Good afternoon. I'm Robin Davenport, Vice President of Corporate Finance, and 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. And 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. So 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 atphstock.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're 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. And 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 Parkes' 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 FY 2018 guidance remains consistent with the update provided during our recent Q2 2018 earnings call held on February 1. 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 Feaver, our Chief Financial Officer. We will also have presentations covering 3 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, presentation of the Filtration Group.
And you'll find bios for each of the executives in the back of the presentation deck. So 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 FY 'twenty three targets. Lee Banks will address the company's strategic initiatives that are driving profitable growth and productivity. Kathy Feaver will review in greater detail the company's financial progress against our FY 2020 targets and discuss the outlook for FY 2023. Each of the 3 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 Cathy will host a Q and A panel. So with that, it's my pleasure to welcome to the stage our Chairman and Chief Executive Officer, Tom Williams.
So 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 5 year update. So welcome again on behalf of the leadership team. Welcome to everybody on the webcast.
And I'm going to start with giving you an update on the agenda for me, so the next 30 minutes. So I'm going to talk about a progress report on the New Win Strategy. I'll give you a brief summary of clockwork as Rob Malone is 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. So the report card for the 1st 5 years, and obviously we're not 5 years into it, we're only 2.5 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 yourself, substantial progress in 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 and the videos you're going to see from the groups, the group presence 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 5 year targets. We're clearly raising the performance bar, talk about capital allocation.
And 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, but we're still early days of the changes that we've made. The future is really, really bright. So 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. And I tried to highlight it in really just a summary of key accomplishments over the last couple of years. It's a team effort around the world.
First one on the list launching 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 2nd largest sales drop in the history of the company.
Under 1 year, 2nd 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% and 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. And because of the pace of improvement we've been making is why we're changing the new 5 year targets.
Free cash flow conversion continues to be strong for the company. When we were together 2.5 years ago, we gave a guidance on our 5 year targets of 8% EPS CAGR. We came in at 11% so far through our FY 2018 guide. And our TSR, while I would always love it to be even bigger, at 50% since January of 2015. So 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 5 years.
So 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 5 years as well. And 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. So 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 2 and a half years ago, but take it more section by section, what have we accomplished and then where we're going, trying to give you a feel.
Those of you hopefully are all familiar with this. This is the business system of the company. It's how we run the company. The front of the Win Strategy is the 4 goals and the strategies on the back of the measures of the success. I'm going to stay primarily on the front of the Win Strategy for this discussion and 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 rural 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 people, high levels of safety performance, meaning low accident rates are clearly linked to strong operational performance, strong customer performance and strong financial performance. So 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 is important on driving safety, but I would tell you the number one 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 0 accident culture. I wanted to take a moment to talk about sustainability, because we don't we do a lot internally on this, 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 of 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 and over 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. So 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.
It's really all around time, talent, treasure, how can we give back to the communities that we work in. So 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 and the locations that we are at. So on engaged people, there's a couple of key strategies I want to talk about. High performance teams is a big part of it.
I cover that on the next slide. We do in every other year engagement survey and it's a rural comprehensive survey, probably 50 or so questions, all trying to hear the voice of our people and 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. So why is this Because the data is very clear, high levels of engagement. So if you get high scores on engagement, you also happen to have high financial performance.
So we are trying to very clearly link this to, if you are a leader for a respective area, how we are 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. And the big focus and the big takeaway we've had from this whole engagement process is focus on the frontline leaders. So if I give you an Army analogy, in the Army, it's the sergeant and lieutenants that run the Army, not the generals. So it's the same thing at Parker.
It's not Lee and I that are running the company in those days we'd like to think we are. It's the frontline leaders. It's 70% of our company reports that first level management, that 2nd shift team leader, the accounting manager, all those people are the people that really run the company. So 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 and we'll be doing in the next several years. The whole goal of this engaged 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 our the people at Parker. But employees think differently than owners. Owners think about 3 key things typically. Are we making money? Are our customers happy?
And are the people working around me happy? And there's a distinct difference in performance if you get people to think like an owner and that they think like an employee. So that's what we're trying to do here. And this is at the heart of how we're going to do it. So high performance teams is the structure how we create that ownership.
So let me step back for a second and explain how our plants are organized. So 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. And depending on the size of the value stream, we might have a team that is the whole value stream or value stream might be broken up into multiple teams. What we want to do and we use the 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 2nd shift supervisor, I learned that the people that do the work know better than anybody else how to make things better. So we're going to put that to practice here. So I'm going to give you a hypothetical example, an 8 person team in one of our plants. Already today, we've assigned 2 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 Parker Lane system or any typical Lane system, these are the typical things you would see in any team improvement board, any Lean system and any really good Lean thinking type of company. So we're going to get people engaged across the entire Parker lean system, all these metrics. So again, the value for shareholders is that improvement you saw on safety. We're going to translate an engagement you saw on safety.
We're going to translate that same kind of passion, the same kind of intellect and horsepower from our team members into quality, cost and delivery. So 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. And 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. We were excited about turning 100. These are pictures from 1 very celebrations around the world. But my whole point on this first goal to win strategy is that engage 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 advance for us going forward.
So 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 for to measure experiences is this metric here, likely 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.
So you can read that question. How likely are you to recommend that your company conducts business in the future with Parker? And 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 9 or 10, you're considered a promoter Parker. If you're 6 or below, you are considered a detractor.
Likely to recommend is measuring that delta between promoters and detractors. So 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. So 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. And 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 get very little negative comments about that. But we get a lot of comments around these three topics you see on this page and they're really kind of all the same thing, resolve my issues faster and communicate better with me. So our action as a team is we're going to be working on those customer engagement process, 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 a gateway into Parker. This is the school of first impression when you think about it. The first impression is really with e business and we want to have a best in class site when it comes to trying to find something, select something within Parker. And 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 is going to touch on IoT a little bit more in his presentation, but I want to make a comment about e business. So that likely to recommend metric that I showed you on customer experience, we asked that same question for people that go to our website. And 2 years ago, our score on likely to recommend was a 4. 4 is not a good score in case you are not following along. We had as many people disliking the website as liking the website.
Today our score is 30. So we've made dramatic improvements. We're not happy with 30, but 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. Now Lee is going to cover this in the bulk of Lee's presentation, so I am not going to go in to all these key initiatives underneath here other than to say there's early indicators that this is working because if you look at 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.
But for us, are not going to be happy until we can demonstrate this over a whole business cycle. It's okay to do it in 1 year. We 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. So 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 'sixteen, almost all of our development was division technology development. There were pockets where we did some things essentially, 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. And then when we acquired CLARCOR about a year before the acquisition, CLARCOR invested in innovation center just for that business. We were very much intrigued with that concept of a technology center for filtration.
