Parker-Hannifin Corporation (PH) Earnings Call Transcript & Summary

Good afternoon. And welcome to the Parker Hannifin 2020 Investor Meeting. [Operator Instructions] It is now my pleasure to introduce Vice President of Corporate Finance, Robin Davenport.

Thank you, Andrew. And good afternoon, everyone. It is my pleasure to welcome you to Parker's 2020 Investor Meeting. As you're aware by now, the meeting format has taken a bit of a different shape than we had originally planned. Due to the unprecedented situation and concerns regarding the coronavirus and related travel restrictions, we've taken the decision to shift this to a virtual meeting. And as such, we appreciate all of the accommodations that are being made with regard to travel. It's, first and foremost, important for us to keep safety and everyone's best interest in mind. So to that end, we have revised the program format to truncate it somewhat to make that still fit within a reasonable time frame. But at the same time, provide with a full level of content that we've been excited to share with you. So today's meeting will run for 2.5 hours, scheduled to run until 3:30 p.m. Eastern time. So settle in and make yourselves comfortable for the next couple of hours. I'd like to first start with directing your attention to the forward-looking statement. During the course of the presentation, we will be making forward-looking statements, so please take a moment to review the statement in its entirety. In addition, we will be making reference to certain non-GAAP measures. These have been defined and reconciled and will appear in the appendices of the presentation slides once they are uploaded. Today's -- throughout today's presentation, we are going to hear from Tom Williams, our Chairman and Chief Executive Officer; Lee Banks, our President and Chief Operating Officer; and Cathy Suever, our Chief Financial Officer. We regret that we are unable to feature the 6 worldwide operating presidents during today's live webcast. However, we will be recording them and then eventually uploading their presentations to phstock.com at some point in the future, and we will notify you once those are made available. So shifting to today's program. Keeping in mind that the presentation has been structured with a longer-term focus on Parker's strategies and fiscal year 2023 targets. You can see the outline to follow. First of all, Tom Williams will be taking us through a review of Parker's transformation journey, introducing The Win Strategy 3.0 and Parker's purpose statement. Tom, together with Lee Banks, will then be going into further detail on the numerous strategies that we are implementing to accelerate organic growth as well as continue our journey on the operating margins expansion. And then Cathy Suever will be giving us a more detailed review over the progress to date being made toward our fiscal year 2023 targets, including our capital deployment forecast as well as revisions that we are making to the fiscal year '23 targets. We'll conclude the program then with a Q&A session featuring Tom, Lee and Cathy. So with that, I'm very pleased to get started and introduce Tom Williams, our Chairman and Chief Executive Officer.

Thank you, Robin, and good afternoon, everybody. So glad you could join us today. We recognize, while this is not quite as good as in-person, it's going to be the next best thing, and you see how we've decorated this set here. So envision that this is a hotel ballroom like you would normally see us in. And I'm going to envision that I can see your smiling faces behind the camera here. So we're excited about today. We have a lot of great things to talk to you about. This is a look at the agenda. So I'll start with the transformation of the company. Lee and I will do the 3.0 together and the purpose statement. We'll then go a little bit more in detail on 3.0, specifically around strategies to drive organic growth and expand margins. I'll come up and talk about capital deployment strategy, and then Cathy will finish with a review of our performance to date, the forecast period and FY '23 targets. So I want to start with what are the key messages you should take away from this, and we'll end with this as well. If you could reflect back to when we launched Win Strategy 2.0, 2015, tremendous amount of change and drove a tremendous amount of performance improvements. We're going to give you a good, objective information on that here in the next couple of slides. The portfolio has changed dramatically. If you look at what happened between CLARCOR, LORD and Exotic, added some great businesses, more resilient, higher margins, higher growth trajectory. We're going to give you a little more color on the portfolio, in particular, how the interconnectivity means such a difference for our customers and what our value proposition is there. We'll give you 2 specific examples. The presence will give you more detail on this and their follow-ups. And then if you look at the financial performance over a period of time, it is pretty remarkable what's changed over the last number of years since The Win Strategy first launched. And The Win Strategy 3.0 and the purpose statement are really designed to take the momentum that we've had to date and to build upon that for the future. If you look at those bullets that are on this page, these are all things that have been what I would characterize as self-help. Despite what's been going on -- because if you reflect back the last 5 years and what happened on growth for the company, it's been some pretty tough macro environments over the last 5 years, and the company has performed dramatically better. So we're ready to weather the current storm. We're ready for the future, with a lot of self-help that can take us to where we need to be. So we're confident in FY '23, even recognizing there are some tough times that we're facing right now. So one of the big questions that I get a lot from shareholders is what is different about the company? What's changed over the last number of years? So I'm going to try to just summarize my view of what's changed. It's not an all-encompassing list. If you remember back in FY '14 to '16, we did a dramatic amount of restructuring, probably the highest amount of restructuring we've done in the history of the company. Changed the structure. We're much leaner, much more agile, able to weather the resilience of a business cycle. We streamlined the organizational structure. If you look at what the number of divisions we've had. And what we try to do with this count here is it pretends that if Lord and Exotic were here at the beginning. So from 126 to 84 divisions, including those acquisitions. When you think about that means, 1/3 of the divisions have been consolidated and to consolidate 1/3, that means 2/3 of all the businesses went through some kind of change process around consolidating. So a huge change process, huge change of management for the company. We made 2 major enhancements to the business system of the company. 