Welcome to Donaldson's 2023 Investor Day. For those of you who don't know me, I'm Sarika Dhadwal, Head of Investor Relations here at Donaldson. I've been with the company for a little under two years, and I started my career, like many of you, on the sell side and have since moved over to the investor relations function, where I've spent the last 10 plus years. I've worked at a number of different companies across a few different industries, and I couldn't be more thrilled to be here at Donaldson today, and absolutely appreciate you taking the time to spend with us and learn more about the company. For those of you here in person, thank you for traveling to Minneapolis, and also, I would like to thank our virtual attendees
We're really excited to be here today and share our longer term strategy, and we hope you walk away today with a deeper and broader understanding of the newly redesigned Donaldson Company. Just a few housekeeping items before we get started. If everyone in the room could just mute your cell phones just for your neighbors and also for the people attending virtually, we would appreciate it. On the tables, there are little place cards that have our Wi-Fi address and password if you need that. If you have any issues with connectivity, you let one of us know. Anybody who has a Donaldson name badge, we will certainly work to get you connected. Our slides and a full version of the presentation for today will be available on our website at www.ir.donaldson.com. I'm just gonna talk a little bit about our agenda for today.
I think you can think about this morning as broken up into three parts. First, to kick things off, we'll have Tod Carpenter, our Chairman, President, and CEO, provide everyone with the strategic overview and vision for our redesigned Donaldson. Following Tod, we will discuss ESG and sustainability initiatives and talk about how we are enabling a cleaner world through our advanced filtration. We'll give you an overview of Donaldson's market leading innovative technology offering. We'll have our first Q&A session, and please limit questions in that Q&A session to those particular topics. We'll follow that with a short 10-minute break, and we'll come back. The second part of our presentation will be focused on our newly designed reporting segments, including the Life Sciences segment, which I know we're very excited about, and I know many of you are very excited about as well.
We'll wrap that segment up. We'll have another Q&A session on those three topics, we'll break again for about 10 minutes, come back, Scott Robinson, our chief financial officer, will come to the stage, tie our story together from a financial perspective, and discuss our strategy to deliver long-term profitable growth. Tod will come up, provide some closing remarks, we'll wrap up our formal sessions with a final Q&A session. That final Q&A session can include questions for anybody that you've heard speak for the morning. Lunch will follow with our leadership team. Last but not least, we will embark on our lab tours, including our new material research center, which has previously not been open to investors, and that should give you a better understanding of Donaldson's best-in-class processes and offerings.
I'd just like you to turn to our safe harbor slide. Most of you are familiar with this. This contains language regarding our forward-looking statements that we'll be making today and non-GAAP financial measures and KPIs that we will discuss. With that, it's my pleasure to welcome Tod Carpenter, Chairman, President, and CEO, to the stage.
Thanks, Sarika. Welcome, everybody. We're really pleased to have you at the Donaldson facilities today. Really appreciate you taking the time out of your schedules and coming and visiting us on what is clearly a beautiful spring day in Minnesota. Third largest snowy winter on record in the state. They tell us it's gonna be 60s this Saturday, and we are all looking forward to that. We really appreciate you coming and making the trek to come see us. We also would like to thank the many online participants today for listening in. We have an exciting day ahead of us, and we're really pleased to show you the steps we've been taking to advance our strategic initiatives across our corporation.
We hope that you come away from this day with the confidence and enthusiasm of our leadership team and indeed that of every Donaldson employee as you take home our messaging. As you settle in today, taking, say, a cup of one last drink of coffee, I want to make sure to cover what I would like you to take home with you. Specifically, as you come back and revisit what we've covered today, these are the messages to take home. One, Donaldson is the filtration technology leader in the markets that we serve. We have best-in-class technology, and we leverage that technology to solve very difficult customer problems across a host of market.
We are partnering with our customers to solve the world's most pressing filtration challenges and opportunities by enabling a greener modern economy and by helping our customers achieve their sustainability targets and transition to an alternative power solution. We are progressing towards a Life Sciences market leadership position and helping to address urgent human needs. We're doing this through a redesigned Donaldson structure, which allows us to have even a deeper customer-centric organization. We have a balanced growth strategy. We put a press release this morning out with our targets. We'll cover the targets in more detail throughout the day. We're proud of the balanced growth strategy that we have, and we look to drive long-term profitable growth. With that as the backdrop for the day, let's dive into a little bit more of the specifics. We are a 107-year-old company.
We were born in 1915. We have over 14,000 employees and 140 locations around the world. Our revenue is in three segments, 65% from Mobile Solutions, 27% from Industrial Solutions, and 8% from Life Sciences. Importantly, we have a strong razor to sell razor blade model, and our razor blades or replacement parts is 65% of Donaldson's revenue. Our first fit revenue, or what we tend to call new products sold to the OEM portions, is 35% of our revenue. Last fiscal year, we reported revenue of $3.3 billion. Importantly, also on this slide is that revenue is protected by over 2,700 active patents. We are a technology-led filtration company.
Looking deeper at our revenue, geographically, we are 40% in the United States and Canada, 29% in Europe, the Middle East, and Africa, 20% in Asia Pacific, and 10% in Latin America. This geographic representation allows us to have a physical presence in 80% of the countries where we do business. Importantly, we have long talked about our operations strategy which is build within region to support region. 75% of our volumes are produced within region. This gives us a strong operating model to be everywhere the customer wants us to be, take care of them with a local touch, and also offer them the best cost in-country opportunity when they desire. Importantly, across the bottom, if you look at the top markets that we have as a company, they are construction, on-road trucking, industrial air, mining, and agriculture.
We have a very experienced leadership team. They represent over 200 years of industry experience for those industries that we play. If you look at this particular slide, you'll hear today from Guillermo Briseno, Andrew Dahlgren, Rich Lewis, Scott Robinson, and then on that lower, row, Michael Wynblatt. I'd like to take a moment to introduce you to our other officers who are here present, and that is Amy Becker. If you could please stand. Amy Becker, our Chief Legal Officer. Bart Driesen, our President of Mobile Solutions Aftermarket. Sheila Kramer, our Chief Human Resources Officer. Tom Scalf, President of Enterprise Operations and Supply Chain, and Dave Wood, our Vice President of Corporate Development. Across our officer group, 35% of our officers are represented by women and people of color.
Also, our ownership requirements as of the officer group are well above common market practices. We act like owners, not shareholders. Turning to the board of directors, our board of directors diversity is equally important. 40% of our board is made up of women and people of color. We have a heavily independent board. 90% of the board is independent. We have a beautiful, balanced tenure of representation across our board. You look at the Donaldson operating model, what we start at is about one o'clock on that wheel, if you will. We start always with developing talent, investing in our people, and helping them become the best they can be. Continuing around, we have a strong collaborative culture where we use that culture to drive a one Donaldson mindset.
We continuously innovate, and you're gonna hear quite a bit about that today, the many cool things that we have in the laboratories as well as our patent portfolios. We have a strong ownership and accountability culture, and in fact, the redesign really strengthened that even further. Additionally, we have teams of people that work every day to anticipate market needs. These portions of the model are done to support our purpose as a corporation, which is to advance filtration for a cleaner world. All of this happens in our company built on six strong principles: act with integrity, engage and empower our people, invent cool things constantly, take care of our customers better than anyone else in the marketplace, operate safely and sustainably, and give back to the communities that we are in. This model and our principles work.
They've been driving our growth, 13% growth, compounded growth over the last two years. Our free cash flow has been roughly 90% over that same period. Importantly, to understand how we solve customers' complex problems is 50% of our revenue is sold on custom solutions. We are now working our operations teams, getting past the supply chain difficulties and headwinds that we've recently experienced, and we're proud to say that across our company, we're nearing back to pre-COVID levels, which is 90% on-time delivery to when the customer tells us when they want it. Our operations teams have worked incredibly hard and really stand tall now coming out of this, coming out of this tough patch looking backwards. I was named CEO in 2015. It was a bit of a different time.
Our company restructured at that time, but we always had advancing our strategy in mind. During that time, we acquired Engineering Product Services. We committed to the inorganic piece of our strategy and executing on it. In 2017, we invested $165 million into the corporation, where we expanded our capacities and increased our R&D investments to drive new product invention. We also acquired two companies that currently reside in our Industrial Solutions portfolio. In 2019, we invested $15 million to build a material research center in support of our Life Sciences strategy. We're proud to be able to show you that today on the tours. You'll get a good look this afternoon. Importantly, we also put a couple of really cool inventions out there. One was the dual stage battery vent.
We'll talk about it in other presentations. It was the first foray into a connected piece of our industrial-based offerings with our product called iCue. More recently, we completed a redesign of the company, and we created the third segment, which is in Life Sciences, and really expand our addressable markets as a corporation. In order to support that, we have acquired three companies: Solaris, Purilogics, and Isolere Bio. We, in our most recent fiscal year of 2022, delivered record revenues and record profits, and we look to do that again in this fiscal year. With us today in the back are the owners of, or let's say they're Donaldson employees now, but the prior owners of those acquisitions, if I could ask them to stand. Matteo Brognoli from Solaris, Jin Zhou, where's Jin?
Of Purilogics, and Kelly Lugenbaugh of Isolere Bio. We're really, really pleased to have them on the Donaldson team with us as we continue to advance our Life Sciences strategy. I talked about patents and where we are, that we have 27,000 active patents. Since we last met in New York in 2019, Donaldson has released over 1,200 patents. Put that in context. Since we last met in New York City, somewhere in the world, every day, Donaldson has been granted a patent. Every day. If you wanna see the magnitude of how we think, that represents one patent for every 4.5 salary employees in the entire corporation. We are committed to technology, we are committed to technology leadership, and I believe that shows how strong we are, really, investing in that portion of our strategy.
We think about macro trends. Those macro trends are really in areas such as sustainability, like the dual vent, but also in expanding service office offerings. Guillermo is gonna give you a strong look at that later this morning. As we continue to connect those devices, he's gonna round out very nicely that portion of our industrial strategy. Also we look to enter new markets. Our strengths as a company are obvious and deep. We are a filtration technology leader. We love our customers, and we have deep customer relationships by solving their most complex problems. Our technologies enable a greener and more efficient economy. We're everywhere the customer wants us to be. Sure, we're a large global corporation, but we operate with a local touch. Remember that 75% within region? It really works.
We have very high razor blade retention in our razor to sell razor blade model. Our aftermarket revenue is as high as 65% of the total company model. We have best-in-class operations, which are clearly a differentiator when taking care of our customers. As we redesigned the corporation, I wanna take just a moment to touch back on what that really means to clarify everything for you. On the top, we show a prior and current Donaldson. Looking at the table below, our Mobile Solutions really is represented by largely what was our engine business of the past. Our industrial segment contains now the Aerospace and Defense business, which was prior in the Mobile Solutions business. You know, airplanes don't run on diesel engines.
We put it in a home where it's actually more appropriate to stand alone and not be considered to be the diesel engine side. That goes into the industrial side. The balance of our businesses are all industrial foundational portfolio activities, and they go into the Industrial Filtration Solutions, and Guillermo will detail that out for you a little bit more here shortly. Lastly, we have the Life Sciences segment. We did this, and we created this vertical orientation, moving our manufacturing plants as well as all supporting activities for those verticals into the verticals, and this has allowed us to increase ownership and accountability across the corporation. We improved our end market focus, our strategic investment abilities.
You know, in short, if I summarize what the biggest opportunity or the biggest benefit of coming out of this re-redesign is, our company is just faster. We're faster to the end markets, we're faster to take care of our customers, and we like to actually do an excellent job for the customers quickly. When we step back then and look at our addressable markets, this overall redesign has expanded our addressable markets by $12 billion. We now have Mobile Solutions at $14 billion, Industrial Solutions at $15 billion, and Life Sciences at $21 billion. We'll use the strengths that we currently have in each of those segments, for example, in our Mobile Solutions segment, our media, our filter performance to really answer the call for air, hydraulic, and fuel applications. We'll also take our leading position in global mining air. We'll parlay that.
Rich will tell you about our opportunities where we expect to continue to grow market share within that growing business space. In industrial, Guillermo will complete the picture for you of how we have world's leading dust collection, mist and fume, and now we'll take the aftermarket, we'll connect the first-fit product, we'll add the service, we'll complete the entire customer experience, and we'll have a really strong linkage to all of the customers across our industrial space. Andy will talk to you later today about how we take the cast and all membrane, especially the PTFE membrane that is so vital in our micro, in our data storage and microelectronic sectors, and how we're parlaying that in addition to acquiring companies to go deeper into the Life Sciences space. We're really excited about our opportunities and the momentum that we have there.
All in all, with this redesign, we're better positioned as a company to address the portfolio of opportunities that the world is putting forth. In Mobile Solutions, we're gonna use our technologies to improve efficiencies and fuel economies in all the end markets. That includes in alternative fuels. Rich will give you better examples on the alternative fuels opportunities in Donaldson, which happen to be very strong yet this morning. In the Industrial Solutions portion, we will continue to get deeper with our customers, our model in order to be able to meet those challenges. Within Life Sciences, there is clearly an increasing need of cell and gene therapy as well as membrane applications for disease treatment and cures, and Donaldson has the technology to be able to answer that call.
Andy will give you a better look at that a little later this morning. We're also happy to be able to play a role in the world's path to zero emissions. In fact, as the world continues down to the zero emissions path, Donaldson's technology play very well. Within the next generation of diesel engines, should they go into hydrogen-based combustion or any type of alternative fuel there, our technologies, we're already the leader in air and liquid, and actually if you take the liquid and the gas challenge, it's the same. You gotta get rid of water and you gotta get rid of particulate. From a filtration standpoint of view, all of us filtration geeks, we just shrug it off and say, "We know how to do this work.
Let's go win." Hydrogen fuel cell is terrific, Rich will explain a little bit later that that actually opens up really strong possibilities for Donaldson Company because the gas in a hydrogen fuel cell has to be cleaned even more than the air in a combustion engine. It has to be a pristine gas, and he'll explain further a little later. In batteries, the battery vent opportunity where you have to keep the pressure regulated within batteries, really, therefore, allowing us to release this new product of the battery vent, the dual vent, gives us terrific opportunities.
On break, in the back of the room, you have an example, on the round table there of a hydrogen fuel cell filter, but you also have a mock-up, it's about clock-size, of the dual battery vent, and then next to it you have the actual size of that battery vent. When you look at that battery vent, think about how many battery cells are in a car and the opportunity for Donaldson Company per vehicle platform. Andy will talk further about that later today. Our strategic priorities for growth are, we're gonna extend into underrepresented markets, extend our market access across all three segments. We're gonna continue to invent cool things and continue to have leadership position of technologies and solutions, and we're gonna buy companies. We're gonna have organic and inorganics as important portions of our strategy.
Going a bit deeper into the acquisitions portion of our strategy, when you look at this is the way that we embrace how we're going after our acquisitions pieces. First, clearly, we would like to buy companies in the life sciences space. We would like to buy companies that will help strengthen our core filtration capabilities. Michael's gonna show you a lot of core capabilities that we're very proud of, but we also know there's more. We can either invent it organically or we can buy it. We keep our ear to the marketplaces, and if we have an opportunity to buy it, strengthen the corporation, we will. Those are the two types of acquisitions that we primarily covet. If you just take life sciences here on the slide, we buy established life sciences companies.