And I will talk more about that. So that happened in the last year. And we are 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 then we want to get better cross Parker leverage by these Parker technology centers. So 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, are going to keep that in Tennessee where it is today, but it's going to be the total Filtration Technology Center, not just ClarkWorks. It's going to be the new combined group that Rob Malone leads. The Motion Technologies Center we're going to start in July of this calendar year.
And we're going to put together the 2 groups that own Motion Technologies for the company. So the Aerospace Group and Motion Systems. Aerospace owned 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.
We'll have these 2 groups work together on electrification, best practices, needs of the customer and to do this more efficiently than then trying to do it on their own. And then following after that, probably a year after we launched the Motion Technology Center, we're going to have an advanced material center because we have several businesses that are very active in material science, Blue connectors and engineering materials. We want to leverage best practice between those 2. The takeaway on this page is really important. I am not a fan of having big corporate R and D centers.
This will not be funded by corporate. This will be funded by the group presidents. They are going to come up and stand and talk to you here. It's going to be small, focused and accountable and it will be engineering cost neutral. We know we're going to take costs out of the divisions and 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, build technologies faster. And then the last part of the Win Strategy, financial performance, what I affectionately called the big four of financial performance. Now another part of this 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.
But on lean, there's a big opportunity still for us. It's moving lean into the office. And 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. So that is a big focus for us, talent development, training, etcetera for those folks.
On our 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. But we need to be much better in the planning and the scheduling side of things, a lot of activities going around that. Then 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. So we're at 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 2016. We have never done that. 2nd largest sales drop and basically kept margins flat was a remarkable job by the team. And you can see the improvement in margins on op margin and EBITDA. So I want 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 is 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. And 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 and a little more color, but the cultural fit has been spot on.
It's very hard to deal this size not have a great cultural fit and we were fortunate to have that. The financial metrics you can see in the next three we're 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 5 total company. We're almost there now, 2 90 basis points. We're 3 years ahead.
So 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. So here's the new CLARCOR targets. At the time of the deal, we announced $140,000,000 cost synergies in FY 'twenty and we didn't disclose any revenue synergies. We disclosed that we're working on them. We didn't give you a number for them.
So the new targets $160,000,000 on cost and $100,000,000 incremental revenue synergies as a result of this deal. So again, we are very happy about this progress. I want to talk about the portfolio for a minute. So this is a pie chart that a lot of you attract us and followed for a long time. A key point a couple of key points I want to make on this.
The total market size has gone from $120,000,000,000 to $130,000,000,000 So 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 technology. Most of our competition has got 1 or 2 of these type of technologies, but we are stronger in combination and IoT further increases this.
Those of you who looked at this slide in the past for us would have noticed we would have used to have a 9th picture on here. We would show aerospace as a separate box. Aerospace is not a technology. Aerospace is a market. So we want to make sure you understood that the aerospace business utilizes almost all those 8 boxes with maybe the exception of climate control, just like the industrial groups use all those technologies into industrial end markets.
So again, it's that strategic positioning advantage we have because of this breadth. Where do we want to go with the portfolio? I always get this question. These are the 3 ingredients. 1, we like the space we're in.
We don't think we need to move outside of motion control. 2nd is we want to have business that have an attractive business model. I'll tell you what I mean by that in the next page. And 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.
So I see very little need to do any serious pruning. It will be trimming around the edges, no major tree branches to come out of the portfolio. But 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.
So those are the ingredients behind that. So now without any further ado, the new corporate targets. So what we are looking at, we just lined up the old 5 year targets and what we are going to for the new ones. So on growth, it's the same target. 150 basis points greater than global industrial production on the market is still best in class.
And we have to demonstrate, again, we do this over a cycle. Hence, we didn't change that. Segment operating margin, we increased from 17% to 19% by FY2023. Let me make two comments about the 2023 targets. They are under normal business conditions.
This doesn't mean a recession in FY 'twenty three. These are the targets and these are organic targets. It's hard for us to predict acquisitions over this period of time. So these are organic targets. The significance of the 19%, so how do we come up with a number?
The top quartile of our proxy peer group, if you look going back 12 months, 3 years, 5 years, the number of the set 25% line bounces between 17.0% to 17.5%. So at 19%, we are not just going to be top quartile, we are 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.
But given that with the Clark order and the amount of intangibles we have, it makes sense to have that as a target as well. 20% is top quartile there. Free cash flow conversion has been a trade market, a company, keep doing that. And if you do all this, our EPS CAGR will be something 10% plus. A little bit less than 10% organically and then with capital deployment, we should be able to do 10% plus CAGR over this time period.
So I want to talk about capital allocation. So you've heard in the last call I went through this and it 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 5 year average.
We want to invest CapEx for organic growth is the most efficient way to invest on behalf of shareholders. We're keenly into paying down the debt from the Clark Ward deal and we'll continue our share repurchase program. But then as the debt glides down, we're going to free up capacity to do 2 extra things, acquisitions or share repurchase. And again, the key thing that always drives us and 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 are going to make one important strategic change, really 2 on CapEx. On the left is the amount we've been spending. So our historical CapEx investment, 1.8 percent of sales. We're going to bump that up slightly to 2.0. The important part on this page is the allocation.
We are always going to allocate CapEx for safety. That's a no brainer. But we are going to spend more CapEx on productivity. We've always invested for organic growth again in the most efficient way. But 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. And that's what we're going to do. We're going to shift that allocation to more productivity focused. So here's our acquisition strategy chart, how we're going to select things and what areas we like. We first want to be to consolidate our choice.
So if it's within our space, we want to take a look at it. It doesn't mean we'll swing at everything, but we like to be at that. We like to focus on a couple of the groups that you're going to hear from today, engineering materials, aerospace, instrumentation, filtration. Why? Because their margins are attractive and they tend to be more resilient over a business cycle.
And then we'll continue to look at adjacencies and name 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's a natural thing for us to filter that system and hence now it's a significant part of our company. So 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 are leading the company with a purpose. Our company, we are fortunate here that we create value for society, our customers, our shareholders, our people. And we do that by working with our customers to help raise the standard of living. So it's a pretty noble cause and noble purpose that the company serves raising the standard of living 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? And really it's that performance in that culture that creates a significant value. So 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 part of Parker. These are our distinct competitive advantages that what makes us special.
At the first list is the Win Strategy. It is the Parker Businesses and it's how we run the company. 2nd is our decentralized divisional structure. There is a tremendous amount of power in connecting people closer to the P and L, closer to their customers, closer to each other and that's what the divisional structure does. We had 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 had the broadest breadth of technologies out there. This is our list. When we talk about strategic positioning for the 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 quartile performer and we want to generate cash and we will be great deployers with that cash. I happen to like this quote. I tend to use it a lot.
