Donaldson Company, Inc. (DCI) Earnings Call Transcript & Summary

Hi. Good morning, everyone. Welcome to Donaldson's 2023 Investor Day. For those of you who don't know me, I'm Sarika Dhadwal, Head of Investor Relations here at Donaldson. I've been with the company for a little under 2 years, and I started my career like many of you on the sell side and have since moved over to the Investor Relations function where I've spent the last 10-plus years. I've worked at a number of different companies across a few different industries, and I couldn't be more thrilled to be here at Donaldson today, and absolutely appreciate you taking the time to spend with us and learn more about the company. For those of you here in person, thank you for traveling to Minneapolis. And also, I would like to thank our virtual attendees. We're really excited to be here today and share our longer-term strategy, and we hope you walk away today with a deeper and broader understanding of the newly redesigned Donaldson Company. Just a few housekeeping items before we get started. If everyone in the room could just mute your cellphones just for it for your neighbors and also for the people attending virtually, we would appreciate it. On the tables, there are little place cards that have our WiFi address and password, if you need that. If you have any issues with connectivity, you let one of us know anybody who has a Donaldson name badge, we will certainly work to get you connected. Our slides and the full version of the presentation for today will be available on our website at www.ir.donaldson.com. I'm just going to talk a little bit about our agenda for today. So I think you can think about this morning is broken up into 3 parts. First, to kick things off, we'll have Tod Carpenter our Chairman, President and CEO, provide everyone with the strategic overview and vision for our redesigned Donaldson. Following Tod, we will discuss ESG and sustainability initiatives and talk about how we are enabling a cleaner world through our advanced filtration. We'll then give you an overview of Donaldson's market-leading innovative technology offering. We'll then have our first Q&A session, and please limit questions in that Q&A session to those particular topics. We'll follow that with a short 10-minute break, and then we'll come back. And the second part of our presentation will be focused on our newly designed reporting segments, including the Life Sciences segment, which I know we're very excited about, and I know many of you are very excited about as well. We'll then wrap that segment up. We'll have another Q&A session on those 3 topics, and then we'll break again for about 10 minutes, come back and then Scott Robinson, our Chief Financial Officer, will come to the stage, tie our story together from a financial perspective and discuss our strategy to deliver long-term profitable growth. Tod will come up, provide some closing remarks, and we'll wrap up our formal sessions with a final Q&A session. That final Q&A session can include questions for anybody that you've heard spoke -- speak for the morning. Lunch will then follow with our leadership team. And then last but not least, we will embark on our lab tours, including our new material research center, which has previously not been open to investors and that should give you a better understanding of Donaldson's best-in-class processes and offerings. Now I'd just like you to turn to our safe harbor slide. Most of you are familiar with this. This contains language regarding our forward-looking statements that we'll be making today and non-GAAP financial measures and KPIs that we will discuss. Now with that, it's my pleasure to welcome Tod Carpenter, Chairman, President and CEO, to the stage.

Thanks, Sarika. Welcome, everybody. We're really pleased to have you at the Donaldson facilities today. Really appreciate you taking the time out of your schedules and coming and visiting us on what is clearly a beautiful spring day in Minnesota. Third largest snowy winter on record in the state, but they tell us it's going to be 60s this Saturday, and we are all looking forward to that. We really appreciate you coming and making the track to come see us. We also would like to thank the many online participants today for listening in. We have an exciting day ahead of us and we're really pleased to show you the steps we've been taking to advance our strategic initiatives across our corporation. We hope that you come away from this today with the confidence and enthusiasm of our leadership team and indeed that of every Donaldson employee as you take home our messaging. As you settle in today, taking -- say, a couple of one last drink of coffee. I want to make sure to cover what I would like you to take home with you. So specifically, as you come back and revisit what we've covered today, these are the messages to take home. One, Donaldson is the filtration technology leader in the markets that we serve. We have best-in-class technology, and we leverage that technology to solve very difficult customer problems across a host of markets. We are partnering with our customers to solve the world's most pressing filtration challenges and opportunities by enabling a greener modern economy and by helping our customers achieve their sustainability targets and transition to an alternative power solution. Also, we are progressing towards a life sciences market leadership position and helping to address urgent human needs. We're doing this through a redesigned Donaldson structure which allows us to have even a deeper customer-centric organization. We have a balanced growth strategy. We put a press release this morning out with our targets. We'll cover the targets in more detail throughout the day. We're proud of the balanced growth strategy that we have, and we look to drive long-term profitable growth. So with that as the backdrop for the day, let's dive into a little bit more of the specifics. We are a 107-year-old company. We were born in 1915. We have over 14,000 employees and 140 locations around the world. Our revenue is in 3 segments, 65% from Mobile Solutions, 27% from Industrial Solutions and 8% from Life Sciences. Importantly, we have a strong razor to sell razor blade model and our razor blades or replacement parts is 65% of Donaldson's revenue. Our first-fit revenue or what we tend to call new products sold to the OEM portions, is 35% of our revenue. Last fiscal year, we reported revenue of $3.3 billion. Importantly, also on this slide is that revenue is protected by over 2,700 active patents. We are a technology-led filtration company. Looking deeper at our revenue, geographically, we are 40% in the United States and Canada, 29% in Europe, the Middle East and Africa, 20% in Asia Pacific and 10% and in Latin America. This geographic representation allows us to have a physical presence in 80% of the countries where we do business. Importantly, we have long talked about our operations strategy, which is build within region to support region. 75% of our volumes are produced within region. This gives us a strong operating model to be everywhere the customer wants us to be, take care of them with a local touch and also offer them the best cost in country opportunity when they desire. Importantly, across the bottom, if you look at the markets that we have as a company, they are construction, on-road trucking, industrial air, mining and agriculture. We have a very experienced leadership team. They represent over 200 years of industry experience for those industries that we play. If you look at this particular slide, you'll hear today from Guillermo Briseño, Andrew Dahlgren, Rich Lewis, Scott Robinson, and then on that lower row, Michael Wynblatt. So I'd like to take a moment to introduce you to our other officers who are here present. And that is Amy Becker, you could please stand Amy Becker, our Chief Legal Officer; Bart Driesen, our President of Mobile Solutions Aftermarket; Sheila Kramer, our Chief Human Resources Officer; Tom Scalf, President of Enterprise Operations and Supply Chain; and Dave Wood, our Vice President of Corporate Development. Across our officer group, 35% of our officers are represented by women and people of color. Also, our ownership requirements as of the officer group are well above common market practices. We act like owners, not shareholders. Turning to the Board of Directors. Our Board of Directors diversity is equally important. 40% of our Board is made up of women and people of color. We have a heavily independent Board. 90% of the Board is independent, and we have a beautiful balanced tenure of representation across our board. When you look at the Donaldson operating model, what we start at is about 1:00 on that wheel, if you will, and we start always with developing talent, investing in our people and helping them become the best they could be. Continuing around, we have a strong collaborative culture where we use that culture to drive a one Donaldson mindset. We continuously innovate and you're going to hear quite a bit about that today the many cool things that we have in the laboratories as well as our patent portfolio. We have a strong ownership and accountability culture. And in fact, the redesign really strengthened that even further. Additionally, we have teams of people that work every day to anticipate market needs. These portions of the model are done to support our purpose as a corporation, which is to advance filtration for a cleaner world. All of this happens in our company built on 6 strong principles: act with integrity, engage and empower our people, invent cool things constantly, take care of our customers better than anyone else in the marketplace, operate safely and sustainably, and give back to the communities that we are in. This model and our principles work. They've been driving our growth, 13% growth, compounded growth over the last 2 years. Our free cash flow has been roughly 90% and over that same period. Importantly, to understand how we solve customers' complex problems is 50% of our revenue is sold on custom solutions. Over 90 -- we are now working our operations teams getting past the chain difficulties and headwinds that we've recently experienced. And we're proud to say that across our company, we're nearing back to pre-Covid levels, which is 90% on-time delivery to when the customer tells us when they want it. So our operations teams have worked incredibly hard and really stand tall now coming out of this tough patch looking backwards. I was named CEO in 2015. It was a bit of a different time. Our company restructured at that time, but we always had advancing our strategy in mind. And during that time, we acquired engineering product services. We committed to the inorganic piece of our strategy and executing on it. In 2017, we invested $165 million into the corporation we expanded our capacities and increased our research and development investments to drive new product invention. We also acquired 2 companies that currently reside in our industrial solutions portfolio. In 2019, we invested $15 million to build a material research center in support of our life sciences strategy. We're proud to be able to show you that today on the tours. You'll get a good look this afternoon. Importantly, we also put a couple of really cool inventions out there. One was the dual-stage battery event. We'll talk about it in other presentations. And it was the first foray into a connected piece of our industrial-based offerings with our product called IQ. More recently, we completed a redesign of the company, and we created third life segment, which is in life sciences and really expand our addressable markets as a corporation. In order to support that, we have acquired 3 companies: Solaris, Purilogics and Isolere Bio. We, in our most recent fiscal year of 2022, a delivered record revenues and record profits. And we look to do that again in this fiscal year. With us today in the back are the owners of -- or let's say, they are domains employees now with prior owners on those acquisitions, if I could ask them to stand. So Matteo Brignoli from Solaris, Jin Zhou of Purilogics and Kelli Luginbuhl of Isolere Bio. We're really, really pleased to have them on the Donaldson team with us as we continue to advance our life sciences strategy. I talked about patents. And where we are that we have 27,000 active patents. Since we last met in New York in 2019, Donaldson has released over 1,200 patents. Put that in context, since we last met in New York City, somewhere in the world, every day, Donaldson has been granted a patent every day. Or if you want to see the magnitude of how we think, that represents one patent for every 4.5 salary employees in the entire corporation. We are committed to technology. We are committed to technology leadership, and I believe that shows how strong we are really investing in that portion of our strategy. We think about macro trends, those macro trends are really in areas such as sustainability, like the dual event. But also in expanding service office offerings, Guillermo is going to give you a strong look at that later this morning. But as we continue to connect those devices, Kelli is going to round out very nicely that portion of our industrial strategy. But also, we look to enter new markets. Our strengths as a company are obvious and deep. We are a filtration technology leader. We love our customers, and we have deep customer relationships by solving their most complex problems. Our technologies enable a greener and more efficient economy where everywhere the customer wants us to be, sure, we're a large global corporation, but we operate with a local touch. Remember that 75% within region, it really works. We have very high razor blade retention in our razor to sell razor blade model, our aftermarket revenue is as high as 65% of the total company model. And we have best-in-class operations, which are clearly a differentiator when taking care of our customers. As we redesigned the corporation, I just a moment, to touch back on what that really means to clarify everything for you. On the top, we show a prior in current Donaldson. Looking at the table below, our mobile solutions really is represented by largely what was our engine business of the past. Our industrial segment contains now the aerospace and defense business, which was prior in the Mobile Solutions business, airplanes don't run on diesel engines. So we put it in a home where it's actually more appropriate to stand alone and not be considered to be the diesel engine side that goes into the industrial side. The balance of our businesses are all industrial foundational portfolio activities and they go into the Industrial Filtration Solutions. And Guillermo will detail that out for you a little bit more here shortly. Lastly, we have the Life Sciences segment. So we did this, and we created this vertical orientation, moving our manufacturing plants as well as all supporting activities for those verticals into the verticals and this has allowed us to increase ownership and accountability across the corporation. We improved our end market focus, our strategic investment abilities. In short, if I summarize what the biggest opportunity or the biggest benefit of coming out of this redesign is our company is just faster. We're faster to the end markets. We're faster to take care of our customers and we like to actually do an excellent job for the customers quickly. So when we step back then and look at our addressable markets, this overall redesign has expanded our addressable markets by $12 billion. We now have mobile solutions at $14 billion Industrial Solutions at $15 billion and Life Sciences at $21 billion. We'll use the strengths that we currently have in each of those segments, for example, in our Mobile Solutions segment, our media, our filter performance to really answer the call for air hydraulic and fuel applications but we'll also take our leading position in Global Mining Air. We'll parlay that Rich will tell you about our opportunities where we expect to continue to grow market share within that growing business space. In Industrial, Game will complete the picture for you of how we have world-leading dust collection misted fuel. And now we'll take the aftermarket. We'll connect the first-fit product. We'll add the service. We'll complete the entire customer experience and we'll have a really strong linkage to all of the customers across our industrial space. Andy will talk to you later today about how we take the cast and all membrane, especially the PTFE membrane that is so vital in our data storage and microelectronic sectors and how we're parlaying that in addition to acquiring companies to go deeper into the life sciences space, we're really excited about our opportunities and the momentum that we have there. All in all, with this redesign, we're better positioned as a company to address the portfolio of opportunities that the world is putting forth. In mobile solutions, we're going to use our technologies to improve efficiencies and fuel economies in all the end markets. That includes in alternative fuels. And Rich will give you better examples on the alternative fuels opportunities in Donaldson, which happened to be very strong yet this morning. In the Industrial Solutions portion, -- we will continue to get deeper with our customers are explained as our model in order to be able to meet those challenges. And within Life Sciences, there is clearly an increasing need of cell and gene therapy as well as membrane applications for disease treatment and cures and Donaldson has the technology to be able to answer that call. Andy will give you a better look at that a little later this morning. But we're also happy to be able to play a role in the world's path to 0 emissions. In fact, as the world continues down to the 0 emissions path, Donaldson's technology play very well. Within the next generation of diesel engines, should they go into hydrogen-based combustion or any type of alternative fuel there, our technologies, we're already the leader in air and liquid. And actually, if you take the liquid and the gas challenge, it's the same. You got to get rid of water and you got to get rid of particulate. From a filtration standpoint of view, all of us filtration geeks, we just shrug it off and say, we know how to do this work. Let's go win. Hydrogen fuel cell is terrific, and Rich will explain a little bit later. That actually opens up really strong possibilities for Donaldson Company because the gas in the hydrogen fuel cell has to be clean even more than the air in a combustion engine. It has to be a pristine gas and he'll explain further a little later. And in batteries, the battery event opportunity where you have to keep the pressure regulated within batteries really, therefore, allowing us to release this new product of the battery event -- the dual event gives us terrific opportunities. On brake in the back of the room, you have an example on the roundtable there of a hydrogen fuel cell filter, but you also have a mockup. It's about clock size of the dual battery event. And then next to it, you have the actual size of that battery event. And when you look at that battery then, think about how many battery cells are in a car and the opportunity for Donaldson Company per vehicle platform. Andy will talk further about that later today. So our strategic priorities for growth are -- we're going to extend into underrepresented markets, extend our market access across all 3 segments. We're going to continue to invent cool things and continue to have leadership position of technologies and solutions. And we're going to buy companies. We're going to have organic and inorganic as important portions of our strategy. Going a bit deeper into the acquisitions portion of our strategy. When you look at this, this is the way that we embrace how we're going after our acquisition pieces. First, clearly, we would like to buy companies in the life sciences space. Also, we would like to buy companies that will help strengthen our core filtration capabilities. Michael is going to show you a lot of core capabilities that we're very proud of, but we also know there's more. We can either invent it organically or we can buy it. So we keep our ear to the marketplaces. We have an opportunity to buy it, strengthen the corporation. We will. Those are the 2 types of acquisitions that we primarily cover. So if you just take life sciences here on the slide, we buy established life sciences companies. A great example of this is Matteo joined the company and Solaris, a fantastic company we're really happy to have him. And we're now looking to use the power of Matteo skill sets and his team skill sets and Donaldson's balance sheet in order to be able to move Solaris forward. It's a lot of fun when you actually talk to customers about growing alternative proteins. Then emerging life sciences companies, Purilogics with Jin and Isolere Bio with Kelli. We look to use the power of Donaldson's balance sheet in these pre-revenue companies. Scott will later show you a mapping of how we're looking at the life sciences pieces and try to explain why this all comes together for you. It will be as clear to you as it is to us, hopefully, at that period of time. But we're going to -- we believe buying these 2 companies and having their whole teams joined donate company, we believe 1 plus 1 equals 3 in both opportunities. And they bring new end markets to Donaldson Company. Third, we look to grow and buy core filtration type of corporations. We then look to integrate all of those types of acquisitions, clearly build them to scale and grow overall Donaldson Company. Which leads me to the slide that you've all been focused on as a result of the press release as a result of this morning. In 2026, our target is to be $4 billion as a corporation. That is -- that represents roughly a 6% compounded average growth rate. We're going to expand our operating margin over 100 basis points over the next 3 years. And our -- at midpoint, our operating margin will be 16%. Over that cycle, our incremental margin will be 20-plus percent. These strong numbers that we're very proud of at Donaldson Company, and we don't put them forward lightly. We've put them forward having very detailed plans and our segment leaders will be showing you those plans here yet this morning. So I want to leave you with the following takeaways. We are the leader in technology filtration. We are just really at the end of it all, a bunch of filtration geeks that love what we do. We have best-in-class technology. Our technology enables a more greener, modern economy. Our strategic growth plan is balanced and achievable. And we're progressing toward life sciences market leadership. With that, I'd like to introduce you to Ashley Merrill our Director of ESG and sustainability. Ashley?

