Good afternoon. I'm Robin Davenport, Vice President of Corporate Finance, it is my pleasure to welcome you to Parker's 2018 Investor Meeting. For those of you attending today, the packets of information that you received when you checked in contain copies of today's presentation. For those of you attending via webcast, we welcome you. The presentations are available on our investor website at phstock.com. I'd like to start by directing your attention to the fact that we will be making forward-looking statements today, please read the statement in its entirety. We will also reference certain non-GAAP measures in our presentations, which have been reconciled and are explained on our investor website at phstock.com. I'd like to thank each of you for joining us today and braving the elements to be here. We are grateful that you have made time in your schedules to join us.
This is an exciting time for Parker and our leadership team. As you are probably aware, in 2017, we celebrated Parker's 100-year anniversary. We're all very proud of the foundation and success we have built over the past century. As we enter the next decade, the company is well-positioned to build on our historical successes and achieve long-term, sustainable top quartile performance. Today's program has been developed with a longer-term focus on Parker's strategies and updated targets through the fiscal year 2023. Consistent with this longer-term focus, we will not be making any comments on financial performance nor market dynamics in the current quarter. Any reference to FY18 guidance remains consistent with the update provided during our recent Q2'18 earnings call held on February the 1st.
Throughout the course of the afternoon, you will be hearing from Tom Williams, our Chairman and Chief Executive Officer, Lee Banks, our President and Chief Operating Officer, and Kathy Suever, our Chief Financial Officer. We will also have presentations covering three of our worldwide operating groups. We're very pleased to introduce Roger Sherrard, President of our Aerospace Group, Jenny Parmentier, President of the Engineered Materials Group, and Rob Malone, President of the Filtration Group. You'll find bios for each of the executives in the back of the presentation deck. Today's program is outlined as follows. Tom Williams will start with a review of the company's tremendous progress since the introduction of the new Win Strategy in 2015, and he'll present our new FY23 targets. Lee Banks will address the company's strategic initiatives that are driving profitable growth and productivity.
Kathy Suever will review in greater detail the company's financial progress against our FY20 targets and discuss the outlook for FY23. Each of the three group presidents, Roger Sherrard, Jenny Parmentier, and Rob Malone, will then provide a review of their respective businesses. To conclude the meeting, Tom, Lee, and Kathy will host a Q&A panel. With that, it is my pleasure to welcome to the stage our Chairman and Chief Executive Officer, Tom Williams.
Thank you, Robin, and thanks so much to everybody for being here today. It was two and a half years ago that we had the last Investor Day, so we are very excited to share with you a lot of progress that's happened in the last two and a half years, and probably even more important, share with you where we're going over the next several years, next five-year update. Welcome again on behalf of the leadership team. Welcome to everybody on the webcast. I'm going to start with giving you an update on the agenda for me, the next 30 minutes. I'm going to talk about a progress report on the new Win Strategy. I'll give you a brief summary of CLARCOR as Rob Malone's going to cover that in a lot more detail.
I'll talk about the portfolio strategy, give you the updated corporate targets, which we're excited about, our capital allocation, and just a brief summary at the end. The report card for the first five years, and obviously, we're not five years into it, we're only two and a half years into this report card, but these are the key messages I want to leave you with as far as what we've seen so far. You've seen it yourselves, substantial progress against those FY 2020 targets. The CLARCOR synergies are ahead of schedule, and hence we're going to increase the synergies that we're going to talk about. You're going to get a constant theme today in the video, in the videos you're going to see from the groups, the group presidents, that one of the distinguishing features of the company is the interconnectivity, the strength of the Parker portfolio.
It's what makes us special. It's what makes us stand out. You're going to see that come through loud and clear. We've got new five-year targets. We're clearly raising the performance bar, talk about capital allocation. The exciting part for me is that the Win Strategy is working, and you can see it in the tone of the people that were in the video. We're still early days of the changes that we've made. The future is really, really bright. I happen to have the good fortune to be the one standing here on behalf of the entire company to talk about this report card. I try to highlight it in really just a summary of key accomplishments for the last couple of years. It's a team effort around the world.
First one on the list, launch of the new Win Strategy, which is building upon the success of the original Win Strategy and is a big part of what has driven our performance the last several years. On safety, we've reduced safety, the injuries related to our workplace by 54%. I'll talk more about that in an upcoming slide. We had exceptional performance during the financial downturn. If you look at our numbers 2015 to 2016, this was the second-largest sales drop in the history of the company. Under one year, second-largest sales drop, we had fantastic financial performance. The CLARCOR deal a clearly transformational acquisition changes the portfolio of the company well on track. Our organic growth at 6.5% in our current guidance, versus you're going to hear us use the term GIPI, Global Industrial Production Index. It's our proxy for what the market is, clearly outpacing the market.
Our operating margins at 16.3% versus that 17% target. Because of the pace of improvement we've been making is why we're changing the new five-year targets. Free cash flow conversion continues to be strong for the company. When we were together two and a half years ago, we gave a guidance on our five-year targets of an 8% EPS CAGR. We came in at 11% so far through our FY 2018 guide. Our TSR, while I would always love it to be even bigger, at 50% since January of 2015. The point I want to make with this is the team that has stood behind and executed and developed these accomplishments is the same team that's standing behind the commitment we're going to make to you for the next five years.
Hopefully, this progress should be a good indicator and confidence level for you as analysts and shareholders, as this team knows how to deliver and deliver the next five years as well. Everything we've been trying to do with the performance and the changes to the new Win Strategy is all around this comment on this slide, repositioning the company for sustainable top quartile performance. That's what we want. I'm going to take you to the new Win Strategy. I'm going to go not into the kind of detail I did when I first launched it two and a half years ago, but take it more section by section, what have we accomplished, and then where we're going. Try to give you a feel. Those of you who hopefully are all familiar with this is the business system of the company.
It's how we run the company. The front of the Win Strategy is the four goals and the strategies. On the back are the measures of success. I'm going to stay primarily on the front of the Win Strategy for this discussion. We're going to go left to right, starting with the most important goal we've got on the Win Strategy, which is engage people. We rolled out a real strong emphasis on safety. You can see the improvement here, 54% improvement. Besides being the right way to run the company and the right message to give with people, high levels of safety performance, meaning low accident rates, are clearly linked to strong operational performance, strong customer performance, and strong financial performance.
You, as shareholders, besides wanting to invest in a company that treats their people the right way, are investing in a company that's going to drive even better performance because of the safety improvements. Clearly, leadership's important on driving safety, but I would tell you the number 1 thing that drove this was the engagement of our people. This high-performance team process, which I'm going to describe, and you heard a little bit on the video, is helping us drive this zero-accident culture. I wanted to take a moment to talk about sustainability because we do a lot internally on this, but we don't share a lot externally, and you'll see us share more about this later. We actually have a sustainability report that we put out every year, which is available, but I just took a couple key metrics here.
If you take our energy usage and our CO2 emissions and normalize it for sales over the last 10 years, you can see there are improvements there. Over a 50% reduction on both of these, which is fantastic progress. We are part of a project called the Carbon Disclosure Project, which takes other industrial companies like us and ranks them on how we're doing on these kind of key sustainability metrics. We're in the top quartile. Our goal being top quartile on financial performance, same thing here from a sustainability standpoint. And the Parker Foundation, which is our philanthropic arm in the U.S., is something that we do around the world, and it's really all around time, talent, treasure. How can we give back to the communities that we work in?
Our focus is on the needs of the community, science and math education, sustainability, and we do that around the world, and it really drives, I think, interest in our people, and it drives the right kind of things for society in the locations that we're at. On engage people, there's a couple key strategies I want to talk about. High-performance teams is a big part of it. I'll cover that on the next slide. We do an every other year engagement survey, and it's a real comprehensive survey, probably 50 or so questions, all trying to hear the voice of our people on what they'd like to see do better from a leadership standpoint, talent development, career development, recognition, you name it, very comprehensive. On the off years, we do a short pulse survey. Why is this important to shareholders? Because the data is very clear.
High levels of engagement. If you get high scores on engagement, you also happen to have high financial performance. We're trying to very clearly link this to if you're a leader for a respective area, how we're going to value you as a leader is directly tied to how your engagement survey comes out. Now we're working our way towards that kind of linkage, but that's where we're going over the next several years. The big focus and the big takeaway we've had from this whole engagement process is focus on the frontline leaders. If I give you an army analogy, in the army, it's the sergeant and lieutenants that run the army, not the generals. It's the same thing at Parker. It's not Lee and I that are running the company, as much as we like to think we are. It's the frontline leaders.
It's 70% of our company reports to that first level of management, that second-shift team leader, the accounting manager, all those people are the people that really run the company. Our job as leaders is to help them be successful. How can we help their skills? How can we listen to them? We might have to make some talent changes there so that focus on frontline leaders is a big part of what we're doing and will be doing the next several years. The whole goal of this engage people is to create owners. You won't hear me use the word employees very often. I prefer to say team members when I'm talking about all of the people at Parker. Employees think differently than owners. Owners think about three key things typically: Are we making money? Are our customers happy?
Are the people working around me happy? There's a distinct difference in performance if you get people to think like an owner than if they think like an employee. That's what we're trying to do here, and this is at the heart of how we're going to do it. High-performance teams is the structure of how we create that ownership. Let me step back for a second and explain how our plants are organized. A typical Parker plant is made up of a variety of value streams. If you're not familiar with what value stream means, it's a natural grouping of part numbers or products. Depending on the size of the value stream, we might have a team that is the whole value stream, or a value stream might be broken up into multiple teams.
What we want to do, we use this star symbol just symbolically to create the team structure, we want our people to be engaged in various aspects you see around that star, where they are actually doing more than just the doing. Very early in my career, when I was a second-shift supervisor, I learned that the people that do the work know better than anybody else how to make things better. We're going to put that to practice here. I'm going to give you a hypothetical example, an eight-person team in one of our plants. Already today, we've assigned two of those people to safety, and you've seen the improvements on safety so far. We're going to do the same thing and assign the rest of the team members to the other parts of the star, so quality, cost, and delivery.
For those of you who are familiar with the Parker Lean System or any typical lean system, these are the typical things you would see on any team improvement board, any lean system, in any really good lean thinking type of company. We're going to get people engaged across the entire Parker Lean System, all these metrics. Again, the value for shareholders is that improvement you saw on safety. Engagement you saw on safety, we're going to translate that same kind of passion, that same kind of intellect and horsepower from our team members into quality, cost, and delivery. That's a big part when we give you the new margin targets, this is one element that's going to help drive that performance. When Robin talked about us turning 100 years old last year, it's really hard to turn 100.
It's not easy to get to 100, and we were excited about turning 100. These are pictures from various celebrations around the world. My whole point on this first goal to Win Strategy is that engaged people is a cultural competitive advantage for us. We've been working on this for decades, but the high-performance process and everything we're trying to do makes this an even more powerful advantage for us going forward. Moving on to customer experience. We changed one word on that, and it changed a tremendous amount of activities in the company, from service to experience. The key metric we're looking at to measure experience is this metric here, likelihood to recommend. Some of you may be familiar with Net Promoter Score as far as a consumer-orientated metric. We're one of the early adopters of this from an industrial standpoint. You can read that question.
How likely are you to recommend that your company conducts business in the future with Parker? We ask this question on almost every transaction we have with a customer or a distributor. If you're a promoter of Parker, the score is 0 to 10 on this survey. You answer this question, you give us a nine or a 10, you're considered a promoter of Parker. If you're a six or below, you're considered a detractor. Likelihood to recommend is measuring that delta between promoters and detractors. The importance here is that obviously, if you create a great customer experience, that is a key enabler to growing. It's pretty hard to grow with a customer if you're having a lousy experience. We spent the last year rolling this out. We now have good data coming in from our customers.
Here's what our customers are saying. I'm a glass is half full type of person. The good thing about the feedback is that they like the products. They like the technologies. We got very little negative comments about that. We got a lot of comments around these three topics you see on this page. They're really kind of all the same thing. Resolve my issues faster and communicate better with me. Our action as a team is we're going to be working on those customer engagement processes, a combination of organization design, process design. How do we make this a better experience for customers on these three things here? One more thing on customer experience. The whole digital experience is really the gateway into Parker. This is the school of first impression when you think about it.
The first impression is really with e-business. We want to have a best-in-class site when it comes to trying to find something, select something within Parker. Then once you're with us, we want to use the Voice of the Machine, which is our trademark brand name for Internet of Things, and that's really driving your productivity, your reliability, your safety. Lee's going to touch on IoT a little bit more in his presentation. I want to make a comment about e-business. That likelihood to recommend metric that I showed you on customer experience, we ask that same question for people that go to our website. Two years ago, our score on likelihood to recommend was a four. A four is not a good score in case you're not following along. We had as many people disliking the website as liking the website.