Great example of this is Matteo's joined the company and Solaris, a fantastic company. We're really happy to have him, and we're now looking to use the power of Matteo's skill sets and his team's skill sets and Donaldson's balance sheet in order to be able to move Solaris forward. It's a lot of fun when you actually talk to customers about growing alternative proteins. Emerging life sciences companies. Purilogics with Jin and Isolere Bio with Kelly. We look to use the power of Donaldson's balance sheet in these pre-revenue companies. Scott will later show you a mapping of how we're looking at the life sciences pieces and try to explain why this all comes together for you. It'll be as clear to you as it is to us, hopefully at that, at that period of time.
We believe buying these two companies and having their whole teams join Donaldson Company, we believe one plus one equals three in both those opportunities, and they bring new end markets to Donaldson Company. Third, we look to grow and buy core filtration type of corporations. We look to integrate all of those types of acquisitions, clearly build them to scale, and grow overall Donaldson Company. Which leads me to the slide that you've all been focused on as a result of the press release as a result of this morning. In 2026, our target is to be $4 billion as a corporation. That represents roughly a 6% compounded average growth rate.
We're gonna expand our operating margin over 100 basis points over the next three years, at midpoint, our operating margin will be 16%. Over that cycle, our incremental margin will be 20-plus%. These are strong numbers that we're very proud of at Donaldson Company. We don't put them forward lightly. We put them forward having very detailed plans. Our segment leaders will be showing you those plans here yet this morning. I wanna leave you with the following takeaways. We are the leader in technology filtration. We are just really at the end of it all, a bunch of filtration geeks that love what we do. We have best in class technology. Our technology enables a more greener modern economy. Our strategic growth plan is balanced and achievable. We're progressing toward Life Sciences market leadership.
With that, I'd like to introduce you to Ashley Merrill, our Director of ESG and Sustainability. Ashley.
Thanks, Tod. Good morning, everyone. As Tod mentioned, I'm Ashley Merrill, and I lead our ESG and sustainability efforts here at Donaldson. Before I get started, I just wanna give a little bit of background on myself. I've been at Donaldson a little over four years now and almost two years in this current role. Prior to Donaldson, I've had different cross-functional leadership roles, including finance, accounting, and strategy, which have been extremely beneficial in the ESG world. As you listen to my presentation, I have a few key messages for you. One is, I'll start by introducing our new sustainability strategy that we're already executing on, and it's grounded by our company purpose, advancing filtration for a cleaner world. Second, as part of this strategy, we're establishing 2030 targets that are specific and measurable.
Third, we are creating sustainable outcomes and long-term value for our stakeholders through this strategy, through our products and our practices, and I'll provide some examples of how we're doing this. Lastly, the key to executing our strategy is integrating sustainability into everything we do at Donaldson. I'll also provide some examples of how we're doing that. I'd like to start with strategy and by introducing our new sustainability strategy, Filtration for a Thriving Future. As I said, this strategy is grounded by our company purpose, advancing filtration for a cleaner world. It's not a standalone initiative or a new direction for us, but rather it builds upon our existing company principles that Tod mentioned. These are again, act with integrity, engage and empower employees, deliver for our customers, cultivate innovation, operate safely and sustainably, and enrich our communities.
I like to think of these as the how we interact with each other and how we interact with our stakeholders. This sustainability strategy is really how we prioritize the choices we can make to deliver value to all of our stakeholders. It's through our products and our practices that we can have a positive impact today and create a thriving future for tomorrow for people and the planet. This strategy is a framework for how we enable sustainable outcomes for our customers, for our employees, and for society. Along with this strategy, today, we're rolling out and announcing our 2030 strategic sustainability ambitions. Before I walk through these, I just wanna level set on some terms on this slide. First, again, our principles are the how we work together and how we work with our stakeholders. Our aspirations are what we ultimately strive to do.
They're aspirational and broad, whereas our 2030 ambitions are specific and measurable targets. These ambitions hold us accountable to those principles while also putting us on a path to achieve our aspirations. Now I'll walk through each. The first one, Donaldson is committed to helping do our part to mitigate climate change. To do this, we're targeting an absolute reduction in our Scope one and two greenhouse gas emissions by 42% by the end of 2030. This goal is science-based and also aligns to a 1.5 degrees Celsius global warming scenario. I wanna emphasize, and on the next slide, I'll share an example, that these aren't just targets, but we actually have detailed action plans and roadmaps to achieve these targets. I'm also extremely proud of the many individuals globally who are working on these initiatives daily.
A good example of this is our environmental health and safety teams who have an EHS framework that help provide safe and healthy workplaces for all of our employees. Our 20/30 safety ambition is to have year-over-year reductions in life-changing events, and we strive to consistently have zero life-changing events. At Donaldson, we strongly believe that having a richly diverse and inclusive culture drives innovation and helps us deliver for our customers. We wanna advance opportunity and continue having equity in our workplace through our recruiting, our retaining all of our policies and our procedures. To do this, and to further our commitment, we aim to increase the number of women in global leadership positions to 35% by the end of 2030.
This represents an increase of 15% percentage points from where we are today. We also strive to improve our racial and ethnic representation in global positions and also leadership positions. Lastly, enriching our communities is a huge part of our culture here at Donaldson. Our employees give their time, their talents, and their resources to many different organizations throughout our communities. Our Donaldson Foundation has a focus on education. To further improve or further commit to this focus, we aim to increase our charitable giving through our Donaldson Foundation by 25% every four years, giving at least thirteen and a half million dollars from now until the end of fiscal 2030. Again, these ambitions are specific and measurable, and they align with our company purpose and our company principles.
To learn more about our sustainability efforts, our sustainability report, which all of you here today have a copy with you, has been published on our website today, along with our first-ever Task Force on Climate-related Financial Disclosures or TCFD report. Like I mentioned, these targets not only are targets, but we have detailed execution plans to go along with these to achieve them. Our approach in setting these ambitions was first to think about all of our different sustainability efforts and prioritize them, think about what our aspirations are, and then set targets with detailed execution plans. As an example, here's a greenhouse gas roadmap. One thing to note is we're not just starting our greenhouse gas reduction journey.
In 2019, we set a near-term target to reduce our greenhouse gas emissions intensity by 5% by the end of 2022. I'm proud to report that we exceeded this target and achieved an 18% reduction in our intensity measure, which equated to an absolute 8,000 metric tons of carbon. We were able to achieve this through execution of energy efficiency projects at our plants globally while also implementing solar arrays at certain sites. As we shift from our short or our near-term target to our long-term 2030 target, we'll use what we've learned in the past couple of years to achieve that target. We'll continue executing energy efficiency projects at our plants. We'll also keep evaluating on-site solar where it makes financial sense, and we'll also increase our renewable electricity purchasing.
Right now we're investigating a power purchase agreement in the United States, and we're partnering to do this with one of our strategic customers. As you can see, this isn't just at a target, or we didn't just set a target and hope to achieve it, but we put together a global roadmap to achieve this target. Sorry about that. A huge part, a large part of executing on our 2030 ambitions is to make sure we're integrating sustainability into everything we do at Donaldson, into our processes, into our culture, and ultimately into our solutions. A good example of this is our Product Sustainability Impact Process. This process is used by our design engineers to integrate sustainability into the thought process of designing our filters, our solutions.
This process uses lifecycle thinking, while designing a filter, thinking about the lifecycle of that filter from the time we're purchasing raw materials all the way to the grave or end of life of a filter. A good example of this was a team of Donaldson engineers redesigned an engine filter for one of our large Mobile Solutions customers. The team was able to identify three key product design decisions that had sustainability benefits. One, they chose a different plastic that was less carbon intensive to use. They used less parts with the new filter, which then also simplified the manufacturing process. On the right-hand side is a spider chart, and the dark blue line represents the impact, the sustainability impact and cost impact of the old filter, whereas the light blue line represents the impact of the new filter.
As you can see, this team was able to reduce the water consumption and the energy consumption in manufacturing this filter, the new filter, which equated to a 14% reduction in greenhouse gas emissions and a 33% reduction in water consumption. Not only was this team able to reduce the resource inputs for the new filter, they were also able to increase the functionality of the filter for the customer while also lowering the manufacturing cost to produce the filter. This process is currently being rolled out globally and helps drive holistic product improvements for our customers. I provided an example of how we're integrating sustainability into our processes and our solutions. I'd also like to provide an example of how we're integrating it into our operational excellence and growth as a business.
Donaldson uses lean manufacturing techniques, and we also consider our environmental footprint when designing new facilities. So in 2021, we announced a plant expansion in León, Mexico to help meet increased customer demand. When we were designing this facility, we considered cutting-edge sustainability features, things like LED lighting with sensors, a state-of-the-art high efficiency compressed air system, all of which help reduce our impact on the environment, but also help us achieve our 2030 ambition while also reducing the ongoing costs of the plant. Now that I've provided some examples of how we're integrating sustainability into our processes and our growth as a business, I'd like to just give a couple examples of how we're enabling sustainable outcomes for our customers.
As you'll see through many of the presentations today is Donaldson offers many different products and solutions for an array of applications and customers and industries. I'm just gonna provide two examples of how our products drive value and also enable sustainable outcomes for our customers. On the left-hand side are our alternative power solutions, which include proton exchange membranes, battery pack vents, Tod already mentioned those, and fuel cell air intake filters that Tod also mentioned. These products support our customers transition to alternative powertrain technologies and also support a transition to a low carbon economy. On the right-hand side is a picture of one of our Solaris bioreactors.
These bioreactors are being sold to alternative protein producers, and these customers are providing an alternative to traditional meat proteins for a growing population, and also as an alternative to those meat proteins, are helping reduce greenhouse gas emissions, methane specifically. Again, as you'll see through the presentations today, Donaldson is cultivating innovation and delivering sustainable outcomes for our customers. Key takeaways that hopefully you heard throughout my presentation is that we are already enabling our sustainability strategy that is grounded by our company purpose, advancing filtration for a cleaner world. With that strategy, we're gonna hold ourselves accountable through our 2030 measurable targets, and we are creating long-term value for all of our stakeholders through our products and our practices. Lastly, this strategy works because we're integrating sustainability into everything we do at Donaldson.
I'm really proud of the journey that we've already been on. I'm confident that we'll continue driving value for our company for a long time to come. With that, I'll turn it over to Michael Wynblatt, our Chief Technology Officer.
Thanks, Ashley. How's the microphone? Can you hear me well? Great. Good morning. I'm Michael Wynblatt, Donaldson's Chief Technology Officer. Donaldson has a strategy of technology leadership. That's exactly why I joined the company five years ago. You know, there's lots of different ways that a company can compete, but as a techie guy, you wanna be at a company where the plan is to have superior products through innovation. I've been here five years. That's the plan. I've been enjoying myself so far, but it's getting even more exciting now as we're entering new markets, and we have a chance to apply our technologies to problems that nobody's ever solved before. Key messages I'm gonna try to convey today, they all touch on the theme that our technology leadership strategy is working because filtration and the purification of fluids is really crucial in a lot of applications.
High performance matters and the problems can be quite complex and challenging. Donaldson has two core capabilities in custom micro materials and custom chemistries that are able to solve many of the toughest customer problems. They've been working for us in our existing markets, but they're also work in any market where purification is important, like the life sciences. You're gonna hear how our filters sit in a key location to use sensors and analytics to provide important intelligence back to the customer. I hope you'll conclude that as our technology leadership strategy has worked well in the past, it continues to deliver differentiated solutions, and it's leading us to even bigger opportunities in the future. Why is technology so important in filtration?
Well, as an example of the difficulty of purifying fluids, I'm gonna use one of our traditional markets, which is diesel fuel filtration. We'll talk later about how the same issues apply in lots of other markets. Our filters sit upstream from fuel injectors. Because of improving emissions regulations, they've gotten very sensitive and expensive. If you wanna repair a single fuel injector on a truck engine, it could cost more than $1,000. In fact, the global market for fuel injector repair is more than $4 billion a year. It's a big problem. Our filters sit upstream of the injector, and in order to protect the injector, we have to take care of the contaminants. Well, the first contaminant we gotta deal with are particulates.
This could be dust in the fuel or could be shavings off the fuel pump. You can capture these particles using a sieve. The question is, how big should you make your sieve? The particles can vary by a factor of 100 in size or even more. If you size for the largest particles, then the small ones will go right through. If you size your sieve for the smallest particles, you're gonna introduce resistance to the flow of the fuel, so your fuel pump has to work harder. It's an energy drag on the system.
You're going to have to design that sieve pretty carefully, that's just the beginning of your problems because diesel fuel also has water in it, and water will flow right through a sieve, and it'll mess up your injectors just as badly as the particulates will. The chemistry of diesel fuel is really complicated. There can be varying amounts of biodiesel. There's all kinds of performance additives that they add in there. There are actually microorganisms that grow in diesel fuel. By the time all this stuff has gone through a complex distribution system and it's been through temperature extremes, and they've interacted with each other, it gets to our filter and forms this kind of unique sludge. This can be unique from truck to truck or even from month to month.
Our customer needs us to remove the particulates, remove the water, remove the microorganisms, but not remove the additives, not introduce too much resistance to the flow, and even in the face of all this sludge, not clog up for 6-12 months. How can we do that? Well, fortunately, that's what we're good at. For more than 100 years, Donaldson is building core capabilities in custom micro materials and custom chemistries. First of all, we can physically separate contaminants from a fluid by designing microstructures that have the right properties, for example, to make one of those sieves. We use wet-laid media, which is our traditional filtration paper, that can be made with cellulose or synthetic fibers, also, glass fibers. We have multiple technologies in-house for making nanofibers just 300 nanometers in width. They can be even smaller than that.
We have multiple technologies in-house for making expanded membranes like our PTFE membranes. Recently, we developed the capability to design and manufacture cast membranes. They're great for removing, for example, bacteria from fluids, and we're about to go to field trials with our first products made with our own cast membranes. We can apply any of these technologies to any application. Oftentimes, we have to apply two or more. Our competitors can't always do that because they don't have the breadth of expertise for the spectrum of different technologies. That makes a great sieve, but sieve is only half the battle. Remember I mentioned the water? We also need to be able to chemically separate using absorption, adsorption, or other kind of chemical bindings to separate the good from the bad. A great example of this is our CarbonWeb technology.
It can absorb volatile organic compounds, ozone, CO₂. We use that in a lot of our products. Our newly acquired Purexa and IsoTag technologies use proprietary chemistries to capture very specific organic molecules. These were conceived for use in bioproduction, but they can apply in many applications of organic separation. Finally, we have our water coalescing technology, which is in fact how we remove water from diesel fuel in a product we call Synteq™ DRY. To solve a problem like diesel fuel filtration, you need to apply the most appropriate micro material or maybe more than one, and the most appropriate chemistry or maybe more than one to make a comprehensive solution. Synteq™ DRY is a great example of that.
It's the only product on the market that can remove 99% of water when it's clean and new, even after months of exposure to that sludge, it can still remove about 50% of the water at its end of life, all the while removing particulates and meeting those other criteria that I mentioned. It's only because of our core capabilities and the breadth of technologies that we can go to that we can solve complex problems like that. We've been working on those capabilities for decades, there's been an opportunity recently to add a new capability. The price-performance curve of sensors and microprocessors has been improving, in a lot of industries, people have been able to make connected, intelligent products, what they call the Internet of Things, right?