Keep changing because when you through changing, you're through. And hopefully you've seen the last two and a half years, last 3 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're 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.
So with that, thank you for your attention. I am going to introduce Lee Banks, our President and Chief Operating Officer.
So I remember 3 years ago, Tom and I traveled around the world really and had focus groups with our probably 3.50 executives around the company about what we wanted to change with the Win Strategy. And there were 2 things that came out of that, that were loud and clear. 1, people first, therefore engage people in this whole concept of ownership. And second was we are a big complicated sometimes bureaucratic company this whole notion of simplification. So back 2.5 years ago, we introduced a 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. But optimize organization and we'll hit a new high watermark this year, dollars 14,100,000,000 we'll hit a new high watermark this year of $14,100,000,000 We're going to do that with 2,000 less people inside the company versus the last high watermark we had of $13,200,000,000 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? And I'll share an update on that. And 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 of the Board of Directors in August and it would always be wrong. So we took that over all those months, all those meetings and brought it down to something that takes literally 2.5 to 3 weeks, very focused and we're a little more right now than we were back then. So 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 will 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. So 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, but 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. And this isn't necessarily about reducing SKU numbers and me to get on an earnings call and tell you how much revenue was 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.
And with every one of our businesses, as natural law is here, the bulk of the revenue comes from a very finite activity. And as you carry on the long tail of activity, the costs accelerate exponentially. And it's that cost opportunity, it gives us an opportunity to improve the business as we go forward. So in Sar Parker, we have a playbook. We have a process, very process driven culture that we tackle this with our businesses and educate them.
And as we educate them, it allows them to use those 3 big drivers Tom talked about lean, pricing, strategic supply chain to really amplify our portfolio. So pricing on non standards, we try to take non standard portfolio. So 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 3rd party sourcing on key long tail items that we need to keep servicing customers for.
And 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, but this is the journey we're on inside the company and that's why we feel confident about our performance going forward. So Tom mentioned this simplification really is about everything we do. It's that whole eightytwenty 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 and really it enables growth and financial performance. So it applies to everything we do inside the company. A little bit on profitable growth. This was the same slide that we presented 2.5 years ago and it started with these 5 key drivers to grow in the marketplace.
And you never want to get too excited about what's happening, but 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 were 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, etcetera. It's very powerful and 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, but the big opportunity has been growing international distribution. And we've been working very hard on that since the last time we saw you 2.5 years ago. We took my very senior executive charges heads us 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. So it could be Malaysia, China, you name it, these people are out there working on Parker's behalf, very powerful. And 3 62 new distributors, This isn't a line item added at a distributor. These are new entities who 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. And 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. And then 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 retailer too, 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. And lastly, when it comes to the Parker store, we continue to grow these.
There's roughly 2,300 Parker stores throughout the world now. It's a great brand recognition tool in all the marketplaces. It's owned by our distribution network. And 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. And 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. And 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. And then we have this whole high performance teaming globally around one of these customers. So 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. And lastly, we take a very outside in view of our performance. So we all have our own internal metrics, but what matters most is how that customer is measuring us.
So in our operating reviews, we're talking about major customers and their dashboard on us and what we can do to improve. And lastly is the ability to do that systems engineering with our customers. So 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.
E Business IoT and Services, I think we've learned a lot on this going forward since we launched this in 2000 or 2.5 years ago. And 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. But 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. So whether it's filtration, seals, compressors, pumps, motors, cylinders, etcetera, we get unique insights as to how they're operating and we enable our customer to plug into those insights. So we're very happy with the progress we've learned here.
We're learning progress we've made here and we're learning more as we go forward. And as these has emerged, these are the 3 commercial platforms where we've got revenue today. So significant bill of material on connected products. Some cases, some revenue stream on monitoring data. But we're on the mobile applications, industrial implant 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. And I would tell you 1st and foremost, it starts with having a good process. And inside our company, we've got a fantastic process. But 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.
So we've been looking very, diligently at our winnovation process and where is the biggest bang for the buck. So this whole idea of looking at simplification inside the company applying those same eightytwenty principles at our businesses. So we make sure that we're putting the right resources where we can get the best returns. Early days, we were pretty happy with the payback that that's giving us and the focus. And then lastly, it's really understanding that customers' needs.
And we've rolled out a product a process inside the company called new product blueprinting. And 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. So with that, I'd like to say thank you, and I'd like to bring up Kathy Seaver, 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 cards 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 fiscal 'twenty three. Let me start with sales. Tom mentioned this briefly.
When we started the new 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. So 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 3 10 basis points with our 6.5% organic growth projection for this year compared to GIPI, which is at 3.4%. So good growth beating the market. So with that confidence, we're setting a target going forward for the next 5 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 5 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 going to get with CLARCOR, which you'll hear more from Rob on that. So we think that we can continue to grow faster than the market. So what will that mean for our margins? When we came into the new 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. So we dipped and we're not quite up to the trend line. These are GAAP numbers. But let me remind you 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 costs to achieve to get the integration benefits of CLARCOR. If I adjust the numbers for those margins, then we're despite the recession in 2016, we're on track to meet that FY 2020 target of 17% on an adjusted basis. And let me remind you in those numbers as well with the CLARCOR integration or CLARCOR acquisition, we took on a fair amount of depreciation and amortization. So on an as 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. So how does that give us confidence to get to 19%. Here's a waterfall, gave you the new target 19% by fiscal year 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.
And starting with our base year of FY 2018 on 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. And you heard Tom talk about our initiative to expand our capital expenditures to help with productivity. All of those combined, 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 $110,000,000 of one off costs for realignment of our base business as well as to get the CLARCOR synergies. $110,000,000 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 $50,000,000 So the difference between $110,000,000 $50,000,000 naturally gives me additional 40 basis points of margin here. And you heard Lee talk about working intently to grow 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 5 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 a good history of being good generators of cash.
You see here our conversion rate of net income. We have 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 5 year average, and there's no reason we can't continue to do that.
We're currently at a 34% 5 year average. So what has our cash deployment looked like over the last 3 years? We've generated operating cash of $3,900,000,000 We've used that to pay out $1,000,000,000 in dividends. We've invested $600,000,000 back into the operations and that's left us operating cash of $2,300,000,000 to use to grow the business through M and A or to do some share repurchase. 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 5 years look like for us? We're projecting that we will earn operating cash of $11,500,000,000 over the next 5 years. Staying at our 30% payout goal for dividends, that will be $2,600,000,000 that we pay out in dividends. At a 2% of sales CapEx estimate, we'll spend $1,600,000,000 back into the operations on CapEx.