Thanks, Tod. Good morning, everyone. As Tod mentioned, I'm Ashley Merrill, and I lead our ESG and sustainability efforts here at Donaldson. Before I get started, I just want to give a little bit of background on myself. I've been at Donaldson a little over 4 years now and almost 2 years in this current role. Prior to Donaldson, I've had different cross-functional leadership roles, including finance, accounting and strategy, which have been extremely beneficial in the ESG world. So as you listen to my presentation, I have a few key messages for you. One is, I'll start by introducing our new sustainability strategy that we're already executing on. And it's grounded by our company purpose advancing filtration for a cleaner world. Second, as part of this strategy, we're establishing 2030 targets that are specific and measurable. Third, we are creating sustainable outcomes and long-term value for our holders through this strategy, through our products and our practices, and I'll provide some examples of how we're doing this. And lastly, the key to executing our strategy is integrating sustainability into everything we do at Donaldson. I'll also provide some examples of how we're doing that. So I'd like to start with strategy and by introducing our new sustainability strategy, filtration for a thriving future. As I said, this strategy is grounded by our company purpose, advancing filtration for a cleaner world. And it's not a stand-alone initiative or a new direction for us, but rather it builds upon our existing company principles that Tod mentioned. These are, again, act with integrity, engage and empower employees, deliver for our customers, cultivate innovation, operate safely and sustainably and enrich our communities. I'd like to think of these as the how we interact with each other and how we interact with our stakeholders. This sustainability strategy is really how we prioritize the choices we can make to deliver value to all of our stakeholders. It's through our products and our practices that we can have a positive impact today and create a thriving future for tomorrow for people and the planet. This strategy is a framework for how we enable sustainable outcomes for our customers, for our employees and for society. Along with this strategy, and today, we're rolling out and announcing 30 strategic sustainability ambitions. Before I walk through these, I just want to level set on some terms on this slide. First, again, our principles are the how we work together and how we work with our stakeholders. Our aspiration are what we ultimately trend. So they're aspirational and broad, whereas our 2030 ambition are specific and measurable targets. These ambition hold us accountable to those principles while also putting us on a path to achieve our aspirations. So now I'll walk through each. The first one, Donaldson is committed to helping do our part to mitigate climate change. To do this, we're targeting an absolute reduction in our Scope 1 and 2 greenhouse gas emissions by 42% by the end of 2030. This goal is science-based and also aligns to a 1.5-degree global warming scenario. I want to emphasize, and on the next slide, I'll share an example that these aren't just targets but we actually have detailed action plans and road map to achieve these targets. I'm also extremely proud of the many individuals globally who are working on these initiatives daily. A good example of this is our environmental health and safety teams who have an EHS framework that help provide safe and healthy workplaces for all of our employees. Our 2030 safety ambition is to have year-over-year reductions in life-changing events, and we strive to have consistently had 0 life-changing events. And at Donaldson, we strongly believe that having a richly diverse and inclusive culture drives innovation and helps us deliver for our customers. We want to advance opportunity and continue having equity in our workplace through our recruiting, our retaining all of our policies and our procedures. To do this, -- and to further -- our commitment, we aim to increase the number of women in global leadership position to 35% by the end of 2030. This represents an increase of 15% and percentage points from where we are today. We also strive to improve our racial and SNC representation in global positions and also leadership position. And lastly, enriching our communities is a huge part of our culture here at Donaldson. Our employees give their time, their talent and their resources to many different organizations throughout our communities. Our Donaldson Foundation has a focus on education and to further improve or further commit to this focus, we aim to increase our charitable giving through our Donaldson Foundation by 25% every 4 years, giving at least $13.5 million from now until the end of fiscal 2030. So again, these ambitions are specific and measurable, and they align with our company purpose and our company principles. To learn more about our sustainability efforts -- our sustainability report, which all of you here today have a copy with you, has been published on our website today, along with our first-ever task force and climate-related financial disclosures, or TCF report. So like I mentioned, these targets not only our targets, but we have detailed execution plans to go along with these to achieve them. Our approach in setting these ambitions was first to think about all of our different sustainability efforts and prioritize them, think about what our aspirations are and then set targets with detailed execution plans. As an example, here's our greenhouse gas road map. One thing to note is we're not just starting our greenhouse gas reduction journey. In 2019, we set a near-term target to reduce our greenhouse gas emissions intensity by 5% by the end of 2022. I'm proud to report that we exceeded this target and achieved an 18% reduction in our intensity measure, which equated to an absolute 8,000 metric tons of carbon. We were able to achieve this through execution of energy efficiency projects at our plants globally while also implementing solar arrays at certain sites. As we shift from our short -- our near-term target to our long-term 2030 target, we'll use what we've learned in the past couple of years to achieve that target. We'll continue executing energy efficiency projects at our plants. We'll also keep evaluating on-site solar where it makes financial sense. And we'll also increase our renewable electricity purchasing. Right now, we're investigating a power purchase agreement in the United States, and we're partnering to do this with one of our strategic customers. So as you can see, this isn't just a target or we didn't just set a target and hope to achieve it, but we put together a global road map to achieve this target. Sorry about that. So a huge part -- a large part of executing on our 2030 ambition is to make sure we're integrating sustainability into everything we do at Donaldson, into our processes, into our culture and ultimately into our solutions. A good example of this is our product sustainability impact process. This process is used by our design engineers to integrate sustainability into the thought process of designing our filter our solutions. This process uses life cycle thinking, so while designing a filter thinking about the life cycle of that filter from the time we're purchasing raw materials all the way to the grave or end of life of a filter. A good example of this was a team redesigned a team of Donaldson engineers redesigned an engine filter for one of our large mobile solutions customers. The team was able to identify 3 key product design decisions that had sustainability benefits. One, they chose a different plastic that was less carbon intensive to use. They use less parts with the new filter, which then also simplified the manufacturing process. On the right-hand side is the spider chart, -- and the dark blue line represents the impact, the sustainability impact and cost impact of the old filter, whereas the light blue line represents the impact of the new filter. As you can see, this team was able to reduce the water consumption and the energy consumption in manufacturing this filter, the new filter which equated to a 14% reduction in greenhouse gas emissions and a 33% reduction in water consumption. And not only was this team able to reduce the resource input for the new filter, they were also able to increase the functionality of the filter for the customer while also lowering the manufacturing cost to produce the filter. So this process is currently being rolled out globally. And helps drive holistic product improvements for our customers. So I provided an example of how we're integrating sustainability into our processes and our solutions. I'd also like to provide an example of how we're integrating it into our operational excellence and growth as a business. So Donaldson uses lean manufacturing techniques, and we also consider our environmental footprint when designing new facilities. So in 2021, we announced a plant expansion in Leon, Mexico, to help meet customer demand -- increased customer demand. And when we were designing this facility, we considered cutting-edge sustainability features, things like LED lighting with sensors, a state-of-the-art high-efficiency compressed air system. All of which help reduce our impact on the environment, but also help us achieve our 2030 ambition while also reducing the ongoing cost of the plant. And now that I've provided some examples of how we're integrating sustainability into our processes and our growth as a business, I'd like to just give a couple of examples of how we're enabling sustainable outcomes for our customers. As you'll see through many of the presentations today, is Donaldson offers many different products and solutions for an array of applications and customers and industries. I'm just going to provide 2 examples of how our products drive value and also enable sustainable outcomes for our customers. On the left-hand side, our alternative power solutions, which include proton exchange membranes, battery pack bent, Tod already mentioned those. And fuel cell air intake filters that Todd also mentioned. These products are already being sold to equipment manufacturers for 0 emissions vehicles. So these products support our customers' transition to alternative powertrain technologies and also support a transition to a low-carbon economy. On the right-hand side is a picture of one of our Solaris bioreactors. These bioreactors are being sold to alternative protein producers, and these customers are providing an alternative to traditional meat proteins for a growing population and also as an alternative to those meat proteins are helping reduce greenhouse gas emissions, methane specifically. So again, as you'll see through the presentations today, Donaldson is cultivating innovation and delivering sustainable outcomes for our customers. So key takeaways that I want -- hopefully, you heard throughout my presentation, is that we are already enabling our sustainability strategy that is grounded by our company purpose, advancing filtration for a cleaner world. And with that strategy, we're going to hold ourselves accountable through our 2030 measurable targets, and we are creating long-term value for all of our stakeholders through our products and our practices. And lastly, this strategy works because we're integrating sustainability into everything we do at Donaldson. I'm really proud of the journey that we've already been on and I'm confident that we'll continue driving value for our company for a long time to come. With that, I'll turn it over to Michael Wynblatt, our Chief Technology Officer.

