got that 30%. We aren't going to exit those markets. They're attractive. We'd like to see them recover. So, to get to 5%, we've got to see some recovery in automotive and electronics. The TF5 is more of a reflection of the uncertainty in industrial production or GDP than it is in specific markets, but we do need those key end markets that we're part of, especially the ones that are a little more attractive long-term, we need to see some recovery there.

John Walsh

Yes. And I guess, maybe switching over to the margin. So, there's been a couple of different dynamics this year, the under-absorption. So, one, maybe can you talk about where you are on taking all that inventory out. And then also, I would say there were some probably mixed dynamics as well, which you've alluded to. But from a high level, can you help us think about what's the jumping off point for the margins as we think about going forward from here?

Mike Roman

Well, as you pointed out, we've taken a number of actions this year; we were facing negative organic growth, largely because of those three big end markets. That puts -- that's a cost -- some fixed cost structure. That's an absorption issue as you put it. And we have been taking out inventory, and that was an important part of delivering the cash flow and stepping up our cash flow conversion as we go through the year.

That's been a big bull point this year. It will continue to be an opportunity. It's part of our business transformation journey, we can continue to improve our turns and our supply chain efficiency over time. It won't be to this likely the same level as we've been taking out through Q2 and Q3 this year, we do expect to see some opportunities to continue to reduce inventory -- days inventory outstanding is the way I would put it.

We were on track for our targets for this year, which was to take out some of the inventory we built for the U.S. go live in 2018 and to take advantage of capabilities we're putting in place. So there's more to do. It'll be -- year-over-year; it'll be less in 2020 than it is in 2019. And the actions we've taken around restructuring and getting our cost structures in place as you see greater growth; those will benefit you in margin and others. There's other factors that go into a margin walk or an EPS walk or an operating income walk. So, we'll talk more about that when we get to our 2020 outlook in January, January 28th.

John Walsh

But I guess, maybe thinking about -- so this year, you've taken your internal production below where market demand was, right, so you could take some of that inventory out. As we think to next year, should we expect, absent a recession, right, you have to take that internal production at least back to market demand.

Mike Roman

Yes, year-over-year, you'll see a utilization go up because you're less inventory reduction volume year-over-year, absent a recession, I would expect us to see better growth in our volume than this year. So, you'll have to meet that demand. You aren't taking as much inventory out. Absolutely, you'll see the other side of that in your absorption.

John Walsh

And then you've been very public with the restructuring, right? So, we had -- in your numbers, you eat the charge, right? And then you've laid out how much comes in 2019 into next year. Are there any known offsets to that that you would call out?

Mike Roman

Well, there will be, and we'll talk more about them in specifics, but a couple of examples. We will -- this year, our incentive compensation hasn't been as big a part of our cost structure. We've had less incentive compensation next year as we do better, and we grow more, you'll see that come back. So, that will be more than just a wage inflation that's incentive comp year-over-year comparable. So, that's one of the things that we'll talk more about.

Pension, depending on what happens with interest rates; you'll see potential changes and the impact from that. So, there's factors that go into it. There's the -- what we've done to put ourselves in a good position for the market dynamics that may come in 2020 in terms of factory costs and inventory and structural costs, SG&A, for example. I think we're well-positioned in those. But there's other factors that will come in as well.

John Walsh

And then just thinking about the actions you've taken this year. One of the big questions we always get asked is, how do you know or -- it's been asked of several companies. How do you know you've taken enough action, right? So, when you obviously, and do these sort of actions, what makes you confident that what you've done this year is the appropriate amount and we won't need to see additional actions taken?

Mike Roman

Well, there's always the potential for additional actions. It depends on what happens to the marketplace. If you look at what we went through this year, we saw the slowdown in the second half of first quarter. Coming out of Lunar New Year, you saw this drop off. It took us a cycle to react to it, 90 days kind of cycle. We got on top of it; we got our cost in place. We implemented our actions so we know we can do that.

We can't do it. I can't turn on a dime, but within a cycle, you can get there within two cycles here in very good shape. So we are well-positioned for the second half of the year dynamic that we're seeing if that continues into 2020. I think we're going in well-positioned. We'll get some benefits from the restructuring actions we've taken this year. We'll continue to manage according to the demand that we see.

If things change, if you saw -- if we see a recession, we responded very well in recessions. We get our margins back pretty quickly. We get our cash flow strong, we can react to it. So, we're ready to take actions as we see changes, if we saw other market slowdown or a significant change or a recession, we'd be taking additional actions. And so I think that's the benefit of our model. It does take us a cycle or two to really get on top of it. But we have a lot of confidence that we can adjust as we need to.

John Walsh

Then maybe going back to the way you think about your internal production levels, obviously, cutting over the U.S., the largest piece of the ERP, right, cutting over the front office part of that. I think there's still a couple of countries left out there to bring on ERP, and there's some of the supply chain stuff in the U.S. I mean, is any of that stuff that could -- or we should be mindful of that could potentially disrupt inventory and how you guys are thinking about it playing out?