2015, when Lee and I have first started our roles, with 2.0. At that time, you might remember, we called it the new Win Strategy, and now 3.0, which we launched in September of last year. We've been always good historically on cash, and I'll show you more objective evidence on that. But we've been more assertive of the balance sheet and putting it to use with some strategic portfolio changes, which you've seen us do. And then our resilience over the cycle, significantly better opportunity. It's a good indicator of what's going to happen in the future as well, and I'll give you a great slide that -- to really drive home that point. And the purpose statement that we launched is really creating the kind of alignment and inspiration that our team members are really rallying behind. I've been working for 40 years, and I can't remember an event that we've done that hasn't registered and really tugged at the hearts of our people like the purpose statement has. And it's done a lot up with engagement and to rally people around that bigger purpose that business stands for, and we'll talk more about that in more detail. So the next several slides are all around objective evidence about how the company has changed over this period of time. We're going to start with, first, how we've been raising operating margins over this period of time. Raising the floor, starting with -- when the original Win Strategy came out in 2001. And if you look at these stairs, this is pretty remarkable improvement. We tried to pick the best representative, recession fiscal year, FY '02, you can read them across the x-axis there. But you can see over 800 basis point improvement in operating margin. Just a fantastic job building on the success of the original Win Strategy with 2.0 and then 3.0. Bringing a little closer to home the last number of years, and this is looking at EBITDA. Cathy later on will talk about operating margin. But EBITDA, given the amount of acquisitions we've done the last couple of years, this is probably a better apples-to-apples comparison. And you can see almost 400 basis point improvement. And in this short period of time, we've had 2 manufacturing contractions. So again, this is -- speaks to the operating engine of the company, the change management, what is transformed, is it much more profitable business. And then cash. I want to orientate you to this slide. So in the gold bars is the cash flow dollars, CFOA dollars, the blue line is CFOA margins. And you can see -- and you can pick the various years over this period of time. This goes back 18 years, we've had double-digit CFOA over this period of time. So good times and bad times, we are a cash-generating machine. 18 consecutive years of free cash flow conversion greater than 100%. So if you're wondering what our number is going to be, I think you could bet, it's going to be double-digit as we go forward in the future. Then I want to move to safety. You heard me talk a lot a bit of some on earnings call over the last number of years. This is our recordable incident rate back in FY '15. So those of you that maybe aren't familiar with what incident rate means, this is the number of safety incidents per 100 team members around the world. 1.43 was a bottom quartile performance. So if you think about quartiles, we want to be top. We were in the last quartile versus our proxy peers, not where we wanted to be. Through the effort of a lot of people around the world, the leadership team, the environmental, health and safety team are high-performance teams that are driving that ownership. We are proud to say we're top quartile now. So that is a remarkable improvement, 70% improvement. Yes, we got more to do. You can see that on the right-hand side of the slide, as far as those focus areas, but this is huge improvement. And remember, part of what we've been talking about over the years is that safety performance is linked to financial performance, and they've gone hand-in-hand. And as I click on the next slide, it's linked to the engagement of our people. So this is a survey that we do. We do it every year, and we get a remarkable amount of feedback here. We get 90% of our team members around the world participate and give us feedback on how they think about the company. We look at engagement, we look at empowerment. In particular, here, I just wanted to show engagement to have you understand what's going on here. Top quartile on engagement, meaning that the people feel favorable about the engagement with their work at Parker is 75%, and we hit top quartile this year. You can see the improvement over these years, 200 to 300 basis point improvement in this result is statistically significant. And you can see the dramatic movement in '19 to '20. And that's even despite we this -- did this in January. January wasn't as a great environment as order entry was still a challenge, and we put a top quartile number. So what you got going here is you got engagement top quartile, safety top quartile and all the other metrics moving in that direction. And that's what it takes. It takes a highly engaged team of people to drive these kind of results, and this is what's happening. I want to move to sustainability. And I would just tell all the shareholders that are listening, we have an extremely robust ESG process. It's a very -- near and dear to our hearts. We review with the Board. I'm not going to go through the G part of that today, but I'm going to give you just a quick summary on the E and the S portions. You can see along the left-hand side of the slide that I talked about safety and where we stand. So we're top quartile there. There's a lot of different ways to measure this. We use the carbon disclosure project as the independent way of trying to compare ourselves to other people. And we're doing that against our proxy peers. When you look at CO2, greenhouse gas reduction, we're top quartile. When you look at water usage and conservation, top quartile there. So 3 in a row, when you think about environmental and social type of things, top quartile. From a waste standpoint, 85% of our waste has been -- is recycled. And then about what we can do with people in our -- in the community is the foundation and besides just what we do with our treasure, what we do with time and talent, we donated $20 million over the last 3 years. But more importantly, what we're focusing on in the kind of really the mantra of the foundation and what we're trying to do from a charitable standpoint, fits very nicely with the sustainability goals that you see the United Nations comes up, which is food, poverty, well-being of people and education. And those are the -- that's the criteria that we're looking about when we spend time with our team members, when they invest in the communities and the -- our donations to people, they fit all of those areas. And then lastly, to kind of wrap up, what's changed over the last number of years and the transformation piece of this is these 3 deals, a much more conservative balance sheet, $3 billion of acquired revenue, more resilient and accretive on growth and margins. And we think it's going to -- you've seen the impact already. But you're going to see a lot more of it going into the future because LORD and Exotic have just started. So we think this bodes well for us in the years to come. So I want to kind of move now from talking less about the transformation to start and move into the strategy of the company more so. And I want to start about with why we've been winning to date and why we will win in the future. And you've heard me talk about this. Those of you who listened to the earnings calls over the last couple of quarters about these competitive differentiators, these things that make us stand out in the crowd. We're going to talk more about The Win Strategy. But our decentralized business model is a big deal. People do not get excited about being part of a cost center. People want to be part of a profit and loss center, where they know whether they were making money, and they want to be close to the customer. That's a big part of what gets people excited. I'll