Thanks, Ashley. How is the microphone? Can you hear me well? Great. Good morning. I'm Michael Wynblatt, Donaldson's Chief Technology Officer. Donaldson has a strategy of technology leadership. That's exactly why I joined the company 5 years ago. There's lots of different ways that a company can compete. But as a techy guy, you want to be at a company where the plan is to have superior products through innovation. So I've been here 5 years. That's the plan. I've been enjoying myself so far. But it's getting even more exciting now as we're entering new markets, and we have a chance to apply our technologies to problems that nobody has ever solved before. Key messages I'm going to try to convey today, they all touch on the theme that our technology leadership strategy is working because filtration and the purification of fluid is really crucial in a lot of applications, high-performance matters and the problems can be quite complex and challenging. But Donaldson has core capabilities in custom micro materials and custom chemistries that are able to solve many of the toughest customer problems. They've been working for us in our existing markets, but they're also work in any market where purification is important, like the Life Sciences. You're going to hear how our filters sit in a key location to use sensors and analytics to provide important intelligence back to the customer. And I hope you'll conclude that as our technology leadership strategy has worked well in the past, it continues to deliver differentiated solutions, and it's leading us to even bigger opportunities in the future. So why is technology so important in filtration? Well, as an example of the difficulty of purifying fluids, I'm going to use one of our traditional markets, which is diesel fuel filtration. And we'll talk later about how the same issues apply in lots of other markets. Our filters sit upstream from fuel injectors because of improving emissions regulations, they've gotten very sensitive and expensive. If you want to repair a single fuel injector on a truck engine, it costs more than $1,000. In fact, the global market for fuel injector repair is more than $4 billion a year. So it's a big problem. Our filters sit upstream of the injector. And in order to protect the injector, we have to take care of the containments. Well the first containment we got to deal with our particulates. This could be dust in the fuel or it could be shavings off the fuel pump. You can capture these particles using a sieve but the question is how big should you make your sieve, the particles can vary by a factor of 100 in size or even more. If you size for the largest particles, then the small ones will go right through. But if you size your sieve for the smallest particles, you're going to introduce resistance to the flow of the fuel. So your fuel pump has to work harder, it's an energy drag on the system. So you're going to have to design that sieve pretty carefully, but that's just the beginning of your problems because diesel fuel also has water in it and water will flow right through a sieve. And it will mess up your injectors just as badly as the particulate as well. And then the chemistry of diesel fuel is really complicated. There can be varying amounts of biodiesel. There's all kinds of performance additives that they add in there. They're actually microorganisms. They grow in diesel fuel. And by the time all this stuff has gone through a complex distribution system, and it's been through temperature extremes and they've interacted with each other. It gets to our filter and forms this kind of unique sludge. This could be unique from truck to truck or even from month to month. So our customer needs us to remove the particulates, remove the water, remove the microorganisms, but not remove the additives, not interest too much resistance to the flow. And even in the face of all the sludge, not clog up for 6 to 12 months. So how can we do that? Well, fortunately, that's what we're good at. For more than 100 years, Donaldson is building core capabilities in custom micro materials and custom chemistries. First of all, we can physically separate contaminants from a fluid by designing micro structures that have the right properties, for example, to make one of those sieves. So we use wet-laid media, which is our traditional filtration paper, that can be made with cellulose or synthetic fibers, also glass fibers. We have multiple technologies in-house for making nanofibers just 30 nanometers in with, they can be even smaller than that. And we have multiple technologies in-house, we're making expanded membranes like our PTFE membranes. And recently, we developed the capability to design and manufacture cast membranes. They're great for removing, for example, bacteria from fluids, and we're about to go to field trials with our first products made with our own cast membranes. Now we can apply any of these technologies to any application. Oftentimes, we have to apply 2 or more. Our competitors can't always do that because they don't have the breadth of expertise for the spectrum of different technologies. Now that makes a great fit, but sieve is only half the battle. Remember, I mentioned the water. So we also need to be able to chemically separate using absorption, adsorption or other kind of chemical bindings to separate from the bad. A great example of this is our carbon web technology. It can absorb volatile organic compounds, ozone, CO2. We use that in a lot of our products. Our newly acquired Purexa and Iso tag technologies use proprietary chemistries to capture very specific organic molecules. These were conceived for use in bioproduction, but they can apply in many applications of organic separation. And then finally, we have our water coalescing technology, which is, in fact, how we remove water from diesel fuel in a product we call Synteq DRY. To solve a problem like diesel fuel filtration, you need to apply the most appropriate micro material or maybe more than one, and the most appropriate chemistry or maybe more than one to make a comprehensive solution. Synteq DRY is a great example of that. It's the only product on the market that can remove 99% of water when it's clean and new. And even after months of exposure to that sludge, it can still remove about 50% of the water at end of life and all the while removing particulates and meeting those other criteria that I mentioned. It's only because of our core abilities and the breadth of technologies that we can go to that we can solve complex problems like that. Now we've been working on those capabilities for decades. But there's been an opportunity recently to add a new capability because the price performance curve of sensors and microprocessors has been improving, in a lot of industries, people have been able to make connected intelligent products. What they call the Internet of Things, right? Well, intelligent products are even more important in the filtration industry because our filters sit in a unique location that in the working fluids they're able not only to purify those fluids, but they can learn about the operation of the entire system. I'll give you an example of that with our oil filters. So we put a sensor on our oil filter so that it can measure the remaining useful life of the filter. That's a great value proposition. The customer knows when they're going to have to change the filter, so they can optimize their maintenance cycle, they can reduce their total cost of ownership. Good value proposition. But we can go a step further because we're in that oil, we can actually measure how the oil is degrading. We can tell the customer how much longer their oil is going to last or when they have to change it. Now that's an entirely new value proposition for Donaldson. And then we can go even a step further we can identify particular contaminants within the oil. For example, we're able to identify coolant in the oil. Well, why would you have cooling in your oil only if you have a calling leak. So now we're able to alert the customer if they have a coolant leak. So because our filters sit in those key working fluids, they can gain a perspective about the customer's overall operation. We've been investing in sensor technologies in data science and modeling capabilities so that we can offer these new value propositions to our customers. While we've been investing, in fact, in all our capabilities. We now have over 1,300 scientists and engineers. They are the ones who did all the good work that I get to tell you about today, and I know they're watching on the webcast. So thank you to everybody. And if you stay for the tour, you'll get to see a slice of our more than 160,000 square feet of laboratory space that the scientists have to practice their craft. We even have full-scale pilot production capabilities where the scientists can scale up their inventions. And all of this investment, as Tod said, has led to over 27,000 active patents. And we're not done yet. We've been increasing our investment in R&D over the last 6 years at more than 6% average growth per year. We're making these investments because it's working our revenues are increasing, we're consistently getting over 15% return on investment. And we're consistently able to use these capabilities to enter new markets like the ones that I'm showing there. Our core capabilities are preparing us for the electrification of heavy-duty vehicles by allowing us to create new products appropriate for fuel cell and battery electric vehicles. Fuel cells offer a great opportunity for Donaldson's existing capabilities that differentiates us. Starting right in the middle with the proton exchange membrane typically, it's the heart of the fuel cell, right? It's usually made of Nafion on a PTFE substrate. We've been manufacturing that PTFE substrate on behalf of fuel cell makers for many years. In fact, we're on our sixth generation of fuel cell membrane product as we optimize its performance. Fuel cells use hydrogen as a fuel. And just like diesel fuel, hydrogen works better when it's been purified. We've identified opportunities both in the distribution infrastructure and on the fuel cell vehicle for hydrogen filtration, and we're working on both. And just like a diesel engine, a fuel cell has an air intake. And we've been providing air intake solutions for fuel cells for many years. We're a leading provider. It's really important in fuel cells because they are particularly susceptible to contamination even a few parts per million of a chemical like sulfur dioxide could permanently poison your fuel cell. So we're working with our proprietary micro materials, next-generation chemistries so that our next-generation air intake products are going to leapfrog over the state-of-the-art in the market in terms of performance. Now on the battery electric world, there are a lot of different new battery technologies. One of the most promising is called lithium-air. And you may not know, but lithium-air batteries require an air intake. Just like a fuel cell, they are very susceptible to contamination. So we've got a project to make a custom air intake system or air cleaner for a lithium-air battery. Both fuel cells and batteries require venting so that during normal operation, they can breathe. But in emergency conditions, they can burst and release pressure. Because of our expertise in PTFE, we've already been able to launch burst vent products, both for fuel cells and for batteries. And finally, there's an opportunity for us to actually improve the performance of the battery itself. It turns out that the performance of a battery is significantly impacted by the size and consistency of the particles in the cathode. It's what they call the cathode active material. We've come up with a way to use our nanofiber technology to regulate the size and consistency of the cathode particles. We think it will increase both the battery capacity and its lifetime. While the global market for cathode active material is pretty big, so -- and it's growing fast. So we're pretty excited about this technology. As the world changes, Donaldson's core capabilities remain relevant because as technologies get more sophisticated, it often comes with a parallel requirement for increased purification. That's true in our existing markets, and it's true in our new markets like bioproduction. That's the production of biologic elements like cells, proteins, DNA typically for biopharmaceuticals, but increasingly for all kinds of applications like cultured food production. Our core Donaldson products play well here. We have filters that can sterilize water and air, they sell well in this market. But it's our new technologies that we're really excited about the opportunities for. Our new acquisitions Purilogics and Isolere Bio have proprietary chemistries that are disruptive for the $7 billion process chromatography market. You're going to hear more about that later from my colleague, Andrew Dahlgren. Those same process chromatography columns, they use a lot of solvent. And the FDA requires that one common solvent be 99% pure. But as they use it, it tends to pick up water. That's a problem because as the water and the solvent mix, their boiling points get closer together with what scientists call an azeotrope. And it makes them very hard to separate. Then the second problem is that the contaminant is hazardous. So when it gets -- excuse me, the solvent is hazardous. So when it gets contaminated, the customer has to pay someone to haul it away. Well, remember, I told you we're good at removing water from things? We've developed a technology for removing the water from the solvent, return it to 99% or better purity so that the customer can reuse the solvent in their chromatography column. That's going to save them money twice. They don't have to buy as much solvent and they don't have to pay someone to haul it away. It's $100,000 savings per chromatography column per year and a $1.6 billion market for us. And there's a parallel application to that upstream at the bioreactor in cultured food production. The feedstock that they use tends to be pretty expensive, and it gets contaminated by cellular waste, things like lactic acid, ammonia, cell debris. We're working on technology to remove the cell waste from the feedstock to clean up the feedstock so that they can continue to use the same feedstock in their cultured food production. It's funny when we talk to the customers about that, that seems like a miracle. But to us, it's just another purification problem. In the bioreactor, most of the processes today are what they call a fed batch, which is basically a batch process, but they keep adding nutrients and other ingredients to it. Now what they really like, is a continuous process where they can pull out the good cells, add nutrients, pull out the waste in the kind of a continuous cycle. They call that a perfusion system. Well, one of the roadblocks to a perfusion system is the filtration. The filters tend to get clogged up with cells and cell debris and so they're constantly having to change the filters. So we've developed a microfluidics solution that separates things by buoyancy. It turns out to be just the right thing for separating cells from fluid and other debris. We think we'll be able to continuously pull off the good cells from a bioreactor and be a key enabling technology of perfusion systems in the future. Donaldson continues to acquire companies in the bioproduction space. It's adding to our technology toolbox and it's helping us to build domain knowledge about the bioproduction applications. But in the end, our core technologies of custom micro materials and custom chemistries are relevant in any application where purification is important. Now just like we can move horizontally into new markets we can also move vertically with our technology, for example, in the launch of our Industrial Services business. Intelligent filtration powers our iCue connected dust and mist collectors. We offer new-to-the-world capabilities like post-valve health monitoring, we can tell the customer when their pulse valve is about to fail. And we offer dramatically improved technologies like our Bin Level Sensor. Our competitors' sensors tend to get confused in the incredibly dirty environment that is a dust collector bin. Our sensor, which works on millimeter wave technology and software analytics can work in the dirtiest environments. iCue can even help you fill in some of your compliance paperwork for EHS issues. We've also recently launched a technology that can simulate the flow of air and contaminant through a whole factory. So our sales folks can place their fume and dust collectors optimally so that the customer gets the maximum impact for a given investment. Now our plan is to combine these 2 technologies, the real-time data from iCue and the simulation of contaminant flow to make a kind of a Digital Twin of the plant. Our service professionals in the future will be able to use the Digital Twin to monitor changes in the plant, including real-time events, see -- predict what's going to happen with the contaminant and then offer the solution that has the optimal result based on the simulation. We'll be able to provide the most cost-effective service because our Digital Twin will allow us to have the best understanding of what's going on in the plan. And choose the solutions which have the most optimal results. So I've given you lots of examples where purification is really important in the applications and high performance matters. And we've seen that the problems could be quite challenging because of the complexity of the contaminants. But I've also given you a lot of examples where Donaldson's core capabilities, custom micro materials and custom chemistries are able to solve tough customer problems. I've shown you that our filters sit in a key place to use sensors and analytics to provide valuable intelligence to the customer. Our technology leadership strategy has been working, revenue is increasing, and we're getting consistent return on investment. But we're really focused forward now as our core capabilities are leading us to even bigger opportunities in the future in new markets. Thank you for your time. And now I think we're going to go through a Q&A session.

Great. Thank you, Michael. So yes, if anybody has a question, just raise your hand. We'll come around with some mics. And if you could just say your name and what firm. Thank you.

Dan Rizzo from Jefferies. So just to kind of drill down on it, you're focusing now on larger equipment or service agreements and kind of shifting a little bit away from just the filter within the system? Or are we still focusing on the let's say, the media -- the filtration media within the equipment? Or is it at it's a larger piece of equipment that you kind of shifting towards selling now?

No, nothing really changes in the fundamental industrial-based businesses, for example. There are times we'll just sell replacement parts, for example, for some competitor system. But we're also in the systems business. We'll remain in the systems business, in our dust collection business, for example, we're #1 in the world. We expect to remain #1 in the world, okay? So nothing changes relative to the systems-based approach or our replacement-based approach. Remember, we're proprietary razors to sell razor blades. Sometimes it looks different in, say, Rich's business, then it does in Guillermo's business because Guillermo might be a larger system in all steel, but then Rich might just be an intake system of all plastic. It's still the same concept, and it's still the same concept than in bioreactors, et cetera, to be able to get into the replacement parts and improve our performance for our customers.

Thanks, it's Nathan Jones, Stifel. Tod, I'd like to talk a bit more about the strategic [ all re ] design that you guys have put in place to talk to Scott a little bit about it. But can you talk about the rationale behind it, what you hope to achieve out of it how? It changes capital allocation within the business? Just any and as much color as you can give us on what changed and what you think it enables for Donaldson?

What really changed for us is we were a matrix-based organization geographic previously. So we would have verticals at our 2 segments, but then we would have essentially miniature Donaldson across 4 different geographies: Europe, Middle East and Africa, Asia Pacific, et cetera. And so consequently, we would have that collaboration necessary in a matrix-based environment slowed us down we're fantastic for the company's history till we got to about $2 billion. You hit $2 billion, you start to have more people involved, gets a little bit slower. And so what we decided in order to be able to speed up the overall corporation and our reaction to the customers and the market-based needs is we need to go vertical. That allowed us then to laser focus on where our opportunities are and then make more precise strategic investments in order to press the accelerator where we possibly can. Frankly, it simplifies the overall operations of the corporation. And Scott and I used to do a tour every year for the last 5 years where we literally go around the world and we budget the company because we hate peanut buttering, right? But it took something like that in the previous organization to be able to make sure we were properly allocating our investments and our best opportunities. It's not like that anymore, okay? What it is, is, hey, segment leader, you are the company this and you know the company this. Let's talk about the strategy and we'll give you a bucket of money because now we get to look across our better -- our opportunities more readily. And so it's really exciting time, and you can feel the energy across the corporation as you really travel the world and interact with the people. We're really excited about it.

And the Life Sciences space is about $21 billion, you guys are going to be like 1% of that this year. Is that truly what you consider to be your addressable market for Life Sciences? Or is it some subsegment of that? And where do you envision Donaldson's share in that long-term?

Chromatography and biologics. We're going to be #1. Long-term, we're going to be #1, okay? But it's going to take a while. We'll continue to do it through organic invention and inorganic. We've got a great start. Really happy with the start, and we'll continue to invest in that and move it forward. So Yes, that's really our addressable market. Yes, that's exactly where we're concentrating. And yes, we have an opportunity to win because of what we have in our laboratories and our balance sheet.

Bryan Blair, Oppenheimer. Michael, you're walking through the kind of natural value proposition of iCue and the facility modeling tool. What's the current scale of the revenue stream or combined revenue stream? And how does that factor into -- on a go-forward basis, the expanded industrial TAM?

I think Guillermo is actually going to talk about that later. Is that fair? Yes. So we'll get to that in the afternoon -- late morning.

Okay. A quick follow-up, more of a clarification point. Todd, you mentioned 50% custom solutions. Exactly how is that defined? We think in terms of your proprietary product offerings, custom is somewhat new in terms of the terminology for Donaldson .

Yes. So Rich is going to tell you about the proprietary based offerings, they are more like 30% within that particular model. But what we want to point out to you is 50% of our offerings to the customers across that $3.3 billion are specific to a customer needs. It may not always be proprietary, but because we have to shape it to what the customer wants, it almost becomes proprietary to be patent protected just simply because what we brought to the table and the applications engineering experience, et cetera. So it's really intended that number to show the power of the organization and how we have deep relationships with our customer because we solve real tough things.

Rob Mason with Baird. I wanted to go back to the R&D conversation. It looked like you showed R&D growing at just over 6% CAGR over the 6-year period. Is that similar growth rate? What is embedded in the next 3 years? Or if you could just speak to how you're thinking about R&D growth. At one point, there was the expectation it would scale up to 3% to 4%. And just with respect to that target, maybe what's embedded in the plan? And then secondarily, speak to how ownership of R&D is now being handled given that you've got the segment leaders and you also try to get leverage with R&D across the organization. So just speak to that.

3% to 4%. So we put 3% to 4% out there and a lot of things happen between here and there, the pandemic, et cetera. What that number was really intended to say is, look, we're going to be serious about this. and we are not going to choke off investment in R&D and Michael's organization. Today, we start our budgeting cycle with how much money does Michael need. We budget him. And then we decide, okay, what's left for the rest. We're going to continue to do that throughout that cycle because we're a technology-led filtration company, and we're going to stay #1. We're going to continue to invent cool things as a corporation, and we're going to be up here 3 years from now and tell you exactly the same thing about how great things wire because we brought in the market. That's just the just who we are, that's the fabric of the corporation. That's how we look going forward. If you look at the budgeting price or the overall allocation within the targets that we've given you, we've baked that mindset into -- to be able to expand the operating margin to 16%, et cetera. It's all in there. We're very comfortable with that kind of a model with being supported by the targets today. We may not hit 3% Rob, but I can assure you, it's likely because the company is growing faster than we originally thought. And Michael is not going to be treated out of any investment.

Todd, can I add to that the second part of the question about how the decisions are made. It's really important in the company that we have centralized technology that can be applied across all the different applications. I gave you lots of examples where the technology that we used from 1 product and then we ended up using it someplace else. So we do have a centralized technology organization, but all of the segment leaders have product engineering and application engineering as well. there's lots of opportunity for them to customize based on what they understand about the customer needs.

Dillon Cumming from Morgan Stanley. I was wondering if you can talk about the battery element. I think in 2019, right, you were kind of highlighting that there was only an incremental opportunity in hydrogen fuel cell versus today. It feels like there's more content on the battery side in addition to the hydrogen opportunity. Can you just talk about fill in potential for lost diesel sales, what you've done to kind of grow out that part of the business and what the still is to come on that front?