Today, our score is 30. We've made dramatic improvements. We're not happy with 30 is significantly better, and we're getting a lot more better feedback on the experience people have when they use our website. Switching to profitable growth. Lee's going to cover this as the bulk of Lee's presentation. I'm not going to go into all these key initiatives underneath here, other than to say there's early indicators that this is working. That organic growth I showed on the progress report of 6.5% versus the market at 3.4%, there's early indicators that this is working. For us, we're not going to be happy till we can demonstrate this over a whole business cycle. It's okay to do it in one year. We've got to do it over a whole business cycle.
What I wanted to highlight was a key change we're making from a technology development standpoint. Using the staircase as a way of describing what's changing and how we're going to develop technology. At the beginning of the staircase, before FY 2016, almost all of our development was division technology built. There were pockets where we did some things centralized, but it was more at the divisions. Last couple of years, in addition to the divisions, we've added a center of excellence with IoT added and robotics. When we acquired CLARCOR, about a year before the acquisition, CLARCOR invested in an innovation center just for that business. We were very much intrigued with that concept of a technology center for filtration, and I'll talk more about that happened in the last year. We're going to go with this.
The bread and butter of technology development for the company will still be at the divisions. However, we're going to supplement that with what we're calling Parker Technology Centers. The reason for that is in the takeaway box here. We want the best of both worlds. We want what the divisions are really good at, and we want to get better cross Parker leverage by these Parker Technology Centers. Here's what I'm referring to when I talk about that. The first bullet is already done. We have an advanced process development with those three things in Northeast Ohio. It's already in place. The Filtration Technology Center, we're going to keep that in Tennessee, where it is today, but it's going to be the total Filtration Technology Center, not just CLARCOR. It's going to be the new combined group that Rob Malone leads.
The Motion Technology Center, we're going to start in July of this calendar year, we're going to put together the two groups that own motion technologies for the company. The Aerospace Group and Motion Systems. Aerospace owns motion technologies for the aerospace business. Motion Systems owns it for all the industrial technologies. The key focus we're going to have here is electrification. Having these two groups work together on electrification, best practices, needs of the customer, and to do this more efficiently than them trying to do it on their own. Following after that, probably a year after we launch the Motion Technology Center, we're going to have an Advanced Materials Center because we have several businesses that are very active in material science, fluid connectors, and engineering materials, and we want to leverage best practice between those two.
The takeaway on this page is really important. I am not a fan of having big corporate R&D centers. This will not be funded by corporate. This will be funded by the group presidents who are going to come up and stand and talk to you here. It's going to be small, focused, and accountable, it will be engineering cost neutral, meaning we're going to take costs out of the divisions, we're going to reallocate that cost into these technology centers, again, for better leverage and speed and a faster innovation pipeline. That's the whole purpose behind this, develop technologies faster. The last part of the Win Strategy, financial performance, what I affectionately call the big four of financial performance. Another part of Lee's conversation with you will be on simplification.
I'm not going to go into that other than just tell you that it touches everything we do. It happens to sit underneath financial performance, but it could sit underneath every one of the four goals. On lean, there's a big opportunity still for us. It's moving lean into the office. Ideally for me, I'll know we're there when we don't have a lean organization. When the value stream managers and the ops managers, which is what we want, are leading lean for the company. That is a big focus for us, talent development, training, et cetera, for those folks. Under supply chain, we've been historically a very strong procurement centric organization. I don't want to give that up. That's a great thing to have. We need to be much better in the planning and the scheduling side of things.
A lot of activity is going around that. The value pricing, you've seen this over the cycle. We're pretty good at strategic pricing. Our big opportunity is to do a better job of pricing our new products and the value that we create for our customers, and we're going to focus on that going forward, too. The punchline of all these activities, especially for all of you that are tracking, and all of you in this room are great at numbers, is this, the numbers page. On the left is op margin, on the right is EBITDA margin. I made that comment about progress during the recession. Look at the numbers between 2015 and 2016. We have never done that. Second largest sales drop, and we basically kept margins flat, was remarkable job by the team.
You can see the improvement in margins on op margin and EBITDA. I'm going to give a brief summary on CLARCOR. I took a page right out of the December 1st announcement. This is a reminder. I think everybody understands the deal, why it was important. It doubled the size of filtration. It was a strategic transformational type of deal. I'll talk about the products in a second. Clearly increased and improved the resilience of the company because of the aftermarket focus, and it was accretive to us margin-wise and growth-wise. This was the page we showed about why we liked it so much on the products on the left, Parker in the middle, CLARCOR on the right. You can see this was a hand in glove fit as far as what it did for us from a technology standpoint. This is my progress report on CLARCOR.
Rob will give you his insights as the leader of this business after 12 months and what he feels in a little more color. The cultural fit has been spot on. It's very hard to do a deal this size and not have a great cultural fit, and we were fortunate to have that. The financial metrics you can see in the next three are well ahead of schedule. In particular, we're very proud of, we mentioned on that deal call that we would improve EBITDA margins 300 basis points by year five, total company. We're almost there now, 290 basis points. We're three years ahead. We're very excited about what that means, and we're on track, and we're going to see the synergies and our balance sheet priorities are intact. Here's the new CLARCOR or our targets.
At the time of the deal, we announced $140 million cost synergies in FY 2020, we didn't disclose any revenue synergies. We disclosed that we're working on them. We didn't give you a number for them. The new target's $160 million on cost and $100 million incremental revenue synergies as a result of this deal. Again, we're very happy about this progress. I want to talk about the portfolio for a minute. This is a pie chart that a lot of you tracked us, followed for a long time. A couple key points I want to make on this. The total market size has gone from $120 billion to $130 billion, so that our addressable space is now bigger. We're still about the same market size, market share, about 11%. Very fragmented. Great opportunity to grow inorganically and organically.
This is one of our distinct competitive advantages, the unmatched breadth of technologies. There's nobody in our space that competes across this breadth of technologies. Most of our competition has got one or two of these type of technologies, but we are stronger in combination, and IoT further increases this. Those of you that looked at this slide in the past for us would have noticed we used to have a ninth picture on here. We would show aerospace as a separate box. Aerospace is not a technology. Aerospace is a market. We wanted to make sure you understood that the aerospace business utilizes almost all those eight boxes, with maybe the exception of climate control, just like the industrial groups use all those technologies into industrial end markets. Again, it's that strategic position advantage we have because of this breadth.
Where do we want to go with the portfolio? I always get this question. These are the three ingredients. One, we like the space we're in. We don't think we need to move outside of motion control. Second is we want to have businesses that have an attractive business model. I'll tell you what I mean by that on the next page. We want to have a leading position. The way I look at the current portfolio today is that 99% of our portfolio matches this definition. I see very little need to do any serious pruning. It'll be just trimming around the edges. No major tree branches to come out of the portfolio. This defines what we have today and what we would like in future acquisitions. I want to just give a little more color when I say attractive business model.
We like businesses that have engineered products with lots of intellectual property, long product life cycles, nice balance between OEM and aftermarket, and moderate to low capital intensity. Those are the ingredients behind that. Now, without any further ado, the new corporate targets. What we're looking at, we just lined up the old five-year targets and what we're going to say for the new ones. On growth, it's the same target. 150 basis points greater than Global Industrial Production or the market is still best in class. We have to demonstrate this. Again, we do this over a cycle, and hence we didn't change that. Segment operating margin, we increased from 17%-19% by FY 2023. Let me make two comments about the 2023 targets. They are under normal business conditions. This doesn't mean a recession in FY 2023.
These are the targets. These are organic targets. It's hard for us to predict acquisitions over this period of time. These are our organic targets. The significance of the 19%. How do we come up with a number? Top quartile of our proxy peer group, you look going back 12 months, three years, five years, the number, the set 25% line bounces between 17.0% to 17.5%. At 19%, we're not just going to be top quartile, we're going to go into the top quartile. It's an important distinction, because in the past we were just happy to get the top quartile. Now we're going to go into the top quartile.
On EBITDA margin, we hadn't had that as a target. Given that with the CLARCOR deal and the amount of intangibles we have, it seemed to make sense to have that as a target as well. 20% is top quartile there. Free cash flow conversion has been a trademark of the company. Keep doing that. If you do all this, our EPS CAGR will be something 10%+. It's a little bit less than 10% organically. Other than with capital deployment, we should be able to do 10%+ CAGR over this time period. I want to talk about capital allocation. You heard in the last call, I went through this. Really, my views don't change on this. Our current allocation priorities are this. Dividends first.
We want to keep that annual increase record. We want to pay out 30% of net income on a rolling five-year average. We want to invest CapEx for organic growth. It's the most efficient way to invest on behalf of the shareholders. We're keenly into paying down the debt from the CLARCOR deal. We'll continue our share repurchase program. As the debt glides down, we're going to free up capacity to do two extra things, acquisitions or share repurchase. The key thing that always drives us, we're going to try to make the best decisions on behalf of all of you, our shareholders listening, is what is the best long-term value-creating decision we can make on how we deploy this capital? That's the guiding principle for us. We're going to make one important strategic change, really two, on CapEx.
On the left is the amount we've been spending. Our historical CapEx investment, 1.8% of sales. We're going to bump that up slightly to 2.0%. The important part on this page is the allocation. We're always going to allocate CapEx for safety. That's a no-brainer. We're going to spend more CapEx on productivity. We've always invested for organic growth, again, the most efficient way. In my time as a leader, especially in manufacturing arenas, this is the best time to invest in productivity investments because of additive robotics. There's no better time to be investing in process technology to drive incremental productivity for the company. That's what we're going to do. We're going to shift that allocation to more productivity focus. Here's our acquisition strategy as far as how we're going to select things and what areas we like.
We first want to be the consolidator of choice. If it's within our space, we want to take a look at it. Doesn't mean we'll swing on everything, but we'd like to be at bat. We'd like to focus on a couple of groups that you're going to hear from today, engineered materials, aerospace, instrumentation, filtration. Why? Because their margins are attractive, and they tend to be more resilient over a business cycle. Then we'll continue to look at adjacencies and named disruptors. My best example, my favorite example of an adjacency is filtration. 35 years ago, it was a natural adjacency for us to get into filtration, where we are pumping and directing all these fluids. It was a natural thing for us to filter that system, and hence now it's a significant part of our company. What's the future look like?
This is a slide I talk about internally that I wanted to share with you on an external basis. We're leading the company with a purpose. Our company, we're fortunate here that we create value for society, our customers, our shareholders, our people. We do that by working with our customers to help raise the standard of living. It's a pretty noble cause, a noble purpose that the company serves, raising the standard of living of people around the world. That's especially important for our people to rally around something bigger than just hitting a financial target or hitting a shipment for the week. Are we doing something bigger than ourselves? Really, it's that performance and that culture that creates that significant value.
Side by side with our customers, we are helping to solve the world's greatest engineering challenges, which is, again, a very inspiring thing to do as a part of Parker. These are our distinct competitive advantages, what makes us special. At the first of the list is the Win Strategy. It is the Parker Business System. It's how we run the company. Second is our decentralized divisional structure. There's a tremendous amount of power in connecting people closer to the P&L, closer to their customers, closer to each other, and that's what the divisional structure does. We have the best distribution network, bar none. It's not even a close race. Lee will talk about that. We make things that has intellectual property, patents, trade secrets, trade secret tooling, processing, material science. Again, we love the intellectual property part of the company.
We're globally balanced, and as I shared with you earlier, we have the broadest breadth of technologies out there. This is our list. When we talk about strategic positioning with a company, this is our strategic position. This is what makes us different so that somebody would pick us versus somebody else as a customer, and why you should pick us as a shareholder or an investor. What drove the changes to the Win Strategy were these two things. We want to do these two things really well. We want to be a top-quarter performer, and we want to generate cash, and we want to be great deployers of that cash. I happen to like this quote. I tend to use it a lot.
Keep changing, because when you're through changing, you're through." Hopefully you've seen the last two and a half years, last three years, we've changed quite a bit. My intention today is to tell you we are not going to slow down. We are going to keep changing because we are running this place with a real passion to take us to the next level, because we want to be the finest industrial company in the world. With that, thank you for your attention. I'm going to introduce Lee Banks, our President and Chief Operating Officer.
Thanks, Tom. I remember, three years ago, Tom and I traveled around the world, really, and had focus groups with our probably 350 executives around the company about what we wanted to change with the Win Strategy. There were two things that came out of that were loud and clear. One, people first, therefore engage people, and this whole concept of ownership. Second was we are a big, complicated, sometimes bureaucratic company, and this whole notion of simplification. Back two and a half years ago, we introduced this slide to you, what simplification means to us. It starts with revenue profile complexity, and I'll tell you, we're on a journey, and I'll share more with you on that. Optimized organization and processes, we've done a lot inside the company to really take out processes that don't need to be there.