give you more color on that interconnectivity, but that's a distinguishing feature that we have. Approximately 85% of what we ship around the world has some element of intellectual property tied to it. And we are fortunate that we make things that have long product life cycles, 30, 40 years or longer. We are not subject to the preferences of the day or the flavor of the month. We are making things that are going to be around here for a long time. We have the best distribution channel in the world in the motion control space. Lee will cover that in a lot more detail. And we are fortunate that this business model that we've created takes low CapEx to run. In general, we're in that 1.5% to 2% CapEx to sales to generate the kind of revenue that we have. That is a great position to be in from a resilience standpoint, but also to having the capacity to deploy more on behalf of the shareholders. And then -- that is our goal is to be great cash generators and to do the best we can on behalf of all of you that are watching, to deploy the cash, to create the best kind of returns on behalf of our shareholders. That's why we've been winning. This is a big part of what will continue to help us win going forward. But what are we going to do different? How are we going to continue to change the company? So the bulk of what we're going to cover in the rest of this presentation is around Win Strategy 3.0, our purpose, and we're going to go deeper on the organic strategies and the margin expansion. All of this is designed to make us a top-quartile company. We are not going to rest for a second until we're the best company in our peer group out there. So I want to move to 3.0, the third revision of Win Strategy over the last approximately 20 years. And the first question you might be asking is why did you change it? If you just watched those other slides, 2.0 seems like it's working pretty good. Why do you want to change it? The first thing would be that the metrics on 2.0, we were fortunate that we've already hit those. And we needed to update those metrics because we were at them or going past them. And then between Cathy, Lee and myself, we've had the opportunity over the last 4 years to see 2.0 at work and to reflect on, "Hey, if we have to do it again, how can we make it better?" And so we worked on that together as a team, and that's what we're going to share with you today is a change on that. The format hasn't changed. It's still 1 page. The first page is the strategy as a company, the back page is the measurements of success. We did make 1 slight color change. For those shareholders who aren't that close to this won't be -- won't mean that much to you. But it's important for our team members because I want them to be able to see that, that's the latest Win Strategy from across the room. So that gold you see in the bottom of The Win Strategy, the culture and values, now it goes all the way up to the goals. That used to fade to white, so it's more of an inside baseball than you probably don't want to know. But that's important for our people to know that this is the latest and greatest. It's important for me when I walk around because I want to make sure they have the latest and greatest up there. That's the back. So what we're going to do is we're going to just cover the things that have changed. And then we try to highlight the things that have changed in green, to make it easier for you. And Lee and I are going to do this. I'll cover the front of The Win Strategy and Lee will cover the back, and we're going to go basically section by section and make a few comments. Now we're not going to try to cover all of this in a lot of detail. We have subsequent slides to go deep on the ones we think are the most important and most meaningful for you listening. So let's start first with Engaged People, the first goal of The Win Strategy. And if you look at these 4 bullets, the 2 big changes we put here is we put ownership as one of the key changes and continuous improvement/kaizen. Ownership. The whole goal of what we're trying to do in Engaged People is to create that ownership mentality, the ownership culture. I would give you an analogy. If you think about somebody that rents a house versus somebody that owns a house, the renters think a lot differently than the people that own the house. When you own a house versus renting, you have a different level of caring, a different level of passion. And what happens with that is the performance dramatically improves. So all 4 of these bullets drive an ownership mentality. Don't underestimate the power of that. I would tell you that those engagement results that you see, the safety results that you see and the financial results that you've seen are a direct correlation to that ownership mentality that people feel. And then lastly, on kaizen. Our brand at kaizen, and Lee will go deep on this, takes these 4 bullets and our Parker Lean System and has -- that's our brand at kaizen. And kaizen has taken the company by storm. It's really creating engagement. It's creating a faster change management. It's creating the most important person being the operator as being the focal point of what we're trying to do around here. So a lot more to come on that. Under the Customer Experience, you see 2 changes: customer experience, those words; and digital leadership. I want to first call attention to experience. And I think a lot of you have heard me talk about this before. We don't want to just have a service, a customer service, we want to create experience. We want to create a holistic experience with the customer, that is a great experience. Yes, you got to have quality solutions on time, and we need to be easier to do business with. But the one I want to talk about and the change we made is around digital leadership. And I'm going to talk about digital leadership on multiple platforms, multi-pronged approach. It first starts with the storefront of the company, which is digital customer experience, our website, and we want to have the best website in the world, bar none. We're not there yet, and there's a lot more opportunity to make that a better experience, but we're working hard to do that. We want to add digital products, so IoT and doing it in the right applications. And for us, that primarily will sit at the beginning, in aerospace, motion systems and filtration. That's the biggest opportunities where we can create insightful data for our customers. We want to have digital operations. So within our factories, using digitization to make us more productive, using automation, using robotics. And then last but not least, and I would tell you, for me and the leadership team here in this room and everybody we've been talking to, artificial intelligence is the other leg of our digital strategy. It is going to be very, very powerful for us. So the part of this that's going to unlock, think of it as machine learning and think about lean in the office. So a lot of you know, we've been trying to do lean enterprise for over 10 years. Yes, we made a lot of progress on lean in the factories, and we have a lot more to do. Lean in the office has been harder. You can't see flow. You can't see information. You can't understand the relationships with data. It's just overpowering. But with machine learning and the use of artificial intelligence, you can make that all click. And so to me, machine learning AI is the Red X to lean in the office. And we have a number of pilots that we're doing around financial forecasting, commercial use around sales opportunity tracking, quality