Intelligent products are even more important in the filtration industry because our filters sit in a unique location that in the working fluids, they're able not only to purify those fluids, but they can learn about the operation of the entire system. I'll give you an example of that with our oil filters. We put a sensor on our oil filter so that it can measure the remaining useful life of the filter. That's a great value proposition. The customer knows when they're gonna have to change the filter, so they can optimize their maintenance cycle. They can reduce their total cost of ownership. Good value proposition. We can go a step further. Because we're in that oil, we can actually measure how the oil is degrading.
We can tell the customer how much longer their oil is gonna last or when they have to change it. That's an entirely new value proposition for Donaldson. We can go even a step further. We can identify particular contaminants within the oil. For example, we're able to identify coolant in the oil. Well, why would you have coolant in your oil? Only if you have a coolant leak. Now we're able to alert the customer if they have a coolant leak. Because our filters sit in those key working fluids, they can gain a perspective about the customer's overall operation. We've been investing in sensor technologies, in data science, and modeling capabilities so that we can offer these new value propositions to our customer. Well, we've been investing, in fact, in all our capabilities. We now have over 1,300 scientists and engineers.
They're the ones who did all the good work that I get to tell you about today, I know they're watching on the webcast, so thank you to everybody. If you stay for the tour, you'll get to see a slice of our more than 160,000 sq ft of laboratory space that the scientists have to practice their craft. We even have full scale pilot production capabilities where the scientists can scale up their inventions. All of this investment, as Tod said, has led to over 2,700 active patents. We're not done yet. We've been increasing our investment in R&D over the last six years at more than 6% average growth per year. We're making these investments because it's working. Our revenues are increasing.
We're consistently getting over 15% return on investment, and we're consistently able to use these capabilities to enter new markets like the ones that I'm showing there. Our core capabilities are preparing us for the electrification of heavy duty vehicles by allowing us to create new products appropriate for fuel cell and battery electric vehicles. Fuel cells offer a great opportunity for Donaldson's existing capabilities to differentiate us. Starting right in the middle with a proton exchange membrane, typically, it's the heart of the fuel cell, right? It's usually made of Nafion on a PTFE substrate. We've been manufacturing that PTFE substrate on behalf of fuel cell makers for many years. In fact, we're on our sixth generation of fuel cell membrane product as we optimize its performance. Fuel cells use hydrogen as a fuel, and just like diesel fuel, hydrogen works better when it's been purified.
We've identified opportunities both in the distribution infrastructure and on the fuel cell vehicle for hydrogen filtration, and we're working on both. Just like a diesel engine, a fuel cell has an air intake, and we've been providing air intake solutions for fuel cells for many years. We're a leading provider. It's really important in fuel cells because they're particularly susceptible to contamination. Even a few parts per million of a chemical like sulfur dioxide could permanently poison your fuel cell. We're working with our proprietary micro materials, next generation chemistries, so that our next generation air intake products are gonna leapfrog over the state-of-the-art in the market as in terms of performance. Now, on the battery electric world, there are a lot of different new battery technologies. One of the most promising is called lithium-air.
You may not know, but lithium-air batteries require an air intake. Just like a fuel cell, they're very susceptible to contamination. We've got a project to make a custom air intake system or air cleaner for a lithium-air battery. Both fuel cells and batteries require venting so that during normal operation, they can breathe, but in emergency conditions, they can burst and release pressure. Because of our expertise in PTFE, we've already been able to launch burst vent products both for fuel cells and for batteries. Finally, there's an opportunity for us to actually improve the performance of the battery itself. It turns out that the performance of a battery is significantly impacted by the size and consistency of the particles in the cathode. It's what they call the cathode active material.
We've come up with a way to use our nanofiber technology to regulate the size and consistency of the cathode particles. We think it'll increase both the battery capacity and its lifetime. The global market for cathode active material is pretty big. It's growing fast, so we're pretty excited about this technology. As the world changes, Donaldson's core capabilities remain relevant because as technologies get more sophisticated, it often comes with a parallel requirement for increased purification. That's true in our existing markets, and it's true in our new markets, like bioproduction. That's the production of biological elements like cells, proteins, DNA, typically for biopharmaceuticals, but increasingly for all kinds of applications like cultured food production. Our core Donaldson products play well here. We have filters that can sterilize water and air. They sell well in this market.
It's our new technologies that we're really excited about the opportunities for. Our new acquisitions, Purilogics and Isolere Bio, have proprietary chemistries that are disruptive for the $7 billion process chromatography market. You're gonna hear more about that later from my colleague, Andrew Dahlgren. Those same process chromatography columns, they use a lot of solvent, and the FDA requires that one common solvent be 99% pure. As they use it tends to pick up water. That's a problem because as the water and the solvent mix, their boiling points get closer together. It's what scientists call an azeotrope, and it makes them very hard to separate. The second problem is that the contaminant is hazardous. When it gets contam, excuse me.
The solvent is hazardous, so when it gets contaminated, the customer has to pay someone to haul it away. Well, remember I told you we're good at removing water from things? We've developed a technology for removing the water from the solvent, return it to 99% or better purity so that the customer can reuse the solvent in their chromatography column. That's gonna save them money twice. They don't have to buy as much solvent, and they don't have to pay someone to haul it away. It's a $100,000 savings per chromatography column per year and a $1.6 billion market for us. There's a parallel application to that upstream at the bioreactor in cultured food production. The feedstock that they use tends to be pretty expensive, and it gets contaminated by cellular waste, things like lactic acid, ammonia, cell debris.
We're working on technology to remove the cell waste from the feedstock, to clean up the feedstock so that they can continue to use the same feedstock in their cultured food production. It's funny, when we talk to the customers about that seems like a miracle. To us, it's just another purification problem. In the bioreactor, most of the processes today are what they call a fed-batch, which is basically a batch process. They keep adding nutrients and other ingredients to it. What they'd really like is a continuous process where they can pull out the good cells, add nutrients, pull out the waste in a kind of a continuous cycle. They call that a perfusion system. One of the roadblocks to a perfusion system is the filtration.
The filters tend to get clogged up with cells and cell debris, and so they're constantly having to change the filters. We've developed a microfluidics solution that separates things by buoyancy. It turns out to be just the right thing for separating cells from fluid and other debris. We think we'll be able to continuously pull off the good cells from a bioreactor and be a key enabling technology of perfusion systems in the future. Donaldson continues to acquire companies in the bioproduction space. It's adding to our technology toolbox, and it's helping us to build domain knowledge about the bioproduction applications. In the end, our core technologies of custom micromaterials and custom chemistries are relevant in any application where purification is important.
Just like we can move horizontally into new markets, we can also move vertically with our technology, for example, in the launch of our industrial services business. Intelligent filtration powers our iCue connected dust and mist collectors. We offer new-to-the-world capabilities like pulse valve health monitoring. We can tell the customer when their pulse valve is about to fail. We offer dramatically improved technologies like our bin level sensor. Our competitors' sensors tend to get confused in the incredibly dirty environment that is a dust collector bin. Our sensor, which works on millimeter wave technology and software analytics, can work in the dirtiest environments. iCue can even help you fill in some of your compliance paperwork for EHS issues. We've also recently launched a technology that can simulate the flow of air and contaminant through a whole factory.
Our sales folks can place their fume and dust collectors optimally so that the customer gets the maximum impact for a given investment. Our plan is to combine these two technologies, the real-time data from iCue and the simulation of contaminant flow, to make a kind of a digital twin of the plant. Our service professionals in the future will be able to use the digital twin to monitor changes in the plant, including real-time events, predict what's gonna happen with the contaminant, and then offer the solution that has the optimal result based on the simulation. We'll be able to provide the most cost-effective service because our digital twin will allow us to have the best understanding of what's going on in the plant and choose the solutions which have the most optimal results.
I've given you lots of examples where purification is really important in the applications and high performance matters. We've seen that the problems can be quite challenging because of the complexity of the contaminants. I've also given you a lot of examples where Donaldson's core capabilities, custom micromaterials and custom chemistries, are able to solve tough customer problems. I've shown you that our filters sit in a key place to use sensors and analytics to provide valuable intelligence to the customer. Our technology leadership strategy has been working. Revenue's increasing, and we're getting consistent ROI. We're really focused forward now as our core capabilities are leading us to even bigger opportunities in the future in new markets. Thank you for your time. Now I think we're gonna go to a Q&A session.
Great. Thank you, Michael. Yep, if anybody has a question, just raise their hand. We'll come around with some mics. If you could just say your name and what firm. Thank you.
Hi. Dan Rizzo from Jefferies. Just to kind of drill down on it, you're focusing now on larger equipment or service agreements, and kind of shifting a little bit away from just the filter within the system, or are we still focusing on the media, the filtration media within the equipment, or is it just a larger piece of equipment that you're kind of shifting towards selling now?
No, nothing really changes in the fundamental industrial-based businesses, for example. There are times we'll just sell replacement parts, for example, for some competitor's system, but we're also in the systems business. We'll remain in the systems business. In our dust collection business, for example, we're number one in the world. We expect to remain number one in the world. Okay? Nothing changes relative to the systems-based approach or our replacements-based approach. Remember, we're proprietary razors to sell razor blades. Sometimes it looks different in, say, Rich's business than it does in Guillermo's business because Guillermo might be a larger system in all steel, but then Rich might just be an intake system of all plastic.
It's still the same concept, and it's still the same concept then in bioreactors, et cetera, to be able to get into the replacement parts and improve our performance for our customers.
All right. Thank you.
Thanks. Nathan Jones, Stifel. Tod, I'd like to talk a bit more about the strategic org and org redesign that you guys have put in place. I talked to Scott a little bit about it, can you talk about, you know, the rationale behind it, what you hope to achieve out of it, how it changes capital allocation within the business? Just any and as much color as you can give us on what changed and what you think it enables for Donaldson.
Sure. What really changed for us is we were a matrix-based organization geographic previously, so we would have verticals at our two segments, but then we would have essentially miniature Donaldson across four different geographies, Europe, Middle East, Africa, Asia, Pacific, et cetera. Consequently, we would have that collaboration necessary in a matrix-based environment. Slowed us down. Worked fantastic for the company's history till we got to about $2 billion. You hit $2 billion, you start to have more people involved, gets a little bit slower. What we decided, in order to be able to speed up the overall corporation and our reaction to the customers and the market-based needs is we need to go vertical.
That allowed us then to laser focus on where our opportunities are and then make more precise strategic investments in order to press the accelerator where we possibly can. Frankly, it simplifies the overall operations of the corporation. You know, Scott and I used to do a tour every year for the last five years where we'd literally go around the world, and we'd budget the company because we hate peanut buttering, right? It took something like that in the previous organization to be able to make sure we were properly allocating our investments at our best opportunities. It's not like that anymore. Okay? What it is, "Hey, segment leader, you owe the company this, and you owe the company this.
Let's talk about the strategy, and we'll give you a bucket of money," because now we get to look across our opportunities more readily. It's really exciting time, and you can feel the energy across the corporation as you really travel the world and interact with the people. We're really excited about it.
The Life Sciences piece of the pie at $21 billion, you guys are gonna be, like, 1% of that this year. Is that truly what you consider to be your addressable market for Life Sciences, or is it some subsegment of that? You know, where do you envision Donaldson's share in that long term?
Chromatography and biologics, we're gonna be number one. Long term, we're gonna be number one. Okay? It's gonna take a while. We'll continue to do it through organic invention and inorganic. We've got a great start. Really happy with the start, and we'll continue to invest in that and move it forward. Yes, that's really our addressable market. Yes, that's exactly where we're concentrating, and yes, we have an opportunity to win because of what we have in our laboratories and our balance sheet.
Thank you.
Michael, you're walking through the kind of natural value proposition of iCue and the facility modeling tool. What's the current scale of that revenue stream or combined revenue stream, and how does that factor into on a go-forward basis, the expanded industrial TAM?
I think Guillermo is actually gonna talk about that later. Is that fair?
Yeah.
Yeah. we'll get to that in the afternoon or late morning.
Okay. A quick follow-up, more so clarification point. Tod, you'd mentioned 50% custom solutions. Exactly how is that defined? You know, we think in terms of your proprietary product offerings, custom is somewhat new in terms of the terminology for Donaldson.
Yeah. Rich is gonna tell you about the proprietary-based offerings. They're more like 30% within that particular model. What we wanted to point out to you is 50% of our offerings to the customers across that $3.3 billion are specific to a customer needs. It may not always be proprietary, but because we have to shape it to what the customer wants, it almost becomes proprietary, though it may not be patent protected, just simply because what we brought to the table in the applications engineering experience, et cetera. It's really intended, that number, to show the power of the organization and how we have deep relationships with our customer because we solve real tough things.
Understood. Thank you.
Thank you. Rob Mason with Baird. wanted to go back to the R&D conversation. It looked like you showed, R&D growing at just over a 6% CAGR over the six-year period. Is that similar growth rate what is embedded in the next 3 years? Or if you could just speak to how you're thinking about R&D growth. At one point, there was the expectation it would scale up to 3%-4%. Just with respect to that target, maybe what's embedded in the plan. Then, you know, secondarily, speak to how ownership of R&D is now being handled, given that you've got these segment leaders and you also try to get leverage with R&D across the organization. Just speak to that.
3%-4%. We put 3%-4% out there, you know, a lot of things happened between here and there, the pandemic, et cetera. What that number was really intended to say is, "Look, we're gonna be serious about this, and we are not gonna choke off investment in R&D and Michael's organization." Today, we start our budgeting cycle with how much money does Michael need. We budget him, and then we decide, "Okay, what's left for the rest?" We're gonna continue to do that throughout that cycle 'cause we're a technology-led filtration company, and we're gonna stay number one. We're gonna continue to invent cool things as a corporation, and we're gonna be up here 3 years from now and tell you exactly the same thing about how great things are because we brought them to market.
That's just who we are. That's the fabric of the corporation. That's how we look going forward. If you look at the budgeting or the overall allocation within the targets that we've given you, we've baked that mindset into to be able to expand the operating margin to 16%, et cetera. It's all in there. We're very comfortable with that kind of a model with being supported by the targets today. We may not hit 3%, Rob, but I can assure you it's likely because the company's growing faster than we originally thought, and Michael is not going to be cheated out of any investment.
Tod, can I add to that? The second part of the question about how the decisions are made, it's really important in the company that we have centralized technology that can be applied across all the different applications. I gave you lots of examples where the technology that we used from one product, and then we ended up using it someplace else. We do have a centralized technology organization, but all of the segment leaders have product engineering and application engineering as well. There's lots of opportunity for them to customize, you know, based on what they understand about the customer needs
Thanks. Dillon Cumming from Morgan Stanley. Was wondering if you can talk about the battery element. I think in 2019, right, you were kind of highlighting that there was only an incremental opportunity in hydrogen fuel cell versus today, it feels like there's more content on the battery side in addition to the hydrogen opportunity. Can you just talk about, you know, fill-in potential for lost diesel sales, what you've done to kind of grow out that part of the business, and what there still is to come on that front?
We have some opportunities clearly as alternative powers come forward. We're focusing on all three possible outcomes. Our belief is it'll be really a combination of possible outcomes. There's not gonna be one particular winner platform. Consequently, we wanna be able to have the technologies to press forward into all of those. Our battery vent opportunity is a wonderful opportunity within. If automotive goes all EV around the world, it'll be a multiple $100 billion business for Donaldson Company because we've got the number one technology. As you get into hydrogen, that's a terrific opportunity for us because that hydrogen has to be pristine, and that's just a filtration project for us, and we're really good at absorption, adsorption, and all the things that Michael actually said earlier.