If you think about it, we'll hit a new high watermark this year of $14.1 billion. We're going to do that with 2,000 less people inside the company versus the last high watermark we had of $13.2 billion. Division consolidations, this was a bottoms-up ability we gave our operating group Presidents to think about where are there overlaps, where is there not critical mass, where can we combine and be stronger in the marketplace? I'll share an update on that. Then reducing bureaucracy. We had things that had matured in the company over 100 years, and when you sat down and challenged them, you said, "Why are we doing this?" We had annual planning processes that would start in February and culminate with a presentation to the Board of Directors in August, and it would always be wrong.
We took that over all those months, all those meetings, and brought it down to something that takes literally two and a half to three weeks. Very focused, and we're a little more right now than we were back then. The whole thing enables speed and growth at reduced cost. Just an update on division consolidations. This includes CLARCOR, but we've gone from 122, we'll be at 88 this fiscal year. The other thing we've done is we've taken our hydraulics group and our automation group, we've combined those together and created a Motion Systems Group. It gives us the ability to seamlessly integrate technology around our customers, around motion systems, the electrification hybrid systems that they're demanding from us. A lot of work here. Where this number goes, I'm not going to tell you.
It's not going to be this rapid amount of change, we're constantly looking at opportunities to strengthen our division portfolio. When it comes to revenue complexity, I get a lot of questions on this. This isn't necessarily about reducing SKU numbers and for me to get on an earnings call and tell you how much revenue is eliminated due to complexity reduction. That's not what we're after here. What we are here is to give our businesses a tool to understand where value is created and where cost is generated. With every one of our businesses, as natural law is here, the bulk of the revenue comes from a very finite activity, as you carry on the long tail of activity, the costs accelerate exponentially. It's that cost opportunity, it gives us an opportunity to improve the business as we go forward.
In Asia-Pac , we have a playbook. We have a process, very process-driven culture, that we tackle this with our businesses and educate them. As we educate them, it allows them to use those three big drivers Tom talked about, lean, pricing, strategic supply chain, to really amplify our efforts. The first is it gives us a better window on pricing. We're getting better pricing analysis now than we had with our strategic pricing portfolio. Pricing on non-standards. We try to take non-standard products to standards, working with our customers. As you can imagine, when you've been around 100 years, you have got a legacy of part numbers. We do third-party sourcing on key long-tail items that we need to keep servicing customers for. Then a combination of part number consolidation and customer consolidation. Some of these things we move to distribution.
This is hard work. This is not easy, this is the journey we're on inside the company, that's why we feel confident about our performance going forward. Tom mentioned this simplification really is about everything we do. It's that whole 80/20 concept applying, where can you create value the quickest? It's going to give us better speed, better customer experience. It redesigns work processes and organization, really, it enables growth and financial performance. It applies to everything we do inside the company. Little bit on profitable growth. This was the same slide that we presented two and a half years ago, it started with these five key drivers to grow in the marketplace. You never want to get too excited about what's happening, I think we're winning in all these areas. It starts with distribution growth.
This global network, as Tom mentioned, is second to none. 13,000 outlets, 96 countries around the world. We're able to tailor this distribution network no matter where we're playing around the world, whether it be remote mining sites, offshore oil and gas opportunities, et cetera. It's very powerful, the brand name is very powerful. The strategies really are founded around us being at this for decades. It's the most valuable off-balance-sheet asset we have. You've heard us say that many times, the big opportunity has been growing international distribution. We've been working very hard on that since the last time we saw you two and a half years ago. We took my very senior executive, heads this up for the corporation. There's roughly 100 Parker employees, which is how North America started. They have left the company voluntarily and joined our distribution networks around the world.
It could be Malaysia, China, you name it. These people are out there working on Parker's behalf. Very powerful. 362 new distributors. This isn't a line item added at a distributor. These are new entities that have joined Parker Hannifin internationally. Still early days, I will tell you, but it took us 60 years to get where we were in North America, and we're building it going forward. I get asked often, "Why are you so successful with distribution, maybe versus other people in your peer group?" I think, one is we're dedicated to it. There's complete integrity within the channel. We don't flip-flop on what we're trying to do. We ask our distribution partners to make investments on our behalf, and we make investments on their behalf.
The broad technology portfolio is something that gives them an advantage in the marketplace that nobody else can do. I talk about this as kind of the four value streams of our distributors and wholesale distribution and industrial retail are two, but it's in the metal, which really amplifies the Parker product portfolio. It's the ability to do technology integration with our customers, our end customers, and really this whole notion of value-added services. Lastly, when it comes to the ParkerStore, we continue to grow these. There's roughly 2,300 ParkerStores throughout the world now. It's a great brand recognition tool in all the marketplaces. It's owned by our distribution network. When you go to developing countries around the world, it's an entry point many times, which gives us great brand awareness as we build out distribution. Share gain, key accounts.
We talked about this going forward. We have the pleasure of dealing with some of the biggest, best industrial companies in the world. What is unique about Parker, as we've said many times, is that product portfolio that we can bring in front of the customer and solve many different applications and needs. Bringing that all together is where the secret sauce is for our company. We do that through a key account manager structure that's very focused globally and regionally. We measure how we're doing on market share by technology. We have this whole high-performance teaming globally around one of these customers. Imagine, if you will, a global customer that's with Parker Hannifin and a global network of sales and account managers talking on a weekly basis about what's happening with that account and how we can improve.
Lastly, we take a very outside-in view of our performance. We all have our own internal metrics, but what matters most is how that customer is measuring us. At our operating reviews, we're talking about major customers and their dashboard on us and what we can do to improve. Lastly, is the ability to do that systems engineering with our customers. We have many different forms of how we do that. This is an example of how we would do it on the mobile systems. We'd be partnering with our customers, looking for a broad array of our technologies, baseline their performance of their current equipment, upgrading with our portfolio, and handing them a bill of material that can improve their outcome. eBusiness, IoT, and services.
I think we've learned a lot on this, going forward since we launched this two and a half years ago. I think, as we look forward, there's no doubt digitization is going to play a much bigger role for the company over the next 100 years than it has in the past 100 years. What's unique for us is, as we develop products, and we are connecting these products, is the ability for these products to talk to each other. Which differentiates us versus our competition is we make all the different parts in the system. Whether it's filtration, seals, compressors, pumps, motors, cylinders, et cetera, we get unique insights as to how they're operating, and we enable our customer to plug into those insights. We're very happy with the progress we've made here, and we're learning more as we go forward.
As these have emerged, these are the three commercial platforms where we've got revenue today. Significant bill of material on connected products. Some cases, some revenue stream on monitoring data. We're on the mobile applications, industrial in-plant applications, and then on energy applications. Lastly, I just want to talk about market-driven innovation. There's a lot that goes into the whole thought about what makes great innovation inside companies. I would tell you, first and foremost, it starts with having a good process. Inside our company, we've got a fantastic process. Second with that process comes from the front end of that process around ideation and making sure you've got great products coming into that, and then how do you sort out what you focus on? We've been looking very diligently at our Winovation process and where is the biggest bang for the buck.
This whole idea of looking at simplification inside the company, applying those same 80/20 principles at our businesses so we make sure that we're putting the right resources where we can get the best returns. Early days, but we're pretty happy with the payback that that's giving us and the focus. Lastly, it's really understanding that customer's needs. We've rolled out a process inside the company called New Product Blueprinting. It's no surprise it starts with the customer or the customer's customer and identifying how we can make or save them money, and then training that across the enterprise, and specifically spending a lot of time with our engineering community on how to do customer interviews and identify value. At the bottom line, it gives us much more focus than we've had, and it's really speeding up the development process and resulting in differentiated solutions.
With that, I'd like to say thank you, and I'd like to bring up Kathy Suever, our Chief Financial Officer.
Good afternoon. Tom mentioned he was thrilled to be able to be the one to stand up here and talk about the good report card that we've done. I'm thrilled to talk about the great metrics we've earned over the last couple of years and the exciting new targets that we're striving for by FY 2023. Let me start with sales. Tom mentioned this briefly. When we started the Win Strategy, we set a goal of growing at 150 basis points faster than GIPI. We did that not forecasting any recessions. We did that on a normal over-period growth, and we said we'd do that by FY 2020. Here you see our activity in the green line. We had a pretty significant drop in FY 2016 as the recession hit us harder than we would have ever imagined.
We've come out of that, we're currently beating GIPI by 310 basis points with our 6.5% organic growth projection for this year compared to GIPI, which is at 3.4%. Good growth, beating the market. With that confidence, we're setting a target going forward for the next five years that we will continue to beat GIPI by more than 150 basis points. In fact, we plan to beat it by 170 basis points. We're projecting GIPI to grow at a rate of 1.5% over the next five years, and we think we'll grow 1.7% on top of that. Now, some of that revenue growth comes from the benefit of the revenue synergies we're going to get with CLARCOR, which you'll hear more from Rob on that. We think that we can continue to grow faster than the market. What will that mean for our margins?
When we came into the Win Strategy, we set a goal of growing margins by FY 2020 250 basis points. Again, we didn't expect the recession that we incurred in 2016, we dipped, and we're not quite up to the trend line. These are GAAP numbers. Let me remind you of some of the significant one-time costs we've been incurring over the last several years to take out fixed costs and improve our margins. We've been doing a lot of realignment. We incurred acquisition costs to bring on CLARCOR. We're going through cost to achieve to get the integration benefits of CLARCOR. If I adjust the numbers for those margins, then despite the recession in 2016, we're on track to meet that FY 2020 target of 17% on an adjusted basis.
Let me remind you, in those numbers as well, with the CLARCOR acquisition, we took on a fair amount of depreciation and amortization. On an adjusted basis, we're growing 140 basis points. On an EBITDA level, we're growing 250 basis points. Pretty good, despite coming out of the recession of 2016. How does that give us confidence to get to 19%? Here's a waterfall. Gave you the new target, 19% by FY 2023. Pretty optimistic after we've already achieved the 17%, or we're getting close to achieving the 17%. Here's how we see it coming out. Starting with our base year of FY 2018 back on a GAAP level of 15.5%. The CLARCOR synergies, both the cost synergies and the revenue synergies, are going to help us gain 90 basis points on top of what we're already incurring a little bit in FY 2018.
You heard both Tom and Lee talk a little bit about simplification. That's going to help us earn another 90 basis points on our margin. Productivity. Lean out the operations. You saw that great video at the beginning with those very energized high-performance team members. They're working every day to improve the productivity on the shop floor. You heard Tom talk about our initiative to expand our capital expenditures to help with productivity. All of those combine a lot of hard work. We think we'll get another 60 basis points through productivity achievements. Working closely with our suppliers and closely with our key suppliers, we think we'll get another 50 basis points of margin. In FY 2018, we have $110 million of one-off costs for realignment of our base business, as well as costs to get the CLARCOR synergies. $110 is a big number for restructuring for a year.
We won't continue at that level. We've built into our model in the later years, $50 million. The difference between $110 and $50 naturally gives me an additional 40 basis points of margin here. You heard Lee talk about working intently to grow our distribution, especially internationally. As we expand the mix we have of MRO versus OEM, we see another 20 basis points coming from that. So we're pretty confident that over the next five years, we can get those margins up to a GAAP number of 19% margin. I think that's pretty exciting. Tom mentioned one of our goals, great generators of cash, great deployers of cash, and we have a good history of being good generators of cash. You see here our conversion rate of net income. We have an ongoing year-over-year, 15 years of converting better than 100% of net income.
We do that through the recessions. We do that through the good times and the bad times. Good management of our working capital. We don't see that stopping. We see that as an ability to continue as we go forward. That has allowed us to continue our 61 years record of dividend increases. We expect that to continue as well. We pay out the dividend at a goal of paying out 30% on a five-year average, and there's no reason we can't continue to do that. We're currently at a 34% five-year average. So what has our cash deployment looked like over the last three years? We've generated operating cash of $3.9 billion. We've used that to pay out $1 billion in dividends.
We've invested $600 million back into the operations, and that's left us operating cash of $2.3 billion to use to grow the business through M&A or to do some share repurchase. You know, we've used that for the CLARCOR acquisition a little over a year ago. So very useful use of that cash. So what's the next five years look like for us? We're projecting that we will earn operating cash of $11.5 billion over the next five years. Staying at our 30% payout goal for dividends, that'll be $2.6 billion that we pay out in dividends. At a 2% of sales CapEx estimate, we'll spend $1.6 billion back into the operations on CapEx. And that leaves $7.4 billion for strategic M&A and share repurchase. Now, you saw Tom show that we still have a motive to get our balance sheet delevered back.