And that leaves $7,400,000,000 for strategic M and A and share repurchase. I heard Tom show, you saw Tom show that we still have a motive to get our balance sheet back, delevered back. We need to spend about $750,000,000 to get debt to EBITDA measure back to a 2x metric. But if we're at 2x, we have plenty of leverage left in the balance sheet to do M and A after that. We're only basing this on organic.
I went through those fairly quickly, but 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 'twenty three, and that will earn us an EBITDA margin of 20%. Free cash flow. We plan to double free cash flow over the next 5 years.
We're currently earning cash per year at about $1,100,000,000 We think that'll be $2,200,000,000 by FY2023. And that results in earnings per share in FY2023 of approximately $15.50 on a GAAP basis. This is organic only. That's the straight numbers for $15.50 over $9.85 would be a CAGR of $9.5 But we've got a lot of cash. You saw over $7,000,000,000 of cash to use to grow or to do share buybacks.
So we're very confident that we'll be able to grow earnings per share by more than a 10% CAGR over these 5 years. So I'll be up here for the Q and A later. I went through those fairly quickly. I'll be happy to answer questions later, but 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 and we do perform. The best way to win new business is to have done a very good job on the current program. And 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. And Parker is ready for takeoff.
What excites me about the future? Many things. We're seeing more electrification and Parker is very well positioned for that. I do see 3 d printing to be a real evolutionary part of our industry. We're designing hardware with 3 d 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 and 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 Parpahannafin 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. So Cliff, you and I were talking about him earlier. But 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 that in this part of the company. We're about 18% of the company. And we're really passionate about focusing on Tom talked about needs of humanity and purposeful work. We're really focused on 3 different things, protecting our war fighters with the fixed swing in helicopters so that they can protect our interests and our people around the world with the products and systems we have, also enabling safe and efficient commercial transport of goods and services around the world.
And last but not least, the safe and commercial transport of us, the traveling public that we can see friends and family and conduct business around the world. And we've been doing this a long time and we're on basically everything that flies. Moving forward here, dollars 2,300,000,000 in sales. As reported, we've organized into 8 technology oriented divisions. I'm going to highlight a few of those platforms as we go forward, give you a feel for that.
And that organization is really for ease of doing business with our customers. The manufacturing footprint is very efficient. We have a very efficient SG and 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.
And then we have 4 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. And 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. And 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. But the majority of our wins over the last few years, which has been in excess of $20,000,000,000 of wins have been systems in orientation. So that functionality is very important.
And 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. And 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. And 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 5 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 1 or 2 in all the technologies that I'm going to show you here. So from a flight control actuation perspective, we are a world leader. We take both a component and a systems posture here. And what we're doing is if you've flown and looked out the window in the aircraft, you see the shape of the wings changing, the surface is changing.
And we do that for many different surfaces. And that's what controls the steerability in a three-dimensional space of an aircraft. And it could be military, commercial, 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, and we've won significant amount 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. It's significant. It's about 20% of the business. I'll just highlight 2 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. But also as you fly and you turn the center of gravity, the aircraft shifts around. So we have to constantly be moving the fuel around in the aircraft. So those are some of the things that go on
behind the scenes. But really interesting part, and you're going to hear a little
bit from our filtration update earlier, we partner with our fil we partner with our filtration group. And this is a business we've been in for a long time, inerting technology. And if you hadn't heard of it, 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 0. So what we do is we eliminate the oxygen through a filtration, a very sophisticated filtration application. And now Rob is going to highlight this, but we create an inert environment over the fuel tanks. We are the world leader in this and we have been since the 60s.
So we do this for military and commercial applications. So this again is a very good business for us. Moving on hydraulics, we're also a world leader here and with some very good competition and we have the privilege of selling to all of the really commercial and military airframers. 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. And this is a really good business for us.
This the Engine Components and Systems part of the portfolio, this is our fastest growing segment in the portfolio and it's largely because we've been focusing there.
I would say
over the last years, probably 2 thirds of our wins have been in this area. And we're providing components and subsystems, whether it be fuel nozzles or fuel delivery. And we like this business. Why do we like it? It's because it has a long life cycle.
Tom mentioned the characteristics of business. These are 30, 40 year life cycles, and there's been a lot of new engine platforms out there. And 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, and we're winning here.
And then finally, the last one I'll highlight is fluid conveyance. So 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 planes. So as 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. But as you get smaller and more compact, higher pressures, and then it has to fly.
I mean, this becomes very difficult to do. And we're a world leader in this, a very deep experience capability here. So fluid conveyance, nice business for us. So those are just a little transparency in technology. Here's also more color on the market segments, both the macro markets up top, commercial military, OEM MRO and then various market segments.
So 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 the 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 $20,000,000,000 worth of wins has been. And 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. But that's going to be a significant area of growth.
But in all these areas, we do see growth going forward, and I'll highlight that on a subsequent slide. But 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 and 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. And so we're very familiar with that.
But we see this as a big opportunity and as much as a lot of these companies are our customers. And so we continue to want to to take advantage of that opportunity. We've been investing quite a bit organically as of late, but we have a very healthy M and 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 and we had have investing a lot high watermark of R and D. That's now coming down to more moderate levels.
The challenge now is production readiness with ourselves and our supply chain and our 0 defect in our quality system. So that's where a lot of the focus is to now make good on that entry into 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, and it takes about a year for that to affect it. But F-thirty five is a very big program for Parker. It's a very good program. And so hopefully, that will continue at a higher level. But the big opportunity for us is the proactivity in the sustainment and the product improvement in 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, and we're becoming very proactive there. And we're not alone. That's what the military wants us to do.
Our key differentiators, this looks like a Parker slide, but we really, really value the customer experience and that we have in the relationship, deep relationships over decades. And that's the first and foremost, our most important asset. And but we also have the broadest line of components of any of our peers. And then we have now an ability to take a systems posture in every one of those platforms that I mentioned and then the global OEM infrastructure to support around the world and then also the 20 fourseven aftermarket support, various different strategies there internally and with partners. So we're a very unique supplier and a good supplier to partner with because we have all these capabilities.
And 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. So 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. But 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 '90s for the Joint Strike Fighter. And it's this technology can develop tens of 1,000 of pounds of thrust, which is what you need for an aircraft like that. So you fast forward, we're porting that technology now over to industrial applications. This happens to be a mobile door actuator application. And it really have we don't have a lot of competition for that.
There's 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. And then 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 on particularly on the medium and the large bizjet space of which it's about 12% of our business. But all of those segments are picking back up for us. And you look to the right, the 3% CAGR going forward, we have good narrow body content. We've held it on the reengineering, if not expanded it, particularly on the both the airframe and engine, F-thirty 5, I mentioned. Some of the proactive work in the aftermarket for the military we're going to benefit from.