What we're gonna do, Dillon, a bit later is Rich is gonna give you probably a deeper look into some of that technology and how we're viewing that whole transformation taking place in alternative powers and alternative power. I'm gonna ask him to go deeper and really give you a more defined understanding.
Okay to ask a question or should I wait for Scott?
Um.
Like the 48%. I don't
Yeah. You might wanna wait for Scott.
Should I hold? Okay. I'll hold off.
What?
He's saying-
I'll save the good ones for him.
either way, Scott
I don't want to get Scott to sequence.
Oh.
Make him, like, stay on topic. Don't want to get chopped down on his answers.
Hi. Vikram Kaura, Thrivent. When you think about, from a technology perspective, what is leverageable from your core business? What's leverageable between your core business and Life Sciences?
A tremendous amount. If you think about our expanded PTFE business, certainly leverageable. If you think about our wet-laid media, there are lots of applications where that can be a part of the solution in Life Sciences. If you think about our nanofibers, there's opportunities to use nanofibers. Our CarbonWeb technology, absolutely relevant in Life Sciences. Even the water coalescing, there may be opportunities there as well. Just of the things I flashed on the screen, almost all of them are relevant. And then there's other things that we haven't talked about today. It's really a technology company that happens to be focused on, you know, separation.
I'll get one in on sustainability. You said 42% reduction in absolute-
Mm-hmm.
Greenhouse gas emissions, that's independent of the level of revenue generated by the company? It's not like greenhouse gas emissions per dollar of revenue?
That's right. Yep.
How often are you planning on reporting that as we go along so that, you know, we can benchmark you as you go along, should the improvement be ratable? Then how are you thinking about and evaluating Scope 3 emissions?
Good questions. Thank you. We will report out our emissions on an annual basis in our sustainability report, which is similar to hopefully how you see it with other companies. Relative to Scope three as you saw in that roadmap, we did identify that we'll be doing a Scope three assessment in our roadmap, and that will be the first step in evaluating if we were to set a Scope three goal. I think as you saw with our plans, we're very detail-oriented and wanna be very thoughtful before we set a target. Our first plan is to do that assessment of which Scope three categories are material to us.
All right.
Other questions?
Any online by chance? Any coming from online?
Yeah.
Oh. Yeah.
Hi. Brian Drab from William Blair. Tod, you just said that the opportunity in EVs could be $ hundreds of billions. Can you elaborate on that? You talked about the battery, vent technology for the lithium-air battery. What are the other opportunities? What's the dollar content, and, like, aren't there other competitors there? I'm just. Wanna flesh out the $ hundreds of billions opportunity, and do all batteries.
I think I had an and in there, not a "b." $ hundreds of millions?
Yeah.
Yeah.
Okay.
on the battery-
I thought you said billions, that's why-
No.
Like, someone needs to ask about this. Yeah.
Yeah. I'm pretty sure I said hundreds of millions.
Okay. Which is important on the battery vent opportunity because that market is just over a billion-dollar market. It's like $1.2 billion-$1.5 billion, somewhere in there, likely, increasing as the world goes to the EV world. We have an exceptional head start on that with a really solid share, and as vehicles come online, more EV, we'll continue to see that grow. We've baked that within our forecast. Andy's gonna give you a little bit more insight into that specifically in those materials. That's just the battery portion. Now you have to deal with the rest of the vent opportunities on a car. You're talking about headlamps and all the way around, and our venting unit is really attacking that comprehensive on the automotive opportunity.
Hi, this is Anil Mittal from Mizuho. One question. The 6% CAGR over the next three years, does it account for the fully ramped up revenues from the newer acquisitions, which are mostly pre-revenue at this point? What portion of that do you attribute to the newer acquisitions?
Everything that we know as we continue to look to scale those pre-revenue acquisitions, as we understand the programs that we would expect to win has been baked in. It's all taken into account 'cause we now consider that not acquired revenue, we consider it organic revenue since Donaldson and those two companies are now part-partnered in order to be able to scale that forward. All that's in, and, you know, we'll look to buy more companies in order to further execute that life sciences strategy. It's all in there.
Great. If nobody else has any questions, we do have some via the web, but I think these will be addressed in the subsequent presentations. We're just running four or five minutes early. If we want to just break now, I think the questions that we have teed up will be answered over the course of the next few hours.
Fantastic. Let's take a 10 minute break.
Break.
We will return, 10 minutes. You'll know when. Okay, thanks.
Please. We'll get started in about a minute.
All right, we ready? Good morning. Thank you for joining us today. My name is Rich Lewis. I am President of our Mobile Solutions business. I'm going to share with you our vision and our strategy for this business over the coming slides. Just a little bit about my background. I've been with Donaldson for a little over 21 years. Prior to my current role, I led our global operations team for the prior six years. As you might imagine, the last three of that were pretty interesting. I'm really excited about the opportunities we're going to share with you. We'll jump in. I'm going to leave you with five key messages. I'm going to touch on each one of these in some detail. The first one is we are the market and technology leader in a large, growing, heavy-duty mobile filtration space.
Secondly, we've built a business that is resilient to the economic cycles that are common in some of our end markets. We have a proven growth model, and it's supported by strategic capabilities that we've developed over decades of leading in this market. We understand that our customers are on the forefront of a technology transformation to decarbonize their power sources. We're very optimistic about the opportunities that are gonna exist in this space, as well as opportunities on the backside of the diesel engine market, and I'll go into quite some detail on those points. Finally, you know, we're a mature market. We're a mature business. I'm highly optimistic about our ability to continue to grow, expand margins through mix and a series of business optimization initiatives.
I wanna start by level setting on our business, what it is we do. We're a large global leader of filtration systems to our OEM customers. We also sell replacement parts through multiple channels all around the world to our distribution partners. We've cultivated a technology leadership position with 30% of our sales coming from proprietary products, and I think there was a question earlier about custom solutions. Our number would be probably north of 70% on the first-fit side. We also have built a natural hedge against the economic cycles with 75% of our revenues coming from replacement parts. Our global presence, our technology leadership are some of the reasons that our 450 OEM and 5,500 aftermarket customers select us as their strategic filtration partner. One other reason that is important for us is our diversified product line.
We sell the most diversified product line in this space. We invest to be the technology leader in each one of these products. We leverage these investments by selling them across a wide spectrum of end markets. It's a $14 billion diesel engine market that we operate in. A little bit later I'll talk to you about what that looks like in an alternative fuel environment. We hold key leadership positions all around the world. With that said, we still see excellent opportunities to expand our position in the market. This slide here is really the heart of my story. This is why we win. This is really what makes us attractive to our customers. I think this is really the Donaldson DNA and Mobile Solutions. It starts with selling first-fit solutions. We secure our position on our customers' vehicles with market-leading technology.
We package that in engineered custom solutions that integrate seamlessly with our customers' vehicles. We're also selling brand integrity. Our product is designed to optimize and safeguard our customer's product. The second part of the model is selling replacement parts, and we do this all over the world. We have 16,000 SKUs that we distribute, manufacture around our global network to 27,000 end user locations. This annuity of revenue and margin allows both us and our customers to take those profits and reinvest back into our businesses. It's really the combination of this business model and these strategically capable advantages that we've developed that makes Donaldson the leader in this space. I wanna walk you through a couple case studies. This one just happens to be my favorite. this is a pretty incredible story here, and frankly, I've got three pictures on my office desk.
I got my two sons, and I got a picture of this filter. That's how important it is to me. I'll walk you through this one. It's a North America truck application. We'll just leave it at that. They brought us a problem that essentially said, "Hey, look, we want the same performance as the prior filter, but you have nowhere to put your filter. We're out of space." We used proprietary PowerCore technology. This provides the same filtration performance as the prior traditional pleated filter in half the space. Equally important is its ability to be configured in very unique shapes. You can see in the bottom right, that really wide flat structure sits right on top of their engine. Their engine, our filter, and then the hood of the truck is layered like a sandwich.
Our ability to custom engineer that into that configuration was almost as important as our ability to shrink the space down. We included with this filter patented interfaces that allowed us and our channel partners to go unchallenged in this market on the replacement parts for over 10 years. You can only buy a Donaldson filter to service this air cleaner. This has led to $180 million of revenue over a 10-year period, 86% of which was replacement parts. This filter has recently gone out of production. The replacement part revenues will continue on for at least another decade. We've also won the follow-on program, we're setting up the next annuity as we speak. It's hard to top that one, but I wanna channel my inner Steve Jobs here for a second.
These are insanely cool examples as well. The reason I say that is each case we solved a very difficult problem using Donaldson proprietary technology, and in every one of these, we improved not only their performance, but the sustainability of either our product or theirs. In the first case, we used our deaeration technology. This allowed us to shrink the hydraulic reservoir for one of our customers by over a third. That's a third less raw materials fit into the space claim that they had, solved a critical problem for them. In the second case, we displaced a local China competitor, for a large OE in China. We were able to extend their filter life by three times, and we were able to optimize the airflow through the system, which led to an over 10% improvement in fuel efficiency.
Again, solving problems, improving performance, and sustainability. The final case was an emissions device. Our competitor was struggling with emissions buildup in their system. This OE came to us, asked us to solve it. We actually have a proprietary mixing technology that we use in the emissions world. We put our system onto their vehicle. It stopped the intermittent shutdowns they were seeing on their engine. The interesting part is they took the same emissions device, and they deployed it on their first hydrogen combustion engine. This is really a good example of how solving problems opens doors for new opportunities for us. I've talked a lot about our business, what we do, and how we approach the market. I'd like to talk a little bit about the market we're in. In general, our markets are supportive of growth.
Agriculture, construction, mining, trucking, they're all going to grow with population growth. Additive to that are several factors that we think will drive higher market growth rates. I'll just mention a couple. Industrialization, so we're talking about continued urbanization, which drives infrastructure. There's a growing middle class around the world, generally drives higher levels of consumption. These are good for our end markets. As we move to a cleaner environment, there's sustainability investments to drive cleaner grids, new hydrogen pipelines. This is good for construction, good for mining. All of these we see as tailwinds for our market. That leaves one big market trend, and that's electrification, and I'm going to spend quite a bit of time on that so that we can come out as aligned as possible.
If we think about electrification, there's really three questions that we're trying to address. One, what does that adoption curve look like? Is it gonna be the same in China for a truck as it is in Europe for a combine? How does it look across regions, across applications? The second one is what technologies are gonna be required to decarbonize the environment through these power sources? Finally, what does it mean for Donaldson? What's the impact on our business? I'll get to the conclusions of that on how we see it here in a minute, but before I do, I'd like to just talk about some of the factors that are gonna drive those answers to those questions. The bottom of the left-hand slide is the regulatory environment.
Right now, there's over 190 parties that have signed up to the Paris Climate Agreement, so there's a tremendous amount of support for solving these problems. What we're paying attention to is what are the regulatory actions that follow on. Mandates, those are a good example of, okay, after this period of time, you have to have a zero emissions vehicle. Incentives that would spur the market to change more quickly than it would do otherwise on its own, and those are also partnered up with like carbon taxes. Right now, our perception and our study of the market is while each one of those, there are examples in the marketplace, we don't see it as an aggressive regulatory environment that's really gonna significantly alter the pace of the market change that's gonna happen anyway.
Barring a more aggressive regulatory environment, we believe the other three factors are gonna significantly drive the pace of change. Cost of ownership, you know, how much does it cost to acquire the new vehicle, operate it, the infrastructure availability to either fuel or charge your vehicle, and then finally, there's customer perception. You know, is the new technology gonna have the same efficacy and reliability as my old technology? We think that all of these factors are gonna be significant players in the pace of change. We've been working with our customers, studying the market. We have a very comprehensive model that we've developed that we're building our business plans around. I'll come to the conclusions on the next slide, but I'll just kinda leave you with this. The diesel market's gonna continue to grow for at least the next decade.
With the new alternative power solutions, there are significant filtration opportunities, and we're partnering with our customers to develop those products. I'm gonna walk from left to right on this slide. We started with, you know, the diesel engine market being a $14 billion market. You know, this is a 100-year-old market. There's supply chains, there's reliability of the technology, the applications, and the effectivity of it in the marketplace are all proven out. We see derivatives of the diesel engine playing a significant role, relying on all those things that we just mentioned, but running on lower carbon fuels. It could be hydrogen, biodiesel, compressed natural gas. All of these, we think, play a significant role. We have multiple customers on record, saying that these technologies will be either part of their portfolio or the primary part of their portfolio.
If we move over to the hydrogen fuel cell, excuse me for one second. We talked a lot about that earlier in the presentation. For us, we see this as maybe just one comment on the derivatives. More or less, the addressable market will be the same with the derivative technologies as the diesel fuels. When we move over to the hydrogen, we see this as being additive. It has a lot of the same filtration requirements as a diesel engine, but there are examples that require higher levels of technology. Fuel cell air intake would be one of those. Why we are excited about that is we are the leader in the air intake space around the world. We hold key leadership positions in every market around the world. We built our business off that product and technology.
It has the same filtration requirements as a diesel engine, plus it requires chemical filtration. We're experts in chemical filtration. We've been doing it for decades in our specialty applications group. We know this really, really well. We're able to apply that science to these problems, and we believe that will not only continue to lead in this space, but we have an opportunity to extend our position. Now, the last one's battery electric, and frankly, this one's not as attractive to us. Michael spoke about a couple opportunities. It is, it's a good opportunity. There are plenty of filtration opportunities, but from an addressable market, it's not as robust as the other two. Michael spoke about two potential technologies that if those were to materialize, those are game changers, and that would change our whole math on this model.
We'll have to see how those unfold over the coming years. I'd like to step back and just tell you, what does this mean for us? For us, the diesel engine market's gonna grow for the next 10 years at least. We're gonna grow as well. Secondly, there are a tremendous amount of opportunities with these new technologies. We are positioning ourselves through investments and partnerships with our customers to be in position to lead in this space in the coming years. Finally, when we talk about the diesel engine market, it's a $14 billion market. Half of that is served by what I would call niche filtration players. Don't get me wrong, these are good companies, but strategically, they operate in one region, they have one product line, or they're overly exposed to the automotive space.
We believe that our technology, global presence, and stability as a supplier is gonna be very attractive. We see an opportunity to consolidate share post-peak diesel engine production. As we look out to the F '26 guidance that we're giving, you know, the alternative power, we're really just setting ourselves up for the long term there. It's not gonna play a meaningful role in the numbers that I'm gonna share here in a minute. What we're driving for the next three years is really two things. One, how do we improve profitability through operational initiatives, and then how do we continue to profitably grow? On the operational side, it's the continuation of driving the Donaldson Production System through all of our plants, all of our distribution centers for additional productivity gains.
It's also the continuation of our footprint optimization efforts that we've been working on for the past few years. The last piece of that is commercial execution. How do we structure our contracts? How do we manage our long product life cycles so that that price-cost responsiveness is as tight as it can be? We feel really strong about the three levers that we're gonna be pulling to enable profitability. On the growth side, China and India remain very attractive markets to us, especially as the emission regulations grow to meet global standards. We also see areas of under-representation in some of our product lines. Michael spent a fair bit of time talking about our fuel filtration. We have the best technology in the world, bar none. We're winning business with customers that frankly were tied in with our competitors for 20 years based on that technology.