We need to spend about $750 million to get the debt to EBITDA measure back to a two times metric. If we're at two times, we have plenty of leverage left in the balance sheet to do M&A after that. We're only basing this on organic.
Well, I went through those fairly quickly, here's what we want you to remember from today. Our new targets, growth of 170 basis points higher than GIPI. That'll be a 3.2% CAGR from where we are for FY 2018. Profitability, taking margins from 16%, where they are today, to 19% by FY 2023, and that will earn us an EBITDA margin of 20%. Free cash flow, we plan to double free cash flow over the next five years. We're currently earning cash per year at about $1.1 billion. We think that'll be $2.2 billion by FY 2023. That results in earnings per share in FY 2023 of approximately $15.50 on a GAAP basis. This is organic only. The straight numbers for $15.50 over $9.85 would be a CAGR of nine and a half, we've got a lot of cash. You saw over $7 billion-
To aerospace customers-
Over $7 billion of cash to use to grow or to do share buybacks, we're very confident that we'll be able to grow earnings per share by more than a 10% CAGR over these five years. I'll be up here for the Q&A later. I went through those fairly quickly. I'll be happy to answer questions later, for now, that's all I have.
To aerospace customers large and small, commercial and military, original equipment and aftermarket, Parker means performance. A first and second-tier supplier to manufacturers around the globe, Parker Aerospace brings motion and control technologies to aircraft applications. From flight control actuation and hydraulics to fuel, inerting, and fluid conveyance systems and components, Parker solutions are enabling and advancing flight.
It's really important for our customers to really believe that we can perform. We do perform. The best way to win new business is to have done a very good job on the current program. I think Parker has built that credibility through a very long history of working with many of our customers.
With a diverse portfolio of products, expertise at the component, subsystem, and system level, and the synergy of complementary groups and technologies within the broader Parker framework, Parker Aerospace is continually finding new ways to provide value to its customers.
Parker is one of the few companies that has this high level of potential integration within the systems. We're able to do things on an aircraft that other companies are not able to do because of the broad reach that we have within aerospace.
In this technical and rapidly evolving industry, the future is coming fast. Aircraft are becoming lighter and safer, more intelligent and more connected, Parker is ready for takeoff.
What excites me about the future, many things. We're seeing more electrification, Parker is very well-positioned for that. I do see 3D printing to be a real evolutionary part of our industry. We're designing hardware with 3D models. Well, today, we're going to additive manufacturing to print those parts, really reducing the development time and allowing us more opportunity to develop the ultimate solutions. Parker has been in this industry since the birth of aviation, Many of the innovations that we've had within Parker have really become part of aviation history. Today, between things like fly-by-wire, additive manufacturing, electrification, lighter-weight solutions, the exciting thing about being a part of Parker Hannifin is not only that history but being able to shape the future.
What a great video. I love that guy. He's my VP of technology. He's been with the company a long time. Cliff, you and I were talking about him earlier. I'm Roger Sherrard. I lead Parker's aerospace business. I'm very proud to give you this business update on behalf of the 5,500 team members in this part of the company. We're about 18% of the company, We're really passionate about focusing on, Tom talked about needs of humanity and purposeful work. We're really focused on three different things, protecting our warfighters with the fixed wing and helicopters so that they can protect our interests and our people around the world with the products and systems that we have. Enabling safe and efficient commercial transport of goods and services around the world.
Last but not least, the safe and commercial transport of us, the traveling public, We can see friends and family and conduct business around the world. We've been doing this a long time, We're on basically everything that flies. Moving forward here, $2.3 billion in sales. As reported, we're organized into eight technology-oriented divisions. I'm going to highlight a few of those platforms as we go forward, give you a feel for that. That organization is really for ease of doing business with our customers. The manufacturing footprint is very efficient. We have a very efficient SG&A structure in the business with 18 manufacturing locations for that revenue is very good, actually. We have 5,500 team members in the organization. About 20% of them are engineers, mostly on the development side.
We want to do that to be able to retain the IP and do the development work for our customers. We have four strategic joint ventures strategically located in areas of growth for us, primarily the Asia-Pacific region for a lot of the activity that's going on over there, as well as with our significant investment in our engine systems business. I'll highlight a couple of those in the balance of the presentation. Tom made a comment about the market-focused nature of aerospace. From an organizational design perspective, we're the only market-facing group in the company. You can see from the technologies there, we really are technology agnostic. We're providing functionality for our customers. We're not just selling parts.
We do a lot of that actually, the majority of our wins over the last few years, which has been in excess of $20 billion of wins, have been systems in orientation. That functionality is very important, we were talking earlier today about the migration of technology solutions from military aviation to commercial aviation over to the industrial side of the company. We take both a component and a systems posture, including all the control, electronics, and software. I think you saw some of the test labs in the video, where it's really unprecedented what we're doing here. Again, we've been doing this a very long time, really since the days of Charles Lindbergh. It's one of the oldest businesses in the company.
I'm going to highlight five of the technology platforms, not to go into a lot of technical detail, just to give you a feel for what do we do and how do we do it. Again, we're number one or two in all the technologies that I'm going to show you here. From a flight control actuation perspective, we are a world leader. We take both a component and a systems posture here. What we're doing is, if you've flown and you looked out the window in the aircraft, you see the shape of the wings changing, the surface is changing. We do that for many different surfaces, and that's what controls the steerability in a three-dimensional space of an aircraft. It could be military, commercial, helicopter. Over the last few years, we've invested a lot, quite a bit for systems capability.
In the video, it was mentioned fly-by-wire stick to surface control. A lot of benefits of that. That's been a big area of organic investment, we've won significant amounts of business that are moving into entry into service at this point. That's our flight control actuation portfolio. Fuel and inerting is another area that we're a world leader. This is significant. It's about 20% of the business. I'll just highlight two things that we're doing here. When we talk about fuel control, that was one of the technologies that was on Tom's slide. We're moving the fuel around the aircraft, to deliver the fuel in an efficient way to the engine or the power plant. Also as you fly and you turn, the center of gravity of the aircraft shifts around. We have to constantly be moving the fuel around in the aircraft.
Those are some of the things that go on behind the scenes. Really interesting part, you're going to hear a little bit from our filtration update earlier, we partner with our Filtration Group, and this is a business we've been in for a long time, inerting technology. If you hadn't heard of it's really exactly what it sounds. We're preventing aircraft from exploding. As you fly and the fuel is dissipated, there's gas over the fuel tanks, and what you need for an explosion is fuel, spark, and oxygen. You can't really fly a plane without fuel, and it's very difficult to take the probability of a spark to zero. What we do is we eliminate the oxygen through a very sophisticated filtration application. I know Rob's going to highlight this, we create an inert environment over the fuel tanks.
We are the world leader in this, we have been since the '60s. We do this for military and commercial applications. This, again, is a very good business for us. Moving on, hydraulics. We're also a world leader here with some very good competition, we have the privilege of selling to all of the really commercial and military air framers. What we're doing here is real simple. Much like on the industrial side of the company, we're providing the working hydraulic energy, which generates the power for the things that move on an airplane, whether they be flight controls or landing gear, this is a really good business for us. The engine components and systems part of the portfolio, this is our fastest-growing segment in the portfolio, it's largely because we've been focusing there.
I would say over the last few years, probably two-thirds of our wins have been in this area. We're providing components and subsystems, whether it be fuel nozzles or fuel delivery, we like this business. Why do we like it? It's because it has a long life cycle. Tom mentioned the characteristics of the business. These are 30, 40-year life cycles, there's been a lot of new engine platforms out there. They really have a nice aftermarket footprint. Usually, about 40%-50% of your sales are in the aftermarket in the engine space. This has been a big area of focus for our growth strategies, we're winning here. Finally, the last one I'll highlight is fluid conveyance. Much like on the industrial side of the company, we're a leader here as well.
We affectionately refer to it as the veins of the plane. As the various different liquids and fluids need to be moved around the aircraft, you can think about your car or your house, how intricate that is. As you get smaller and more compact, higher pressures, it has to fly, I mean, this becomes very difficult to do, we're a world leader in this. A very deep experience capability here. Fluid conveyance, nice business for us. Those are just a little transparency into technology. Here's more color on the market segments, both the macro markets up top, commercial, military, OEM/MRO, various different market segments. I think one of the things that should jump out at you is a pretty diverse portfolio. Diverse portfolio of technology, diverse portfolio of market segments.
I will call out, if you look at the combination of our commercial business and the OEM side, that's about 45% of the overall portfolio. That's where most of our north of $20 billion worth of wins has been. A lot of those programs are moving out of development and into entry into service, which creates challenges for the production engineers and the supply chain. That's going to be a significant area of growth. In all these areas, we do see growth going forward, and I'll highlight that on a subsequent slide. This gives you a little bit of feel for how our portfolio is broken down. For those of you who follow aerospace, you probably see one of the big trends in the industry is consolidation. There has been very large partners that have been consolidating for a lot of different reasons.
That's how we built our business over the decades. We're very familiar with that. We see this as a big opportunity. A lot of these companies are our customers. We continue to want to take advantage of that opportunity. We've been investing quite a bit organically as of late. We have a very healthy M&A pipeline as well. The commercial super cycle, a number of you have mentioned this to me. Now that we have won a lot of new business. We have been investing a lot, high watermark of R&D. That's now coming down to more moderate levels. The challenge now is production readiness with ourselves and our supply chain and our zero defect and our quality system.
That's where a lot of the focus is to now make good on that entry into service for both airframe and engine customers that have entrusted those opportunities to us. A little commentary on the military budget. That's going to be a tailwind for us going forward. Don't know really what's going to happen with the 14% increase in budget that's been recommended. We'll learn more this October. It takes about a year for that to effect it. F-35 is a very big program for Parker. It's a very good program. Hopefully, that will continue at a higher level. The big opportunity for us is the proactivity in the sustainment and the product improvement and retrofits in the massive installed base of both fixed wing and helicopters around the world. That's what we do at Parker. We help engineer their success.
That's a very industrial approach. We're becoming very proactive there. We're not alone. That's what the military wants us to do. Our key differentiators, this looks like a Parker slide. We really, really value the customer experience and that we have in the relationship, deep relationships over decades. That's the first and foremost our most important asset. We also have the broadest line of components of any of our peers. We have now an ability to take a systems posture in every one of those platforms that I mentioned. The global OEM infrastructure to support around the world. The 24/7 aftermarket support. Various different strategies there internally and with partners. We're a very unique supplier and a good supplier to partner with because we have all these capabilities.
On the right there, even though we've had a tremendous amount of development, we're always trying to align our technology roadmaps with those of our customers. Usually it's 5 or 6 years out so that when a program is going out for request for proposal, we have the right technology that they must have, and it's innovative and creates value for both sides. Tom had mentioned the flow of technology between the groups. I would say, and there's some pictures here, I'll highlight them in a moment. This has happened naturally over time at a certain pace, and that's good. What's going to happen now with these technology centers that we're talking about is it's going to create more of a robust, on-purpose process for technology transfer. I'll just give you some examples, and you can see the power of it.
That little black box there on the left was really technology that started back in the 1990s for the Joint Strike Fighter. Technology can develop tens of thousands of pounds of thrust, which is what you need for an aircraft like that. You fast-forward, we're porting that technology now over to industrial applications. This happens to be a mobile door actuator application, and we don't have a lot of competition for that, because not a lot of our industrial partners have an Aerospace Group. The other one, emissions control, is a very interesting collaboration between our Instrumentation Group and our aero engine fuel part of the Aerospace Group, where we're taking aerospace diffusion technology, integrating it with instrumentation in a diesel dosing application for emissions control.
I would say the motor design, electronic software, and everything that goes around it, that's at the heart of a motion control system. There's a lot of collaboration that goes on across the corporation for motor design and motor control. Just a little commentary on the acceleration of growth we have seen over the last couple of years. A number of us have talked about it, some headwind relative to the wide-body market slowing down for those of you who follow the market, and a little bit of pressure, particularly on the medium and the large biz jet space, of which it's about 12% of our business. All of those segments are picking back up for us. When you look to the right, the 3% CAGR going forward, we have good narrow-body content.
We've held it on the re-engining, if not expanded it, particularly on both the airframe and engine, F-35, I mentioned. Some of the proactive work in the aftermarket for the military we're going to benefit from. We have a significant amount of entry into service, both in commercial transport and the biz jet arena. There's a lot of growth things for us going over the next 5 years that will be tailwind for us. Final chart here. I hope I've, in a short few minutes, laid out why we think we're a global systems leader. We have 20% market share. We have a very diversified market portfolio, very diversified technology portfolio. We can take a component and now a tier 1 systems posture where the customer sees value in that.