And then we have a significant amount of entry into service, both in commercial transport and the biz jet arena. So there's a lot of growth things for us going over the next 5 years that will be tailwind for us. So 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 hydro mechanical solution. And we do see growth acceleration going forward. And 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 2 40 basis points. And that's not insignificant. And 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. So that's a nice tailwind for us.
But 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. So we have to work the efficiencies in our sub tiers and our supply chain working the 0 defect.
So 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. So 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. So with that, thank you for your attention. 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 ceiling and shielding solutions,
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, 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 partner.
We can leverage the Engine and 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 as a whole. They include robotics, automation, additive or 3 d 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 ceiling or shielding solution. The fact that we have such a diverse playground for us to engineer solutions with our customers is very exciting. But ultimately, it's about being able to improve our customers' outcomes. That is incredibly rewarding and part of who we are as Parker Hannifin had been for many years.
Well, 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 $1,500,000,000 of Parker's total sales.
We have 9 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. So then 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 3 platforms within our group: ceiling 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 1 or 2 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 6 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 9 and 10 speed transmissions that are on the top 2 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 ceiling solution. But more notable is the performance that are required from unique materials for higher temperatures and higher pressures. These vehicles are designed for 1,000,000 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. However, 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 3 d 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 market. 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. In addition, collaborative robots are becoming a big part of our group. We use these robots in applications that we affectionately call the 4Ds dull, dirty, dangerous and 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 variations and meet the ever increasing quality requirements from our major OEMs. 1st 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. We have the largest ceiling and shielding distribution network in the industry, and our dedicated market focused sales force serves us very well.
I mentioned industry trends on the previous page and we are investing in all of these key technologies that support these trends. One I didn't mention was model based systems engineering. So 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, and we are very well positioned to meet the new corporate targets communicated today by Tom Lee and Cathy. 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 process fluids Parker Filtration Group helps customers protect their most important assets improve operational efficiency, reduce downtime, control costs and deliver consistent quality.
Within Park Risk 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. And then we also purify a lot of the products that we actually process and make themselves.
And in 2017, Parker made a transformational and highly complementary acquisition with a similar problems than ever before. With the broadest portfolio of filtration products in the business and 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 in the one room and really start developing the technologies for the future. CLARCOR had set up an innovation center, so 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. So 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 partner 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. But 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 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. So our group is $2,700,000,000 in sales. We have 18 divisions worldwide and 64 manufacturing locations.
So we have about 100 locations if you include R and 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? So the most engaged team of course wins. We're a highly engaged group. But 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 broader 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 Parker has built in strong industrial OEMs. And we have an extremely diverse portfolio, the 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. And 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. So 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. So 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 media. The first thing we did when we bought CLARCOR was we put the medias together 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 4 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
and locomotives. Industrial air, we do gas
and locomotives. Industrial air, we do gas turbine inlet filtration. We do pollution control filtration, HVAC and compressed air and gas treatment filtration, 4 different segments. You'll find Dominic 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.
So these technology platforms go across a wide array of end markets which we'll talk about next. Balanced end markets. These 6 end markets Transportation and Plant, Industrial processing, construction mining, power generation and HVAC represent about 80% of the sales of the Filtration Group. But Filtration is in every industrial end market that Parker has. So how that benefits us is if any one end market is down, the other end markets are doing well for us typically.
So 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. So pre acquisition Parker Rayco 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 our 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 that's been displaced by using hollow fiber membrane technology and inerts the fuel making the tank less flammable and ultimately it makes the sky safer. So, it's something I always I'm 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. And they have strong domain expertise in the end markets in which they serve. 2nd, we see even a greater opportunity to drive win strategy efficiencies across the 4 pillars.
You can pick any one. Premier customer experience is 1 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, right? So company likes to win, likes to win with integrity, highly growth focused and highly engaged, all three characteristics And to our surprise, they were they really understood the strategic rationale.
So we basically took that chart that Tom showed earlier, which is the strategic rationale for the deal and all the customers got it. And they understood that neither individual Filtration business could offer what the combination could. So it's kind of a 1 +1 equals 3 mentality. I'd like you to think of it that way. And aftermarket distribution, we knew they were good, highly efficient order processing, warehouse and transportation logistics.
They get 400,000 applications anywhere within a couple of day lead time. So 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 1, we announced $140,000,000 of cost synergies, is 1,000 basis points of CLARCOR's FY 'sixteen annual sales, 1,000 basis points of cost synergies, EPS accretive in year 1, EBITDA margin accretive and high single digit ROIC in year 5 will continue possible for expansion. We'd like to update and add another $20,000,000 to that we've identified in our 1st year of ownership for $160,000,000 target.
And for the first time, we're announcing revenue synergies of $100,000,000 which we'll talk about the buckets of those as well. The same three bullets still apply. So 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 hypersimplification, if you will. We're going to close 22 plants for a total of 2,300,000 square feet.
That's 2,300,000 square feet 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 has improved by 20% from a sales per employee basis. Material costs, by leveraging the spend, combined spend of the 2 organizations and standardization on raw materials, we're able to reduce our direct material spend by 6% And by taking advantage of the Parker preferred transportation and logistics rates, we reduced our freight costs 14% right away. And of course, we eliminated the legacy CLARCOR headquarters and SG and A and all associated overhead in that business for significant savings upfront. So as you look at our savings from a run rate basis, we're going to come close to $60,000,000 in the 1st year, dollars 58,000,000 dollars 125,000,000 more than double that next year, moving out to $160,000,000 our new target.
And our cost to achieve, we move forward, you can see, still at $90,000,000 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 work network. So if you look at the legacy Clark Corp business, they were not growing internationally. They were flat in the past 3 years. So we already have a built in through Parker sales company a built in selling network that already sells filtration.
So 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 and to do that. So 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.
And 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. We go and change out the customer because we have a broader product coverage. We can take that to their customers and now compete.
And then 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. So we're winning across all three areas in our revenue. Again, dollars 100,000,000 in FY 2020, dollars 25 this fiscal year followed up with $75,000,000 next year. And 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. It brought us aftermarket coverage, applications that we cover, technology, filtration and system technology.
Remember media is a core 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 time frame on all the plant restructuring and things are going really well. And we see tremendous opportunities for continued margin expansion with the new business.
So 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. So that's all I have for today. I want to thank you for your time and for braving this terrible weather. Thank
you. Okay. So thanks for hanging in there with us, your attention. And we went through a lot of material in a short period of time. So 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 and A portion.
So this is the first time we've showcased 3 operating groups at any one of these Investor Day. So hopefully you enjoyed that, the transparency, again to see what we do and a little more color on how we do it. Hopefully, you get a sense of what we talked about in the beginning. We're a company on the move, literally, as far as our products and on a move with the progress we're making through our results in the Win Strategy. So 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 behind the progress we'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, allows us to win because of the breadth of our technologies. And the new win strategy is working. It's definitely working. We've got lots and lots more work ahead of us. So we updated these targets.