Our market share doesn't quite represent the technology we have. We see that as a nice growth opportunity. Finally, continuing to strengthen our aftermarket. I wanna spend a little bit more time on that. Strengthening our aftermarket is really important 'cause it does two things. It's a significant growth lever. It's also an ability to expand our margins 'cause it's generally a higher margin business. With the org redesign, we created a global organization around our aftermarket business. More autonomous, more nimble, so that they can continue to drive some of the same growth initiatives that have given us success, but to do it more quickly. Our aftermarket sales went from 50% of our revenues to 75% over the last 10 years. It's been a good run. We see excellent opportunity to keep going.
One example is we have dedicated engineering that gets up every day to release products for applications where we're not the first-fit supplier. Their target is to improve time to market by 25%. Allows us to claim a greater portion of the market share and set the pricing dynamics by being first. Overall, we see a lot of opportunity in our aftermarket business, and it's a key player in our F '26 targets that I'm gonna share with you. We have an incredible business. I feel very privileged to be leading this business. Our F '26 guidance on the top line is a 4% compounded annual growth rate at the midpoint. We're looking to expand our margins by 220 basis points from fiscal year 2022 to a 16% margin.
This comes from a combination of mix, leverage, business optimization initiatives, and commercial discipline. I am very encouraged with the team that we have and our ability to deliver these results. I'll leave you with the key takeaways for today. We are the technology leader in a growing market. We have a proven business model with multiple sustainable advantages that have been cultivated through investment and leading in this market for decades. The opportunities that continue to grow for us are certainly there, and we feel really good about our plans to deliver those growth numbers. On the resiliency side, 75% of our revenues come from replacement parts. Our business is very resistant to those economic cycles that are common in some of our end markets. We're in a position to lead in alternative power as those technologies come to the market.
As I mentioned, we're partnering with our customers. We feel excellent about our opportunities to solve those problems. We also see an opportunity to continue to grow in the diesel space and consolidate share on the backside of this market. Finally, we're gonna continue to grow the business, expand margins through a combination of mix and business optimization initiatives. Before I introduce the next speaker, I'd just like to give a shout-out to our 7,000 employees that get up every day. They compete, they win, they deliver for our customers in this space. None of this is possible without them. I'll be around later for questions. I look forward to haring your thoughts. Up next is Guillermo Briseno. He's a friend of mine, a colleague, and he's gonna cover Industrial Solutions.
Thank you, Rich. Good morning to everyone. Welcome again to Donaldson Company. For those of you here in the room, as well as the ones that are connected in a virtual way, thank you for joining us today, and thank you for your interest in Donaldson. My name is Guillermo Briseno. I am now responsible of the Industrial Solutions organization. A little bit of my background. I have been in the company for almost 20 years now. Before accepting this position, I used to be running our Donaldson Latin America organization for a period of years. Before doing that, I was also responsible for our industrial business within the same region for another period of years. Before joining Donaldson 20 years ago, I used to be a Donaldson Torit distributor from our industrial air filtration business. I was on the other side of the fence.
I think I understand what it feels to be a Donaldson customer, but I do understand what it means for us to deliver a great experience to our customers. Have been around industrial businesses for many years throughout my professional career. I'm very passionate about it, and that's why I'm very excited to be here today to share with you our thoughts regarding the vision and the strategy of this business going forward. With that, I would like to start by providing you with four key messages I would like you to take away after our conversation this morning. We will leverage our competitive advantages in order for us to drive and advance our Industrial Solutions competitive position in a large addressable market share with plenty of opportunities for us to grow.
We will also enhance our customer relationships with the implementation of an innovative business model that will deploy additional connected solutions and service capabilities in order for us to gain additional market share in the aftermarket, as well as to improve our customers' satisfaction doing businesses with us. We will also play a critical role with our customers' ESG and sustainability journey as we keep deploying sustainable solutions, and we help our customers operate them through the design values, and that we are very well positioned to deliver a profitable growth in the long term. With the redesign of the organization, Industrial Solutions represents now roughly 27% of our company revenues and pre-tax profits. We have a diverse revenue base comprised of 25,000 customers, supported by 2,700 great employees across our organization with an infrastructure of 26 different facilities.
With an unmatched value proposition that includes custom solutions and connected services to monitor equipment performance. We support almost every industry there is in the marketplace. Every company that faces contamination challenges because of dust, fume or mist, or have issues with their industrial gases or industrial hydraulics is a potential customer of us. With the redesign of the organization that we just completed a few weeks ago, as I was mentioning before, we play in a large addressable market, $15 billion. We have 6%-7% of the addressable market. In order for us to advance this position with this redesign, we organized Industrial Solutions around five business units. Industrial air filtration for dust, fume and mist collection applications for the industry in general. Industrial gases, this is the consolidation of two businesses of ours. On compressor and compressed air filtration ones.
This is basically solving the applications at the source, the compressor, and then all the way down the stream to the point of use of the application. Industrial hydraulics, this is leveraging the Hy-Pro acquisition, the one that we completed late in fiscal year 17 here in the United States, to support high quality filtration for hydraulics and lubrication fluids in order for us to protect and improve equipment performance. Power generation, also high quality filtration for air inlet systems, for power generation turbines, as well as for large industrial compressors. These four first businesses are going to be reported to the external community as Industrial Filtration Solutions, IFS. Aerospace and Defense. This one is coming to us from Mobile Solutions, our legacy engine business. Basically because they are not 100% dedicated to solve diesel engine applications.
We have found important opportunities within our product portfolios and technologies engineering capabilities as well within industrial air filtration and industrial hydraulics to support the growth of this business. Within this redesign and our competitive advantages, we are clear market leaders in the segment. We are number one in dust, fume and mist collection applications for the industry in general. We have also leadership in the development, design and qualification of high performance, high efficiency medias for a wide variety of industrial applications into the industry. We have what we believe is the most complete and robust product portfolio there is for the market. We complement our global value proposition with a global reach and availability. We have 17 manufacturing facilities, six distribution centers, three regional sales headquarters in order for us to support our customers in the best way that we can.
We have also deployed a global sales distribution network and applications engineering capabilities in order for us to help our customers tailor-made and engineer even the most complex filtration applications in the industry in general. We are also making progress with our operational excellence mindset as we keep deploying our continuous improvement culture in order for us to deliver best-in-class high quality products with industry-leading levels of service. These competitive advantages positions us well to address key opportunities and secular trends. With our product portfolio, we will support our customers' sustainability journey as we help them with our company purpose of advancing filtration for a cleaner world. Optimizing our customers' energy utilization, reducing their total carbon footprint as they keep operating with our different solutions.
Our connected and predicted solutions strategy will also help our customers reduce their total cost of maintenance and cost of ownership as they keep using our different systems. Our evolved business model will also align and integrate additional applications towards a complete connected ecosystem to support the use of automation and technology, IoT. We have also identified very good opportunities for us to enter within the electrification mega-trend, particularly with our industrial air filtration and industrial gases business units. Within this, we are clearly at the forefront of gaining additional market share with high return areas of the industry.
In order for us to address these opportunities, and as I have been mentioning before, we are evolving our business model so we can further leverage our competitive strengths in order for us to enhance our razor to razor blade business model by creating the solutions. We do believe on creating high quality first-fit engineered solutions in the marketplace. Connecting all of those solutions in order for us to provide real-time information to our customers about the performance of all of their systems. When the time is right, we will offer them access to our one-stop-shop approach, so our customers can find all of the replacement parts for Donaldson branded products as well as for other manufacturers' systems. In order for us to gain additional market share in our most profitable business segment, which is the aftermarket.
We will complement our value proposition within enhanced razor to razor blade business model, deploying additional service capabilities in order for us to help our customers restore their systems to normal values of operations, improve the performance of those systems, and reduce total cost of ownership. What we're trying to do here is to improve our customers' lifetime value accelerate our revenues, and improve our profitability. We understand very well that if we grow this business, we are positively leveraging the financials of the organization. With the redesign of the company, our competitive advantages, and the evolution of our razor to razor blade business model, we have a clear growth strategy to strengthen our leadership position in the marketplace.
With the implementation of this new aftermarket and services organization that is basically consolidating all of our replacement parts within a single umbrella to offer our customers a one-stop-shop approach and also to improve our customers' experience doing business with us. Expanding our technologies and solutions offering, we will also keep deploying our systems into the market, improving our connected solutions, and deploying additional service capabilities. All of this is in order for us to become the single source of filtration for the market in general, at the same time that we achieve profitable growth across our 5 business units. We take good pride on the service levels and great experience that we provide to our customers, and we have been historically successful in doing so.
There is always opportunity to do better, and we're trying to take this to the next level in order for us to drive additional growth at the same time that we support our customers' operations in a number of ways. For example, helping them reduce their total energy consumption and maintenance issues as they keep operating our systems within our expanded portfolio. Enhancing our customers' digital experience once we give them access to our one-stop-shop approach through our best-in-class e-commerce application, which has the best capabilities to cross-sell, cross-reference, and upsell in order for us again to win additional market share in the aftermarket. Improving our operations and forecasting capabilities to support best-in-class fill rates in order for us to have product available in the marketplace. Again, improve our customers' experience doing businesses with us. Moving to our connected solutions strategy.
This is an unmatched value proposition. This new market approach gets me really, really excited because it's gonna drive additional value for both our customers and Donaldson. Historically, we have been providing connected solutions for real-time information to our industrial air filtration customers through a subscription model. In order for us to go fast, we need this strategy to go fast. We're gonna move away from the subscription model, and we're gonna offer this as an additional feature of our first fit equipments, and we're gonna take the opportunity to onboard other businesses. We already have industrial air filtration. We're gonna onboard industrial hydraulics, industrial gases, and power generation, so we can offer our customers a full overview of all of their systems.
When the time is right, our customer is going to be only one click away from gaining access to our e-commerce application, one-stop shop, so they can find all of the replacement parts. Our e-commerce applications may already have the aftermarket purchase orders already preloaded into their systems in order for us to become an easier to do business with kind of an organization. Our customers are gonna be another click away in order for them to schedule their service capabilities or services needs, so we can help them restore their systems to proper values of operation and improve the performance of those systems. This is how this new strategy is going to look like. This is an almost complete deployment of our product portfolio within a manufacturing facility. We're sampling this what is supposed to be a manufacturing facility.
We are also sampling the deployment of a dust collector, a fume collector, mist collector, a lubrication system for a press, for a hydraulic press, for example, or an absorption compressed air dryer within the compressor room. All of those systems connected within a complete ecosystem that will compute all of the necessary data in order for us to provide real-time information for every single individual equipment, as well as to offer a 360-degree overview of the performance of all of these systems. This is very powerful. What we're trying to do here is to move from being a product-centric towards a customer-centric organization. As we keep deploying our solutions, increasing our connected solutions and service capabilities, we will be improving our supplier qualification within our different customers, enhancing and strengthening our relationships with them until we become strategic partners.
By doing this, we will gain additional market share, gain profitability in our different businesses, and also build very high barriers of entry to our different competitors. We have been talking to you about our connected solutions strategy. Let me show you what it means from a value standpoint for our customers. I'm showing here a couple of examples of systems that started showing some decline in their performance, causing our customers additional issues with employee safety, very complicated. Additional energy consumption, we don't want that, and unnecessary expenses because of maintenance issues coming from unnecessary downtimes. Our connected solutions systems detected those issues, as you can see in the graphics over there. No need for you to read the graphics, they are showing deficiencies in the performance of their systems.
Our applications engineering team called those customers and helped them restore those systems to normal values of operation. When we did this, our customers trusted us with additional businesses, and this is exactly what we're doing or we're trying to do with this strategy, is to gain incremental market share as we gain or become strategic partners within our different customers. Once again, with the redesign of the organization, our competitive advantages, and the evolution of our razor to razor blade business model, we are very well-positioned to deliver a profitable growth for the organization. With implementation of this new aftermarket and services organization, in order for us to win incremental market share in the aftermarket segment, at the same time that we improve our operational capabilities with a continuous improvement mindset in order for us to positively leverage the financials of the organization.
Our objectives for fiscal year 2026, it's to keep strengthening our revenues within our two reporting business units, Industrial Filtration Solutions and Aerospace and Defense, also increasing our connected customers from less than 1% that we have today to a range within 5%-10% by the end of fiscal year 2026. Taking our revenues from $1.1 billion-$1.2 billion, which means a three-year CAGR of somewhere around 4%-8%. With a pre-tax profit margin between 16.6% and 17.4% coming from improving our revenue mix with additional aftermarket share gains, increasing our operational efficiencies for improved gross margins, at the same time that we continue with our very strong disciplined pricing strategies.
In summary, our key takeaways, and as we have been mentioning before, we will leverage our competitive advantages in order for us to sustain and advance our leadership position within Industrial Solutions. We will enhance our customer relationships with an implementation of an evolved razor to razor blade business model in order for us to become strategic partners and gain additional market share. Playing a critical role with our customers' ESG and sustainability journey as we keep making progress with our company purpose of advancing filtration for a cleaner world. At the same time that we have a clear strategy to deliver a long-term and sustainable profitable growth. With that, I would like to thank you for listening here, for being with us on today. I would like now to introduce you to Andrew Dahlgren, which has another exciting and passionate story about Life and Sciences.
Thank you very much.
Thank you, Guillermo. How's my volume? We good?
Yep.
Excellent. I have a hunch that some of you might wanna hear about Life Sciences. Is that correct?
All right. Excellent. As Guillermo mentioned, my name is Andrew Dahlgren. I'm the president of our brand-new Life Sciences segment, and I'm really happy to be here today to tell you what we're up to. I've been with the company 29 years. I've had the opportunity to lead 8 of our global businesses. Prior to this role, I was vice president of our Asia Pacific region. I'm not known as a super excitable guy, but I can tell you I've never been more excited in my 29 years about what we're working on here. It's not just because we're shaping the future of this great company. It's because we're helping cure diseases that have ravaged humankind for centuries. We're helping develop sustainable food supplies for the planet, and we're supporting an energy transition. Really exciting stuff, pretty weighty stuff.
It gives us a lot of excitement about what we're doing, and I will try to pass that along. The key messages that I'd like to leave you with today is that we have a huge market, and we have existing and acquired capabilities that will be very useful in solving difficult customer problems and help us gain share. We have favorable end market dynamics. That, coupled with our M&A activity, will drive growth for our business going forward. Our margins are higher than the rest of the company. As we scale up our acquisitions and we grow our sales, we're gonna have an increasing impact on company profitability. We have a fantastic foundation to build this business on.
We have over 1,500 employees, 15 facilities, almost 7,000 existing customers. I talked already about the cool things we're working on to help, you know, advance humanity. Probably the most important thing that you'll wanna pay attention to is in the bottom of the center of the chart. We're gonna grow 3 times faster than the rest of the company. We're gonna do it at a margin that's 15 points higher. Big impact on the future of this company. We've got $20 billion of addressable market. These markets are generally characterized by having high growth, high performance requirements, high quality expectations, and high profit potential.
We're breaking them into two categories here, our core Life Sciences segments that we're really focused on growing as fast as we possibly can. Our digitization and electrification segments that have some of our legacy businesses that bring important capabilities to help us grow Life Sciences. There's some great opportunities in there too. Demand drivers in the Life Sciences space is really around vaccine development, cell and gene therapies, alternative proteins like cell-cultured meat, plant-based meat, general increase in demand for process integrity in food and beverage markets, and an aging population that drives increasing demand for medical devices. In digitization and electrification, demand drivers are around the energy transition. We've talked a lot about that already. We have a great opportunity in this space.