Yes. So we have some opportunities clearly as alternative powers come forward. We're focusing on all 3 possible outcomes. Our belief is it will be really a combination of possible outcomes. There's not going to be one particular winner platform. And so consequently, we want to be able to have the technologies to press forward into all of those. So our battery event opportunity is a wonderful opportunity within, if automotive goes all EV around the world, it will be a multiple hundred billion-dollar business for Donaldson Company because we've got the #1 technology. As you get into hydrogen,-- that's a terrific opportunity for us because that hydrogen has to be pristine, and that's just a filtration project for us, and we're really good at absorption, adsorption and all the things that Michael actually said earlier. And so what we're going to do, Dillon a bit later, as Rich is going to give you probably a deeper look into some of that technology and how we're viewing that whole transformation taking place in alternative powers -- alternative power. And so I'm going to ask him to go deeper and really give you a more defined understanding.

[indiscernible] With the 48%. I don't want to why don't we... [indiscernible] Do you think I want to ask...

Vikram Kaura, Thrivent. When you think about from a technology perspective, what is leverageable from your core business? What's leverageable between your core business and Life Sciences?

Yes, a tremendous amount. So if you think about our expanded PTFE business, certainly leverageable. If you think about our Wet lead media, there are lots of applications where that can be part of the solution in Life Sciences. If you think about our nanofibers, there's opportunities to use the nanofibers. Our carbon web technology, absolutely relevant in Life Sciences. Even the water coalescing, there may be opportunities there as well. So just of the things I flashed on the screen, almost all of them are relevant. And then there's other things that we haven't talked about today. So it's really a technology company that happens to be focused on separation.

I'll get one in on sustainability. You said 42% reduction in absolute greenhouse gas emissions. So that's independent of the level of revenue generated by the company. It's not like greenhouse gas emissions per dollar of revenue.

That's right.

How often are you planning on reporting that as we go along so that we can benchmark you as you go along, should the improvement be ratable? And then how are you thinking about and evaluating Scope 3 emissions?

Good questions. Thank you. So we will report out our emissions on an annual basis in our sustainability report, which is similar to, hopefully, how you see it with other companies. Relative to Scope 3, as you saw on that road map, we did identify that we'll be doing a Scope 3 assessment in our road map. And that will be the first step in evaluating if we were to set a Scope 3 goal. So I think as you saw with our plans, we're very detail-oriented and want to be very thoughtful before we set a target. So our first plan is to do that assessment of which Scope 3 categories are material to us.

Other questions?

Any online? Any comments around...

Brian Drab from William Blair. Todd, you just said that the opportunity in EVs could be hundreds of billions. Can you elaborate on that? You talked about the battery vent technology for the lithium-air battery. What are the other opportunities? What's the dollar content and like aren't there other competitors there? I'm just want to flesh out the hundreds of billions of opportunity and do all batteries need....

Hundreds of millions?

I thought you said billion. That's why.

No.

Someone needs to ask about this.

Yes. So I'm pretty sure I said hundreds of millions, okay? Which is important on the battery vent opportunity because that market is just over a $1 billion market. It's like $1.2 billion to $1.5 billion, somewhere in there, likely increasing as the world goes to the EV world. We have an exceptional head start on that with really solid share. And as vehicles come online, more EV, we'll continue to see that grow. We baked that within our forecast. Andy is going to give you a little bit more insight into that specifically in those materials, but that's just the battery portion. Now you have to deal with the rest of the vent opportunities on a car. So you're talking about headlamps and all the way around, and our venting unit is really attacking that comprehensive on the automotive opportunity.

This is Anil Mittal from Mizuho. One question. The 6% CAGR over the next 3 years, does it account for the fully ramped up revenues from the newer acquisitions, which are mostly pre-revenue at this point? And what portion of that do you attribute to the newer acquisitions?

Everything that we know as we continue to look to scale those pre-revenue acquisitions, as we understand the programs that we would expect to win has been baked in. So it's all taken into account because we now consider that not acquired revenue. We consider it organic revenue since Donaldson and those companies are not partnered in order to be able to scale that forward. All that's in, and we'll look to buy more companies in order to further execute that life sciences strategy. So it's all in there.

Great. So if nobody else has any questions, we do have some via the web, but I think these will be addressed in the subsequent presentations. So we're just running 4 or 5 minutes early. If we want to just break now, I think the questions that we have teed up will be answered over the course of the next few hours. So...

Fantastic. Let's take a 10-minute break. Maybe we'll return 10 minutes. You'll know when. Okay. Thanks. [Break]

Good morning. and thank you for joining us today. My name is Rich Lewis. I am President of our Mobile Solutions business, and I'm going to share with you our vision and our strategy for this business over the coming slides. Just a little bit about my background. I've been with Donaldson for a little over 21 years. Prior to my current role, I led our global operations team for the prior 6 years. And as you might imagine, the last 3 of that were pretty interesting. So I'm really excited about the opportunities we're going to share with you. So we'll jump in. I'm going to leave you with 5 key messages. I'm going to touch on each one of these in some detail. The first one is we are the market and technology leader in a large, growing, heavy-duty mobile filtration space. Secondly, we've built a business that is resilient to the economic cycles that are common in some of our end markets. We have a proven growth model, and it's supported by strategic capabilities that we've developed over decades of leading in this market. And we understand that our customers are on the forefront of technology transformation to decarbonize their power sources. We are very optimistic about the opportunities that are going to exist in this space as well as opportunities on the backside of the diesel engine market. And I'll go into quite some detail on those points. And then finally, we're a mature market. We're a mature business. I'm highly optimistic about our ability to continue to grow, expand margins through mix and a series of business optimization initiatives. So I want to start by level setting on our business, what it is we do. So we're a large global leader filtration systems to our OEM customers. We also sell replacement parts through multiple channels all around the world to our distribution partners. We've cultivated a technology leadership position with 30% of our sales coming from proprietary products. And I think there was a question earlier about custom solutions. Our number would be probably north of 70% on the first-fit side. We also have built a natural hedge against the economic cycles with 75% of our revenues coming from replacement parts. Our global presence, our technology leadership are some of the reasons that are 450 OEM and 5,500 aftermarket customers select us as their strategic filtration partner. One other reason that is important for us is our diversified product line. We sell the most diversified product line in this space. We invest to be the technology leader in each one of these products. We leverage these investments by selling them across a wide spectrum of end markets. It's a $14 billion diesel engine market that we operate in. A little bit later. I'll talk to you about what that looks like in an alternative fuel environment. We hold key leadership positions all around the world. With that said, we still see excellent opportunities to expand our position in the market. So this slide here is really the heart of my story. This is why we win. This is really what makes us attractive to our customers. I think this is really the Donaldson DNA and Mobile Solutions. It starts with selling first fit solutions. We secure our position on our customers' vehicles with market-leading technology. We package that in engineered custom solutions that integrate seamlessly with our customers' vehicles. We're also selling brand integrity. Our product is designed to optimize and safeguard our customers' product. The second part of the model is selling replacement parts. And we do this all over the world. We have 16,000 SKUs that we distribute, manufacture around our global network to 27,000 end-user locations. This annuity of revenue and margin allows both us and our customers to take those profits and reinvest back in our businesses. It's really the combination of this business model in these strategically capable advantages that we've developed that makes Donaldson the leader in this space. So I want to walk you through a couple of case studies. This one just happens to be my favorite. This is a pretty incredible story here. And frankly, I've got 3 pictures on my office desk. I got my 2 sons and I got a picture of this filter. That's how important it is to me. So I'll walk you through this one. It's a North America truck application. We'll just leave it at that. And they brought us a problem that essentially said, "Hey, look, we want the same performance as the prior filter, but you have nowhere to put your filter. We're out of space." So we use proprietary PowerCore technology. This provides the same filtration performance as the prior traditional pleated filter in half the space. Equally important is its ability to be configured in very unique shapes. So you can see in the bottom right that really wide, flat structure sits right on top of their engine. So their engine, our filter and then the hood of the truck is layered like a sandwich. And so our ability to custom engineer that into that configuration was almost as important as our ability to shrink the space down. Now we included with this filter patented interfaces that allowed us and our channel partners to go unchallenged in this market on the replacement parts for over 10 years. You can only buy a Donaldson filter to service this air cleaner. This has led to $180 million of revenue over a 10-year period, 86% of which was replacement parts. Now this filter has recently gone out of production. The replacement part revenues will continue on for at least another decade. We've also won the follow-on program. So we're setting up the next annuity as we speak. So it's hard to top that one, but I don't want to channel my inner Steve Jobs here for a second. These are insanely cool examples as well. And the reason I say that is each case, we solved a very difficult problem using Donaldson proprietary technology. And in every one of these, we improve not only their performance but the sustainability of either our product or theirs. In the first case, we used our deaeration technology. This allowed us to shrink the hydraulic reservoir for one of our customers by over 1/3. So it's 1/3 less raw materials, fit into the space claim that they had, solve the critical problem for them. In the second case, we displaced a local China competitor for a large OE in China. We were able to extend their filter life by 3 times and we were able to optimize the air flow through the system, which led to an over 10% improvement in fuel efficiency. Again, solving problems, improving performance and sustainability. And then the final case was an emissions device. Our competitor was struggling with the missions buildup in their system. This OE came to us, asked us to solve it. We actually have a proprietary mixing technology that we use in the emissions world. We put our system onto their vehicle. It stopped the intermittent shutdowns they were seeing on their engine. And the interesting part is they took the same emissions device and they deployed it on their first hydrogen combustion engine. So this is really a good example of how solving problems opens doors for new opportunities for us. So I've talked a lot about our business, what we do and how we approach the market. I'd like to talk a little bit about the market we're in. In general, our markets are supportive of growth. Agriculture, construction, mining, trucking, they're all going to grow with population growth. Additive to that are several factors that we think will drive higher market growth rates. I'll just mention a couple. So industrialization, so we're talking about continued urbanization, which drives infrastructure. There's a growing middle class around the world, generally drives higher levels of consumption. These are good for our end markets. Also, as we move to a cleaner environment, their sustainability investments to drive cleaner grids, new hydrogen pipelines. This is good for construction, good for mining. All of these we see as tailwinds for our market. Now that leaves one big market trend, and that's electrification. And I'm going to spend quite a bit of time on that so that we can come out as aligned as possible. So if we think about electrification, there's really 3 questions that we're trying to address. One, what does that adoption curve look like? Is it going to be the same in China for a truck as it is in Europe for a combine. So how does it look across regions, across applications. The second one is what technologies are going to be required to decarbonize the environment through these power sources. And then finally, what does it mean for Donaldson? What's the impact on our business. So I'll get to the conclusions of that and how we see it here in a minute. But before I do, I'd like to just talk about some of the factors that are going to drive those answers to those questions. The bottom of the left-hand slide is the regulatory environment. So right now, there's over 190 parties that have signed up to the Paris Climate Agreement. So there's a tremendous amount of support for solving these problems. What we're paying attention to, is what are the regulatory actions that follow on. So mandates. Those are a good example of, okay, after this period of time, you have to have a 0 emissions vehicle incentives that would spur the market to change more quickly than it would do otherwise on its own. And those are also partnered up with like Carbon, Texas. Right now, our perception and our study of the market is, while each one of those, there are examples in the marketplace. We don't see it as an aggressive regulatory environment that's really going to significantly alter the pace of the market change that's going to happen anyway. So barring a more aggressive regulatory environment. We believe the other 3 factors are going to significantly drive the pace of change. Cost of ownership, how much does it cost to acquire the new vehicle, operate it. The infrastructure availability to either fuel or charge your vehicle. And then finally, there's customer perception. Is the new technology going to have the same efficacy and reliability as my old technology. So we think that all of these factors are going to be significant players in the pace of change. We've been working with our customers studying the market. We have a very comprehensive model that we've developed that we're building our business plans around. So I'll come to the conclusions on the next slide, but I'll just kind of leave you with this. The diesel market is going to continue to grow for at least the next decade. And with the new alternative power solutions, there are significant filtration opportunities, and we're partnering with our customers to develop those products. So I'm going to walk from left to right on this slide. And so we started with the diesel engine market being a $14 billion market. This is a 100 year old market. There's supply chains. There's reliability of the technology, the applications and the effectivity of it in the marketplace are all proven out. So we see derivatives of the diesel engine playing a significant role. Relying on all those things that we just mentioned, but running on lower carbon fuels. Could be hydrogen, biodiesel, compressed natural gas, all of these, we think, play a significant role. We have multiple customers on record, saying that these technologies will be either part of their portfolio or the primary part of their portfolio. So if we move over to the hydrogen fuel cell -- excuse me for one second. We talked a lot about that earlier in the presentation. For us, we see this as -- maybe just one comment on the derivatives. More or less, the addressable market will be the same with the derivative technologies as the diesel fuels. And then when we move over to the hydrogen, we see this as being additive. It has a lot of the same filtration requirements as a diesel engine, but there are examples that require higher levels of technology. Fuel cell, air intake would be one of those. Why we're excited about that is we are the leader in the air intake space around the world. We hold key leadership positions in every market around the world. We built our business off that product and technology. It has the same filtration requirements as a diesel engine. Plus, it requires chemical filtration. We're experts in chemical filtration. We've been doing it for decades in our specialty applications group. We know this really, really well. We're able to apply that science to these problems. And we believe that we will not only continue to lead in this space, but we have an opportunity to extend our position. Now the last one is battery electric, and frankly, this one is not as attractive to us. Michael spoke about a couple of opportunities. It's a good opportunity. There are plenty of filtration opportunities, but from an addressable market, it's not as robust as the other two. Michael spoke about 2 potential technologies that, if those were to materialize, those are game changers. And that would change our whole math on this model, but we'll have to see how those unfold over the coming years. So I'd like to step back and just tell you what does this mean for us. So for us, the diesel engine market is going to grow for the next 10 years, at least. And we're going to grow as well. Secondly, there are a tremendous amount of opportunities with these new technologies. We are positioning ourselves through investments and partnerships with our customers to be in position to lead in this space in the coming years. And then finally, when we talk about the diesel engine market, it's a $14 billion market. Half of that is served by what I would call niche filtration players. Now don't get me wrong: These are good companies, but strategically they operate in one region. They have one product line or they're overly exposed to the automotive space. We believe that our technology, global presence and stability as a supplier is going to be very attractive. We see an opportunity to consolidate share post peak diesel engine production. So as we look out to the F '26 guidance that we're giving, the alternative power. We're really just setting ourselves up for the long term there. It's not going to play a meaningful role in the numbers that I'm going to share here in a minute. What we're driving for the next 3 years is really 2 things. One, how do we improve profitability through operational initiatives? And then how do we continue to profitably grow? On the operational side, it's the continuation of driving the Donaldson Production System through all of our plants, all of our distribution centers for additional productivity gains. It's also the continuation of our footprint optimization efforts that we've been working on for the past few years. The last piece of that is commercial execution. How do we structure our contracts? How do we manage our long product life cycles so that, that price-cost responsiveness is as tight as it can be? We feel really strong about the 3 levers that we're going to be pulling to enable profitability. On the growth side, China and India remain very attractive markets to us, especially as the emission regulations grow to meet global standards. We also see areas of underrepresentation in some of our product lines. Michael spent a fair bit of time talking about our fuel filtration. We have the best technology in the world, bar none. We're winning business with customers that, frankly, we're tied in with our competitors for 20 years based on that technology. Our market share doesn't quite represent the technology we have. We see that as a nice growth opportunity. And then finally, continuing to strengthen our aftermarket. And I want to spend a little bit more time on that. Strengthening our aftermarket is really important because it does 2 things. It's a significant growth lever. It's also an ability to expand our margins because it's generally a higher-margin business. With the org redesign, we created a global organization around our aftermarket business, more autonomous, more nimble so that they can continue to drive some of the same growth initiatives that have given us success but to do it more quickly. Our aftermarket sales went from 50% of our revenues to 75% over the last 10 years. It's been a good run. We see excellent opportunity to keep going. One example is we have dedicated engineering that gets up every day to release products for applications where we're not the first-fit supplier. Their target is to improve time to market by 25%. That allows us to claim a greater portion of the market share and set the pricing dynamics by being first. Overall, we see a lot of opportunity in our aftermarket business, and it's a key player in our F '26 targets that I'm going to share with you. So we have an incredible business. I'm -- I feel very privileged to be leading this business. Our F '26 guidance on the top line is a 4% compounded annual growth rate at the midpoint. We're looking to expand our margins by 220 basis points from fiscal year '22 to a 16% margin. This comes from a combination of mix, leverage, business optimization initiatives and commercial discipline. I am very encouraged with the team that we have and our ability to deliver these results. So I'll leave you with the key takeaways for today. We are the technology leader in a growing market. We have a proven business model with multiple sustainable advantages that have been cultivated through investment and leading in this market for decades. The opportunities that continue to grow for us are certainly there, and we feel really good about our plans to deliver those growth numbers. And then on the resiliency side, 75% of our revenues come from replacement parts. Our business is very resistant to those economic cycles that are common in some of our end markets. We're in a position to lead in alternative power as those technologies come to the market. As I mentioned, we're partnering with our customers. We feel excellent about our opportunities to solve those problems. We also see an opportunity to continue to grow in the diesel space and consolidate share on the backside of this market. And then finally, we're going to continue to grow the business, expand margins through a combination of mix and business optimization initiatives. Before I introduce the next speaker, I'd just like to give a shoutout to our 7,000 employees that get up every day. They compete. They win. They deliver for our customers in this space. None of this is possible without them. I'll be around later for questions. I look forward to hearing your thoughts. And then up next is Guillermo Briseño. He's a friend of mine, a colleague; and he's going to cover Industrial Solutions.