Mike Roman

Yes, we've been having a number of discussions around this even this morning. Look at it, I see -- we're in a place now, we're in a good place with a business transformation journey, where we have -- we've, as you said, deployed the U.S. now. We have a majority of our revenue globally on the new, not just ERP, but the ecosystem, the new business processes and that we're taking advantage of the capabilities we're building. And we've been optimizing.

We've gone -- it's a big project plan that we're working through. We're now at a point where you -- we have a lot more predictability, confidence in how it plays out, and we're getting better at it every step. As we deployed in Europe, it was better than when we first started in Canada, as we deployed in the U.S., it was better than when we were in Europe. We're optimizing as we go.

We still have Asia, which is the biggest part to that will be Japan and China. In Latin America, we have the manufacturing operations in the U.S. So, there's more work to be done. But we've gained so much from where we've come to them. I see it as something that I'm very confident we will execute well. We see benefits that we can drive as we go in terms of our performance, productivity, supply chains, that's -- this year, we -- the inventory that we took out because of the deployment in the U.S. and the way we've been optimizing that deployment.

We took that inventory out and improved our service at the same time for our customers. And there's always more to do on each of those, but that's a good example of how we've been able to leverage that. So, now it becomes more of a operational improvement strategy. There's still deployment to do as part of that.

And those are things you have to get ready for, and that's a lot of change for customers and for our people, but it's -- now we have a well -- kind of a well-defined way to do that and optimize up. So, -- so we've got more to do. It will take time to continue to execute that, but it'll just mean we're getting additional opportunities to benefit from that in terms of operational performance.

John Walsh

And then I think thinking about that ERP deployment. I think in Europe, you had a margin target. That ERP deployment was going to be one of the levers to get you there. Maybe can you talk a little bit about what you saw through Europe through the ERP deployment?

Mike Roman

Yes, it's been encouraging this year. It's been one of the bright spot, there's negative organic growth with what we've talked about earlier, kind of overhangs a lot of things, but there's been some bright spots in our businesses. We've seen strong growth in developing economies and key markets.

Europe has been actually a positive point for us this year. We've seen a little better growth coming through Europe, and we've made good progress on that margin improvement because of the business transformation efforts and the work to optimize that. It's playing out. And Canada, too, it's interesting. I highlighted at the Q3 earnings call. They were bright spots in Q3. Both of them had improved margins, had grown better than the rest of the portfolio.

And there is a noticeable impact of business transformation on that. We're improving service to our customers, that's helping our growth opportunities; we're getting more efficient in our supply chains. I just came back from Europe this week, I was at our supply chain headquarters, the confidence that team has and what they can drive and keep going forward, that this is going to continue to add as was great to see.

John Walsh

And I guess, thinking about the free cash flow. So, this year you've taken the guide up a couple of times, been able to take more inventory out, generate cash. When we think about at least tailwinds, headwinds into next year to maybe help us bridge it a little bit. Obviously, we'll get more details on the Q4 call.

But from a high level, it sounds like there's still some inventory benefit. You mentioned Acetify earlier, obviously, given the way you do your earnings construct, there is an amortization associated with that. I don't know if that's a number that you guys are able to share. It could be helpful for us from a modeling perspective. But what are the other big moving pieces as you see them?

Mike Roman

First, I think it's a few points on -- from Acelity, so in terms of the cash flow conversion benefit. The inventory continues to be the opportunity that we're focused on that -- from business transformation, from the work that we started this year; we'll see additional benefits from that. Those are the big drivers for us in free cash flow conversion. And just that operational execution is an important part of it.

We -- even in a lower growth environment, being able to drive that operational execution, that margin improvement, those will be important as well. And if you see any growth, we'll get additional growth. We'll see good leverage potentially that will drive that free cash flow.

John Walsh

And then when you think about the growth CapEx and your R&D spend, it's not a new question, but can you help us, what are the measurements you look at to know that you're getting the efficiency that you expect from those investments?

Mike Roman

Yes, it's at the center of what we do to differentiate ourselves for our customers, for our shareholders. It's what makes us unique as a company. So, it gets a lot of attention, and we manage it. We manage it in a portfolio view. We manage it as an innovation strategy. We certainly manage a portfolio of innovation investments.

We have -- at a high level, we spend almost 6% of sales in R&D, for example, 15% of that is in longer-term big R research kinds of investments. But it's much more than that. We look at a portfolio in our pipeline of our long-term innovation and what we're delivering in our revenue in any given year.

We're looking at, are we getting the returns on each of the categories that are critical for us, line extensions, that's still an important part of it. New penetration, new product opportunities in existing markets and customers, for example, and then entirely new markets. And we have targets for those, we have expectations of those to deliver that growth above macro premium margins.