Reshoring of semiconductors, as part of the CHIPS Act in microelectronics, and then continuing demand for data that will be with us forever. That drives a lot of disk drive demand. We bring a lot of existing and acquired core capabilities that help us win business in these segments. We have differentiated technology. For example, we've got the best bioprocessing technology, I think, in the market with our Isolere and Purilogics acquisitions. These technologies substantially increase productivity in the bioprocessing processes. We've got deep application knowledge, ensuring process integrity when it matters the most. Our customers rely on us for that. We've got great technology. Michael talked about a lot of that. We're able to package it up into devices that seamlessly integrate with our customers' systems and their devices. We have a broad solutions portfolio.
We're a relative newcomer to life sciences, we already have the broadest range of bioreactors in the market, coming from Matteo and Solaris. We've got Donaldson's global presence to rely on, where we can use our global network to ensure world-class service delivery, quality, and reliability to our customers wherever they need it. Really wonderful capabilities to grow in this market. You're probably asking yourself how some of these businesses fit together, the answer to that question is the capabilities that they bring to the life sciences initiative. This is a summary of core capabilities across the top end markets along the left-hand side there, where those are coming from within our portfolio. You can see a lot of check marks in that lower part in the digitization and electrification segments.
What that, those strengths allow us to do is we can leverage those to grow Life Sciences faster. In a nutshell, we can grow Life Sciences a whole lot faster by having all these capabilities in one portfolio, instead of having to develop them independently. Our organizational concept reflects this philosophy. You know, we've just redesigned. What we've got now is end market-focused commercial teams as close to the customer as they can possibly get, reading what's happening in the market and feeding that back to centralized functional teams where we can leverage all those wonderful capabilities and direct them towards the best opportunities that we have. We have over 100 growth initiatives already in flight, that's gonna drive growth at about a 20% CAGR to $450 million in fiscal 2026.
I already gave up one of my surprises for you guys, but 20% CAGR, $450 million fiscal 2026. That growth, and it's all organic, is represented by 75% growth in dollar terms in life sciences. That's food and beverage, bioprocessing, and medical device. Then we have another 25% coming out of digitization and electrification with a whole lot of alternative power in there. This is how we're gonna grow, by leveraging those capabilities, and you can see the result in our growth plans. I'm gonna talk a little bit about the digitization and electrification foundation, and then we'll pivot to the really exciting life sciences stuff. In alternative power, growth there is driven by growth in vehicle production.
There's a lot of EVs being produced. They're growing 60% annually. That's creating tons of opportunity for us. Our role is to help those customers extend the range of their vehicles and then improve their reliability, especially in something like a Minnesota winter. Our products meet that need wonderfully. We've got actually pretty, really good dollar content per vehicle, ranging from $15 to hundreds of dollars if it's a fuel cell, and we're winning 35% of the time in this market. In microelectronics, we see demand coming from smaller, faster chips, reshoring of manufacturing capacity, and as the chips get smaller and faster, it drives filtration needs. Our LITHOGUARD technology already protects about half of the world's semiconductor production. If you do the math, that's over 1 billion semiconductors a day protected by Donaldson.
Pretty significant position and something we all pretty much take for granted. In disk drive, we see long-term growth driven by cloud data. We're all storing data on the, in the cloud. Those are all protected by Donaldson filters, or not all of them, but at least 75% of them. There's a change in the industry with new technology introduction that's driving a lot of new filtration needs. We've had a reset over the last several months, as I'm sure you all know, but from this point forward, we see disk drive as a growth business. As I mentioned, we protect 75% of your data in the cloud. Pretty significant and meaningful position. These businesses aren't gonna deliver the explosive growth that I'm gonna tell you about with Life Sciences, but it's still pretty darn good.
It's four points higher than the company average at 10%. These are end markets that we really value and, like I said, can leverage capabilities in to drive life sciences growth. Now I'll pivot to the really exciting part. Sustainable food and human and improving human health are the two basic categories in our life sciences segments. They obviously interact. Rich talked about the PowerCore filter that he's got pictured on his desk. If I was gonna make a picture out of my slides here, it'd be on this one. These are really important trends that are driving pretty much everything we do. In food and beverage, the bottled water industry drives 100 million filters of consumption annually, growing 5% a year. That's a great market for our LifeTech technology, wonderful growth prospects there.
In alternative protein, which is cell-based protein and plant-based protein, it's projected that the world will need 10 billion liters of bioreactor capacity. Sounds like a lot, especially when you consider there's only 100 million liters of bioreactor capacity on the planet today for all uses. That's gonna drive a ton of demand for Solaris bioreactors. Moving to biopharma, it's anticipated that there'll be over 100,000 new vaccines, cell and gene therapies in the pipeline in the next 10 years. That's gonna drive all kinds of demand for the things we can do it with our Purilogics and Isolere Bio acquisitions. In medical device, huge market, lots of examples you could choose. We're in the hearing aid market, there's hundreds of millions of people that could use hearing aids that have disabling hearing loss but don't use them.
We see that driving demand for this market going forward. It's a good segment for us. Here's a overview of the segments. I'm gonna go in greater detail on the first three, but I'd like to make two points. One is our acquired capabilities are ever present here and enabling a lot of growth in those segments. The second point is alternative protein is an emerging market for us that is really, really interesting. It combines our strengths in food and beverage, which are mature and ready to rock and roll with a whole lot of customers, and then the capabilities that we're acquiring in bioprocessing, where they need bioreactors, they need fermenters, they need process expertise. We see a lot of opportunity going forward in alternative protein. I'll spend a little more time on medical devices.
We're already a pretty significant provider of filters and vents for medical devices. We provide $60 million of such products per year. We provide $20 million hearing aid vents. What those do is they help a hearing aid function under duress, such as a rainstorm, sweat, oils, particles. You still wanna be able to hear when those things are present. With an ostomy bag vent, we're the world's leading independent provider of ostomy bag vents, $40 million a year. What we're doing there is helping a cancer survivor and somebody suffering from digestive complications live a more normal life. To them, it's essential. We are working with a partner, and we're going into clinical trials this calendar year for a Class III implantable device.
I can't say a lot more than that right now, but I look forward to being able to talk about that in more detail later. We're entering that Class III medical device space. Now we'll pivot into little more detail on food and beverage. This is our largest, most mature market in our life sciences portfolio. We have wonderful value proposition centered on process integrity, and we have a proven selling model that has worked very well in Europe and is working increasingly well in the Americas, and we're going to expand it to the Asia-Pacific region. It's really about scaling up what's already working in some pretty big markets. Driving that is our strategic accounts approach. This market is represented by 15 very large players who control about 75% of the food and beverage activity.
In the past, let's say three years ago, we would have addressed these customers more regionally or maybe at the plant level. We've pivoted to a global strategic system where we work with their corporate headquarters, understand their needs, and design a system to help them everywhere in the world. What that does is it gives us lots of cover within their organization. When we show up at a plant anywhere on Earth, you know, they know us, they know what we can bring, and they're ready to work with us. The result is that we've doubled sales in this category, and it's driven 30% LifeTech liquid growth, which is our flagship product line in this market. I mentioned already about the alternative protein market. Really exciting. It's a multi-billion dollar market growing at 20% CAGR a year.
It could be 40, it could be 10, it's gonna be a lot. What our customers in this space are trying to do is establish a cleaner and more sustainable food supply for the planet. Our resources simply won't support where we're going without some changes. They need a lot of help. In a lot of cases, they're developing a brand-new process, never been done before, and that's where we come in with a wide range of bioreactor and fermenter capabilities that we've picked up with Solaris, a whole lot of filtration expertise we already had, and process expertise that we've acquired while working with the market, dozens of customers. The result of our work in this space is that we're more than or almost doubling our revenue in alternative proteins in our food and beverage business. That's primarily plant-based activity.
Solaris, which we probably would have all thought was a bioprocessing play, which it definitely is, those products are also needed and welcome in the alternative protein space. A great example of that is our partnership with Wildtype that was announced last fall, where we're their development partner, helping them scale up more cost effectively and help them satisfy their mission of providing the cleanest, most sustainable seafood on the planet. It's pointed at cell-cultured salmon right now. Really exciting opportunities here. This is the last segment that I'm gonna deep dive on, but I'm gonna spend a little more time here because it's new to a lot of us and something that I'm sure you're interested in. We see explosive growth in vaccine cell and gene therapy on the horizon.
In, in that pipeline that you, that you see up here is a cure for cancer, a cure for diabetes, a cure for heart disease. This is serious stuff. Our acquisitions of Solaris, Purilogics, and Isolere Bio have critical capabilities that will help this happen. We are gonna help this industry realize its potential. We've got game-changing technology there. Let's talk a little bit about the technology. I'm gonna start at the top of this slide. There's a lot here. What the key issue is molecule size. Traditional pharmaceuticals all operate in a small molecule space. There's a whole chromatography industry built up around that, really good at processing small molecules. Where the most promise is that I just talked about, and where all the investment is going, is into cell and gene therapy and vaccine developments.
Those all use much larger molecules, much more complex molecules, much more sensitive molecules. We have a solution to that problem with our Purilogics technology. We have a membrane structure that's much more open. It allows these large molecules to make their way through the system, and we can add a zero to their productivity for the day. 10X more valuable therapies coming out. With Isolere Bio, we're able to do the separation and purification of viral vectors in solution, we completely remove the size restriction, we can do it more effectively, more efficiently, and again, help those developers of life-changing therapies succeed. We can help relieve a pretty significant bottleneck in this industry. That's the technology. Now I'm gonna talk about the process a little bit. It's a complicated process.
At least it looks complicated, and it is, but there's some basic things going on. Oops. Not sure what happened there. That's a picture of a castle, at least that I can see. What just happened? Okay. While that's getting set back up again, a bioprocess starts with growing cells in a bioreactor, and those cells have specific medicinal characteristics that a drug developer is after. Then as you move along in that process, you break those cells open, and you separate and purify out the very molecule that you need in order to, you know, perform your therapy. We play a pretty important role in that process. While our slides are coming back, this is a Solaris bioreactor. This is where the cells are growing.
We've got some good old-fashioned Donaldson Life Sciences growth brewing in there right now. We have the widest range of bioreactors in the market. We go from 0.2 to 20,000 liters. This is an 8-liter bioreactor. The extent of our range is 2,500 times bigger than this. What that does is it allows us to be a partner to a drug developer from the lab all the way up to their full-scale production. As a relative newcomer, we've got a ton of capabilities that they need from us. Once you get past the bioreactor, what you need to do is do that separation and purification that I talked about. That's where Purilogics comes in. What we're able to do here is increase productivity downstream by 10X.
Yeah, I guess you all have the slides in your thing, so I'll keep trying to remember what the slides say, and you guys can keep following along. For frame of reference, with the Purilogics device here, it's a scalable system. We got up to five layers where we can accommodate that in this system. If they need the full thing, we got five layers that we can scale up of Purilogics magic inside. Rough orders of magnitude and just some commercial perspective for you is this device, which I encourage you to come and look at at a break. Here's where we are. I'll back up a little bit now that I see my slides again.
Plasmid DNA is a building block of this whole industry. It starts with cell production, starts in a Solaris bioreactor, and then downstream as you're separating and purifying those cells, we can increase productivity 10x. That works for both plasmid DNA, and then plasmid DNA is a building block for mRNA, which we all have a little bit of familiarity with these days. It's a different chemistry, but we have the same impact in that process. This is a Purilogics system, and just rough order of magnitude, this system sells for around $100,000. A customer might produce $1 million of product from this type of system in the past with the old technology. With the new technology, they can produce $10 million of product per day.
We've got a very significant role in helping that happen, and you can imagine the value that's created for that customer, for humanity, and for Donaldson. The really cool thing is that four months ago, this was our product for Purilogics. This is a really important product. This is what customers use in the lab to design their new drug and figure out how to purify it. This is what we had, and they loved it. Their first question was, "When are you gonna scale it up?" We can definitively answer that question as right now. In three months, we designed, we developed, and we made this device. We are out of the gate fast, and we are thinking about what we're gonna be able to do in years of being in this market, as opposed to a few months.
We're super excited about that. A little bit further downstream is the cell and gene therapies. Cell and gene therapies are distributed within your body using viral vectors. That's the distribution mechanism. That's where Isolere Bio comes in with much higher purity, much higher productivity, the ability to eliminate some process steps, and the increased yield is a really big deal. At this stage in the process, a gram of the therapeutic is worth several million dollars, $6 million-$20 million to be exact. Imagine if we can help them improve that yield just a few percentage points. Pretty powerful stuff, not only for the new all the great work that the new therapy is gonna do, but, you know, for our business. We are completing some of our first batches with Isolere. We're open for business.
We're working with a lot of big developers of therapeutics that are extremely interested in this technology. I think we've got the best capabilities in the whole market to help the cell and gene therapy market realize its potential. If we bring all that together, we anticipate 20% growth year-over-year, up to $450 million by fiscal 26. We have higher profitability than the rest of this company. As we grow, corporate profitability, company profitability will improve, and we are really excited about that. Just coming back to my main points, huge market. We've got, I think, game-breaking technology that's gonna help customers solve complex challenges that they're dealing with. That's gonna help us gain share. Our end markets aren't going anywhere soon. These are huge markets that are growing fast.
We're gonna continue to look for acquisitions that fill in some of those blanks in that process chart I was showing you. With a gross margin that's 15 points higher than the rest of the company, you know, as we grow and scale up our acquisitions and simply grow our higher margin sales, we're gonna have a significant impact on the future of this company. That concludes my talk. I think our next step is a Q&A session. I imagine you might have a couple.
Yep. Just give us one minute to set up, and then we'll get started.
Thank you.
Yeah. Yep, thanks.
Thank you. Dan Rizzo from Jefferies again. Just with Life Sciences, is the model different? Is it not razors to sell razor blades? Is it more about focusing on selling the bioreactor, or is there something else like you get a royalty payment, or I just am wondering how the business-
Yeah, great. Excellent question. This is our razor. Even though this thing is a $100,000 thing, it's a replacement part. It's a consumable. That's the razor blade. That's a couple days of production in a bioprocessing center. It's still the razor blade model. They're just a lot more valuable.
Okay. Makes sense.
Okay. And then with mobility, I don't know if I missed this, but can you just tell us what the difference is in terms of dollar amount per type of vehicle, you know, hydrogen versus diesel versus electric? Have you disclosed that at all?
Excuse me. Yeah, we did not specify the numbers. We talked more directionally. If you think about the derivative diesel engines, think about that as more or less the same as a diesel. Fuel cell would be neutral to a positive. Battery is the wild card because there's a couple technologies that we're working on in Michael's space that change the math entirely. There's the hydraulic question. If you're in a small mini excavator in an urban center, you might be able to electrify hydraulics. If you're in a large vehicle, you might not. I would think about that one as neutral to negative overall. We haven't specified dollar amounts.
Thank you.
Bryan Blair, Oppenheimer. In industrial, broken out on the final slide, increased customer penetration from less than 1% or connected customer penetration less than 1%- 5%-10%. What is the current, you know, margin on your connected offerings, and how much does that growth factor into the expansion target?
The margin on the connected solutions, we get that from, you know, summarizing all of the businesses that we get from having a connected solution. All of those will add up to our aftermarket businesses and gaining additional opportunities within the first fit organization. We have around 1,200 systems already connected that are helping us drive additional businesses within the aftermarket, if that makes sense for you.
Okay. Thank you.