Thank you, Rich. Good morning to everyone. Welcome again to Donaldson Company, for those of you here in the room as well as the ones that are connected in a virtual way. Thank you for joining us today and thank you for your interest in Donaldson. My name is Guillermo Briseño. I am now responsible of the Industrial Solutions organization. A little bit of my background: I have been in the company for almost 20 years now. Before accepting this position, I used to be running our Donaldson Latin America organization for a period of years. Before doing that, I was also responsible for our Industrial business within the same region for another period of years. Before joining Donaldson 20 years ago, I used to be a Donaldson Torit distributor from our industrial air filtration business. I was on the other side of the fence. I think I understand what it feels to be a Donaldson customer, but I do understand what it means for us to deliver a great experience to our customers. I've been around industrial businesses for many years throughout my professional career. I'm very passionate about it, and that's why I'm very excited to be here today to share with you our thoughts regarding the vision and the strategy of this business going forward. With that, I would like to start by providing you with 4 key messages I would like you to take away after our conversation this morning. We will leverage our competitive advantages in order for us to drive and advance our Industrial Solutions competitive position in a large addressable market share with plenty of opportunities for us to grow. We will also enhance our customer relationships with the implementation of an innovative business model that will deploy additional connected solutions and service capabilities in order for us to gain additional market share in the aftermarket as well as to improve our customers' satisfaction doing businesses with us. We will also play a critical role with our customers' ESG and sustainability journey as we keep deploying sustainable solutions and we help our customers operate them through the design values. And that we are very well positioned to deliver a profitable growth in the long term. With the redesign of the organization, Industrial Solutions represents now roughly 27% of our company revenues and pretax profits. We have a diverse revenue base comprised of 25,000 customers, supported by 2,700 great employees across our organization with an infrastructure of 26 different facilities. With an unmatched value proposition that includes custom solutions and connected services to monitor equipment performance, we support almost every industry there is in the marketplace. Every company that faces contamination challenges because of dust, fume or mist; or have issues with their industrial gases or industrial hydraulics is a potential customer of us. With the redesign of the organization that we just completed a few weeks ago and as I was mentioning before, we play in a large addressable market, USD 15 billion. We have 6% to 7% of the addressable market. And in order for us to advance this position, with this redesign, we organized Industrial Solutions around 5 business units: industrial air filtration for dust, fume and mist collection applications for the industry in general; industrial gases. This is the consolidation of 2 businesses of ours, on-compressor and compressed air filtration [ ones ]. This is basically solving the applications at the source, the compressor; and then all the way down the stream to the point of use of the application. Industrial hydraulics. This is leveraging the Hy-Pro acquisition, the one that we completed late in fiscal year '17 here in the United States to support high-quality filtration for hydraulics and lubrication fluids in order for us to protect and improve equipment performance. Power generation, also high-quality filtration for air inlet systems for power generation turbines as well as for large industrial compressors. These 4 first businesses are going to be reported to the external community as Industrial Filtration Solutions, IFS. And then Aerospace and Defense. This one is coming to us from Mobile Solutions, our legacy engine business, basically because they are not 100% dedicated to solve diesel engine applications. We have found important opportunities within our product portfolios and technologies, engineering capabilities as well within Industrial Air Filtration and industrial hydraulics, to support the growth of this business. So within this redesign and our competitive advantages, we are clear market leaders in the segment. We have -- we are #1 in dust, fume and mist collection applications for the industry in general. We have also leadership in the development, design and qualification of high-performance, high-efficiency media for a wide variety of industrial applications into the industry. And we have what we believe is the most complete and robust product portfolio there is for the market. We complement our global value proposition with a global reach and availability. We have 17 manufacturing facilities, 6 distribution centers, 3 regional sales headquarters in order for us to support our customers in the best way that we can. We have also deployed a global sales distribution network and applications engineering capabilities in order for us to help our customers tailor made and engineer even the most complex filtration applications in the industry in general. And we are also making progress with our operational excellence mindset as we keep deploying our continuous improvement culture in order for us to deliver best-in-class, high-quality products with industry-leading levels of service. These competitive advantages positions us well to address key opportunities and secular trends. By -- with our product portfolio, we will support our customers' sustainability journey as we help them with our company purpose of advancing filtration for a cleaner world, optimizing our customers' energy utilization, reducing their total carbon footprint as they keep operating with our different solutions. Our connected and predictive solutions strategy will also help our customers reduce their total cost of maintenance and cost of ownership as they keep using our different systems. Our evolved business model will also align and integrate additional applications towards a complete connected ecosystem to support the use of automation and technology, IoT. And then we have also identified very good opportunities for us to enter within the electrification megatrend, particularly with our Industrial Air Filtration and industrial gases business units. Within these, we are clearly at the forefront of gaining additional market share with high-return areas of the industry. So in order for us to address these opportunities and as I have been mentioning before, in order for us to -- we are evolving our business model so we can further leverage our competitive strengths in order for us to enhance our razor-to-razorblade business model by creating the solutions. We do believe on creating high-quality first-fit engineered solutions in the marketplace then connecting all of those solutions in order for us to provide real-time information to our customers about the performance of all of their systems. When the time is right, we will offer them access to our one-stop-shop approach so our customers can find all of the replacement parts for Donaldson branded products as well as for other manufacturers' systems, in order for us to gain additional market share in our most profitable business segment which is the aftermarket. And then we will complement our value proposition within enhanced razor-to-razorblade business model, deploying additional service capabilities in order for us to help our customers restore their systems to normal values of operations, improve the performance of those systems and reduce total cost of ownership. What we're trying to do here is to improve our customers' lifetime value, accelerate our revenues and improve our profitability. We understand very well that, if we grow this business, we are positively leveraging the financials of the organization. With the redesign of the company, our competitive advantages and the evolution of our razor-to-razorblade business model, we have a clear growth strategy to strengthen our leadership position in the marketplace with the implementation of this new aftermarket and services organization that is basically consolidating all of our replacement parts within a single umbrella to offer our customers a one-stop-shop approach and also to improve our customers' experience doing businesses with us. Expanding our technologies and solutions offering, we will also keep deploying our systems into the market, improving our connected solutions and deploying additional service capabilities. All of these is in order for us to become the single source of filtration for the market in general at the same time that we achieve profitable growth across our 5 business units. We take good pride on the service levels and great experience that we provide to our customers, and we have been historically successful in doing so. However, there is always opportunity to do better. And we're trying to take these to the next level in order for us to drive additional growth at the same time that we support our customers' operations in a number of ways, for example, helping them reduce their total energy consumption and maintenance issues as they keep operating our systems within our expanded portfolio; enhancing our customers' digital experience once we give them access to our one-stop-shop approach through our best-in-class e-commerce application which has the best capabilities to cross-sell, cross-reference and upsell in order for us again to win additional market share in the aftermarket; and then improving our operations and forecasting capabilities to support best-in-class fill rates in order for us to have product available in the marketplace, again, improve our customers' experience doing businesses with us. Now moving to our connected solutions strategy. This is an unmatched value proposition. And this new market approach gets me really, really excited because it's going to drive additional value for both our customers and Donaldson. Historically, we have been providing connected solutions for real-time information to our industrial air filtration customers through a subscription model, but in order for us to go fast, we need this strategy to go fast. We're going to move away from the subscription model and we're going to offer this as an additional feature of our first-fit equipment. And we're going to take the opportunity to onboard other businesses. So we already have Industrial Air Filtration. We're going to onboard industrial hydraulics, industrial gases and power generation so we can offer our customers a full overview of all of their systems. When the time is right, our customer is going to be only one click away from gaining access to our e-commerce application, one-stop shop, so they can find all of the replacement parts. Our e-commerce applications may already have the aftermarket purchase orders already preloaded into their systems in order for us to become an "easier to do business with" kind of an organization. And then our customers are going to be another click away in order for them to schedule their service capabilities or services needs so we can help them restore their systems to proper values of operation and improve the performance of those systems. So this is how this new strategy is going to look like. This is an almost complete deployment of our product portfolio within a manufacturing facility. We're sampling this what it's supposed to be, a manufacturing facility. We are also sampling the deployment of a dust collector; a fume collector; mist collector; a lubrication system for a press -- for a hydraulic press, for example; or an absorption compressed air dryer within the compressor room, all of those systems connected within a complete ecosystem that will compute all of the necessary data in order for us to provide real-time information for every single individual equipment as well as to offer a 360-degree overview of the performance of all of these systems. This is very powerful. What we're trying to do here is to move from being a product-centric towards a customer-centric organization. As we keep deploying our solutions, increasing our connected solutions and service capabilities, we will be improving our supplier qualification within our different customers, enhancing and strengthening our relationships with them until we become strategic partners. By doing this, we will gain additional market share, gain profitability in our different businesses and also build very high barriers of entry [ to ] our different competitors. We have been talking to you about our connected solutions strategy. Let me show you what it means from a value standpoint for our customers. I'm showing here a couple of examples of systems that started showing some decline in their performance, causing our customers additional issues with employee safety, very complicated; additional energy consumption. We don't want that and unnecessary expenses because of maintenance issues coming from unnecessary downtimes. Our connected solutions systems detected those issues, as you can see in the graphics over there. No need for you to read the graphics, but they are showing the efficiencies in the performance of their systems. And our applications engineering team called those customers and helped them restore those systems to normal values of operation. When we did this, our customers trusted us with additional businesses, and this is exactly what we're doing. What we're trying to do with this strategy is to gain incremental market share as we gain -- or become strategic partners within our different customers. Once again with the redesign of the organization, our competitive advantages and the evolution of our razor-to-razorblade business model, we are very well positioned to deliver a profitable growth for the organization with implementation of this new aftermarket and services organization in order for us to win incremental market share in the aftermarket segment at the same time that we improve our operational capabilities with a continuous improvement mindset in order for us to leverage, positively leverage, the financials of the organization. Our objectives for fiscal year 2026 is to keep strengthening our revenues within our 2 reporting business units, Industrial Filtration Solutions and Aerospace and Defense; and also increasing our connected customers from less than 1% that we have today to a range within 5% to 10% by the end of fiscal year '26, taking our revenues from USD 1.1 billion to USD 1.2 billion, which means a 3-year CAGR of somewhere around 4% to 8%, with a pretax profit margin between 16.6% and 17.4% coming from improving our revenue mix with additional aftermarket share gains, increasing our operational efficiencies for improved gross margins at the same time that we continue with our very strong disciplined pricing strategies. So in summary, our key takeaways. And as we have been mentioning before, we will leverage our competitive advantages in order for us to sustain and advance our leadership position within Industrial Solutions. We will enhance our customer relationships with an implementation of an evolved razor-to-razorblade business model in order for us to become strategic partners and gain additional market share, playing a critical role with our customers' ESG and sustainability journey as we keep making progress with our company purpose of advancing filtration for a cleaner world at the same time that we have a clear strategy to deliver a long-term and sustainable profitable growth. With that, I would like to thank you for listening here, for being with Donaldson today. I would like now to introduce you to Andrew Dahlgren, which has another exciting and passionate story about life and sciences. Thank you very much.

Thank you, Guillermo. How's my volume, good?

Yes.

Excellent. I have a hunch that some of you might want to hear about Life Sciences. Is that correct?

[indiscernible].