returns and looking at that analysis. Our -- the calls that come into our call centers, how do we better use information to help them with that. I'm extremely excited about that whole AI front. It is extremely powerful. We've got a functional leader tied up with our IT leader. And we're going to be all over that, and that's going to be a bigger part of productivity going into the future. Our earnings growth, strategic positioning and acquisitions are the changes. Strategic positioning is an interesting change here because it was a clear message to the divisions that your divisional strategy is equally as important as The Win Strategy. And we've always said that, but by putting it on The Win Strategy, we've gotten very strong feedback from the GMs that they think this is one of the best changes that we've ever done. Because -- and it encourages the GMs to own how they are positioning their business versus the competition. Because The Win Strategy, being the business system, does not tell you -- your technology road map does not tell you the channels to market, does not tell you what markets to go after. Your positioning strategy does it. So the power of this is better strategic thinking at our divisions, coupled with a great operating system that creates better strategy for the company as a whole. And then lastly, you can see those bullets are all organic orientated. We wanted to make sure acquisitions is another important part of the growth strategy. I'll talk more about that later on. And then lastly, financial performance. These 4, I would say, are the bread and butter of The Win Strategy. They didn't necessarily change, but we colored simplification in green, and that's because we put simple by design underneath there, and I'm going to cover that as a separate topic here later. So Lee.

Okay. Good afternoon, everybody. It's great to be here. Driving in this morning, I was thinking that it's been -- this is our third investor conference that Tom and I have done together. It's been 5 years since we were put in our new roles, and it's just hard to believe time goes that fast. So I'm going to cover the metrics that we do to measure all the strategies Tom talked about upfront. And we'll start with Engaged People. And under that, we changed zero accidents to zero safety incidents. And the reason we did that is messaging more than anything. With zero accidents, it almost gave you the impression that it was unavoidable. When we talk about incidents, it's more messaging that is avoidable. In fact, we have a huge amount of facilities around the world that do have zero accidents, month in and month out, year in and year out. Second, we added the word agility to speed. We constantly get feedback from our customers about being more nimble, being quicker, and it's not always being fast. It's being flexible. It's being accurate with that flexibility. So we've done that quite a bit, and I think this has really resonated with the team. Tom talked about updating metrics on here. We used to have 74% on engagement, and we've changed that to 75% because we knew that was top quartile on this engagement survey. And I can tell you, we all take great pride in the organization of meeting that this year and looking forward to building on top of that. Composite likelihood to recommend. So you've all heard about Net Promoter Score. This is our industrial internal version of how that works. And it's built up of 4 key metrics. 2 of the metrics are transactional with our distribution and our OEM base. One is how we do line item ship complete. And then the third -- or the fourth, I'm sorry, is really deep customer interviews and assessing how we're doing with that organization. This is incredibly impactful to our businesses around the world in measuring and giving them outside feedback from their customer and how we're performing. And then zero defects. We changed from Six Sigma quality to zero defects. I think we all felt that Six Sigma quality left you with the impression that it was just designed for Six Sigma. What's important to our customers is not only designed for Six Sigma but all the way through the value chain until we deliver a product to our customer that is zero -- defect-free. Moving to Profitable Growth. One of the things that we added here is #1, new, #2 in each business. Tom talked about 126 divisions to 84. Our businesses today have critical mass. Our businesses are very capable of developing products and competing in the marketplace, and we task each one of them to create road maps and how to be #1 or #2. A subtle thing we added to distribution was global. We've been talking about global since 2.0 was introduced, but it was one of these words that should have been under with 2.0 and it wasn't. And I'm going to give you a nice update on how we're doing there so we want to make sure we capture that. And then on the bottom, we've always talked about increasing new products, but the Gage R&R and the metrics still developing. We're getting much better on that. The vitality -- we've added vitality and gross margins. We're looking at 5-year sales from new products introduced to the market. And then what we're doing is we're comparing that gross margin from those 5-year sales to the core gross margin of the business. And as you would expect, we hold ourself accountable if we're truly innovating around high needs with our customers. We would expect that value, that gross margin to be higher, so it was a great add. And then our Financial Performance, simple wordsmithing, top quartile. We just added performance on there. Tom talked about updating metrics. Again, the old Win Strategy 2.0 had 17%, 19% clearly is in the middle of top-quartile performance. We added incremental margin performance back to this Win Strategy. It was on the original, and we wanted the message to the organization how important this is. Not that we've ever lost it, but it's just -- it's amazing when you have a document that goes around the world. What's on here becomes gospel in the way people operate. So very happy with the way our team is performing there. And then lastly, free cash flow. Tom talked about the 18 years of 100% free cash flow conversion. And I have every expectation that, that will continue to happen as we go forward. But what we did and what I would say, "We save the best for last," on Win Strategy 3.0 is this whole concept of Leading with Purpose. And the purpose statement and, to some extent, our value statements have been shared with everybody. But this was a big deal, and it has resonated clearly within the organization. And really, how it came about was, we started asking ourself what distinguishes a good company from a great company. And we started getting around the question of, "Why do we all do what we do?" There is long tenure in this company, and we perform here for 30, 35, 40 years for a reason. We wake up every day, excited about the mission this company has. In fact, what we also talked about is every single day we wake up, and we're executing on The Win Strategy, we're meeting weekly, monthly, quarterly targets but there's more to what we're doing than just those time-bounded strategies and tactics. And really, we're incredibly, durably relevant to the world on what this company does. Lots of research on this when we got down to the purpose statement. 81% of millennials will talk about the successful businesses to have a genuine purpose. But I would argue, all of us need to have a genuine purpose inside the company. So with that, I'm going to have Tom kick off the purpose statement.