Thanks. Dillon Cumming from Morgan Stanley again. Just wanted to ask first on the Life Sciences target, you can stop me if you're gonna address this later. Obviously you're, I think, planning to do a lot more M&A in that segment, I think going forward, right? The targets that you're giving today are organic, right? When you think about scope to kind of grow beyond the targets that you laid out today, any kind of framework to help us think about, you know, what the opportunity set there is as you kind of fill in the other parts of the Life Sciences portfolio?
Yeah. Everything we have today is built into the projections I just talked about. Any M&A activity would be on top of that. What you see in front of you going to $450 million is where we see it today.
Okay. Just to follow up, I guess, for Rich Lewis and Guillermo Briseno. I think you guys really both touched on the thematic of really growing out and kind of prioritizing the aftermarket services component, you know, taking another kind of strategic step forward there. I think the historical core competency of Donaldson in the past has been really retaining that razor blade business, right? What more is there to do in terms of incremental opportunity? Who are you taking share from there? You know, what does the kind of runway for that look like?
One of the major objectives that we have is to retain a higher percentage of our own first fit deployments that we have for the market. We have a very strong percentage of retention of our own businesses, but we want to increase that at the same time that we increase competitors or competitive systems within additional aftermarket as well. Then doing them within the five business units that we have. It's not only one business in specific, it's within the whole spectrum of business units that we have within the portfolio.
That's why we are, you know, very excited with the connected solutions strategy because we're gonna be able to measure that and understand what's happening in a manufacturing facility or with a customer specifically, and we will understand about their needs on additional aftermarket. We're placing a lot of bets on that.
Yeah. On the mobile space, you know, I think there's multiple things that we're doing. The biggest one is continuing to create patented technologies that drives higher aftermarket retention rates than a non-patent significantly. Our representation there is pretty good, but we see a large opportunity to keep driving that initiative forward. We talked about the org redesign. You know, it's interesting. You know, we have best practices around the world in certain markets. Maybe it's mining in Chile. Our ability to deliver those and deploy those globally in this new structure is much more quickly than in the past, working through the matrix. One thing that I've seen recently, I won't go into a lot of details about who and where, but we've actually seen where certain regions have increased their emission standards.
Honestly, they probably didn't fully buy into our technology around fuel. After two or three years of these new products being out there, and they're seeing their warranty claims significantly higher than they expected. We're getting all types of service requests where we're actually going in mid-production cycle and replacing other competitors while they're still first fit. That's almost unheard of, and it's really a testament to our technology.
Brian Drab from William Blair again. Maybe Andrew first, I had a question for you. Who are you competing with primarily in selling this setup here? Is it Danaher, Pall Corporation within Danaher? You know, what other competitors are you seeing?
Danaher, Repligen, the companies you'd see in this market. When it comes to the cell and gene stuff, we're pioneers in a lot of that technology, so we feel really good about where we're at.
Just so I understand it, this $100,000 device or system?
Mm-hmm.
it expires within a couple day. It's
Yep.
It's a single use.
for a batch
Okay.
of production.
Okay. You mentioned disk drive as a growth business. Can you just talk about that a little bit more? I just wanna make sure that I get the confidence.
Sure.
to model that as a growth business going forward.
Yeah, fair enough. My starting point is after the reset, so like from this point. What we've done is we've seen a lot of the businesses that were in decline were kind of accelerated through the pandemic, like PCs and laptops. Those have been replaced by solid state at this point. From here, we're talking about really cloud center, cloud data center growth, and that's where we have a very strong position, and the future's really bright. From here we see growth. That technology transition that I talked about is also gonna drive filtration content.
Okay.
It's not explosive, but it won't be going backwards, let's put it that way.
It's that in those data centers, the disk drives that are being used are not solid state. There's enough.
Correct. There's solid state
Disk drives that are used in filter.
on the front end, the stuff you need to access in a nanosecond.
Yeah.
Anything you need.
Anything you can wait a hundredth of a second for is stored on a hard drive, that business is growing. It's called the nearline drives.
Okay. Thank you.
They're right behind the front line.
Okay. Thank you. Rich, just one quick one for you. That filter that you were proud of, was that PowerCore technology, or is that a.
It was. It was our panel PowerCore. We have two. We have a wound PowerCore technology and a panel. That was our panel.
Thank you.
Nathan Jones, Stifel. I'm gonna start on Mobile. I think, Rich, you were talking about the aftermarket having gone from 50% to 75% over the last 10 years. Certainly higher penetration of proprietary technology over the last 10 years. Margins over the last 10 years have been pretty flat. Would have expected those to be higher with proprietary technology and aftermarket. Maybe you can talk about the headwinds that have been there that are, you know, causing you not to have seen margins improve over, you know, most of the last decade.
Yeah. You know, if I think about, you know, the world that we lived in sort of pre-pandemic, it was a relatively deflationary environment, globalization driving down wages, people pursuing, you know, lower cost positions around the globe. I think what my view on it is as a person relatively new into this position is that carried over to how contracts were structured and productivity clauses. We've seen a pivot on that more recently, where we've been exiting a lot of our contracts, restructuring them to be more price positive. I think it's gonna be a different environment going forward. The reality was that worked for many, many years. There was plenty of opportunities to offset that. I think that carried on probably for a little too long.
Right now we feel pretty good about where we're going with our customers and how we're setting up our contracts moving forward.
Okay. Second one's for Guillermo. There was a slide that you had with a bunch of market growth CAGRs over the next three years on them. The majority of which were, you know, 5% or greater market CAGRs, which is not what we've seen in the industrial economy over the last 10 or 20 years. Maybe you could just talk about what leads you to believe that those markets are actually gonna grow that quickly.
We are deploying more global capabilities. I think our market share is still reduced compared to the opportunity that we have ahead of us. The way we're structuring the design of the industrial organization, leveraging certain resources across all of the businesses, and then, you know, entering in areas that we have maybe geographies that we are underrepresented as well in certain businesses. For example, industrial hydraulics, it's very focused within North America. Industrial gases is very focused within compressor filtration. It seems that we have more opportunities to expand our technologies to other markets and other geographies. We are placing a lot of bets on increasing our aftermarket opportunities, not only with Donaldson Elements, but other systems as well, and give additional momentum to that business and keep growing it.
That doesn't mean that we're going to move away from our deploying first fit solutions within the market, which is kind of the racer approach to the business. Deploying additional capabilities, additional technologies within a global infrastructure, within our five business units, that's what we're trying to do.
Those growth rates on that slide are what you think you're gonna grow in those markets.
Yes, correct.
not what you think the
Correct.
under the core market is growing at.
Correct. Yes.
Okay. Got it. Thank you.
That's gaining additional market share. Yep.
Anyone else? Oh, Brian.
Andrew, you've got targeted margin 22.1%-22.9% by fiscal 2026. Still a bit below the fiscal 2021-
run rate, still a drag from acquired margins at that point. How long should we expect it to take for those to reach the prior segment average? If we look forward, is it, you know, perspective to get back to mid-20s plus as those businesses continue to scale in the segment overall scales?
Yeah. I think what we're looking for there is the right level of investments. We'll be investing heavily into growing these businesses. Those investments come a little bit ahead. I'm talking about people and plants and various investments. Those investments come a little bit ahead of the return, so we'll be chasing it for a little while here. We like those margins.
Understood. Focusing, I guess, directly on gross margin, you cited the 49% trailing three-year, obviously lower on a run rate basis. Over time, should we expect the acquired businesses to exceed that trailing rate?
That's all baked into our forecast, but yes, we see these as good margin businesses.
Okay. Thank you.
Great. Anyone else? Okay, we're doing good with time. I think we're up for our next 10 minute break. We'll reconvene at 11:10. Thanks.
I don't know if I mentioned it in the, in the presentation.
confusion we had there. We have the founders of all of this technology in the room. If you have questions, I'd be happy to, you know, at a break or whatever, answer them up here.
Get started with Scott. Just looking at the amount of material we have left to cover and the time, we might end about 10 minutes early, in which case we can all just head upstairs 10 minutes early and start lunch. With that, I'll turn it over to Scott.
All right. Can you hear me? Sound okay? Welcome, everybody. Thanks for attending today. Sorry for the weather today. We had hoped for a nice spring day. We couldn't quite deliver it. It does get nice here, we promise, at some point in the spring. To make up for it, we have Minnesota walleye for lunch. Please indulge in that. My name is Scott Robinson. It's my pleasure to be the CFO here at Donaldson. It's really awesome to be here with everybody today and especially those watching from close and far on the web, including the finance team. I'm very excited about what you've heard today and for my presentation. Let's get into it. My key messages. I believe Donaldson has and is developing great technologies that ultimately are the lifeblood of the company.
These technologies position us well for long-term growth. We continue to invest in higher than average margin opportunities, which, as I always say, drive higher levels of profitability on higher sales. Finally, in going on my eight years here, I believe we had our strongest position yet, which will propel us to meet or exceed our financial goals laid out today. A look at our 2019 investor day and our estimates for FY 2023. Who would have thought a pandemic would hit in the middle of all this? As can be seen, we have exceeded the high end of our investor day sales target and expect to be above $3.4 billion this year at the midpoint of our current guidance. I am proud of the company's tenacity over the last several years to support our customers in delivering the products needed for their operations.
I really thank our employees for their efforts in this regard. Operating margin has been quite a story. At this point, our pricing has basically caught up to the significant cost increases we've experienced, such that our op margin for this year is touching the low end of the range we provided in 2019. We have battled through significant cost increases and exit this time with much stronger pricing muscle. As can be seen, strong EPS growth here and also strong return of cash to shareholders. In terms of returning cash to shareholders, we have a very consistent story over a long period of time, which allowed us to be added in 2016 to the S&P High Yield Dividend Aristocrats Fund after 20 years of consecutive dividend increases. That is a record that I do not want to break.
In terms of share buyback, we also have a consistent track record, as can be seen here. Going forward, we are committed to at least offset our annual dilution of approximately 1% for share grant. In terms of our balance sheet, Donaldson is very strong. We have consistently ran under our net debt to EBITDA target of 1.0, and we have $800 million available under current borrowing arrangements, which gives us plenty of room to pursue our strategy. We have strong free cash flow conversion, which has averaged 85% and is expected well above 100% this year as we reduce inventory levels. Our capital deployment priorities continue to be, number one, invest in the company, either organically or inorganically, two, pay dividends, and finally, share buybacks.
The share buyback component is the most flexible portion of our capital deployment strategy and is determined as we contemplate current and future cash needs. As an FYI, at current levels, a 1% share buyback represents an outflow of approximately $80 million. Over the past three years, we have deployed $1.1 billion split, as you see here. Our organic investment, shown in the Donaldson blue slice, was focused on capacity expansion and new product development. We expect our CapEx to run at approximately 3.5% of sales for each of the next three years, and that Life Sciences will be our primary focus in terms of acquisitions.
As you have consistently heard from me, we have been pushing to focus our investment and capital deployment on higher than average margin opportunities in our advance and accelerate portfolio for a while now, and the investment we have made are paying off. As this matures, we get higher margins with more dollars to reinvest, and the cycle continues. The redesign just completed will not only accelerate our ability to execute in general and specifically in this area, but also assist with identification of additional opportunities for investment. Additionally, the new Life Sciences segment expands our TAM by $12 billion, providing many new opportunities. A bit more on our M&A strategy. First off, as previously noted, we are in very strong position in terms of debt, cash flows, and liquidity, which allows pursuit of our strategy. We currently sit with a net debt to EBITDA ratio of less than 1.
Please note that we would be willing to increase our debt ratio if the right strategic opportunity came along. If there was a significant increase in debt, we would accompany that with a corresponding plan for reduction. We are primarily focused on life sciences, which have strong growth rates and will have much higher margins when maturing. We look at both established and new technologies. Opportunities for gross margins in the 40s% and into the 50s% is something that makes me very happy. Our key focus includes separation, purification, and some consumables. Once an acquisition is complete, our new life sciences team will make sure integration facilitates scale-up and leverage of offerings. We believe we can often be the acquirer of choice based on what we bring to the table, and I think this has proven out over the last several acquisitions executed by the company.
I think it is really great that we have Kelly from Isolere, Jin from Purilogics, and Matteo from Solaris here with us today. I really believe we are lucky to have them on our team. I like this chart, okay? It goes to Nathan's earlier question. Across the top, we have various processes in bioproduction. Down the side we have the different types of products involved. You can see where we have been involved and also what our acquisitions have added. This is driven by Dave Wood and our life sciences team, but it gives you a feel for how we are analyzing bioproduction and where we operate and how we connect our legacy products with our acquisition across the value chain.
As can be seen, we are filling out the puzzle both organically and through acquisition, and the company has great technology and opportunity here, and we expect to continue further down this path. A few additional thoughts on margin improvement, and this truly is my favorite topic. I always say we are committed to higher levels of profitability on higher sales. I believe that this is easily possible as we continue to invest in and grow higher margin opportunities to mix the company up. Further, our organizational redesign will sharpen our focus on cost management and execution. I believe this trend can continue long into the company's future. We are also exiting the last few years with significantly improved pricing muscle and a much better focus on pricing optimization. In conclusion here, we anticipate continuous improvement in margin for years to come.
Pulling together what you've already heard from Rich, Guillermo, and Andy, and presuming reasonable economic conditions, our organic targets are as follows. We have Mobile Solutions growing 2%-6%, Industrial Solutions growing 4%-8%, and Life Sciences growing 18%-22%, which equates to a consolidated annual growth of 4%-8% over the three year period. In terms of operating margin, our current midpoint for guidance this year is 14.8%. What is here would represent an 80-160 basis point improvement with Life Sciences pushing above 22% in fiscal 2026. If I were to put a picture on my desk, in addition to my three sons, it would be an income statement with operating margin at 22%. That was supposed to be funny, all right?
This level of growth and operating margin would indicate consolidated incremental margins in the low 20s% over the cycle. As I said before, I think we are very well positioned to deliver on these goals. In conclusion, and to revisit my key thoughts, I believe Donaldson has and is developing great technologies that ultimately are the lifeblood of the company. These technologies position us well for future growth. We will continue to invest in higher margin opportunities to drive higher levels of profitability on higher sales. As I said in my opening, I really believe this is the best the company has been positioned in my time here, and I'm very optimistic for the future. Thanks very, very much. With that, I'll turn it back to our fearless leader, Tod Carpenter.
Thanks, Scott. This concludes our prepared remarks for today. We'll open it up to questions here shortly. I just wanna do a quick recap of what we talked about this morning. We opened today, I talked about our new segmentation across Donaldson Company, the restructured company, and the fact that we're now focused on all three of these segments. Ashley came up, shared with you our ESG and sustainability targets for 2030, talked about our journey, specifically how we are addressing those and the detailed plans behind them. We had Michael come up and give you a really deep look at how we think about technology.
He showed you some of the things that we have in laboratories, talked about some of the items we haven't even brought to market, also talked about some really cool things that we're leveraging that are about to come to market. Most important of all, hopefully you walk away with a clear understanding and a belief that we are a technology-led filtration company. We had our segment leaders come up. Rich talked about within the Mobile Solutions segment, how we expect to continue to grow and gain share across that market as it grows for at least a decade. When it eventually does feel a little bit of headwinds, based upon the global model that we have, the deep customer relationships, we would expect us to do very well in the end consolidation.