We can do the complete electronics and software, not just things made out of metal, if you will, the hydromechanical solution. We do see growth acceleration going forward. I'd be remiss if I didn't mention that last comment about continued margin expansion. Since 2015, we have expanded the operating margin by 240 basis points. That's not insignificant. We are, of course, working to draw down our development spend at the pace that our customers will support us. We have contractual commitments for these massive development programs, but they're now moderating to more of a normal level. That's a nice tailwind for us. Well, we have been working the Win Strategy in terms of simplification, as Lee talked about, the continued productivity, you saw the numbers there, the sales per employee, it's very good, top quartile, through the Parker Lean System.
We're 70% outsourced, we have to work the efficiencies in our sub tiers and our supply chain, working to zero defect. We're going to continue to work all those strategies so we have line of sight to the operating margin goals that were presented early in the presentation. With that, we're going to focus on our key mission that I mentioned at the beginning, the top three goals, and continue to grow the top and the bottom line for Parker shareholders. With that, thank you for your attention and appreciate your time.
For Engineered Materials customers across a broad array of markets and challenging applications, Parker leverages its material science expertise and market-focused engineering to improve productivity and reduce costs. Parker Engineered Materials Group develops and manufactures high-performance engineered sealing and shielding solutions, thermal management, and medical products.
The foundation and backbone of the Engineered Materials Group is material science. The key function of the products that we manufacture is to prevent or direct the passage of solid, liquid, gas, or vapor from one point to another. We manufacture seals that are static in nature, that are pseudo-static in nature, and dynamic in nature, in a variety of materials.
The group's breadth of technology, material science leadership, systems engineering, and advanced manufacturing capabilities, make it a valued partner both inside and outside Parker.
We can leverage the Engineered Materials Group capability into Aerospace Group applications, into Filtration Group applications, into Motion Systems Group applications. Our ability to innovate in the white space between the groups of Parker Hannifin is one of the key differentiators that we have.
To that end, Parker Engineered Materials Group has identified several new technology platforms that will enable it to advance the science and engineering for the group and corporation as a whole. They include robotics, automation, additive or 3D manufacturing, electrification, light weighting, miniaturization, and metal replacement.
Another key differentiator is our expertise in predictive engineering. We couple that with our material science expertise to design the form factor in addition to the material chemistry of the sealing or shielding solution. The fact that we have such a diverse playground for us to engineer solutions with our customers is very exciting. Ultimately, it's about being able to improve our customers' outcomes. That is incredibly rewarding, and it's part of who we are as Parker Hannifin have been for many years.
As you can see, a passion for innovation and premier customer experience is alive and well in the Engineered Materials Group. Good afternoon. I'm Jenny Parmentier, and I'm the very fortunate leader of this group. Thank you for being here to see the first-ever glimpse inside of our group. We represent $1.5 billion of Parker's total sales. We have nine operating divisions and 56 manufacturing locations globally. Why are we called the Engineered Materials Group? It's because every product that we design and manufacture has its foundation in material science. People usually ask me, "What is material science, Jenny?" Material science is the study of the properties and applications of these four classes of materials, metals, polymers, ceramics, and composites. Each one of these materials has its own unique properties, structures, and performance characteristics that we combine in unique ways to meet or exceed our customers' expectations.
It's these proprietary blends, secret ingredients, special recipes that allow us to differentiate across the marketplace. With this foundation, we created three platforms within our group, sealing products, electromagnetic interference products, and thermal management products. On this page, you just see a sampling of the many products and systems that we provide to our customers. We hold the number one or two position in each of these platforms across the globe. One of the keys to this market leadership position is our market-focused engineering approach. We leverage this approach to provide a premier customer experience across our global distribution network and with all of our OEM customers. We utilize global account managers for all of our premier OEM customers and market sales managers in each of the six core markets you see on this page. I'd like to share a couple of these markets and our solutions.
We enjoy the automotive market for many reasons. First of all, its size and global nature fits our products and our systems and our footprint. We participate in almost every system in vehicles today. Most all of us have collision avoidance in our vehicles. We provide the complete subsystem that enables this feature in your vehicle. We actively seal the entire fuel delivery system from the gas cap to the fuel injector, and we are the leader in unique components for engine and transmission systems. Although you see a car on this page, we have significant content on the new nine and 10-speed transmissions that are on the top two best-selling trucks on the road today. Many of these same systems are present in a heavy-duty Type 8 Class truck. Probably the most obvious difference between cars is the size of the sealing solution.
More notable is the performance requirements that are required from unique materials for higher temperatures and higher pressures. These vehicles are designed for one million mile performance, and we have the solutions to meet those requirements. In addition, we collaborate with the Filtration Group to provide sealing solutions for this type of vehicle. You've already seen a picture of this airplane today. Roger described to you the many sophisticated systems provided by our Aerospace Group. The Engineered Materials Group provides sealing solutions for many of these same systems. Unique to the aerospace market is the need for both high and low temperature solutions, compatibility with aggressive aviation fluids, and resistance to electromagnetic interference. You've probably noticed in each of these three markets that the sealing solution isn't the most obvious or the largest on the bill of material.
The performance of our solutions is mission critical to the safety and efficiency of the car, truck, or airplane. It's because of these proprietary materials that we are able to translate into improved performance and reliability across all of these markets. Across these markets, we see several industry trends. I've already mentioned the need to meet high and low temperature requirements. We continue to invest in research and development to make sure that we can stay ahead of those trends and offer the solutions for our customers. We utilize additive manufacturing or 3D printing to design solutions for our customers that wouldn't be available traditionally in manufacturing solutions. Although not in mass production yet, we have developed and we are printing and selling seals into the industrial markets. I mentioned earlier the fuel delivery systems on an internal combustion engine of a passenger car.
Whether the energy source comes from fuel or batteries, we have the traditional sealing systems as well as the thermal management products that can cover internal combustion, hybrid electric vehicles, or pure electric vehicles. Collaborative robots are becoming a big part of our group. We use these robots in applications that we affectionately call the four Ds: dull, dirty, dangerous, and difficult. We are deploying these robots across our manufacturing locations to ensure the safety and productivity of all of our team members. Collaborative robots also give us the ability to reduce manufacturing variation and meet the ever-increasing quality requirements from our major OEMs. First and foremost, how we win is through the passion and power of all of our engaged team members.
We utilize high performance teams across all of our disciplines, including research and development, where we have over 80% of our portfolio of products protected with patents and trade secrets. Another key to us winning is our global manufacturing footprint, being situated close to our customers all around the world. Our dedicated market-focused sales force serves us very well. I mentioned industry trends on the previous page. We are investing in all of these key technologies that support these trends. One I didn't mention was model-based systems engineering. Prior to design and development, we are talking to our customers' customers. We are understanding what their pain points are. We are modeling solutions and integrating them into their subsystems and systems. In conclusion, the New Win Strategy is our playbook, and it's working.
The foundation of our group is material science expertise, coupled with a market-focused engineering approach, a global distribution network that is the envy of the industry, connectivity across all our groups. We are very well positioned to meet the new corporate targets communicated today by Tom Lee and Kathy. Thank you.
For filtration customers around the world, in many of the harshest environments and toughest applications on the planet, Parker promises to protect and purify. The global leader in filtration, separation, and purification systems for fuel, hydraulic oil, compressed air, and processed fluids, Parker Filtration Group helps customers protect their most important assets, improve operational efficiency, reduce downtime, control costs, and deliver consistent quality.
Within Parker's Filtration Group, our purpose really is to protect and purify. We protect our customers' investments, whether that be equipment or their systems. Some of that really relates to the removal of contamination and anything that could be detrimental to the performance of their equipment. We also purify a lot of the products that they actually process and make themselves.
In 2017, Parker made a transformational and highly complementary acquisition with a similar culture of innovation and entrepreneurship. As a result, Parker is better positioned to collaborate, innovate, and solve customer problems than ever before. With the broadest portfolio of filtration products in the business, an unrivaled distribution network, and aftermarket support, Parker Filtration is delivering greater reliability and peace of mind.
Something that we've been talking about for a while was being able to bring some of those technology experts we have together under one roof and really start developing the technologies for the future. CLARCOR had set up an innovation center, we have experts in many fields down there. That innovation center is a real fantastic add to us as an engineering community and to the group as a whole.
Indeed, Parker is engineering its business and products for customer success. What will the future of filtration hold? More opportunity for collaboration, more efficiency, and greater foresight.
One of the reasons our customers like working with us is the breadth of product we have, not just within our filtration business, but around Parker itself. We can reach out to these other groups and bring in some of the functionality that they have to make our systems a lot more sophisticated, but packaged in a much smaller, more compact footprint to really bring value to the customer. I'm an engineer, and that really excites me. What excites me more is the talent that we've got in the organization and what we can achieve when we actually bring that talent together. That's what really makes me proud. We're solving problems that are making a difference.
Good afternoon, everyone. My name is Rob Malone. I'm the president of the Filtration Group, and I'm happy to talk to you about the transformative changes we're driving in the group today to drive both top-line growth and operating margin. Our group is at $2.7 billion in sales. We have 18 divisions worldwide and 64 manufacturing locations. We have about 100 locations if you include R&D centers, distribution centers, and sales and engineering offices. We have 10,000 highly engaged team members engaged in the manufacturing and distribution of our filtration products, and we have a world-class Filtration Technology Center that's engaged in process development, it's engaged in media development, and robotics, and we'll come back to that, talk about that one a little bit later. Competitive differentiators. How do we win? The most engaged team, of course, wins. We're a highly engaged group.
As you look at it from a channel perspective, aftermarket, we win through application knowledge, understanding of how our customers are going to use our products, and cover. We have a broad array of products that we can take to the customer base, the highest coverage in the industry. Distribution capabilities, we take orders, process orders, transport the orders, strong logistics and warehousing, better than any other filtration company. On the original equipment side, we have strong channels. We want to leverage relationships that we already have built with, that Parker has built in strong industrial OEMs, and we have an extremely diverse portfolio. Most diverse filtration company out there. Technology and media leadership go across both. From a technology side on the aftermarket, we are like OE or better from a quality perspective.
From a media leadership, we have a strong patent portfolio of world-class medias, which we'll talk about in a later slide. All that supported by a global presence. We are everywhere our customers are at and where they're going to be. Our value proposition, you heard it in the video. We protect assets of our customers, and we purify the liquids and gases that go into their systems. Protect and purify, if you want to remember what we do. How do we do that? Filtration and systems. What's in the filtration and system that makes it go? Media. We're very serious about media. We invest heavily in media. We talked about the world-class Technology Center. We have a strong application database of medias. The first thing we did when we bought CLARCOR was we put the medias together in a centralized database.
It saved us money, both in leveraging, we'll talk about later. Very serious about media. Media is core to filtration. These products go across four platforms to provide a strong recurring revenue system for the Filtration Group. Engine and mobile, that's on and off-road, heavy duty for heavy duty trucks. You'll see strong brands, Baldwin and Parker Racor there. Hydraulic, lube oil filtration systems, hydraulic filtration systems. You'll see the strong brands, CLARCOR and Parker, servicing large engines and hydraulic reservoirs and locomotives. Industrial air, we do gas turbine inlet filtration. We do pollution control filtration, HVAC, and compressed air and gas treatment filtration. Four different segments. You'll find domnick hunter brand there, as well as Parker. On the process side of the business, life sciences, food and beverage, and industrial process, you're going to find the strongest brand in PECO there, as well as Parker.
These technology platforms go across a wide array of end markets, which we'll talk about next. Balanced end markets. These six end markets, transportation and plant, industrial processing, construction and mining, power generation, and HVAC, represent about 80% of the sales of the Filtration Group. Filtration is in every industrial end market that Parker has. How that benefits us is if any one end market is down, the other end markets are doing well for us, typically. It's kind of a resilience to volatility. Coverage. We already talked about one of the ways in which we win in the aftermarket is through coverage. That's having the most applications that your customers want. Pre-acquisition, Parker Racor was primarily an OEM-focused entity, focused on fuel filter water separation to the OEM. We did cover aftermarket, but very small, at 12%.
Post-acquisition, we are now at an industry-leading 84% in coverage of over 400,000 heavy-duty on and off-road applications. That's extreme high value to our customers, and it's something that makes us a one-stop shop for all the filtration needs for all heavy-duty on and off-road customers. Roger mentioned this one already, interconnected technologies. Some of our biggest growth opportunities are to sell filtration products to other Parker Group. We sell to every product group today. This is just one example. Our fuel tank inerting system, as Roger said, it inerts fuel as it's being displaced by using a hollow fiber membrane technology and inerts the fuel, making the tank less flammable, and ultimately it makes the sky safer. It's something I always am very proud of, that flight is safer because of this module. We've owned CLARCOR for a year, and here's some of the takeaways.