So this next slide is the actual purpose statement. And it's 9 simple words: enabling engineering breakthroughs that lead to a better tomorrow. And like Lee said, it has very much resonated with our team. These words allow you to connect to this purpose statement. So enabling speaks to everybody. Everybody is on the enabling team, whether you're an accountant or whether you're an engineer, whether you're on the first ship, you're on the third ship, you're on the enabling team. You are an enabler. Engineering breakthroughs that we do are those 8 motion control technologies through our customers' application. And everybody here, all of you watching, everybody here in the room, we're all trying to create a better tomorrow for ourselves, for our families, for the communities, for our shareholders, our customers, all the stakeholders involved. This was developed with focus groups of over 600 people. And these words are important, and they resonated with people. So we've done a multimedia-type of rollout process to our team. I'm going to show you a video here in a second. So we have an overarching video that describes the purpose statement of the company. We have application videos, which you're going to see when we break for Q&A. And then we're going to have videos, we'll have multiple of those over the next several years. And we also have videos how we bring this purpose to life in the communities. I purposely like this page a lot because this is from the purpose book. And this purpose book, those of you that have children or have read a child book to children would relate to this. So we tried to design the purpose book to complement the video, and in such a way that it had impactful pictures, easy words, keywords to help you connect to the purpose statement to personalize this. This is the last page from the purpose statement, the woman that you see here is the lead character, happens to work for Parker. And this is -- happens to be Lake Erie, and she's reflecting on the end of her purpose. You may not discover your purpose in a day, but you will spend every day after living up to it. And the connection has been that you can't lead to a better tomorrow if you're a weak company. If you can barely make payroll, you don't stand a chance of living up to that kind of purpose to it. And the way we've connected for people is that if you're a strong company, and our definition of strong is being top quartile, you have a chance of creating this better terminal for people. When we show you the video, a lot of people have told us that, that video has enabled them to be able to go home and talk to their family about what Parker does around here. And we're not necessarily redefining the company. We put words to what the company has been doing for 103 years. But we put important words so that people can now rally behind what it means to work for Parker and how we do lead to a better tomorrow. So Dan, if you'd run the video? [Presentation]

So hopefully, you all liked it. What's interesting about the video is, just as an aside, is that everybody you just saw in that video is a Parker team member. So we didn't hire actors and actresses to do that. We created a bunch of new movie stars. And it was very exciting for people to see that. But really, what makes me come to life is to give you these kind of examples. I'm going to give you two. Again, when you get the President's information, you'll see it in more detail, and you'll get 6 of those. But when you bring the purpose of life with examples, it becomes more real. And you can go home and talk about it and it becomes more meaningful to your -- what you do during the day. So this first one happens to apply with a recent acquisition with LORD. So our enabling technology here is adhesive technology. The breakthrough is around lightweighting and electrification. So that addition to the portfolio creates the ability to take dissimilar materials and also eliminate mechanical fasteners to create bonding of materials at a lot lighter weight. And then when you think about a battery module, which is in that middle section there, different OEMs have different strategies. Some want to seal the battery and be able to service it, and some want to permanently seal it. We are one of the few suppliers out there in the world that can do both of those things. We already had the sealing technology. Now we have the permanent sealing with the structural adhesive. Both of those things, lightweight and electrification, create a more environmentally friendly world, better fuel, lower emissions. And then if you move to -- you're going to see this video when we break for Q&A. This is from our Fluid Connector Group, and the enabling technology here is the high-pressure coupling technology. In the middle there, you'll see an app -- the application. So firefighters with an air tank on their back going into the fight. Today's technology is the threaded connection. You can imagine with a set of gloves on with smoke and fire around you and the stress that happens in that environment, trying to make that connection, it's 60 seconds at best. And today, with our technologies, this enabling technology with this coupler, we can do it in 2 seconds. Clear to see what the better tomorrow is, the firefighters, security and safety, obviously. And then the safety of the people who are trying to rescue and the property as well. So it's a huge, huge opportunity and very much speaks to this purpose and action. And you'll see the video that will help reinforce the point here. So we're going to go deeper now. So that's Win 3.0. That's the purpose statement. And we're going to take you a deeper cut into some specific strategies around growth and our margins. Let's start first with what has to change to create this. We need to continue to do the portfolio of things that we did, and we'll continue to look at that in the future. And I'll give you more color on that when I get to the portfolio section. But we're going to continue to look at, which is what we did, buying companies that are more resilient, better margins, better growth rates. That's -- so we can do portfolio of things. But there's things we need to do on the other side of the page, which is internal performance, things we can do. So we talked about that first bullet, Win Strategy 3.0. We're going to cover the rest of those bullets is what the rest of the presentation is going to cover. And Lee and I will take turns to uncovering these topics. So the point here on this page is to do organic changes, and margin expansion is going to take both of these things. So let's start first with simplification. We'll go down that right-hand side of the page on the prior slide. The first two, I just want to make a quick comment about. We are going to continue to look at our organization design and organization structure. We think we have about the right number of divisions, but that's