All right, excellent. As Guillermo mentioned, my name is Andrew Dahlgren. I'm the president of our brand-new Life Sciences segment. And I'm really happy to be here today to tell you what we're up to. I've been with the company 29 years. I've had the opportunity to lead 8 of our global businesses. Prior to this role, I was vice president of our Asia Pacific region. And I'm not known as a super excitable guy, but I can tell you I've never been more excited, in my 29 years, about what we're working on here. And it's not just because we're shaping the future of this great company. It's because we're helping cure diseases that have ravaged human kind for centuries. We're helping develop sustainable food supplies for the planet. And we're supporting an energy transition, really exciting stuff, pretty [ weighty ] stuff. It gives us a lot of excitement about what we're doing, and I will try to pass that along. The key message that I'd like to leave you with today is that we have a huge market. And we have existing and acquired capabilities that will be very useful in solving difficult customer problems and help us gain share. We have favorable end market dynamics. That coupled with our M&A activity will drive growth for our business going forward. And our margins are higher than the rest of the company, and as we scale up our acquisitions and we grow our sales, we're going to have an increasing impact on company profitability. We have a fantastic foundation to build this business on. We have over 1,500 employees, 15 facilities, almost 7,000 existing customers. And I've talked already about the cool things we're working on to help advance humanity, but probably the most important thing that you'll want to pay attention to is in the bottom of the center of the chart. We're going to grow 3x faster than the rest of the company. And we're going to do it out of margin that's 15 points higher, big impact on the future of this company. We've got $20 billion of addressable market. And these markets are generally characterized by having high growth, high performance requirements, high quality expectations and high profit potential. We're breaking them into 2 categories here: our core Life Sciences segments that we're really focused on growing as fast as we possibly can and our digitization and electrification segments that have some of our legacy businesses that bring important capabilities to help us grow Life Sciences. And there are some great opportunities in there too. Demand drivers in the life sciences space is really around vaccine development; cell and gene therapies; alternative proteins like cell-cultured meat, plant-based meat; general increase in demand for process integrity in food and beverage markets; and an aging population that drives increasing demand for medical devices. In digitization and electrification, demand drivers are around the energy transition. We've talked a lot about that already. We have a great opportunity in this space and reshoring of semiconductors as part of the CHIPS Act in microelectronics and then continuing demand for data that will be with us forever. That drives a lot of this drive -- demand. So we bring a lot of existing and acquired core capabilities that help us win business in these segments. So we have differentiated technology. For example, we've got the best bioprocessing technology, I think, in the market with our Isolere and Purilogics acquisitions. These technologies substantially increase productivity in the bioprocessing processes. We've got deep application knowledge, ensuring process integrity when it matters the most. Our customers rely on us for that. And we've got great technology. Michael talked about a lot of that. We're able to package it up into devices that seamlessly integrate with our customers' systems and their devices. We have a broad solutions portfolio. We're a relative newcomer to life sciences, but we already have the broadest range of bioreactors in the market coming from Matteo and Solaris. And we've got Donaldson's global presence to rely on, where we can use our global network to ensure world-class service delivery, quality and reliability to our customers wherever they need it, so really wonderful capabilities to grow in this market. You're probably asking yourself how some of these businesses fit together. And it really -- the answer to that question is the capabilities that they bring to the life sciences initiative. So this is a summary of core capabilities across the top and then end markets along the left-hand side there and then where those are coming from within our portfolio. And you can see a lot of check marks in that lower part, in the digitization and electrification segments. And what that, those strengths allow us to do is we can leverage those to grow Life Sciences faster, so in a nutshell, we can grow Life Sciences a whole lot faster by having all these capabilities in one portfolio instead of having to develop them independently. Our organizational concept reflects this philosophy. We've just redesigned. What we've got now is end market-focused commercial teams as close to the customer as they can possibly get, reading what's happening in the market and feeding that back to centralized functional teams where we can leverage all those wonderful capabilities and direct them towards the best opportunities that we have. We have over 100 growth initiatives already in flight. That's going to drive growth at about a 20% CAGR to $450 million in fiscal '26. I already gave up one of my surprises for you guys, but 20% CAGR, $450 million in fiscal '26. That growth, and it's all organic, is represented by 75% growth in dollar terms in Life Sciences, so that's food and beverage, bioprocessing and medical device. And then we have another 25% coming out of digitization and electrification, with a whole lot of alternative power in there. So this is how we're going to grow, by leveraging those capabilities; and you can see the result in our growth plans. So I'm going to talk a little bit about the digitization and electrification foundation and then we'll pivot to the really exciting Life Sciences stuff. In alternative power, growth there is driven by growth in vehicle production. There's a lot of EVs being produced. They're growing 60% annually. That's creating tons of opportunity for us. Our role is to help those customers extend the range of their vehicles and then improve their reliability, especially in something like a Minnesota winter. Our products meet that need wonderfully. We've got actually really good dollar content per vehicle ranging from [ $15 ] to hundreds of dollars if it's a fuel cell. And we're winning 35% of the time in this market. In microelectronics, we see demand coming from smaller, faster chips; reshoring of manufacturing capacity. And as the chips get smaller and faster, it drives filtration needs. And our Lithoguard technology already protects about half of the world's semiconductor production, so if you do the math, that's over 1 billion semiconductors a day protected by Donaldson, a pretty significant position and something we all pretty much take for granted. In disk drive, we see long-term growth driven by cloud data. We're all storing data on the -- in the cloud. Those are all protected by Donaldson filters -- or not all of them but at least 75% of them. There's a change in the industry with new technology introduction that's driving a lot of new filtration needs, so we've had a reset over the last several months, as I'm sure you all know, but from this point forward, we see disk drive as a growth business. And as I mentioned, we protect 75% of your data in the cloud, a pretty significant and meaningful position. So these businesses aren't going to deliver the explosive growth that I'm going to tell you about with Life Sciences, but it's still pretty darn good. It's 4 points higher than the company average at 10%. And these are end markets that we really value and, like I said, can leverage capabilities in to drive Life Sciences growth, so now I'll pivot to the really exciting part. Sustainable food and improving human health are the 2 basic categories in our Life Sciences segments, and they obviously interact. Rich talked about the PowerCore filter that he's got pictured on his desk. If I was going to make a picture out of my slides here, it'd be on this one. These are really important trends that are driving pretty much everything we do. In food and beverage, the bottled water industry drives 100 million filters of consumption annually, growing 5% a year. That's a great market for our LifeTec technology, wonderful growth prospects there. In alternative protein, which is cell-based proteins and plant-based protein, it's projected that the world will need 10 billion liters of bioreactor capacity. It sounds like a lot, especially when you consider there's only 100 million liters of bioreactor capacity on the planet today for all uses. That's going to drive a ton of demand for Solaris bioreactors. Moving to biopharma. It's anticipated that there'll be over 100,000 new vaccines, cell and gene therapies in the pipeline in the next 10 years. That's going to drive all kinds of demand for the things we can do with our Purilogics and Isolere Bio acquisitions. Then in medical device, a huge market, lots of examples you could choose. We're in the hearing aid market. And there's hundreds of millions of people that could use hearing aids, that have disabling hearing loss but don't use them, so we see that driving demand for this market going forward. It's a good segment for us. So here's overview of the segments. I'm going to go in greater detail on the first three, but I'd like to make 2 points. One is our acquired capabilities are ever present here and enabling a lot of growth in those segments. The second point is alternative protein is an emerging market for us that is really, really interesting. It combines our strengths in food and beverage, which are mature and ready to rock and roll with a whole lot of customers; and then the capabilities that we're acquiring in bioprocessing, where they need bioreactors. They need fermenters. They need process expertise, so we see a lot of opportunity going forward in alternative protein. I'll spend a little more time on medical devices. So we're already a pretty significant provider of filters and vents for medical devices. We provide 60 million of such products per year. We provide 20 million hearing aid vents. So what those do is they help a hearing aid function under duress such as a rainstorm, sweat, oils, particles. You still want to be able to hear when those things are present. And within ostomy bag vent, we're the world's leading independent provider of ostomy bag vents, 40 million a year. What we're doing there is helping a cancer survivor and somebody suffering from digestive complications live a more normal life. To them it's essential. And we are working with a partner, and we're going into clinical trials this calendar year for a Class III implantable device. I can't say a lot more than that right now, but I look forward to being able to talk about that in more detail later. So we're entering that Class III medical device space. So I will pivot into our -- a little more detail on food and beverage. This is our largest, most mature market in our Life Sciences portfolio. We have a wonderful value proposition centered on process integrity. And we have a proven selling model that has worked very well in Europe and is working increasingly well in the Americas. And we're going to expand it to the Asia Pacific region, so it's really about scaling up what's already working in some pretty big markets. Driving that is our strategic accounts approach. So this market is represented by 15 very large players who control about 75% of the food and beverage activity. In the past -- let's say, 3 years ago, we would have addressed these customers more regionally or maybe at the plant level, but we've pivoted to a global strategic system where we work with their corporate headquarters, understand their needs and design a system to help them everywhere in the world. And what that does is it gives us lots of cover within their organization. When we show up at a plant anywhere on Earth, they know us. They know what we can bring and they're ready to work with us, so the result is that we've doubled sales in this category. And it's driven 30% LifeTec liquid growth, which is our flagship product line in this market. So I've mentioned already about the alternative protein market, really, really exciting. It's a multibillion-dollar market growing at 20% CAGR a year. It could be [ 40 ]. It could be [ 10 ], but it's going to be a lot. And what our customers in this space are trying to do is establish a cleaner and more sustainable food supply for the planet. Our resources simply won't support where we're going without some changes, so they need a lot of help. In a lot of cases, they're developing a brand-new process never been done before. And that's where we come in with a wide range of bioreactor and fermenter capabilities that we've picked up with Solaris, a whole lot of filtration expertise we already had and process expertise that we've acquired while working with the market or with dozens of customers. And the result of our work in this space is that we're more than -- or almost doubling our revenue in alternative proteins in our food and beverage business. That's primarily plant-based activity, but then Solaris, which we probably would have all thought was a bioprocessing play, which it definitely is -- those products are also needed and welcome in the alternative protein space. And a great example of that is our partnership with Wildtype that was announced last fall, where we're their development partner helping them scale up more cost effectively and help them satisfy their mission of providing the cleanest, most sustainable seafood on the planet. It's pointed at cell-cultured salmon right now, really exciting opportunities here. So this is the last segment that I'm going to deep dive on, but I'm going to spend a little more time here because it's new to a lot of us and something that I'm sure you're interested in. We see explosive growth in vaccine, cell and gene therapy on the horizon. And in that pipeline that you see up here is a cure for cancer, a cure for diabetes, a cure for heart disease. This is serious stuff. And our acquisitions of Solaris, Purilogics and Isolere Bio have critical capabilities that will help this happen. We are going to help this industry realize its potential. We've got game-changing technology there, so let's talk a little bit about the technology. And I'm going to start at the top of this slide. There's a lot here, so -- but the key issue is molecule size. So traditional pharmaceuticals all operate in the small molecule space. There's a whole chromatography industry built up around that really good at processing small molecules. Where the most promise is that I just talked about and where all the investment is going is in the cell and gene therapy and vaccines developments. Those all use much larger molecules, much more complex molecules, much more sensitive molecules. And we have a solution to that problem with our Purilogics technology. We have a membrane structure that's much more open. It allows these large molecules to make their way through the system. And we can add a 0 to their productivity for the day, 10x more valuable therapies coming out. With Isolere Bio, we're able to do the separation and purification of viral vectors in solution, so we completely remove the size restriction. And we can do it more effectively, more efficiently; and again, help those developers of life-changing therapies succeed. We can help relieve a pretty significant bottleneck in this industry. So that's the technology. And now I'm going to talk about the process a little bit. So it's a complicated process. At least it looks complicated, and it is, and -- but there's some basic things going on, so -- oops. I'm not sure what happened there. That's a picture of [ a castle ], at least, that I can see. What just happened?

[indiscernible].

Okay. So while that's getting set back up again: A bioprocess starts with growing cells in a bioreactor, and those cells have specific medicinal characteristics that a drug developer is after. And then as you move along in that process, you break those cells open and you separate and purify out the very molecule that you need in order to perform your therapy. And we play a pretty important role in that process. So while our slides are coming back: This is a Solaris bioreactor. This is where the cells are growing. We've got some good, old-fashioned Donaldson Life Sciences growth brewing in there right now. We have the widest range of bioreactors in the market. We can go from 0.2 to 20,000 liters. This is an 8-liter bioreactor, so the extent of our range is 2,500x bigger than this. So what that does is it allows us to be a partner to a drug developer from the lab all the way up to their full-scale production. And as a relative newcomer, we've got a ton of capabilities that they need from us. And once you get past the bioreactor, what you need to do is do that separation and purification that I talked about, so that's where Purilogics comes in. And what we're able to do here is increase productivity downstream by 10x -- so I guess you can -- I guess you all have the slides in your things, so I'll keep trying to remember what the slides say and you guys can keep following along. For frame of reference with the Purilogics device here. It's a scalable system. We've got up to 5 layers where we can -- if the customer needs a smaller system, we can accommodate that in the system. If they need the full thing, we've got 5 layers that we can scale up of Purilogics magic inside. And rough orders of magnitude and just some commercial perspective for you is this device, which you -- I encourage you to come and look at, at a break -- so here's where we are, and I'll back up a little bit now that I see my slides again. Plasmid DNA is a building block of this whole industry. And the -- it starts with cell production. It starts in a Solaris bioreactor. And then downstream, as you're separating and purifying those cells, we can increase productivity 10x. And that works for both plasmid DNA -- and then plasmid DNA is a building block for mRNA, in which we all have a little bit of familiarity with these days. We can have -- it's a different chemistry, but we have the same impact in that process. So this is the Purilogics system. And just rough orders of magnitude, this system sells for around $100,000. And a customer might produce $1 million of product from this type of system, in the past, with the old technology. With the new technology, they can produce $10 million of product per day; and we've got a very significant role in helping that happen. And you can imagine the value that's created for that customer, for humanity and for Donaldson. And the really cool thing is that, 4 months ago, this was our product for Purilogics. This is a really important product. This is what customers use in the lab to design their new drug and figure out how to purify it, but this is what we had. And they loved it, but their first question was, "When are you going to scale it up?" We can definitively answer that question as right now. So in 3 months, we designed, we developed and we made this device, so we are out of the gate fast. And we are thinking about what we're going to be able to do in years of being in this market, as opposed to a few months, so we're super excited about that. A little bit further downstream is the cell and gene therapies. So cell and gene therapies are distributed within your body using viral vectors. That's the distribution mechanism. And that's where Isolere Bio comes in with much higher purity, much higher productivity, the ability to eliminate some process steps. And the increased yield is a really, really big deal. At this stage in the process, a gram of the therapeutic is worth several million dollars, $6 million to $20 million, to be exact, so imagine if we can help them improve that yield just a few percentage points, pretty powerful stuff not only for the new -- all the great work that the new therapy is going to do but for our business. So we are completing some of our first batches with Isolere. We're open for business. We're working with a lot of big developers of therapeutics that are extremely interested in this technology, so I think we've got the best capabilities in the whole market to help the cell and gene therapy market realize its potential. So if we bring all that together, we anticipate 20% growth year-over-year, up to $450 million by fiscal '26. We have higher profitability than the rest of this company. As we grow, corporate profitability, company profitability will improve; and we are really excited about that. So just coming back to my main points: huge market. We've got, I think, game-breaking technology that's going to help customers solve complex challenges that they're dealing with. That's going to help us gain share. Our end markets aren't going anywhere soon. These are huge markets that are growing fast. We're going to continue to look for acquisitions that fill in some of those blanks in that process chart I was showing you. And with a gross margin that's 15 points higher than the rest of the company, as we grow and scale up our acquisitions and simply grow our higher-margin sales, we're going to have a significant impact on the future of this company. That concludes my talk. And I think our next step is a Q&A session, and I imagine you might have a couple.

[indiscernible]. Yes, so just give us 1 minute to set up. And then we'll get started.

Thanks.

Thank you.

Yes.

Yes, thanks.

Dan Rizzo from Jefferies again. So just with Life Sciences, is the model different? Is it not razors to sell razorblades? Is it more about focusing on selling the bioreactor? Or is there something else, like you get a royalty payment? Or I'm just wondering how the...

Yes, great, excellent question. This is our razor. And even though this thing is a $100,000 thing, it's a replacement part. It's a consumable. That's the razorblade. So that's a couple days of production in a bioprocessing center, so it's still the razor-razorblade model. They're just a lot more valuable...