The leadership and the selling organization is highly growth-focused. They were growth-focused on both inorganic growth, they made several acquisitions before we purchased them, and organic growth. They have strong domain expertise in the end markets in which they serve. Second, we see even a greater opportunity to drive Win Strategy efficiencies across the four pillars. You can pick any one. Premier customer experience is one we're working on right now. Profitable growth is a big part of what we're doing with the simplification in Lean, which we'll talk about later. Cultural alignment, it helps when companies that are that large come together for them to be aligned on what's important. The company likes to win, likes to win with integrity, highly growth-focused, and highly engaged. All three characteristics were in both filtration organizations. Customer enthusiasm. We did the deal.
We wanted to roll it out to all our customers. We put all our customers on a list, and we started visiting them. To our surprise, they really understood the strategic rationale. We basically took that chart that Tom showed earlier, which is the strategic rationale for the deal, and all the customers got it. They understood that neither individual filtration business could offer what the combination could. It's kind of a one plus one equals three mentality. I'd like you to think of it that way. Aftermarket distribution. We knew they were good. Highly efficient order processing, warehousing, transportation, logistics. They get 400,000 applications anywhere within a couple of day lead time. Now I'd like to talk to you about our integration progress and process. The theme of this section is bigger and faster.
On December 1st, we announced $140 million of cost synergies, which is 1,000 basis points of CLARCOR's FY 2016 annual sales. 1,000 basis points of cost synergies. EPS accretive in year one, EBITDA margin accretive, and high single-digit ROIC in year five with continued possible for expansion. We'd like to update and add another $20 million to that we've identified in our first year of ownership for $160 million target. For the first time, we're announcing revenue synergies of $100 million, which we'll talk about the buckets of those as well. The same three bullets still apply. On the cost synergy, we bucketed our cost synergy approach into 5 categories. Footprint, but another way I'd like you to think about footprint, it's Lean and simplification. Kind of hyper Lean and hyper simplification, if you will. We're going to close 22 plants for a total of 2.3 million sq ft.
That's 2.3 million sq ft that you don't have to heat, cool, utilities, or have a management structure in place. Significant savings there. As a result of the footprint activity, our productivity and layers, our productivity is improved by 20% from a sales per employee basis. Material cost, by leveraging the combined spend of the two organizations and standardization on raw materials, we're able to do some direct material spend by 6%. By taking advantage of the Parker preferred transportation and logistics rates, we reduced our freight costs 14% right away. Of course, we eliminated the legacy CLARCOR headquarters and SG&A and all the associated overhead in that business for significant savings up front. As you look at our savings from a run rate basis, we're going to come close to $60 million in the first year, $58 million.
$125 million, more than double that next year, moving out to $160 million, our new target. Our cost to achieve, we move forward, you can see, still at $90 million, but we wanted to spend early to minimize the disruption from restructuring. First time we announced our revenue synergies. Globalization, we want to leverage Parker's international sales network. If you look at the legacy CLARCOR business, they were not growing internationally. They were flat in the past three years. We already have a built-in, through Parker sales company, a built-in selling network that already sells filtration. All we have to do now is get them trained to sell the new filtration products. We already have a built-in channel and a sales force for them to do that. We've seen our funnel have the biggest growth in globalization early on.
OEM, once again, we can leverage the strong relationships that Parker already has. We're working on, in our tech centers around the world, the next generation media specifications for our customers to build upon already super strong first-fit relationships that we've got. Channel and distribution. This is a very active part of our growth strategy, and this kind of expands our relationship with our distributors as the primary supplier, where we might have been a second tier before. We've also been able to displace the competition. We call that changeover, where we go and change out the customer because we have a broader product coverage. We can take that to their customers and now compete. Finally, we add new distributors. Distributors that wouldn't sign up with either company, now because we have this great product bandwidth, we can add new distributors.
We're winning across all three areas in our revenue. Again, $100 million in FY 2020, $25 million this fiscal year, followed up with $75 million next year. This is, like I said earlier, a growing funnel for us. Key takeaways. Hyper-focus on the Win Strategy execution. It's been an outstanding tool to help us in the integration activities. We win with unrivaled breadth of products. We have more filtration products than any of our competition. The broadest aftermarket coverage, applications that we cover. Technology, filtration and system technology. Remember, media is a core of filtration, and we're leaders in media, and we protect that media. Integration and synergies, bigger and faster. Again, we want to minimize the disruption. We compress the timeframe on all the plant restructuring, and things are going really well. We see tremendous opportunities for continued margin expansion with the new business.
Once we have moved to the receiving locations, then we'll start on working on productivity at the new location, because we'll have scale there, and we can have stronger operational talent to drive even greater efficiencies in the receiving operations. That's all I have for today. I want to thank you for your time and for braving this terrible weather. Thank you.
Thanks for hanging in there with us, your attention, and we went through a lot of material in a short period of time. This is the first time. Let me just make a few closing comments and let Robin come up and go through logistics for taking a break and then we'll go into the Q&A portion. This is the first time we've showcased three operating groups at any one of these investor days. Hopefully you enjoyed that, the transparency, beginning to see what we do in a little more color and how we do it. Hopefully you get a sense what we talked about in the beginning. We are a company on the move, literally, as far as our products, and on the move with the progress we're making through our results and the Win Strategy.
It all comes back to this, the changes we made building on the success of the original Win Strategy with the new Win Strategy, and this is really captivating the organization and is behind the progress you've seen so far to date. These are the takeaways I talked about at the beginning of the presentation. Great progress. We've updated synergy targets. We've updated the corporate goals. A very powerful portfolio that is strategically positioned differently than our competitors. It allows us to win because of the breadth of our technologies. The new Win Strategy is working. It's definitely working. We got lots and lots more work ahead of us. We updated these targets, and the only comment I'm going to make about these, because I've already went through them, is that for 15 years, we had one margin target for 15 straight years, 15%.
In three years, we have changed that margin target twice, raised it 400 basis points. It's a big target, but you got a team that stands behind it that's very confident that we can do what we said we're doing here. With that, I'm going to have Robin come up and talk to you about stretching your legs and taking a break, and we'll move into Q&A after that.
Great. We are going to take a short break. We will take about 15 minutes. I'd like to reconvene at 3:00 P.M. Refreshments are being served in the foyer. When you come back at 3:00 P.M., we'll start a Q&A session with Tom, Lee, and Kathy. Enjoy the break. Thanks.
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I'm saving and saving, only sending it away. Because I'll be back on my feet someday.
No cash to chew for the fun that's good. You ain't got no money to stuff in your hood.
Well, I guess if you say no. I'll have to find replacement soon.
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Well.
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It isn't fair.
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Doesn't come back no more.
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Doesn't come back no more. Doesn't come back no more.
Yeah.
Bye-bye, love. Bye-bye, happiness. Hello, loneliness. I think Bye-bye, love. Bye-bye, sweet caress. Hello, emptiness. I think I'm gonna die.
There goes my baby. With someone new. She sure looks happy. I'm so blue. She was my baby. Till he stepped in. Goodbye to romance. That might have been. Whoa.
Bye-bye, love.
Well, now.
Bye bye.
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Hello. Gonna die.
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Hello, emptiness. I think I'm gonna die.
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I'd like to welcome you all back, please. If you'd take your seats, momentarily, we will be commencing with the Q&A. Thank you. We're going to take the next 45 minutes for a question and answer panel discussion with Tom, Lee, and Kathy. You will see Ryan Reed. Ryan, raise your hand, and Aidan Gormley. Aidan, over here. Both of them have microphones. If you would be so kind, just raise your hand if you have a question. They will come to you. If you would kindly introduce yourself in advance of your question, that would be very helpful. Thank you very much.
We're not going to pick. We're going to let the runners pick just so to make life easy on people.
Hi, Jamie Cook, Credit Suisse. I guess two questions. Can you just give us an update? It sounded like with what you guys talked about on CLARCOR, you were potentially accelerating sort of the plant consolidations. Can you talk about whether that's true, like what the expectations are today versus when you initially did the deal? Then as we pull that forward, how that impacts potential incremental margins in 2019, because I think people were concerned about the incremental margins this quarter and sort of next quarter. Then my second question is, Tom, you're going to be generating a lot of cash flow between now and 2023 in terms of this $7.4 billion.
Can you just talk to, you'll be at your leverage target by the end of this year, so how quickly you'll redeploy that cash and whether you have a preference for M&A or repo.
Okay. On the footprint synergies, I would tell you that we ended up pulling things forward because we saw more opportunities. That's what kind of added up to the 22 plant closures that you see for this year. On the MRO forecast, this might be a question people have in general about our five-year forecast. We forecasted what that calculates out to five years, 37% average MRO over this next five years. Way you get to that is 30% base MRO, and the CLARCOR synergies takes us to 37% over this period of time. Now, to put that in context, if you look at what our MRO has been the last 10 years, historically, 23%. This is clearly a step change in margin return on sales to get there. The step change is going to happen a couple ways.
One, we'll go from that 23 historical to 30 based on the high-performance teams, the Win Strategy, the CapEx strategy we talked about on productivity, those type of things. We go to 37 because of the CLARCOR synergies. The way that'll feather out is we'll probably see some higher lift on marginals as CLARCOR synergies kick in and the cost to achieve comes down. You'll see a little bit over that five-year period of time. You'll see higher margin returns in the near term gliding down over that period of time. The marginal impact now, which was a big discussion in the second quarter, is somewhat because the comparisons are apples and oranges. CLARCOR is not in the prior period, and it is in this period, so it's a difficult comparison, which is why we showed the EBITDA margin improvement, the dramatic EBITDA growth for the company.
I view that as a short-term issue that we have, some of the mix and plant inefficiencies. Probably the next quarter or two quarters that we'll be faced with that. We go into FY 2019, a lot of that will be behind us, and that's part of what gives us confidence in the forecast. I don't know if I caught your entire first question.
We anniversary CLARCOR and get through this for 2019, the incremental margin should be above average, which is what I think people want to get to.
Right.
You're confirming that.
Yes.
Okay. Just the $7.4 billion in cash that you have.
Oh, yeah.
Sorry.
Okay. It's the acquisition strategy that I talked about, that's in your slide deck as far as what we're going to focus on. We'll be the consolidator of choice. We'll look at three of the businesses you looked at today, plus instrumentation as key things to look at, as well as adjacencies. We'll make those decisions every quarter based on the opportunities that present themselves. We will wait for the debt to come down a bit more. It's moving in a nice direction. As our capacity frees up, we'll be more active again. Some of you have heard me say we want to have an assertive balance sheet. We want to have it put to work, we're going to do that. We will make sure we do it in the most effective way, looking at all the allocation opportunities.
One of the things that one of my friends in the room offered me in one of my early months in the job was the book "The Outsiders," which the first time I've ever had somebody give me a book that I've actually read before they gave it to me. In that book, it talks about great business leaders do a great job first at generating cash. That book influenced us quite a bit with what changed in the Win Strategy. You have to first be great generators of cash, we look at free cash flow conversion as being a good indicator of that. We want to be known as great deployers of cash.
I think what Kathy showed the last couple of years, we did a nice job with that because the CLARCOR deal and how we deployed cash changed the valuation of the company. We'll continue to do that going forward. If we don't find the right properties at the right kind of valuations, we think we're a great investment. We know Parker better than anybody else, and we're going to invest and bet on ourselves. You'll see us put the cash to work.
John Inch. What's the margin assumption in your five-year walk for CLARCOR? You're at 2019. Where is CLARCOR in that?
You can expect CLARCOR to be without the depreciation and amortization equivalent to the rest of our Filtration Group, we don't talk about margins for that breakdown.
Is it above or below the 2019?
Sorry?
I'm sorry, Kathy, is it above or below the 19? You kind of gave a little bit of info. I'm just a little too lazy to sort of map it out there, so I figured you could give us the answer.
Yeah. We haven't disclosed it specifically. I don't think we were prepared to do that today. With their synergies, they'll have nice margin improvements. We get to the 19 with a mix of businesses, some above, some below, and filtration is a nice margin business.
Right. You said CLARCOR is at filtration average. Is that what you said?
I'm sorry, John.
I'm sorry. Did you say CLARCOR is at filtration average?
Yes.
Okay. Filtration is higher than 19.
The other question I had was the CapEx. Is getting to the 19 dependent on you raising the CapEx? Lee, you talked about sort of the investments were for productivity, if I'm not mistaken. Maybe you could talk a little bit more about that. I know Emerson talked about the fact that they have to invest more in their U.S. plants. They have an aging workforce. They're sort of reticent to hire more people, so they're trying to drive more productivity through more automation. A two-part question, right? Is getting to the 19 dependent on raising the CapEx, or is that potentially more on top of that, given that you're conservative? Secondly, what's the status of your productivity and your operations today and could you invoke a lot more automation? I mean, how are you thinking about that?