always something we'll look at. But I think more of that structure discussion is going to happen within the divisions. Do we have the optimal design organizationally for the strategy positioning of that division? The 80/20 work that you've heard us talk about on revenue, complexity and operational complexity, early days still. I would say the first inning has big, big legs for us still. But what I want to spend time with today is on Simple by Design. All of these things under simplification are speed enablers, margin enhancers and growth enhancers. So Simple by Design is a clever way describing exactly what we're trying to do. We're going to try to design things simpler. And this is the page, I think, that kind of resonates, nobody intends to design things, complex to civil engineer and accounting, the state people who worked on this interstate system, I'm sure they didn't design to look quite as complex, and neither do our engineers. However, complexity happens as a result of good intentions. So just -- to kind of frame this thing as to what we're trying to do. If you think about any kind of product cost or complexity continuum, about 70% of it is tied and unique to design. And you could push back, I mean, so maybe it's not 70%, but I'm directionally correct on that. And then everything else is the conversion side of thing. How do we take that design and convert it into a final product. If you think about on the right-hand side of your page here, what happens on the conversion side? Well, there's hundreds and hundreds of decisions. The bulk of the life cycle of that product sits over on that right-hand side of that page. 30 years, 40 years, you're making lots of decisions. But if you think about it in the grand scheme of things, they have relatively limited impact. They're easier to change and change in the design, but they don't quite get at the big knot that you're trying to get at. The big knot is on the left-hand side of the page. Again, over this 30, 40-year life cycle, the design might have taken you 3 months. But still, you're going to live with that thing for a long time. So that impact is lasting. Think of the left-hand side as pouring the concrete. We pour the concrete, and guess what, you're stuck with the concrete for a long period of time. Hence, we used some more time when we pour the concrete, let's pour it differently. Let's pour it in the way that's easier to manufacture, easier to supply, et cetera. If I reflect on my own personal journey as an engineer, our company -- and I would say, most companies out there spend most of their time on the right-hand side of this continuum and need to spend more time on the left-hand side. The right-hand side is still important. We are never going to stop working on that. But the left-hand side needs more energy, needs more process capability and needs more specific tools to make it better, And that's what we're going to talk about. And the power about doing that is the same thing I talked about simplification: speed, margin growth. So we had a team work on this. And we piled it with 2 divisions, and the team came back with really 4 design principles. And I'm going to make a quick comment about each one of these bubbles. These are the 4 principles. We're going to design with forward thinking. Meaning we're going to design with a more intimate knowledge of the customer. We're going to design with thinking about what that customer might change downstream, and we're going to design for safety at the beginning of the process. We're going to design to reduce. How do we design a bill of material that's less deep, simpler? How do we design to reduce the number of setup? How do we design to reduce the number of suppliers? How do we design to reduce those single and sole-source suppliers that create more risk? We're going to design to reuse. How do we eliminate redundancies? How do we eliminate part numbers? How do we reuse materials that we used already throughout the company? How to reuse the people in the value stream, the equipment in the value stream? Reuse is a powerful concept. Then we want to design for flow. I can tell you when I was designing things, I was not thinking about designing for flow. And we want to do that. And the idea here is how do we design with late-point customization at the end of the line, not at the beginning, so that'll enable us to flow things better. All of these things are -- become possible in today's world with some process changes we're going to make and the use of AI, and this will become clearer here in a minute. So the process changes is Winovation. So I wanted to orientate you here on this slide. The top is our symbol for the innovation process, which we call, internally, Winovation. The middle section of the page you see is the stage-gate process we use. So from market evaluation from the idea to the end-stage gate 5 when we're ready to launch. What Winovation has done well is it's always assessed technical risk, our technical capabilities to do things. We need to get better on the commercial, which I'm going to talk about in a minute, but we had assessed commercial risk to technical risk. What we never looked at was how complex is this thing that we're designing. And that's the new element you see there towards the bottom of the page. We are going to have a complexity assessment tool, and we're going to take those 4 guiding principles. And those make up 10 questions that we're going to have a cross-functional team evaluate every new idea and come up with a complexity score. Now this complexity score is like golf, lower number is better. And so we're going to look for people to shoot under par here, who want to develop new products. We have never done this before. We have never even assessed -- make things complex at all when we designed things. This would be a huge change to how we design things. But if we just did the process side, and we didn't help our engineers assimilate data and information, we would make some progress, but we wouldn't ultimately get there. This stat is pretty true. Again, if I think about my time years ago doing this, you spend about half your time trying to find information. And if we want engineers to design, to reduce things and to reuse, if they can't find information, it's almost impossible for them to figure out how to do that. And if you're trying to do it manually, you will just sort of come to the amount of information and engineers default to -- I'll just make a new part number, and that's what happens. So this all becomes enabled and the game changer is the use of AI. I'm not going to disclose the software we're using. That's something that we want to keep to ourselves. But this software searches our large database, looks for part geometry similarities, material similarities, manufacturing method similarities and will allow the engineers to do things like design for reduce, design to reuse with