Okay, okay. And then with mobility, I don't know if I missed this, but did you -- can you just tell us what the difference is in terms of dollar amount per type of vehicle of hydrogen versus diesel, versus electric? Have you disclosed that at all?

Yes, we did not specify the numbers. We talked more directionally, so if you think about the derivative diesel engines, think about that as more or less the same as a diesel. Fuel cell would be neutral to positive. And then battery is the wild card because there's a couple technologies that we're working on in Michael's space that change the math entirely. And then there's the hydraulic question. So if [ you're in ] a small mini excavator [ and urban centered ], you might be able to electrify hydraulics. If you're in a large vehicle, you might not. And so I would think about that one as neutral to negative overall, but we haven't specified dollar amounts.

Bryan Blair, Oppenheimer. In industrial and broken out on the final slide, increased customer penetration from less than 1% -- or connected customer penetration, less than 1% to 5% to 10%. What is the current margin on your connected offerings? And how much does that growth factor into the expansion [ target ]?

So the margin on the connected solutions, we get that from summarizing all of the businesses that we get from having a connected solution, so all of those will add up to our aftermarket businesses, and gaining additional opportunities within the first fit organization. We have around 1,200 systems already connected that are helping us drive additional businesses within the aftermarket, if that makes sense for you.

Dillon Cumming from Morgan Stanley again. I just wanted to ask, first, on the Life Sciences target, so you can stop me if you're going to address this later, but obviously you're, I think, planning to do a lot more M&A in that segment, I think, going forward, right? The targets that you're giving there are organic, right, so if we think about scope to kind of grow beyond the targets that you lay out today, any kind of framework to help us think about what the opportunity set there is as you kind of fill in the other parts of the Life Sciences portfolio?

Yes. Everything we have today is built into the projections I just talked about, so any M&A activity would be on top of that. And what you've seen in front of you going to $450 million is where we see it today.

Okay. And then just a follow-up, I guess, for Rich and Guillermo: So I think you guys really both touched on the thematic of really growing out and kind of prioritizing the aftermarket services component, taking another kind of strategic step forward there, but I think the historical core competency of Donaldson in the past has been really retaining that razorblade business, right, so what more is there to do in terms of incremental opportunity? Who are you taking share from there? What does the kind of runway for that look like? So...

So one of the major objectives that we have is to retain a higher percentage of our own first fit deployments that we have for the market. We have a very strong percentage of retention of our own businesses, but we want to increase that at the same time that we increase competitors -- or competitive systems within additional aftermarket as well and then doing them within the 5 business units that we have. It's not only 1 business in specific. It's within the whole spectrum of business units that we have within the portfolio. And that's why we are very excited with the connected solutions strategy, because we're going to be able to measure that and -- understands what's happening in a manufacturing facility or with a customer specifically. And we will understand about their needs on additional aftermarket, so we're placing a lot of bets on that.

Yes. And then on the mobile space, I think there's multiple things that we're doing. The biggest one is continuing to create patented technologies that drives higher aftermarket retention rates than a non-patent significantly. Our representation there is pretty good, but we see a large opportunity to keep driving that initiative forward. We talked about the org redesign. It's interesting. We have best practices around the world in certain markets, maybe it's mining in Chile, our ability to deliver those and deploy those globally in this new structure is much more quickly than in the past, working through the matrix. And then one thing I've seen recently, I won't go into a lot of details about who and where. But we've actually seen where certain regions have increased their emission standards. Honestly, they probably didn't fully buy into our technology around fuel and after 2 or 3 years of these new products being out there, and they're seeing their warranty claims significantly higher than they expected. We're getting all types of service requests where we're actually going in mid-production cycle and replacing other competitors while they're still first fit. That's almost unheard of, and it's really a testament to our technology.

Brian Drab from William Blair again. Maybe Andrew, first, I had a question for you. Who are you competing with primarily in selling this setup here? Is it Danaher, Pall Corp with Danaher, what other competitors are you seeing?

Danaher, Repligen, the companies you'd see in this market. But when it comes to the cell and gene stuff, we're pioneers in a lot of that technology. So we feel really good about where we're at.

And then just so I understand it, this $100,000 device, or system, it expires within a couple of days, it's a single-use...

For a batch of production.

Okay. And then you mentioned Disk Drive is a growth business. Can you just talk about that a little bit more? I just want to make sure that I get the confidence to model that as a growth business.

Yes, fair enough. My starting point is after the resets like from this point. And what we've done is we've seen a lot of the businesses that were in decline were kind of accelerated through the pandemic, like PCs and laptops. Those have been replaced by a solid state at this point. So from here, we're talking about really cloud center -- cloud data center growth, and that's where we have a very strong position and the future is really bright. So from here, we see growth. And that technology transition that I talked about is also going to drive filtration content. So it's not explosive, but it won't be going backwards, let's put it that way.

So it's that -- in those data centers, the disk drives that are being used are not solid, there's enough...

Correct. There is solid straight up at front end, the stuff you need to access in a nanosecond, anything you need, and if you can wait 100th of a second for and stored on a hard drive, and that business is growing, that's called the nearline drives right behind the front line.

Okay. And then, Rich, I was just one quick one for you. The filter that you were proud of, is that -- was that PowerCore technology? Or is that...

Yes. And it was our panel PowerCore. So we have 2 -- we have a wound PowerCore technology in a panel, yes. And so that was our panel.

Nathan Jones, Stifel. I'm going to start on mobile. I think Rich you were talking about the aftermarket having gone from 50% to 75% over the last 10 years, certainly higher penetration of proprietary technology over the last 10 years, margins over the last 10 years have been pretty flat. I would have expected those to be higher with biotechnology and aftermarket. So maybe you can talk about the headwinds that have been there that are causing you not to have seen margins improve over most of the last decade.

Yes. So if I think about the world that we lived in sort of pre-pandemic, it was a relatively deflationary environment, globalization, driving down wages, people pursuing lower-cost positions around the globe. And so I think what my view on it is, as a person relatively new into this position is that carried over to how contracts were structured and productivity clauses. We've seen a pivot on that more recently, where we've been exiting a lot of our contracts, restructuring them to be more price positive. And I think it's going to be a different environment going forward. The reality was that worked for many, many years. There was plenty of opportunities to offset that. I think that carried on probably for a little too long. And right now, we feel pretty good about where we're going with our customers and how we're setting up our contracts moving forward.

Okay. Second one is for Guillermo. There was a slide that you had with a bunch of market growth CAGRs over the next 3 years on them. The majority of which were 5% or greater market CAGR, which is not what we've seen in the industrial economy over the last 10 or 20 years. So maybe you could just talk about what led you to believe that those markets are actually going to grow that quickly?

We are deploying more global capabilities. I think our market share is still reduced compared to the opportunity that we have ahead of us. The way we're structuring the design of the industrial organization, leveraging certain resources across all of the businesses. And then entering in areas that we have maybe geographies that we are underrepresented as well in certain businesses, for example, industrial hydraulics, it's very focused within North America. Industrial gases is very focused within compressor filtration. It seems that we have more opportunities to expand our technologies to other markets and other geographies. And then we are placing a lot of bets on increasing our aftermarket opportunities not only we done on some elements, but other systems as well and give additional momentum to that business and keep growing it. Now that doesn't mean that we're going to move away from our first -- deploying first-fit solutions within the market, which is kind of the razor approach to the business. So deploying additional capabilities, additional technologies within a global infrastructure within our 5 business units, that's what we're trying to do.

So those growth rates on that slide are what you think you're going to grow in those markets, not what you think the -- under that core market is...

Correct. Yes.

Got it.

Yes. That's gaining additional market share. Yes.

Andrew, you've got targeted margin, 22.1%, 22.9% by fiscal '26 is still a bit below the fiscal 2021 run rate so still a drag from acquired margins at that point. How long should we expect it to take for those to reach the prior segment average? And if we look forward, is it perspective to get back to mid-20s plus as those businesses continue to scale in the segment overall.

Yes. I think what we're looking for there is the right level of investments. We'll be investing heavily into growing these businesses that puts those investments come a little bit ahead, and I'm talking about people and plants and various investments. Those investments come a little bit ahead of the return, so we'll be chasing it for a little while here. But we like those margins.

Understood. Focusing, I guess, directly on gross margin, you cited the 49% trailing 3 year, obviously lower on a run rate basis. Over time, should we expect the acquired businesses to exceed that trailing rate?

That's all baked into our forecast. But yes, we see these as good margin businesses.

Great. Anyone else? Okay. So we're doing good with time. I think we're up for our next 10-minute break. So we'll reconvene at 11:10.

I don't know if I mentioned it in the presentation, confusion we had there, but we have the founders of all of this technology in the room. If you have questions, I'd be happy to add a break or whatever answer them up here. [Break]

Welcome everybody, and thanks for attending today. Sorry for the weather today. We had hoped for a nice spring day, but we couldn't quite deliver it, but it does get nice here. We promise at some point in the spring, and to make up for it, we have Minnesota Wall eye for lunch. So please indulge in that. My name is Scott Robinson. It's my pleasure to be the CFO here at Donaldson. It's really awesome to be here with everybody today, and especially those watching from close and far on the web, including the finance team. I'm very excited about what you've heard today and for my presentation. So let's get into it. My key messages I believe Donaldson has and is developing great technologies that ultimately are the lifeline of the company. These technologies position us well for long-term growth. We continue to invest in higher-than-average margin opportunities, which, as I always say, drive higher levels of profitability on higher sales. And finally, in going on my 8 years here, I believe we had our strongest position yet, which will propel us to meet or exceed our financial goals laid out today. A look at our 2019 Investor Day and our estimates for FY '23. Who would have thought a pandemic would hit in the middle of all this. As can be seen, we have exceeded the high end of our Investor Day sales target and expect to be above 3.4 billion this year at the midpoint of our current guidance. I am proud of the company's tenacity over the last several years to support our customers and delivering the products needed for their operations. I really thank our employees for their efforts in this regard. Operating margin has been quite a story. At this point, our pricing has basically caught up to the significant cost increases we've experienced such that our op margin for this year is touching the low end of the range we provided in 2019. We have battled through significant cost increases and at this time with much stronger pricing muscle. As can be seen, strong EPS growth here and also strong return of cash to shareholders. In terms of returning cash to shareholders, we have had a very consistent story over a long period of time, which allowed us to be added in 2016 to the S&P High-Yield Dividend Aristocrats Fund. After 20 years of consecutive dividend increases, that is a record that I do not want to break. In terms of share buyback, we also have a consistent track record, as can be seen here. And going forward, we are committed to at least offset our annual dilution of approximately 1% per share grant. In terms of our balance sheet, Donaldson is very strong. We have consistently ran under our net debt-to-EBITDA target of 1.0 and we have 800 million available under current borrowing arrangements, which gives us plenty of room to pursue our strategy. We have strong free cash flow conversion, which has averaged 85% and is expected well above 100% this year as we reduce inventory levels. Our capital deployment priorities continue to be: number one, invest in the company either organically or inorganically, to pay dividends; and finally, share buybacks. The share buyback component is the most flexible portion of our capital deployment strategy and is determined as we contemplate current and future cash needs. As an FYI, at current levels, a 1% share buyback represents an outflow of approximately $80 million. Over the past 3 years, we have deployed $1.1 billion split, as you see here. Our organic investment shown in the Donaldson Blue slice was focused on capacity expansion and new product development. We expect our CapEx to run at approximately 3.5% of sales for each of the next 3 years, and that life sciences will be our primary focus in terms of acquisitions. As you have consistently heard from me, we have been pushing to focus our investment and capital deployment on higher-than-average margin opportunities in our Advance and Accelerate portfolio for a while now and the investment we have made are paying off. As this matures, we get higher margins with more dollars to reinvest and the cycle continues. The redesign just completed will not only accelerate our ability to execute in general and specifically in this area, but also assist with identification of additional opportunities for investment. Additionally, the new Life Sciences segment expands our TAM by $12 billion, providing many new opportunities. A bit more on our M&A strategy. First off, as previously noted, we are in a very strong position in terms of debt, cash flows and liquidity, which allows pursuit of our strategy. We currently sit with a net debt-to-EBITDA ratio of less than 1. Please note that we would be willing to increase our debt ratio if the right strategic opportunity came along. If there was a significant increase in debt, we would accompany that with a corresponding plan for reduction. We are primarily focused on life sciences, which have strong growth rates and will have much higher margins when maturing and we look at both established and new technologies, opportunities for gross margins in the 40s and into the 50s is something that makes me very happy. Our key focus includes separation, purification and some consumables. Once an acquisition is complete, our new life sciences team will make sure integration facilitate scale up and leverage of offerings. We believe we can often be the acquirer of choice based on what we bring to the table and I think this has proven out over the last several acquisitions executed by the company. I think it is really great that we have Kelly from Isolere, Jin from Purilogics and Matteo from Solaris here with us today. And I really believe we are lucky to have them on our team. I like this chart, okay? It goes to Nathan's earlier question. Across the top, we have various processes in bio-production, and down the side, we have the different types of products involved. You can see where we have been involved and also what our acquisitions have added. This is driven by Dave Wood and our life sciences team, but it gives you a feel for how we are analyzing bio-production and where we operate and how we connect our legacy products with our acquisition across the value chain. As can be seen, we are filling up the puzzle of both organically and through acquisition, and the company has great technology and opportunity here, and we expect to continue further down this path. A few additional thoughts on margin improvement, and this truly is my favorite topic. I always say we are committed to higher levels of profitability on higher sales. I believe that this is easily possible as we continue to invest in and grow higher-margin opportunities to mix the company up. Further, our organizational redesign will sharpen our focus on cost management and execution. I believe this trend can continue long into the company's future. We are also exiting the last few years with significantly improved pricing muscle and a much better focus on pricing optimization. In conclusion here, we anticipate continuous improvement in margin for years to come. So pulling together what you've already heard from Rich, Guillermo and Andy and presuming reasonable economic conditions, our organic targets are as follows: We have mobile solutions growing 2% to 6%, industrially growing 4% to 8% and Life Sciences growing 18% to 22%, which equates to a consolidated annual growth of 4% to 8% over the 3-year period. In terms of operating margin, our current midpoint for guidance this year is 14.8%. So what is here would represent an 80 to 160 basis point improvement with life sciences pushing above 22% in fiscal '26. If I were to put a picture on my desk, in addition to my 3 sons, it would be an income statement with operating margin at 22%. That's supposed to be funny. This level of growth in operating margin would indicate consolidated incremental margins in the low 20s over the cycle. As I said before, I think we are very well-positioned to deliver on these goals. So in conclusion and to revisit my key thoughts, I believe Donaldson has and is developing great technologies that ultimately are the lifeblood of the company. These technologies position us well for future growth, we will continue to invest in higher-margin opportunities to drive higher levels of profitability on higher sales. And as I said in my opening, I really believe this is the best the company has been positioned in my time here, and I'm very optimistic for the future. Thanks very much. And with that, I'll turn it back to our realist leader, Tod Carpenter.