I'll start since that was in my slide, but I'll let Lee tag on if I don't catch everything. Yeah, that is part of it. I wouldn't say it's the biggest part of it, but it's clearly part of it. In Kathy's walk for productivity, I think we had 50, 60 basis points of productivity there. It's a combination of the Win Strategy, lean, all those type of things, but some of it is the CapEx. I would say if you look at our CapEx that was geared towards productivity in the past, it was geared at making feeds and speeds and machines faster, so the touch time faster.
Not bad, what we want to focus on in the future is actually reducing the number of people, or what's going to happen for us going forward, is not needing to add as many people as we might need to add for every dollar of revenue that we have. It's going to be more on automating the processes through robotics, through additive, and that's why we've got that center of excellence working that. We're going to have a team of people define the criteria that we're going to expect when you submit a CapEx investment. If it doesn't hit that hurdle, you're not going to get that kind of money. We're going to invest in productivity investments that are real productivity. There's limited productivity in just making the machine run faster. We want to take out the waste from the system, the non-value-added time.
We're looking more at the automation side of things. Now the process technology has caught up to where we can actually do that. Cliff knows this intimately. In the past when we would do robotics, they became tombstone operations, and what that means is they were this big central thing that everything had to funnel through. That's anti-lean. You want to be able to embed your robotics right in the flow of things. The technology now exists to allow you to be able to do that, we're going to be much more aggressive on building that into the flow. It's going to help us with our future hiring needs, because the numbers that we show to grow to, we'll be able to achieve that without needing to add quite as many people as we might have needed.
I would just add that, first and foremost, we're a lean company. I mean, it's about eliminating waste within the value stream and moving forward. What's happening with technology today, and you heard Jenny talk about it, about the four Ds, there is a chance as you eliminate waste, a chance to automate some of those touchpoints that still need to happen. It's that blend, and we think there's a great opportunity there.
Anne, you need to move your mic here.
Thanks. My first question is around the M&A strategy. You have listed aerospace pretty consistently, yet I think we all would acknowledge that franchises that come up for sale in aerospace are never attractive from a financial standpoint. Now with Boeing trying to get into the fray, I'm curious as to whether you thought at all about whether it's appropriate or even whether aerospace makes any sense anymore to be looking at M&A. I'm just curious about that. Second follow-up question is just on last quarter's North American industrial margins. Is there any way you can break out for us dollar-wise how much was the heavy lifting on the plant closures versus mix?
Okay, start with the M&A question. Aerospace has still got a nice pipeline. Roger alluded to that. Obviously, given the nature of this being a public discussion, can't get into the details of those type of things. We still want to look at the acquisition side of things. You've seen over the last years, we've done most of it organically, and that's okay. There's still properties that we'd like to add to the portfolio and areas we'd like to build onto. While it's been on the list and we haven't necessarily put one over the finish line, doesn't mean that we're not going to continue to be active on that, because we still see properties that would be attractive for us to work on.
On the North America margin question, or the marginal question on the impact on plant inefficiencies and mix and all that, it's too hard to quantify. I mean, it's real. I mean, the mix issues, challenges we face with mobile at 20% and industrial at the high single digits and distribution in the low teens obviously creates a margin compression for us, that's going to temper over time. Those are going to start to equalize over time. How long that takes, hard to forecast that. Plant inefficiencies are really, really hard to quantify. You would remember that from your prior days, how hard that is to quantify. They're real. Anybody that's closed a plant understands when you go from plant A to plant B, there's inefficiencies in plant A, and inefficiencies in plant B.
Eventually, when it's all in plant B and we stabilize the processes, you'll start to yield all those savings. That discussion that I just said is what we're living through right now. The 22 plants that Rob's closing and the 39 for the total company is some pretty heavy lifting that we're doing. We'll get through it this fiscal year, and it'll make next year even better.
Nathan Jones, Stifel. There are a few parts of the presentations today that talked about electrification. Can you talk about the challenges and opportunities from a shift in the market towards more electrification and how that presents itself to you guys?
Yeah. Let me start with electrification for us. We are energy source agnostic. Whether it's natural gas, diesel, batteries, whatever the case may be, we have the motion control technology. That's the benefit of our portfolio. The fact that we got hydraulic, electro-hydraulic, electro-mechanical, pneumatic, we have the full suite no matter what the energy source is. Specifically, as far as looking at our platforms. If you take Jenny's business that she just talked about, what's the impact of hybrids and electric vehicles? I'm going to give you the forecast data that they've given us. May not be exact, but it's directionally correct. First of all, let me say, other than Jenny's business, the engineered materials business, we have nothing on board automotive. You've seen us divest over the last several years of getting out of on board automotive.
We love being in the plants, helping all of our customers make the vehicles, but we've been very selective on what we're going to do on board. We purposely do like very much the engineered material business being on board because we offer distinct value propositions to our customers based on those technologies. It's really about 3% of the portfolio, and it's really the engineered material business. Specifically on that, today, EVs and HEVs, electric vehicles and hybrid electric vehicles, may be 3% of the total vehicles produced, 1%-3% something like that. Over the next 10 years, it's going to get to 25%. Maybe I'm off by a little bit on that, but that's the forecast people are given. A lot of that growth will be HEVs.
When you look at an HEV system for hybrid electric vehicles, that actually creates a larger bill of material for the engineered materials business. All the same technologies that Jenny showed, fuel, transmission, engines, as well as the lidar and the collision things, they're all still there. Now we have opportunities to seal batteries, the motors, and a lot more thermal management opportunities because of all the added electronics that's on that vehicle. When you get to just EVs only, we see that bill of material being about the same as it is today. For Jenny's business, we see upside to the movement of electric vehicles and a big opportunity for us to lead and to help because we are one of the few engineered materials business that has sealing and shielding.
The fact that we can do both of those together is a big advantage for the automakers. If you look at the rest of the company on the motion side, we're already there. We already offer all these motion technologies that go from E to H. That's why we're going to do that Motion Technology Center is to continue to help with that. Our aerospace business has probably been leading that for the most part, and what we're going to share across industrial as well as aerospace. For filtration, if you look at heavy-duty truck, the forecast there is pretty modest as far as what people think. Medium-to-heavy-duty truck, which first of all, if you take our filtration business, we have virtually zero passenger car business. It's all medium and heavy-duty truck.
The forecast for the next 20 years is still to see diesel engines grow and to have HEVs and EVs be only 3% of the portfolio. Again, these are heavy vehicles where the value proposition doesn't make quite as much sense. This isn't my forecast. This is coming from the industry forecasters that are forecasting this space. We feel pretty good about where we are positioned because we've built this company to be able to solve motion control technology challenges no matter what your energy source is. That's, again, back to the distinct advantage we have versus anybody else. Jenny.
Just a question for Tom and Kathy. You talked about sort of the upside scenario over the next several years. Just a couple of things. How would you think about Parker's performance in the next downturn, particularly given various from cash flow generation you have? How would you adjust your capital allocation in case of a recession? How much EPS cushion do you think you could create? I guess that would be the big questions.
Yeah. Well, if you remember, we convert cash nicely in any part, during a recession, coming out, going in. I think we have teams that understand how to manage the working capital, just depending on whatever they're looking ahead to. I'm not concerned about not being able to generate the cash. Will we change our allocation priorities? You've heard over and over what our priorities are. Start with the dividend, then CapEx, we'll go from there.
Right. I guess to build on this, right? You always bring up this progression, how your incremental margin just gets better and better over the past 15 years, let's say.
Right.
Over the past three recessions, right? You definitely see
Cash flow was a lot more stable, I guess, even in, whatever, 2009, 2010 recession, right? You really behave like a multi-industrial company. I think low down 15% or something versus earnings down 40%, right? Do you think you could allocate, you could do something to bring this connection between cash generation and EPS, low volatility of cash generation and lower volatility of EPS, more into industrial focus by allocating cash differently? I guess that's the question.
Yes. Yes. What you've seen for us on cash is there is very little volatility. We've done a nice job at cash through the cycles. You're pointing out historically, there's been a bigger volatility on EPS. Your point's right. In the 2001-2002 recession, we were -60% decrementals. I'm going to use round numbers. In the financial crisis, decrementals was more like -40%. Then the last downturn, 2015, 2016, it was -20%. Again, I'm using round numbers. I think we will continue. -30% is still a good number as far as being world-class, I think. I think on the top line, a CLARCOR deal like we just did will make us more resilient in the downturn.
hopefully, our top line will get less hammered, and hence, that will help EPS, and we'll do the same kind of good job we did through the last downturn of managing costs. Yes, the answer is, if you were to plot our bottom EPSs, we should continue to blunt that drop as we take on the next recession.
Cliff Ransom, Ransom Research. Kathy, on your operating margin driver waterfall, where would you put inflation in that?
Well, we cover inflation through pricing, proper pricing with our customers. We didn't spell that out separately as an item as we have sometimes in the past. Our anticipation is that when we see inflation come along, we'll be able to pass that on.
Well, I don't see a waterfall element that says pricing in your chart.
Correct.
Where would it be included?
I think it's mixed in with the supply chain and the productivity, and it's just our overall operating principles.
Fair enough. Could you please, somebody has to ask this question, I'll do it. Can you talk a little bit about your current view, not that you have a clear view yet, on steel tariffs?
On the tariff side, if you look at our imported steel, and again, let me just say we don't, as you said, Cliff, we don't know the details yet. This assumes that all countries, all of our imported steel, this is, in round numbers, $20 million of extra cost to us. Let me put an asterisk by that that's just the imported side of things. What we don't know yet, and won't have visibility to for a while, is what happens with domestic steel that we buy. Couple things. We will be watching, and I can assure you we'll be watching every day what domestic steel suppliers do. We will be looking at our PPI, purchase price index, of the steel we buy today versus what we bought in prior periods.
Because we could have domestic suppliers trying to raise price in the current environment, or they may actually be buying imported steel, and we don't know that. They're providing us a finished product or a semi-finished product. We'll be watching for inflation on that. On the imported steel that gets a tariff that comes directly to us, that's the $20 million. We will add that onto our price via a surcharge on day one. We will cover that immediately. What we will have to watch, and it is a quantity which we don't know yet, is what happens to the domestic suppliers and what they do, just the whole discussion I just had. You can rest assured, everybody in this room has tracked us for a long period of time.
You know that we have a very robust SPI, sell price index, and PPI index, and we look at that every day, every division around the company. If you look at us historically, we actually do better on that comparison in inflationary times than we do in deflationary times. I'm not afraid of an inflationary time period. What I can't quantify for you yet is what happens on the domestic side of things, just because there's too many unknowns.
The last question would be, if you look at your big four key initiatives, simplification, lean enterprise, strategic supply chain, value pricing. To date, which of those has been the most important? Should we expect that to change over some intermediate term, say, 3-5 years?
Well, I think they're all important. I don't want to pull one out. I think the big thing when I think about simplification and revenue simplification, Cliff, it really amplifies the effect of the supply chain efforts, the pricing efforts, and the lean efforts. I'm really encouraged on what's happening with our lean enterprise as we think through where we should be spending and Paretoing our time leaning things out. I'd hate to break them apart like that. I think they're all equally important, but I see simplification as a great enabler of all those initiatives.
You've seen S curves on product growth cycles and all that. What I think simplification does is it's created a new S curve for lean supply chain and pricing because it's put new life, new energy behind those, and it's what we refer to as focus. If people are diluted and not focused, then you're not getting the most out of what you're trying to do.
Thank you.
Yeah.
I just wonder, Kathy, if you can talk a little bit about where the cushions are in your bridge. You kind of got a little bit of that question before, but can you just give us-
Some areas where you're maybe being conservative or maybe things that you feel like you're stretching a little bit and where you've built the cushions in.
I'll just say there's a lot of hard work that has to be done behind every one of those improvements in the margins that we're showing there. Have we built in cushion? Not that I know, not significant. Are we going to go way out there ahead? Obviously not, but we're confident that we can do what we're demonstrating we can do. Are there easy targets in there? No. A lot of hard work behind all of those.
The one thing, if I could just add on to try to maybe characterize this next five years versus the five years we just gave you a while ago, is that we beat the current five-year march by about two years. Of course, last time I thought it would take five years last time, too. This is going to be a five-year look. I don't see us getting to 19, two years, three years early. You know us well enough that we don't ever give you a number that we haven't thought through, and we don't think we have a reasonable chance of achieving. We have confidence, but I would just characterize this as being a more aggressive five-year target than the walk from 15 to 17.
Just, can I pick on your $100 million of sales synergies? It sounds like the international opportunity is huge, and to only give us $100 million, can you just give us a sense of how that all fits together?
Dylan?