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 3 years, we have changed that margin target twice, raised at 400 basis points. So 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. So 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 and A after that.
Great. So we are going to take a short break. We will take about 15 minutes. I'd like to reconvene at 3 o'clock. Refreshments are being served in the foyer.
And when you come back at 3 o'clock, we'll start a Q and A session with Tom, Lee and Kathy. So enjoy the break. Thanks.
I have been. Let me say what's
and try
and try. I'd like to welcome you all back, please. If you'd take your seats And momentarily, we will be commencing with the Q and A. Thank you. So we're going to take the next 45 minutes for the question and answer panel discussion with Tom, Lee and Cathy.
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. So thank you very much.
And we're not going to pick. We're going to let the runners pick just so that it makes life easy on people.
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? And 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. And 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 point $1,000,000,000 So can you just talk to how quickly we I mean, 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 and A or repo?
Okay. So on the footprint synergies, I would tell you that we ended up pulling things forward because we saw more opportunities. And that's what kind of added up to the 22 plant closures that you see for this year. On the Emerald West forecast, and maybe just kind of this might be a question people had in general about our 5 year forecast. We forecasted what that calculates out to 5 years, 37% average MROS over this next 5 years.
And the way you get to that is 30% base MROS and the Clark Art Synergies takes us to 37% over this period of time. Now to put that in context, if you look at what our MROS has been the last 10 years historically, 23%. So this is clearly a step change in margin return on sales to get there. And 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 that we talked about on productivity, those type of things.
We go to 37 because of the CLARCOR synergies. Now the way that will feather out is we'll probably see some higher lift on F marginals as CLARCOR synergies kick in and the cost achieved comes down. So you'll see a little bit over that 5 year period of time, you'll see higher margin returns in the near term, sliding down over that period of time. The marginal impact now, which was a big discussion in the Q2, 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. So that's I view that as a short term issue that we have, some of the mix and plant inefficiencies, really the next quarter or 2 quarters that we'll be faced with that. As 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.
As we looked as 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. So you're confirming that? Yes. Okay. And then just the $7,400,000,000 in cash that you have?
Yes. Sorry.
Okay. So what I mean, it's the acquisition strategy that I talked about 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 3 of the businesses you looked at today plus Instrumentation as key things to look at as well as adjacencies. But we'll make those decisions every quarter based on the opportunities that present themselves.
We will wait for the debt to come down a little bit more. But it's moving in a nice direction. And as our capacity frees up, be more active in the game. Some of you have heard me say we want to have an assertive balance sheet. We want to have it put to work and we're going to do that.
And we will make sure we do it in the most effective way looking at all the allocation opportunities. I mean one of the things that one of my friends in the room offered me in one of my early months And the job was to 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. And in that book, it talks about great business leaders do a great job first at generating cash. So that book influenced us quite a bit with what changed in the Win Strategy. You have to first be great generators of cash and then we look at free cash flow conversions being a good indicator of that.
But then we want to be known as great deployers of cash. And I think what Kathy showed the last couple of years, we did a nice job with that. The Clark Ward deal, how we deployed cash, changed the valuation of the company. But we'll continue to do that going forward. And 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, but you'll see us put the cash to work.
John Inch, first, what's the margin assumption in your 5 year walk for CLARCOR? You're at 'nineteen. Where is CLARCOR in that?
You can expect CLARCOR to be without the depreciation and amortization equivalent to the rest of our Filtration group, but we don't talk about margins for that breakdown. Is it above
or below the 19? Sorry? I'm sorry, Kathy, is it above or below the 19? We 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 Yes. We haven't disclosed it specifically. So I don't think we were prepared to do that today. But with their synergies, they'll have nice margin improvement. And we get to the 2019 with a mix of businesses, some above, some below.
And filtration is a nice margin business.
Right. And you said CLARCOR is at filtration average. Is that what you said?
I'm sorry.
I'm sorry. Did you say CLARCOR is at filtration average?
Yes. Okay.
And filtration is higher than 19%. The other question I had was the CapEx. Is getting to the 2019 dependent on you raising the CapEx? And Lee, you talked about sort of kind of the investments 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 trying to drive more productivity through more automation. What's the status of so a 2 part question, right? It's getting to the 2019 dependent on raising the CapEx? Or is that potentially more on top of that given that you're conservative? And secondly, what's the status of your productivity in 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 me tag on if I don't catch everything. That is part of it. It's not I wouldn't say it's the biggest part of it, but it's clearly part of it. So in Kathy's walk for productivity, I think we had 50, 60 bps of productivity there. It's a combination of the Win Strategy, Lean, all those other 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, but what we want to focus 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. So 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.
And we're going
to have a team of people to find 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 in the system, the non value added time.
So we're looking more at the automation side of things. And now the process technology has caught up to where we can actually do that. In the past when and Cliff knows this intimately, in the past when we do robotics, it 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. So 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 1st and foremost, we're a lean company. I mean it's about eliminating waste within the value stream and moving forward. But what's happening with technology today and you heard Jenny talk about it about the 4 Ds, there is a chance as you eliminate technology to automate I mean eliminate waste a chance to automate some of those touch points that still need to happen. So it's that blend and we think there's a great opportunity there.
And you need to move up your mic.
Thanks. My first question is around the M and A strategy. You have listed Aerospace pretty consistently and yet I think we've all acknowledged that franchises that come up for sale in aerospace are never attractive from a financial standpoint. And 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 and A? I'm just curious about that.
And then second follow-up question is just on last America 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. So I'll start with the M and 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.
But 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. But there's still properties that we'd like to add to the portfolio in areas we'd like to build on to. So while it's been on the list and we haven't necessarily put one over the finish line, it 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 issue is I mean, it's real. I mean, the mix issues, challenges we face with mobile at 20% and industrial at the high single digits, distribution in the low teens, obviously, creates a margin compression for us, but that's going to temper over time. Those are going to start to equalize over time. How long that takes, don't hard to forecast that.
And plant inefficiencies are really, really hard to quantify. You would remember that from your prior days how hard that is to quantify. But 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, 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.
But that's And the 22 plants that Rob's closing and the 39 for the total company, And the 22 plants that Rob's closing and the 39 for the total company is some pretty heavy lifting that we're doing, but 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 presentation to 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?
Yes. So let me start with electrification for us. We are energy source agnostic. So 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, electrohydraulic, electromechanical, pneumatic. We have the full suite no matter what the energy source is. Now specifically, as far as looking at our platforms, now if you take Jenny's business that you just talked about, what's the impact of hybrids and electric vehicles? So I'm going to give you the forecast data that they've given us. May not be exact, but it's directionally correct.