the use of this tool. So this will come to life here on example. So one of those divisions, that was our pilot division, did this sample right here, this application. So if a camera can help me so we'll see how well this works on virtual. Another point I'm trying to make, I don't -- these are 2 high-pressure couplers. I'll make -- put this in the right hand. So this is the FET series, don't worry about FET, what it means. This is an interchangeable high-pressure coupler. This is the new coupler we're making. If you look at the 2, outside of this has a different coating than this one. They kind of look the same, don't they? That's the only point I want you to make. These look the same. However, when we did it, originally, we designed something that was wildly different. Let's step back into, okay, so what is the application for this coupler? So this coupler is used to connect attachments, work tools to the piece of equipment, whether it's a construction vehicle, agricultural vehicle, oil and gas application. The FET series that you see on the left-hand side is an interchangeable coupler that can work anywhere, any application in the world. What our customers and distributors have come to us saying, we'd like something for more severe environments, as an example, a rock breaker. If you can imagine the impulse pressures that a rock breaker, the tool has -- and of an excavator, hence, let's come up with a project and survive that. This will be noninterchangeable because we don't want to put that severe one into a different application. And we came up with a new product, the 59 Series. So now you understand the application. These things look a lot of like with some distinct, subtle differences. When we designed that new one, we created 147 new part numbers. These things look almost the same. We created 147 new part numbers. Just as this was getting discussed within division, the division pulled the brakes, saying, let's stop. Let's put that 59 Series design through these 4 principles and see what happens. So they did that. They came back and looked at it, and they came up with a redesign that meets all the same customer needs and requirements, requalified it. And what happens is they eliminate 123 part numbers. So this concept to design for reduce, they reduced 123 part numbers. They achieved 100% of functionality, but 90% of the components are shared between the 2 products, the FET and the 59 Series. We get to reuse the capital. We have the same value stream. We were going ahead to create a whole new value stream. We're going to have to train people. We're going to have other equipment. We don't have to do that. We're going to reuse the same value stream. So the cost goes down. When we originally designed that thing, we probably would have never been able to sell many of them because it was so costly, customers, even though there's a distinct value proposition, will probably want to be able to sell than the way we thought we could. So the cost was dramatically lower to -- as you can imagine, with eliminating 123 part numbers and having that kind of commonality. If you have to inventory 147 separate part numbers with 127 different demand planning schedules, 147 -- I'm missing the numbers, 147 different receivers, you get the idea. There's a lot more complexity on inventory management, delivery, cost, et cetera. So this has kind of captured all of our engineering team's imagination. We're rolling this out. This has big, big possibilities. And we're -- every engineer is getting trained, as we speak. And we're launching it just over the next quarter or 2. The result's going to be pretty impactful. I gave you that example, dramatic change in the cost structure. You can see those things are going to happen as a result of this. As part of innovation, I'm going to lift it up now beyond Simple by Design and talk about it from a broader standpoint. First thing is we're going to still simplify that pipeline, all of those ideas that sit in that pipeline, that 80/20 constant that I talked about earlier. This design has the same risk because when we look at the tail of existing products, these are ideas. So we can cut that tail off, and we have. The tail of innovative ideas by division, we've lopped that tail off. We had engineers working on things that were diluting the talent within the division. We're now focusing on things with the most commercial opportunities, the most commercial value. I covered Simple by Design. I'm going to talk about some changes on -- to the Winovation process here on the next page, and then I'm going to give you an update. I covered this last IR Day about our technology centers. And then Lee talked about this Vitality Index matrix -- metric. This metric will be on every division engineering's goals and objectives as well as every division marketing manager's objective. So Winovation 2.0. Again, that process I described earlier, the change here is on the front end, that red box that you can see on the screen here. When we really looked at ourselves and looked at ourselves hard, we were too inside out. We weren't enough outside in. We have weak customer engagement, and hence, that created more commercial risk, more commercial interest when we were designing things. We recognize that, and the action here was we launched a new initiative called New Product Blueprinting. And to make this simple, what this is, is we've trained our engineers to be better observers, better interviewers, better listeners and spending time with the end users and the customer to understand those unmet needs and to understand those pain points that they have. So we could do a better job of gate 1 and gate 2, so better value, better ideas, better rooting with an outside in-type of focus. That training is all done. The process changes are fully integrated to Winovation 2.0, and we're off and running. Every new product that you'll see us develop going forward is going to go through this New Product Blueprinting process. And then lastly on innovation about the tech centers. We talked about advanced process development the last time we were together at IR Day. I would just give you an update, an additive. We have 4 centers of excellence: 3 in aerospace and 1 in industrial. And robotics is really happening in every division. We still have a Center of Excellence, but that Center of Excellence and that expertise is pretty much transferred to the divisions and divisions are off and running. The filtration tech center came to us from CLARCOR, and it was a great addition. We recognize the value of that, and we made it to total filtration group's tech center. The motion technology center puts the motion technologies that we have in aerospace with the motion technology we have in industrial side of the company, and we have them working together. Small team of about 15 people, and this team is really focused on electrification. And this is taking