Thanks, Scott. So this concludes our prepared remarks for today. We'll open it up to questions here shortly. But I just want to do a quick recap of what we talked about this morning. We opened today, I talked about our new segmentation across Donaldson Company, a restructured company and the fact that we are now focused on all 3 of these segments, Ashley came up shared with you our ESG and sustainability targets for 2030, talked about our journey, specifically how we are addressing those and the detailed plans behind them. We then had Michael come up and give you a really deep look at how we think about technology. He showed you some of the things that we have in laboratories, talked about some of the items we haven't even brought to market, also talked about some really cool things that we're leveraging that are about to come to market. Most important of all, hopefully, you walk away with a clear understanding and a belief that we are a technology-led filtration company. Then we had our segment leaders come up. Rich talked about within the Mobile Solutions segment, how we expect to continue to grow and gain share across that market as it grows for at least a decade. And then when it eventually does feel a little bit of based upon the global model that we have, the deep customer relationships, we would expect us to do very well in the consolidation. However, we also have an underlying strategy there, which as our customers go and turn toward alternative power sources, Rich and his team are focused on things like hydrogen, and electric vehicles so that we make sure we capture the greatest filtration challenges and therefore, market share. We turn to Guillermo, Guillermo will talk to you about how we have fantastic products. And we have a strong aftermarket. We believe we have a great opportunity to continue to get a deeper relationship with our customers as we digitize those first-fit systems and service and really complete the overall customer experience, maximizing our customer touches and really helping them through a telephone, alert or whatever vehicle touching them and helping them keep their plants operating and their equipment doing well on a constant basis. We then moved over to Andy, who talked about our Life Sciences segment, and he talked about the underlying technologies and how all the components of our Life Science segment fit together and really drive one another to be able to allow us to achieve future growth in the Life Sciences segment. We gave you a deeper look into the acquisitions, Solaris, Isolere Bio and Purilogics and how they fit together. And we told you that our priority in our acquisition strategy is Life Sciences, as well as core filtration opportunities in our company. Scott came up and wrapped it all up with overall targets, give you a deeper understanding of how we're going to achieve those targets, where they are also give scoreboard of our 2019 targets. We're proud of what we have as a challenge in front of us. We look to become a $4 billion company in 3 years, we're going to expand our operating margin by over 100 basis points, and we'll be delivering 16% operating margin across that. Last year, we delivered record revenues and record profits, and we're going to do the exact same thing in 2026, and we're going to do it with a $4 billion organization and 16% operating margin. So with that, I will ask Scott to come up and we'll open the floor for questions.

Rob Mason with Baird again. Todd, could you speak to the M&A criteria, I guess, in updated form. Historically, you had some fairly defined parameters, metrics that you would benchmark M&A against in terms of EPS accretion and hurdle rates to achieve in the first 4 years, but you were not buying pre-revenue companies at the time. So how have those changed with the introduction of Life Sciences...

Yes. Maybe let me start. I'm going to let Scott get to the numbers relative to that, okay? But at the macro, what's important to walk away from here is what we're targeting and also the fact that, hey, we've got an aggressive M&A portion of our strategy and we're going to execute on it, and we stood up a piece of our organization led by Dave Wood, our Vice President of Corporate Development, and we're going to continue to add to -- muscle to that particular organization and execute on what has always been a portion of our strategy, and you see that through our recent 3 acquisitions. So we're going after Life Sciences. We're going after Core Filtration Capabilities. Perhaps we would do something in the industrial space that could help our overall strategy that Guillermo has laid out, but really, that's our focus. And as far as the returns and the financials...

So you're right. I mean I think historically, even before I was got here, the company was doing some acquisitions and acquiring companies that were more in an operating mode. And it's a lot easier to have standard financial metrics on a company that is experienced or established and mature and has revenues and profits. In the case of Life Sciences, what we're really looking for are 2 things, which both myself and Andy mentioned, which is higher-than-average growth rates and higher than average margins, okay? That's what we want the potential to be, and we easily see that with the 3 acquisitions we've been able to complete. And so that's really what we're looking for. In a company's pre-revenue, it's not obviously going to be a creative. We want to be smart about our capital deployment and understand we have about $1.8 billion of invested capital and the return that generates an the more mature existing Donaldson business will continue to increase their ROI and that will allow us to take on acquisitions that obviously are going to be at less than a 20% ROI. But over time, we think those life sciences businesses are really going to have strong returns with the revenue growth and the operating margin profiles that they have.

And to the extent that you would do a larger acquisition, what is -- what should be your upper bounds in terms of where you would take leverage understanding you would tend to delever fairly quickly.

Yes. So we -- I don't think we have a specific number in mind. We want to understand a particular asset that we're acquiring and what its operating ratios are and how that would come alongside Donaldson. But we would consider taking our debt level is up a couple of turns if the right strategic opportunity came along. I would say the majority of the opportunities that we see and that we look at in a pipeline are of a smaller nature, basically only because there are so many more companies that are of a smaller nature in this space than there are large established companies.

Scott, you walked through the kind of scorecard relative to fiscal '19 targets delayed, obviously, you've operated through some crazy conditions in the last few years. In terms of the margin target and that now being in play for fiscal '23. Can you walk us through direct cost impact, supply chain inefficiencies and the frictional considerations there or perhaps mix that has compressed margin through the...

Through the current period or for the future period? For our guidance going forward or what we've experienced up through today.

What you've experienced through today.

Yes. I mean today, if you go back to our gross margins, it's been a very strong effort on behalf of the whole company, right? Our margins dropped -- our gross margin dropped to 33.1%. At one point and even lower than that. And we have been coming up every quarter, right? And we've been focused on measuring our pricing impact, measuring our cost of goods that we're purchasing. And there's just been all sorts of waves that were hitting the company, as most companies faced, right? But we got the 34% last quarter, and I think that was a good gross margin move for the company. That, to me, indicated that, for the most part, our pricing actions had caught up with our cost increases. And I think the supply chain disruptions have reduced, not to 0 but down considerably. So I mean everything you mentioned labor costs, input costs, logistics costs, just constraints in the system, really aggressive pricing in certain commodities hit us. And it's tough to go to our big OEs and say we got to raise your prices 20%. But in many cases, that's what we were saying. And nobody wants to hear their prices going up 20%, right, including me, but that was what we needed, in many cases, to get a better balance of costs between us and our customers. So I would really thank the organization for all the efforts on pricing. As Rich mentioned, I really do believe we have improved commercial views right now. And we just want to have reasonable commercial relations with our customers and we want to provide good technology to them that helps them be successful, and we want to get a fair price for that.

I appreciate all the color there. And a quick one to level set you mentioned reasonable economic conditions you're anchoring on that in terms of fiscal 2016 outlook, can you offer a little more detail is that just positive GDP? Or do you have GDP or IP range in mind?

Yes. I mean I think of industrial production and GDP has 2 key measures. I don't think we're looking for 5% growth. Certainly positive, a couple 1, 2, 3 on both fronts, I think, would be reasonable economic conditions.

A few comments today about pricing, certainly changing the structure of some of the contracts in mobile and Scott, you've talked about the last couple of years kind of exercising a pricing muscle at maybe Donaldson hadn't used as much as it could have historically. Can you talk about opportunities to continue to drive pricing to realize the value that you're providing to customers. I mean up till you guys offered enough over the years for you to know that I think your pricing should be high, you're providing better value to customers, how do you generate that value to Donaldson?

So I think what -- with the new design, and we have the vertical orientation, really, we have a bit more autonomy within the businesses to be able to attack pricing. When you were geographic, sometimes a geography wouldn't want to go, 1 geography would want to go. But now it's really about products base and customer orientation. So I think we're going to actually be more strategic and at many times, aggressive relative to the pricing opportunities. But there is a comprehensive reset across our OE-based businesses whereby, we always had those -- Rich talked about and productivity, price downs on an annual basis. There was a reset during all of this, and we took advantage of that opportunity. It wasn't every contract I would tell you is most contracts. We also have a clearer path forward now and a confidence in the organization that would suggest that when we're not being treated fairly, we're going to do something about it. It's not just going to be wait till the contract ends, we're going to do something about it. And I think this whole pandemic situation, especially the supply chain headwinds, gain the organization a tremendous confidence to be able to do that. So I would look for us to take advantage of those opportunities. But as Scott says, always have that fair relationship with our customer base. We're not trying to maximize the margins. We're trying to optimize things for them and for us, that's our goal.

So you have 120 basis points at the midpoint of budget expansion over the next 3 years, what is strategic pricing contribute to that?

If you look at 6% revenue growth, over that time frame. I think price -- volume will be a larger piece of that than pricing. In case, we had presumed flat FX in that equation. So which is volume and pricing, I would expect the volume to be a little higher than pricing. But we do expect positive...

From a margin perspective, if you've got [ 14.8 ] to 16 at the midpoint, what is strategic pricing within the portfolio contribute to that margin expansion?

Yes. I mean it's a piece of that. There's a lot in the soup there, but I really think the company is in good position, right? I think we have improved pricing muscle, which I think is good, and we talked about that quite a bit. I think we're going to have nice volume growth, and we have to leverage both our manufacturing organization as well as our management organization, right? We're not growing finance cost 6% next year because revenues are growing 6%. And we talk about that. We have to leverage the OpEx because we want to give Michael as many dollars as we can as many as he can spend, we're going to find them. And he's first and then everybody else kind of gets what's left over, and we have to be able to leverage our and then mix the company up. If we're going to grow 4%, 6% and 20%, that's going to be an inherent tailwind to margin because your 20% growth is your highest margin. And so I really think we have a lot of things headed in the right direction. I'm sure it all won't go perfect, and there are some things we'll have to deal with and adjust. But I think we're in a strong position, and we're ready to execute. Getting the organizational redesign behind us is a big step for the company.

It may go better than perfect.

I'm a finance guy.

Just a follow-up on the pricing. So I'm a little surprised that when you look at the organic -- if you say organic, it's going to be 6%, that will just a little more than half of that would be volume. So you're saying pricing could be like 2 points...

Yes. I mean we haven't taken guidance yet, but I would think volume would be the larger portion. But certainly, pricing is going to be presuming relative reasonableness in our costs, we're going to continue to increase prices.

Yes, absolutely. We're back to normal cycles across the corporation on pricing. Clearly, watching it every single moment to understand what's happening in the commodity markets. That's coming in into the raw materials input cost to the corporation. But clearly, right now, we have really worked very hard in order to expand those gross margins. You see that in our latest results. And we're going to continue to watch that. But we're right now across the corporation back to a more normal cycle, which would suggest 1 or 2 points now. If inflation takes off, we'll go more.

When we give our guidance next year, just like last year, we'll give the 3 pieces. So we'll give you a price, we'll give you volume and we'll give you the FX impact in the expected sales growth for next fiscal year when we come out with guidance after the fourth quarter.

So can we just zoom out and look at Donaldson and pricing as it has been over the last 10, 15 years? And just talk for another second about how that's changed because I think if you -- I think I started covering the company in 2008 or 7. And the message was always we're giving up a little price right? Yes, I think that's the old...

Yes, I think you've been around a while. So you remember, and I think Rich even hit on it a bit today in his presentation. I mean, even when I got here, I think there was many years of relatively consistent inflation, deflation. So I think the customers got -- and we got lulled into the situation where you get a little price down every year, and then all the cost reduction initiatives, we'll balance that out. So I think your cost for many years kind of back when you remember, was relatively neutral, and it was all volume, okay? And now I think we're -- we went through and steals up a couple of hundred percent just not like that anymore. And while it was painful, I think it was good to go through that exercise that, that's really not the way the world works anymore. Everything is getting more expensive, and we need to -- we have to pay our suppliers, too. And so we have to account for that and we want to have a reasonable rates to our suppliers, but we're expecting to continue to have wage increases and our cost of insurance is going up and everything I look at continues to go up. And so we have to account for that in our prices. And so I think the old version, which I think you accurately depict of maybe 0%, I don't think that's in play anymore.

The OEMs look at it differently. Everyone is looking at it differently.

I think they are. And nobody wants to admit it, but prices are going up, right? That's the way it is.

Yes. Another question just as I'm reflecting on the longer history of the company, and the aftermarket opportunity and the slightly higher margins that you get in the aftermarket filters. I'm thinking largely the mobile segment. That was a big part of the story in terms of margin expansion. You had a great first-fit historically, just dominant -- maybe you don't want me to use the word dominant, but a very strong position in first-fit, and then aftermarket, there were opportunities to gain share all over the place and PowerCore was what was at least in large part, what was going to help you do that and gain that share. How is that opportunity? How big is that opportunity now in the U.S., in Europe to continue to gain share in that aftermarket in mobile?

Well, I would just tell you that nothing has changed relative to the model, proprietary razors to sell razor blades, win the first-fit in order to drive the aftermarket, that beautiful picture that Rich talked about, right? That model still plays very, very well. We're more diverse across markets in the United States than we are over into Europe. We have a higher aftermarket opportunity in Europe, a huge aftermarket opportunity as we drive proprietary over in Asia, particularly in China, the #1 diesel engine manufacturer -- manufacturing country in the world where we're winning with PowerCore today and driving that opportunity forward. So there's a lot of room in the aftermarket and particularly you play with proprietary razors. And then when you establish that brand with the proprietary razors, a lot of the rest starts to come along with you. So we've got a lot of runway. The model still plays very, very well. Our strengths are our strengths, and we'll continue to play those cards, frankly, because they work.

All right. And then maybe I'll just ask one more. Are there any regulatory changes that could move the needle significantly coming up in this forecast period?

Really tough to say, obviously, I think Rich talked about the regulatory environments and what happens relative to EVs and how people are going to chase, et cetera. We'll have to see how that evolves, right? But other than that, the big one for us that we're really looking forward to starting to engage is the law that was passed in the infrastructure bill. And when that starts to take place, that should be able to give us some tailwind here over the course of the next 2, 3, 4 years, not sure how quickly they can spend and ramp those projects up. But that gives us a little bit of stability, should things overall turn a little bit more tight. At this point, I mean Europe talks about it, everybody talks about it, but there's nothing that I'm aware of at this point that we can say, wow, that's coming. So we'll just have to keep our ear to the ground.

I think just the world moving to cleaner solutions, right? I mean our second presentation today was all Ashley in sustainability and how we're trying to help the world. I mean I think the world is moving in the right direction and we're very well positioned to help that movement.

Yes. The one -- as people, our customers chase those sustainability goals, it's not so much emissions in the rest of those things on Rich's side, but where it should help us and play really strong is in Guillermo's business over on the industrial side because as we continue to connect those devices and then print out reports for them to answer the questions, that could be pretty powerful for them because the maintenance person doesn't want to really find out how much is going up the stack, just give me the answer, right? So we'll be able to give him the answer. And so we're headed in that direction. And so as the world continues to press sustainability, should play very nicely to our strength in the industrial side. Anyone else?

All right. Great. So then we will wrap up the formal presentations and Q&A and we can solely start heading upstairs for lunch. Back staircase, there'll be some Donaldson people along the way to guide you.

And just maybe closing just thanks to all of you, a special thanks for making the trip to come see us here. We have an exciting group of tours where we're going to show you some pretty cool things across our laboratories. I'd also like to thank the over 200 virtual attendees today. Thanks for your time and hanging in there with us. Let's see.