The way I would characterize the revenue synergies is what it does over the next five years for CLARCOR. When we bought the company, our assumption on sales CAGR was 3.5%. You've got to do all these models to come up with justifying the deal and talking to the board and all that. That was based on their historical growth average. We didn't try to invent some new number. That was their historical growth average. $100 million takes that CAGR from 3.5%-4.5%. That's not insignificant. 100 basis points difference growth CAGR is meaningful. Now, we're obviously working to a much larger pipeline than that, but what happens with sales pipelines is they have, like, a 30% yield. We're shooting for way more than $100 million. We hope to beat the pants off of that number.
A 100 basis point shift in the historical growth rate is meaningful. That's how I would characterize it, because I sat in a lunch meeting with maybe some of the folks who are in here, and people's minds were going to some big, gigantic numbers. It's hard to change a company that was a well-run company. You're not going to grow 100 basis points faster than you've ever grown before. That's a meaningful shift. Obviously, we're going to try to do better.
Good afternoon, Jeff Hammond. Just on the international distribution rollout, can you just talk about what inning do you think we're in, and what markets are you finding to be more challenging to grow that footprint?
Jeff, good question. No, I still think we're in early innings. I'm really happy by what's happening. The international distribution in general in developing countries is developing. Developing quickly, but it's developing. Parker is such a well-known brand name, it gives us the opportunity to sort through who we can partner with best. This is not something three years from now, I'm going to say we're done. Like I told you, North America took 60 years to develop, and it's an incredibly robust enterprise today. This is a journey we'll be on, but we're laying the groundwork, really, to grow it quickly.
Just on aerospace, seems like early on when you were winning all the programs, you were talking about a higher growth rate. Now we're saying as things are getting better, it's 3%. Is there any point in the cycle where we start to see 5%, 6%, 7% growth in aerospace again?
Yeah. What changed from our original growth rates on that is a couple of things. The market dynamics changed. From when we showed that slide, say, five years ago, biz jets softened significantly, helicopters softened, and wide body softened. We had entry into service on a lot of programs that we've won lied to the right. That 3% that Roger Sherrard showed for aerospace was our next three years. Remember, we're ramping up on some of these entry into services. I think you're going to see stronger growth beyond that three-year period of time as those come up to rate. Hopefully biz jets are going to finally come off of bottom. Helicopters, which is a really attractive market for us, will come off a bottom.
A lot of what Roger Sherrard has been focused on, the aerospace team winning, is the engine side of things for the reasons that Roger Sherrard talked about. We like engines for a lot of reasons, but engines create a tremendous amount of MRO just because of the nature and the environment that engines have to live in. We purposely have looked at. When you make decisions in aerospace about what you try to bid on, you have to be careful, because when you win something, you've won it for the next 30 years, and you've won all the NRE, that non-recurring engineering, that comes with it. I think you're going to see us, as we win, be a little more balanced in what we try to win.
We won a tremendous amount of flight control work over the last 10 years, which is at the upper end of engineering requirements and costs in a very difficult space. We're going to try to be more balanced around all the platforms that Roger Sherrard showed, as opposed to being overly concentrated on winning one.
Jorge Pica, Wells Fargo. I'm kind of calculating back into what revenue and margin expansion gets you, and it seems like there's an implied share reduction in the 2023 target. Is there a certain amount allocated to share repo? In addition to that, growing at twice the end market, are we saying that we have to have M&A to maintain that growth rate through 2023?
I'll take that. We have assumed no acquisitions in the growth rate of 3.2%. That's pure organic. We have a 10B5-1 program of spending $50 million a quarter or $200 million a year on share repurchase, and that's what we've built into the model. We have not built in any additional.
Aidan. Go.
I wonder if Roger could talk a little bit about his dream acquisition or sort of some of the areas that he really sees as being the most fertile areas to grow in the next five to 10 years.
For aerospace?
Yeah.
Seeing as he doesn't have a mic, I'll try to answer for him. We like the engine platform. We like fluid advantage. I would say inorganically, we would invest in all the platforms. Probably one we don't need to invest in would be flight controls, because we've built that platform organically, and there's really not a need to invest inorganically in that. All the other platforms that Roger showed are all equal opportunity players that we'd like to invest in. This gent here.
Thanks. Kathy, I noticed, in the waterfall, again, I guess we'll all pick on that there wasn't a strategic pricing bar there. I know in the past, that's been sort of an opportunity for the company, and I guess I'm just curious whether you guys view this as being kind of, you got to where you wanted to be relative to repricing various parts of the MRO stream, or whether you think there's still opportunity on strategic pricing.
Can I handle that?
Yeah.
I think the best way to think about pricing it, we did talk about putting it as a separate thing there, we said, at the end of the day, let's just bury it, is the wrong word. Let's place it in all the different buckets that make sense. It's baked into simplification, baked into the organic growth number. Pricing is a core competency of what we do, it is part of that bridge.
If I could help, Steve, if you were to go look at your old book from 2015, we didn't have pricing on that waterfall either. I think for an assumption and a five-year forecast is that we're going to have pricing and cost margin neutral.
If I missed it, I apologize. The 19%, what's the mix between North America, international, and Aerospace, roughly? What are the margins that come down to 19% total?
You didn't miss it. We didn't give it. Let me just, because it'd be too hard for me to try to remember that anyhow. Here's the key thing about the company. We showed you three operating groups this time. Next time we meet, we're going to show you the other three operating groups. All the operating margins for all six of those groups are basically in the same neck of the woods. On round numbers, that walk that we showed you on that page is 350 basis points from our GAAP 15 and a half to 19. About 100 basis points of that is CLARCOR, so that's going to all show up in the Filtration piece. That means everybody else, and this is the expectation, every group is going to move 250 basis points. Roger's going to move 250 basis.
Every one of those groups is going to move 250 basis points. You would imagine, if you took our current splits on margins, we expect that same thing happen North American and international.
For years, it's always been, can we get international at least very close to North America?
You'll still have a difference, mainly because you still have a couple structural differences that we won't be able to overcome in five years. While we've worked really hard on making Europe's SG&A look like North America's, still not there. The key structural difference is that distribution channel that we're working so hard on is still not going to catch up to North America's channel in the next five years. They have a distinct channel mix issue that won't be overcome.
I was thinking North America, north of 20, international, slightly below 19, aerospace, 17, 18. That's kind of the mix. North America, to get a two handle on that margin, is there any shift to how much distribution versus OE in that thought process?
No, not in North America. International is a slight shift. That's on that walk that we've got international mix shifting a little bit.
That's what I was kind of backing into, is this the time we get international closer to North America? You're saying the gap.
It's closer, but there's still a gap.
Okay. It is closer.
Yeah.
The idea of international distribution growth can help that a little bit.
It helps.
Okay. Thanks.
Just before we leave, one of the keys to getting a higher valuation is the lower exposure to the cycles, I just wondered if you could help us think about how Parker has changed in the last couple of years, or how it may change over the next two years. Also maybe, is there a chance that you would use acquisitions or your balance sheet as a way to sort of smooth out the natural cycles within the company?
Joe, you're spot on. I mean, that was the One of the key strategic thought processes with CLARCOR, besides the fact that we liked it for all the reasons that we've gone through this afternoon, it does add to the resilience of the portfolio because it's 80% aftermarket. It's a natural shock absorber. On that acquisition strategy page that I had, those four businesses that I talked about after being consolidated are choice, are all more resilient through this cycle: Aerospace, instrumentation, Filtration, Engineered Materials. Yes, we are trying to do a portfolio shift to try to help with that. He's coming, John. He's slow.
No comment. Just to make sure I'm clear on the walk again. You've got the 10B5-1 plan, you're going to buy a couple of hundred million of stock a year. You're going to basically pay off CLARCOR at the end of next year. That leaves sort of four years with still surplus cash. It doesn't sound like that's going anywhere. Is that cushion or is it going somewhere? Because you said there's no M&A in this, and there's no incremental share repo. In theory, we get more probably to the EPS side because it's not going to have as much to do with the margins. It might be dilutive to margins if you do more deals, but could it mean upside to the EPS? Maybe, Tom, what's your own thought about just the stock price, et cetera? I mean, your stock's down today-
Yeah
The last couple of years, is it attractive? Would you ever opportunistically look for opportunities? How should we think about it?
Well, because it's a five-year forecast, it's really difficult to model what type of deals you're going to do and the multiples and all those things. We did the forecast similar how we did the last five-year forecast, organic only. You can rest assured that that cash we generate over the next five years is going to be put to work. Yes, it is EPS accretive, whether we buy companies or we buy more shares. That priority list that I have is what we're going to work through. We take it very seriously that we are acting on all of your behalf to make the best value creation decisions that we can, and to do it at the right kind of returns and all those type of things.
At this current share price, if we weren't working down debt from CLARCOR or absolutely, we would be looking at deal opportunities versus share repurchases, and we'd be making those choices every quarter, looking at what makes sense. We think we're a great buy right now. Absolutely, we think we're a great buy. I think we're a great buy every quarter. If you look at our share repurchase history, we've never gone wrong buying shares. I think when you compare those two things, once you get through dividends, CapEx, and debt reduction, acquisitions versus share repurchase, I always err on let's generate cash on behalf of the shareholders. Acquiring the right companies generates cash. Buying shares doesn't generate any incremental cash.
If we don't find the right properties, and we will be good acquirers, and I think we have a good track record there, we will be absolutely buying our shares.
Some companies are arguing that there's still a digestion time post-U.S. tax reform to figure out sort of where the ducks settle, and some have even said, "Hey, there's still potentially opportunities to lower the tax rate even further." What's going on with respect to your international and U.S., and then how are you thinking about that with respect to taxes, and could taxes potentially still drop over that five-year period from what your guide is from 2018, I guess?
Yeah. We're guiding to an effective rate of 25% minus the $225 million that we booked as a one-off in the second quarter. We're continuing to look at it. I've heard some peers recently talk about reducing their legal entities, international legal entities, and simplifying. I was a little shocked at how many they have. We don't have that many. We certainly have some complexity, and we can simplify that. We're looking at all of those opportunities. We're also looking at the opportunities to return some of that cash, which is easier to do now. Now, keep in mind, to complete the CLARCOR acquisition, we utilized $1.8 billion of our international cash at that time. That was pretty much everything we could bring at that time.
We're not overly cash-rich in our international entities right now, but we're busily working on an ongoing basis as they're generating nice cash for us. How can we best utilize that? There's certain restrictions in each country. There's certain withholding taxes, but we'll take the best ones we can do and bring that cash in and try to utilize it as best we can. We continue to look at all that. We're looking at this year, a 25% rate ongoing, about a 23% rate as the law is written today. I give that objective to my tax team every day, yes. Still early days to figure that out. It made it a lot more complex in terms of the GILTI and the other things that they've put in. We'll find opportunities. It's part of job security for the tax team.
In your long-term outlook, you have free cash flow doubling, basically growing significantly higher than the earnings assumption. Can you just walk us through what's happening with working capital and any of the other items that drive that?
As we continue to work on productivity and we continue to work on simplification, some of the synergy advantages we're going to bring in through CLARCOR, we see better utilization through working capital of that cash. We have better access now with the new tax law, we've built all that into our model of how we see that going forward at the better earnings and how we can best use that. That's what our forecast is showing us. Some improvement in working capital, not dramatic, but we're continuously working as we work through Lean and we work through other things with our suppliers. We can reduce our inventory levels, and we can make better use of that cash.
Can I ask just one follow-up on aerospace? In your five-year outlook, does your mix return to a more normal 50/50 OE versus aftermarket? Are we in a different era where we're 60/40, 65/35 permanently? Just curious.
We're heavy OE right now, as we have these new platforms going into service, it'll remain heavy OE for a while. It takes six years plus to get that into the aftermarket volume. I'd say we're going to be 60/40 for a while yet, with it leading into a heavier MRO in the long run. 60/40 for quite some time.
Yes. The way I've described it, we're 64/36 today, in the next five-year period of time, it might move a little bit, it's not going to move too significant for what Kathy just said. I think the upside for aerospace beyond that five-year period of time is that mix finally starts to come and help us. I've been waiting long enough for that, it will. Time is on our side on that one, it's not probably in the next five years that helps us too much. A little bit.
We're happy to take one last question, if anybody has any. Okay.
I just want to say thank you again for coming out today. Thank you for your attention. Robin might have some closing comments, thank you mostly for your interest and your thoughts and you're always here trying to get us to be better. We appreciate it very much. Thank you for braving the weather.
Yeah, we thank you very much.
We hope that you have found the session to be informative. I want to thank all of our presenters, Tom, Lee, Kathy, Roger, Rob, and Jenny. If you have any follow-up questions, you can always be in touch with Brian Reid or myself. With that, safe travels, and this concludes the webcast. Thank you.