So today well, first of all, let me say, we 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 onboard 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 onboard. And we purposely do like very much the Engineered Material business being onboard because we offer distinct value propositions to our customers based on those technologies. So it's really it's about 3% of the portfolio and it's really the Engineered Materials business.
So specifically on that, today, EVs and HEVs, so electric vehicles and hyper electric vehicles, maybe 3% of the total vehicles produced, 1% to 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 giving. So for Jenny and a lot of that growth would be HEVs. So when you look at an HEV system for us, hybrid electric vehicles, that actually creates a larger bill of material for the Engineered Materials business.
So all the same technologies that Jenny showed, fuel, transmission engines as well as the LIDAR and the collision things, they're all still there. But 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. And then when you get to just EVs only, see the bill of material being about the same as it is today. So 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.
Now 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. And 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. Now 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 0 passenger car business. So it's all medium and heavy duty truck. And 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 coming from the industry forecasters that are forecasting this space. But 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. And that's again back to the distinct advantage we have versus anybody else.
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 very strong cash flow generation you have? So how would you adjust your capital allocation in case of a recession?
How much EPS cushion do you think you could create? And I guess that would be the big questions.
Yes. Well, if you remember, we generate we convert convert cash nicely in any part during the recession, coming out, going in. So I think we have teams that understand how to manage the working to generate cash. Will we change our allocation priorities? You've heard over and over what our priorities are.
Start with the dividend and CapEx and we'll go from
there. Right. But I guess to build on this, right? I mean you always bring up this progression how your decremental margin just gets better and better over the past 15 years, let's say, over the past 3 recessions, right? And you generate but you definitely see cash flow was a lot more stable, I guess, even in whatever, 2,009, 2010 recession, right?
You really behave like sort of multi industrial company, think what was down 15% or something versus earnings down 40%, right? But do you think you could allocate, you could sort of do something to sort of bring this connection between cash generation and low volatility of cash generation and lower volatility of EPS sort of more into investor focus by allocating cash differently? I guess that's the question.
Yes. So 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. But you're pointing out historically there's been a bigger volatility on EPS. So your point's right.
In the 'one, 'two recession, we were minus 60% decrementals. I'm going to use round numbers. The financial crisis decrementals, it's like minus 40%. And in the last downturn, 15%, 16% is minus 20%. Again, I'm using round numbers.
I think we will continue minus 30 is still a good number. It was sort of being world class, I think. I think on the top line, the CLARCOR deal, like we just did, will make us more resilient in the downturn. So 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 in the last downturn of managing costs.
So 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?
Well, we cover inflation through pricing, proper pricing with our customers. So we didn't spell that out separately as an item as we have sometimes in the past. So 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. Where would it be included?
So I think it's mixed in with the supply chain and the productivity and it's just our overall operating principles.
Fair enough. And 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?
Yes. Okay. So 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. So this assumes that all countries, all of our imported steel, this is in round numbers $20,000,000 of extra cost to us. Let me put an asterisk by that, that that's just the important 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 of things. We will be watching and I can assure we'll be watching every day what domestic steel suppliers do. We will be looking at our PPI, purchase price and index of the steel we buy today versus what we bought in prior periods because we could have domestic suppliers wanting to try 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.
And so we'll be watching for inflation on that. On the imported steel that gets a tariff that comes directly to us that's the $20,000,000 We will add that onto our price via surcharge on day 1. We will cover that immediately. What we will have to watch and as the 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. But you can rest assured those of you who track 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 inflationary times than we do in deflationary times. So I'm not afraid of an inflationary time period. But what I can't quantify for you yet is what happens on the them.
And then the last question would be if you look at your big four simplification, lean enterprise, strategic supply chain, value pricing, to date, which of those has been the most important? And should we expect that to change over some intermediate term, say 3 to 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. So I'm really encouraged on what's happening with our lean enterprise as we think through where we should be spending and Pareto ing our time leaning things out. So I'd hate to like 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 is though, it's created a new S curve for lean supply chain and pricing because it's put new life, new energy deluded and not focused, then you're not getting the most out of what you're trying to do.
Thank you.
I just I 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?
So 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. So 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. But 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 5 years versus the 5 years we just gave you a while ago is that we beat the current 5 year March by about 2 years. This one's going to take of course, last time I didn't think I thought it would take 5 years last time too. But this is going to be a 5 year look. I don't see us getting to 2019 2 years, 3 years early.
We're obviously going to 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. So we have confidence. But I would just characterize this as being a more aggressive 5 year target than the walk from 2015 to 2017.
And then just can I pick on your $100,000,000 of sales synergies? It sounds like the international opportunity is huge. And to only give us $100,000,000 can you just kind of 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 5 years for CLARCOR, when we bought the company, our assumption on sales CAGR was 3.5%. You got to do all these models to come up with justifying the deal and talking to the Board and all that. And that was based on their historical growth average. So we didn't try to invent some new number that was their historical growth average. Dollars 100,000,000 takes that CAGR from 3.5 to 4.5.
And that's not insignificant. 100 bps difference growth CAGR is meaningful. Now we're obviously working to a much larger pipeline. But what happens with sales pipelines is they have like a 30% yield. So we're shooting for way more than $100,000,000 We hope to beat the pants off of that number.
But 100 basis point shift in the historical growth rate is meaningful. So 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 that 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? Yes. Good question.
No,
I still think we're in early innings. I'm really happy by what's happening. The international distribution, distribution in general in developing countries is developing, developing quickly, but it's developing. And Parker is such a well known brand name. It gives us the opportunity to kind of sort through who we can partner with best.
But this is not something 3 years from now I'm going to say we're done. This like I told you North America took 60 years to develop and it's an incredibly robust enterprise today. So this is a journey we'll be on, but we're laying the groundwork really to grow it quickly.
And then just on Aerospace, it 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%. So is there any point in the cycle where we start to see 5%, 6%, 7% growth in Aerospace again? Yes.
So what changed from our original growth rates on that? It's a couple of things. In the market the market dynamics changed. Bizjets from when we showed that slide say 5 years ago, Bizjets softened significantly, Helicopter softened and wide body softened. And then we had entering into service on a lot of programs that we won flying to the right.
So that 3% that Roger showed for Aerospace was our next 3 years. Remember, we're ramping up on some of these entering into services. I think you're going to see stronger growth beyond that 3 year period of time as those come up to rate. And then hopefully, bizjets are going to finally come off a bottom. Helicopters, which is a really attractive market for us, comes will come off a bottom.