We have to deliver on a balance that I -- you wouldn't be surprised. I have CEO objectives with the Board that are called out very specifically in these areas of how we measure. We used to talk about a broader -- 30% of our revenue coming from products introduced in the last five years. That's more of a -- help you understand how we are culturally as opposed to what do we have to drive to really make sure we're ensuring success. We have to get really -- we have to deliver on each of those different strategies. It's not one in -- big budget that we hope delivers. We are driving individual strategies.

So, we manage that. And we -- and our capital allocation in CapEx is tied to that as well. So, its portfolio strategies are part of that. The technology where we can create value is part of that. There's the innovation in the customer markets that drive it. And then we've got to get the right mix going forward. It's what we've been able to do for the long run. And it's -- the opportunities are there. So, it's -- that's the exciting part of it. And as you look into the pipeline, I see a very healthy pipeline that has a balance in those areas.

John Walsh

And then, I guess, broadening out that capital allocation discussion, I mean, how should we think about next year, right? You're coming off of a very large deal. In your mind, what are the uses of cash next year?

Mike Roman

Well, the frame is still the same sense. The first priority is organic R&D and CapEx. It's in the 10.5% to 11.5% range together. Dividends, we've been a long-term dividend payer and actually increasing our dividends. We expect to grow our dividends with earnings.

Then you get into flexible capital where maybe the discussion gets more interesting. We -- that's M&A and share repurchases. We've been -- this year, we -- with the acquisition of Acelity, we reduced our share repurchases year-over-year. We're in the $1 billion to $1.5 billion range. And that was a reflection of allocating more capital to M&A.

And so -- we also leveraged up, and we've talked about that for some time. And our capital allocation strategy, we would leverage up for the right acquisition where we can get greater than the sum of the parts and create shareholder value in the long run and that was Acelity. So, we leveraged up and -- but we'll work our way back to our longer-term kind of strategy around -- net debt to EBITDA around 2%.

And so that's -- so as we go through this year, that means we adjust share repurchases -- we'll offset dilution. And we'll talk more about how we think about that more broadly in terms of the overall capital allocation. But that thinking still frames up. We talked about that in the five-year plan a year ago. That's still the frame for how we will operationalize it in 2020.

John Walsh

Yes. And then, I guess now that Acelity has come into the portfolio, what's the conversations been like with the healthcare leaders when you talk to them?

Mike Roman

Well, there's a lot of excitement. Yes, it's -- we just closed. So, less than two months ago, we closed the deal. We have been working closely through due diligence and getting ready for close. The excitement builds, you have a lot of ideas and plans for greater than the sum of the parts kind of approach as you integrate. And now we're into actually executing on it. And you see early examples where people are energized.

I think we've gotten really, I think, good at engaging with acquired companies and bringing our best at 3M forward. That tends to energize. We're seeing good energy between the teams, a lot of excitement as we get to customers. So, it's not just about internal and the south. The customers are saying, hey, this really is -- makes a lot of sense to us. We're excited that you've done that.

Global customers are excited that we can -- 3M, they can leverage the 3M global capabilities to bring Acelity into their markets. They see that as an opportunity for them. And our channel partners see that as -- so the -- we're a little bit in the excitement phase with now executing and building plans for actually realizing those planned synergies in 2020.

And I would say we're, if anything, everything we're doing is giving us more substantive foundation for having confidence for doing that and not just being excited about it. We're building the details now. And I -- so I see anecdotes mostly at this point from my perspective. As we keep together on the journey here, it's -- they're all playing out the strategy that we had set in motion when we made the acquisition.

John Walsh

Got you. I saw a hand go up before the time. So, we'll give -- beat the clock.

Unidentified Analyst

Thank you. Thanks very much for the detailed discussion. I just wanted to go back to the big picture and maybe completely set aside any macro indicators and any discussion of 2020, et cetera, but just purely focusing on what you're hearing from your organization and from your customers and thinking about sequentially. It sounds like what you said is that we're kind of plugging away at that level that we got to towards kind of the end of last quarter. And maybe there are some indications where things may get better at some point, but they're not getting better right now. Is that kind of -- did I read that right from--

Mike Roman

Yes, I think you answered it pretty well. I would say we -- at our Q3 earnings call, we laid out guidance for Q4. We're on track for that. And it's minus 1% to minus 3% organic. Local currency growth was the frame that we set at the top of that. We're on track for that. It's -- the dynamic looks similar in the marketplace.

There are, I would say, hopeful signs in a few areas, hasn't played through necessarily the value chains yet. It's not -- it also hasn't gotten worse. There's not something that there's another leg down in this market or that market.

So, I think it's playing out in line with what we thought it would be. So, the second half has been -- I don't know how to put a simple label on it, but it's been in line. Q3 and Q4 have been pretty much in line with each other.

Unidentified Analyst

Great. Thank you.

John Walsh

Great. And with that, I'd like to thank 3M and we look forward to having continued conversations.

Mike Roman

Yes. Thanks, John.

John Walsh

Appreciate it.

Mike Roman

Appreciate the chance to be here again. Thank you.

John Walsh

Thank you.