We also have an underlying strategy there, which as our customers go and turn toward alternative power sources, Rich and his team are focused on things like hydrogen and electric vehicles so that we make sure we capture the greatest filtration challenges and therefore market share. We turn to Guillermo. Guillermo talked to you about how we have fantastic products and we have strong aftermarket. We believe we have a great opportunity to continue to get a deeper relationship with our customers as we digitize those first-fit systems, add service, and really complete the overall customer experience, maximizing our customer touches, and really helping them through a telephone, the alert, or whatever vehicle, touching them and helping them keep their plants operating and their equipment doing well on a constant basis.
We then moved over to Andy, who talked about our Life Sciences segment, and he talked about the underlying technologies and how all the components of our Life Sciences segment fit together and really drive one another to be able to allow us to achieve future growth in the Life Sciences segment. We gave you a deeper look into the acquisitions, Solaris, Isolere Bio, and Purilogics, and how they fit together. We told you that our priority in in our acquisition strategy is Life Sciences, as well as core filtration opportunities in our company. Scott came up and wrapped it all up with overall targets, gave you a deeper understanding of how we're gonna achieve those targets, where they are, also gave scoreboard of our 2019 targets. We're proud of what we have as a challenge in front of us.
We look to become a $4 billion company in three years. We're gonna expand our operating margin by over 100 basis points, and we'll be delivering 16% operating margin across that. Last year, we delivered record revenues and record profits, we're gonna do the exact same thing in 2026. We're gonna do it with a $4 billion organization and 16% operating margin. With that, I will ask Scott to come up, and we'll open the floor for questions.
Yeah. Rob Mason with Baird again. Tod, could you speak to the M&A criteria, you know, I guess in updated form? Historically, you had some fairly defined parameters, metrics that you would benchmark M&A against in terms of EPS accretion and hurdle rates to achieve in the first four years, but you were, you know, not buying pre-revenue companies at the time. How have those changed with the introduction of, you know, life sciences, bioprocessing to the mix?
Yeah. Maybe let me start. I'm gonna let Scott get to the numbers relative to that, okay? But at the macro, you know, what's important to walk away from here is what we're targeting. Also the fact that, hey, we've got an aggressive M&A portion of our strategy, and we're gonna execute on it. We stood up a piece of our organization led by Dave Wood, our Vice President of Corporate Development, and we're gonna continue to add to the muscle to that particular organization and execute on what has always been portion of our strategy. You see that through our recent three acquisitions. We're going after Life Sciences, we're going after core filtration capabilities. Perhaps we would do something in the industrial space if that could help our overall strategy that Guillermo has laid out.
Really, that's our focus. As far as the returns and financials of that-
You're right. I mean, I think historically, even before I was got here, the company was doing some acquisitions and acquiring companies that were more in an operating mode. It's a lot easier to have standard financial metrics on a company that, you know, is experienced or established and mature and has revenues and profits. In the case of Life Sciences, what we're really looking for are two things, which both myself and Andy mentioned, which is higher than average growth rates and higher than average margins. Okay. That's what we want the potential to be, and we easily see that with the three acquisitions we've been able to complete. That's really what we're looking for. You know, when a company's pre-revenue, you know, it's not obviously gonna be accretive.
We wanna be smart about our capital deployment and understand, you know, we have about $1.8 billion of invested capital and the return that generates and the more mature existing Nelson business will continue to increase their ROI, and that will allow us to take on acquisitions that obviously are gonna be at a less than a 20% ROI. Over time, we think those life sciences businesses are really gonna have strong returns with the revenue growth and the operating margin profiles that they have.
To the extent that you would do a larger acquisition, what is, you know, what should be your, you know, upper bounds in terms of where you would take leverage, understanding you would attempt to delever fairly quickly?
Yeah. You know, we, you know, I don't think we have a specific number in mind. We wanna understand the particular asset that we're acquiring and what its, you know, operating ratios are and how that would, you know, come alongside Donaldson. We would, you know, consider taking our debt levels up a couple turns if the right strategic opportunity came along. I would say the majority of the opportunities that we see and that we look at in a pipeline are of a smaller nature, you know, basically only because there are so many more companies that are of a smaller nature in this space than there are large established companies.
I think Bryan.
Go ahead, Bryan.
Yeah.
Yeah. Bryan Blair, Oppenheimer. Scott, you walked through the, you know, kind of scorecard relative to fiscal 2019 targets, you know, delayed. Obviously, you've operated through some crazy conditions the last few years. In terms of the margin target and that, you know, now being, you know, in play for fiscal 2023, can you walk us through, you know, direct cost impact, supply chain inefficiencies, any of the, you know, frictional considerations there, or perhaps mix that has compressed margin through today?
Through the current period or for the future period? For our guidance going forward or what we've experienced up through today?
What you've experienced through today.
Yeah, I mean, today, you know, if you, if you go back to our gross margins, you know, it's been a very strong effort on behalf of the whole company, right? Our gross margin dropped to 33.1%, you know, at one point, and even lower than that. We have been coming up every quarter, right? We've been focused on measuring our pricing impact, measuring our cost of, you know, goods that we're purchasing. There's just been all sorts of waves that were hitting the company, as most companies faced, right? We got to 34% last quarter, and I think that was a good gross margin move for the company.
That to me indicated that for the most part, our pricing actions had caught up with our cost increases. And I think the supply chain disruptions have reduced, you know, not to zero, but down considerably. I mean, everything you mentioned, you know, labor costs, input costs, logistics costs, you know, just constraints in the system, really aggressive pricing in certain commodities hit us. It's tough to go to our big OEs and say, "We gotta raise your prices 20%," but in many cases, that's what we were saying. Nobody wants to hear their price is going up 20%, right? Including me. That was what we needed in many cases to get a better balance of costs, you know, between us and our customers.
You know, I would really thank the organization for all the efforts on pricing. As Rich mentioned, I really do believe we have improved commercial views right now, and we just wanna have reasonable commercial relations with our customers, and we wanna provide good technology to them that helps them be successful, and we wanna get a fair price for that.
I appreciate all the color there. A quick one to level set. You mentioned, you know, reasonable economic conditions. You're anchoring in terms of fiscal 2026 outlook. Can you know, offer a little more detail? Is that just positive GDP, or do you have, you know, GDP or IP range in mind?
Yeah, I mean, I think of industrial production and GDP as two key measures. You know, I don't think we're looking for 5% growth. You know, certainly positive, a couple, 1%, 2%, 3%, you know, on both fronts, I think would be reasonable economic conditions.
Okay. Thank you.
Few comments today about pricing, certainly changing the structure of some of the contracts in mobile. Scott, you've talked about, you know, the last couple of years kind of exercising a pricing muscle that maybe Donaldson hadn't used as much as it could have historically. Can you talk about opportunities to continue to drive pricing to realize the value that you're providing to customers? I mean, I think I've talked to you guys often enough over the years, for you to know that I think your pricing should be higher. You're providing better value to customers. How do you generate that value to Donaldson?
I think what, you know, with the new redesign, and we have the vertical orientation, really, we have a bit more autonomy within the businesses to be able to attack pricing. When you were geographic, sometimes a geography wouldn't wanna go, one geography would wanna go, but now it's really about product space and customer orientation. I think we're gonna actually be more strategic and at many times aggressive relative to the pricing opportunities. You know, there was a comprehensive reset across our OE-based businesses whereby we always had those, Rich talked about on productivity, price downs on an annual basis. There was a reset during all of this, and we took advantage of that opportunity. It wasn't every contract. I would tell you it was most contracts.
We also have a clearer path forward now and a confidence in the organization that would suggest that when we're not being treated fairly, we're gonna do something about it. It's not just gonna be wait till the contract ends. We're gonna do something about it. I think this whole pandemic situation, especially supply chain headwinds, gained the organization a tremendous confidence to be able to do that. I would look for us to take advantage of those opportunities. As Scott says, always have that fair relationship with our customer base. You know, we're not trying to maximize the margins, we're trying to optimize things for them and for us. That's our goal.
You have 120 basis points at the midpoint of margin expansion over the next three years. What does strategic pricing contribute to that?
You know, if you look at 6% revenue growth, you know, over that timeframe, I think pricing, volume will be a larger piece of that than pricing. In case anyone was wondering, we have presumed flat FX in that equation, so it's just volume and pricing. I would expect the volume to be a little higher than pricing.
And, um-
We do expect.
The margin from a margin perspective, if you've got 14.8%-16% at the midpoint, what does strategic pricing within the portfolio contribute to that margin expansion?
Yeah. I mean, it's a, it's a piece of that. You know, there's. There's, you know, there's a lot in the soup there, but, you know, I really think the company's in a good position, right? I think we've have improved pricing muscle, which I think is good, and we talked about that quite a bit. I think we're gonna have nice volume growth, and we have to leverage both our manufacturing organization as well as our management organization, right? We're not growing finance costs 6% next year because revenues are growing 6%. We talk about that. You know, we have to leverage the OpEx because we wanna give Michael as many dollars as we can, as many as he can spend. We're gonna find them.
He's first, and then everybody else, you know, kinda gets what's left over, and we have to be able to leverage our OpEx and then mix the company up. If we're gonna grow 4%, 6%, and 20%, that's gonna be an inherent tailwind to margin because your 20% growth is your highest margin. I really think we have a lot of things headed in the right direction. I'm sure it all won't go perfect, and there's some things we'll have to deal with and adjust. I think we're on strong position and we're ready to execute. Getting the organizational redesign behind us is a big step for the company.
It may go better than perfect.
Yeah, it may. I'm a finance guy.
Yeah.
Brian.
Sure. Yeah, I'll ask a question. I didn't have my hand up. I've got questions. Just to follow up on the pricing. I'm a little surprised that when you look at the organic, if you say organic's gonna be 6%, just a little more than half of that would be volume. You're saying pricing could be, like, two points to.
Yeah. I mean, we haven't given guidance yet, but I would think volume would be the larger portion, but certainly pricing is gonna be. You know, presuming, you know, relative reasonableness in our costs, we're gonna continue to increase prices.
Yeah, absolutely. We're back to normal cycles across the corporation on pricing. Clearly watching it every single moment to understand what's happening in the commodity markets that's coming into the raw materials input costs to the corporation. Clearly, right now, we have really worked very hard in order to expand those gross margins. You see that in our latest results. We're gonna continue to watch that, but we're right now across the corporation back to a more normal cycle.
Okay
which would suggest one or two points. Now, if inflation takes off
Yeah.
we'll go more.
When we give our guidance next year, just like last year, we'll give the three pieces. We'll give you price, we'll give you volume, and we'll give you the FX impact.
Yep
and the, you know, the expected sales growth for next fiscal year when we come out with guidance after the fourth quarter.
Can we just zoom out and look at Donaldson, you know, and pricing as it has been over the last 10, 15 years, and just talk for another second about how that's changed?
Yeah
because I think if you know, I think I started covering the company in 2008.
Yeah
or seven. The message.
Sure
was always kind of we're giving up a little price.
Yeah.
Right?
Yeah.
Yeah.
That's the.
Yeah, I think you've been around.
way of doing it
you've been around a while, so you remember. I think Rich even hit on it a bit today in his presentation. I mean, even when I got here, I think there was many years of relatively consistent, you know, inflation, deflation, you know. I think the customers got, and we got lulled into this situation where, you know, you get a little price down every year, and then all the cost reduction initiatives will balance that out. I think your cost for many years, kind of back when, you know, you remember, was relatively neutral, and it was all volume, okay? Now I think we're, you know, we went through and, you know, steel's up a couple hundred %. Yeah, just not like that anymore.
I, you know, while it was painful, I think it was good to go through that exercise, that that's really not the way the world works anymore. Everything is getting more expensive, and we need to pay our suppliers, too. We have to account for that, and we wanna have reasonable rates with our suppliers, but we're expecting to continue to have wage increases, and our cost of insurance is going up, and everything I look at continues to go up. We have to account for that in our prices. I think the old version, which I think you accurately depict, of maybe 0%, I don't think that's in play anymore.
Just the OEMs look at it different. Everyone's looking at it differently.
I think they are.
Chances
you know, nobody wants to admit it, but prices are going up.
Yeah.
Right? That's the way it is.
Another question. Just as I'm reflecting on the longer history of the company and, you know, the aftermarket opportunity and the slightly higher margins that you get in the aftermarket filters, I'm thinking largely the mobile segment. You know, that was a big part of the story in terms of margin expansion. You know, you had a great first fit historically, just a, you know, dominant maybe you don't want me to use the word dominant.
Yeah
You know, very strong position in first fit. Then aftermarket, there were opportunities to gain share all over the place, and PowerCore was what was, you know, at least in large part, what was gonna help you do that and gain that share. You know, how is that opportunity now? How big is that opportunity now in the U.S., in Europe, you know, to continue to gain share in that aftermarket in mobile?
Well, I would just tell you that nothing's changed relative to the model. Proprietary razors to sell razor blades. Win the first fit in order to drive the aftermarket. That beautiful picture that Rich talked about, right? That model still plays very, very well. We're more diverse across markets in the United States than we are over into Europe. We have a higher aftermarket opportunity in Europe, a huge aftermarket opportunity as we drive proprietary over in Asia, particularly in China, the number one diesel engine manufacturing country in the world, where we're winning with PowerCore today and driving that opportunity forward. There's a lot of room in the aftermarket, and particularly to play with proprietary razors. Then when you establish that brand with the proprietary razors, a lot of the rest starts to come along with you.
We've got a lot of runway. The model still plays very, very well. Our strengths are our strengths, and we'll continue to play those cards, frankly, because they work.
Maybe I'll just ask one more. Are there any regulatory changes that could move the needle significantly coming up in this forecast period?
You know, really tough to say. Obviously, I think Rich talked about the regulatory environments and what happens relative to EVs and how people are gonna chase, et cetera. We'll have to see how that evolves, right? But other than that, the big one for us that we're really looking forward to starting to engage is the law that was passed and the infrastructure bill. When that starts to take place, that should be able to give us some tailwind here over the course of the next two, three, four years. Not sure how quickly they can spend and ramp those projects up. That gives us a little bit of stability should things overall turn a little bit more tight.
The commission for vehicles.
At this point, I mean, Europe talks about it, everybody talks about it, but there's nothing that I'm aware of at this point that we can say, "Wow, that's coming." We'll just have to keep our ear to the ground.
Yeah, I think just the world moving to cleaner solutions, right?
It's-
I mean, our second presentation today was all Ashley and sustainability and how we're trying to help the world. I mean, I think the world is moving in the right direction, and we're very well positioned to help that movement.
Yeah. As people, our customers chase those sustainability goals, it's not so much emissions and the rest of those things on Rich's side, but where it should help us and play really strong is in Guillermo's business over on the industrial side. As we continue to connect those devices and then print out reports for them to answer the questions, that could be pretty powerful for them because, you know, the maintenance person doesn't wanna really find out how much is going up the stack. Just give me the answer, right? We'll be able to give them the answer. We're headed that direction. As the world continues to press sustainability, should play very nicely to our strength in the industrial side.
Anyone else? All right. Great. We'll wrap up the formal presentations.
Yeah.
Q&A. We can slowly start heading upstairs for lunch. Back staircase, there'll be some Donaldson people along the way to guide you.
Yeah, just maybe closing, just thanks to all of you. A special thanks for making the trip to come see us here. We have an exciting group of tours where we're gonna show you some pretty cool things across our laboratories. I'd also like to thank the over 200 virtual attendees today. Thanks for your time and hanging in there with us.