And then a lot of what Roger has been focused on, the aerospace team winning, is the engine side of things for the reasons that Roger talked about. And we like engines for a lot of reasons, but engines has a high engines are created a tremendous amount of MRO just because of the nature and the environment that engines have to live in. And so we purposely have looked at our 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 nonrecurring engineering 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 showed as
So George Peaker, Wells Fargo. So I'm kind of calculating back into what revenue and margin expansion gets you. And it seems like there is an implied share reduction in the 2023 target. Is there a certain amount allocated to share repo? And then in addition to that growing at twice the end market, I mean, are we saying that we have to have M and 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. And we have not we have a 10b5-1 program of spending $50,000,000 a quarter or $200,000,000 a year on share repurchase and that's what we've built into the model. We have not built in any additional.
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 5 to 10 years. For
Aerospace? Yes. The thing is he doesn't have a mic, I'll try to answer it for him. But We like the engine platform. We like Fluke Advanced.
I would say organic inorganically, we would invest in all the platforms where probably one we don't need to invest in would be flight controls because we've built that platform organically. There's really not a need to invest inorganically in that. But all the other platforms that Roger showed are all equal opportunity players that we'd like to invest. Thanks. Kathy, I noticed
in the waterfall again, I guess we'll all pick on that, that there wasn't a strategic pricing bar there. And I know in the past that's been sort of an MRO stream or whether you think there's various parts of the MRO stream or whether you think there's still opportunity on strategic side?
So can I handle that? So I think the best way to think about pricing it and we did talk about putting it as a separate thing there. And 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, Meridian. But it's baked into simplification, baked in into the organic growth number.
Pricing is a core competency of what we do, but it is part
of that bridge. And if I could help Steve, if you were to go look at your old book in 20 15, we didn't have pricing on that waterfall either. Because I think for an assumption and a 5 year forecast is that we're going to have pricing and cost margin neutral.
If I missed it, I apologize. But the 19%, what's the mix between North America, International and Aerospace roughly? What are
the margins that went down to 19% in total?
Yes. We didn't you didn't miss it. We didn't give it. Let me just because it would be too hard for me to try to remember that anyhow. Here's the key thing about the company.
So we showed you 3 operating groups this time. Next time we meet, we're going to show you the other 3 operating groups. All the operating margins for all 6 of those groups aren't basically in the same neck of the woods. So on round numbers that walk that we showed you on that page 3.50 basis points from our GAAP 15.5% to 19%. About 100 bps of that is CLARCOR, so that's going to all show up in the filtration piece.
But that means everybody else and this is the expectation. Every group is going to move 250 basis points. The Rogers is going to move 250 basis points. Every one of those groups can move 250 basis points. And you would imagine if you took our current splits on margins, we expect that same thing happen North America and international.
I mean 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 of structural differences that we won't be able to overcome in 5 years. While we've worked really hard on making Europe's SG and A look like North America's, still not there. And then the key structural difference is that distribution channel that we're working so hard on is still distinct channel mix issue that won't be overcome. It's a distinct channel mix issue that won't be overcome.
I was thinking North America north of 20 percent International is slightly below 19 percent Aerospace 17% to 18 percent that's kind of mixed. But North America to get a 2 handle on that margin,
is there any shift how much distribution versus OE in that thought process? No. None of
there mix shifting a little bit.
And that's why I was kind
of backing into. Is this the time we get international closer to North America? And you're saying things get It's closer,
but there's still a gap. Okay. But it is closer. The idea
of international distribution growth can help manage the big. It helps.
And just before we leave, one of the keys to getting a higher valuation is lower exposure to the cycles. And 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 2 years? And 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 one of the key strategic thought processes with Harper. 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. And so on that acquisition strategy page that I had, those four businesses that I talked about after being consolidated of choice are all more resilient to the cycle: Aerospace, instrumentation, filtration, engineering materials.
So yes, we are trying to through the portfolio shift to try to help with that. He's coming, He's slow.
No comment. So just to make sure I'm clear on the walk again. You've got the 10b5-1 plan. So that's you're going to buy a couple of 100,000,000 of stock a year. You're going to basically pay off CLARCOR at the end of next year.
That leaves sort of 4 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 and A in this and there's no incremental share repo.
So 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? And maybe Tom, what's your own thought about just the stock price, etcetera? I mean your stock's down today. It's up last couple of years, but is it attractive?
Would you ever opportunistically look for opportunities? How should we think about it?
Well, because it's a 5 year forecast, it's really difficult to model what type of deals you're going to do in the multiples and all those things. So we did the forecast similar to how we did the last 5 year forecast organic only. But you can rest assured that, that cash we generate over the next 5 years is going to be put to work. And so 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.
And 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 Clark or absolutely we didn't have we would be looking at deal opportunities versus share repurchase and we'd be making those choices every quarter looking what makes sense. We think we're a great buy right now. Absolutely, we think we're a great buy. But then I think we're a great buy every quarter.
If you look at our share repurchase history, we've never gone wrong buying shares. But I think when you compare those two things, those once you get through dividends, FX and debt reduction, acquisitions versus share repurchase, I always on let's generate cash on behalf of the shareholders. And acquiring the right companies generates cash. Buying shares doesn't generate any incremental cash. But 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 drop over that 5 year period from what your guide is from 2018, I guess?
Yes. So we're guiding to an effective $225,000,000 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 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 $1,800,000,000 of our international cash at that time.
And that was pretty much everything we could bring at that time. So we're not overly cash rich in our 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 cash and try to utilize it as best we can. We continue to look at cash and try to utilize it as best we can.
We continue to look at all that. But 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. But there's 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, so basically growing significantly higher than the earnings assumption. So can you just walk us through what's happening with working capital and any of the other items that drive that?
Yes. 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. Core. We see better utilization through working capital of that cash. We have better access now with the new tax law, but 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.
So 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 5 year outlook, does your mix return to more normal fifty-fifty OE versus aftermarket? Or are we in a different era where we're sixty-forty, sixty fivethirty five permanently?
Just curious. Yes. We're heavy OE right now. And as we have these new platforms going into service, it will remain heavy OE for a while. It takes 6 years plus to get that into the aftermarket volume.
So I'd say we're going to be sixty-forty for a while yet with it leading into a heavier MRO in the long run, but sixty-forty for quite some time.
Yes. So the way I've described it, so we're 60 four-thirty 6 today. And in the next 5 year period of time, it might move a little bit, but it's not going to move too significant for what Kathy just said. I think the upside for Aerospace beyond that 5 year period of time is that mix finally starts to come and help us. I've been waiting long enough for that and it will.
Time is on our side on that one, but it's not probably in the next 5 years that helps us too much, a little bit.
We're happy to take one last question.
Just want
to say thank you again for coming out today. Thank you for your attention. Robin might have some closing comments, but 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.
Yes. 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. And if you have any follow-up questions, you can always be in touch with Brian Reed or myself.
So with that, safe travels and this concludes the webcast. Thank you.