best practice back and forth from the motion side in industrial with the motion side from aerospace. And then lastly, on tech centers, we acquired a fantastic tech center with the LORD acquisition. In Cary, North Carolina, we have the material tech center that was part of LORD. That will be the material tech center for engineered materials as well as fluid connectors, the groups that have a high element of material science development as part of. The whole idea of this is this has not taken the place of our division engineering teams. That is still where the lion's share of our engineering work is going to get done. But we have a small focus group on those things that translate across the company for us to go faster and to really scale them up. And they are paid for by the groups. This is not a corporate SG&A free for all. We're not paying for any of this stuff. The group's -- the group president sitting in this audience are paying for every element of this. I'm going to pivot now to incentives. So we've made a lot of strategy changes, metric changes. We just want to step back with some discussion we have with the Board. What needs to change from an incentive standpoint? When we looked at that, we were very happy with the long-term incentive plan that we have. And what it came down to is we thought, are there some things we should change on the annual side of our cash incentive? I'll just remind you what our current cash incentive. The current cash incentive is RONA, return on net assets. And its return on net assets for each division of the company that we add that up, and that's the return on net assets for the whole company. It's been around a long time, 30 years, and it's served us well. It's created alignment with the divisions with a really powerful incentive. And it's everywhere. About 95% of the company is on return on net assets. However, there are some challenges. And if we want to get to be top quartile, there are some things that we'd like to change. It tends to act too much like a long-term plan, and we already have a long-term plan. So we felt we probably need to look at this. It doesn't have the elasticity that we'd like. It's just not as responsive to current conditions. And it doesn't quite have the growth sensitivities that we would want. Now if you remember, we talked about this and -- over the last couple of years. And we recognize this. We made a change so we've created that growth multiplier on RONA, where you could have an addition, if you beat the market. And you can have a deduct, if you are worse than the market. That was successful, but we reflected on it. It was probably modestly successful, didn't really hit the mark as aggressively as we wanted. And so we recognize this needs a clean sheet of paper. We got to do an -- new annual incentive design. The design principles here are going to be simple. It's going to be linked to annual performance. It's going to have a high R-squared to TSR. We wanted to make it simple so people can understand it. And we want to have it -- a higher growth sensitivity. And when you think about those design criterias, these 3 metrics come up: division net earnings is more of a Parker internal jargon, think of it as EBIT for the divisions, for those of you watching behind the camera; revenue; and cash flow. High R-squared to TSR, great shareholder alignment. It will be based on a percentage of your salary, based on where you are in the organization. Obviously, higher up the organization, you should have more payout risk; lower, you'll have a smaller amount. But every person will have some amount of payout risk. And it will be more elastic because it's going to be tied to annual performance. So we've been piloting this already in the filtration group with very positive feedback. And this will be a multiyear journey. It'll take us a couple of years to roll this out, recognizing that we have over 50,000 people that are on this. So there's a lot of communications, a lot of change management. But with this, there's going to be a very powerful change to just reinforce that top quartile vision for the company. Lee?

Okay. Thank you, Tom. So we started this section talking about strategies for organic growth growing faster than market and strategies to enhance margin performance. So I'm going to cover 2 of those strategies here, which I think you'll find very interesting. First and foremost, we talk about distribution a lot inside Parker Hannifin. It's very meaningful. We describe it often as our most important off-balance sheet asset, and it is. And if you go to The Win Strategy and you'll go under profitable growth, you'll find that they're prominent with all the other things. It is a key to growing faster than the market, and we've talked about that before. I'm going to walk you through distribution, what that means. So when we talk about distribution, I think, many times, externally, it's thought of as just one type of single entity. But in reality, it takes several different forms, and it's what allows us to grow very well and be very sticky in every trading area. First and foremost, in every trading area, we start with what we call a multiple-technology systems-focused distributor. This is high-capital investment, heavy engineering investment, doing a lot of systems integration work, MRO work and working with small OEM customers. They are a excellent engineering resource in every area. They would handle products like our connectors, motion systems group, pneumatics, electromechanical and sometimes engineered materials group and filtration, too. We add to that a single technology-focused distributor in any trading area. These are distributors with deep expert domain in a pretty much straight vertical segment. Technologies to think about in this area would be Engineered Materials Group and Instrumentation Group, very vertically integrated focus on a key area and do well. They coexist with these multiple technology distributors in any area. We also have distributors that are product line-focused. These are distributors that come to us many times through an acquisition. Sometimes they stay that way, [ exhibiting ] product line focus many times. And what is great about the technology portfolio we have as a company is we can move up the value chain, displace many competitive products on their shelf and grow that distributor over time. So another great add to the portfolio. We have market-focused distributors. These are distributors that are focused on a certain market that would coexist with all these other distributors that I talked about. Underground coal mining is a perfect example. We have distributors who do nothing but focus, but an underground coal mine service the equipment, work with the providers and take care of that area. And then lastly, we have MRO focused or catalog house. These are companies like Grainger, MSC, Applied Industrial Technologies, companies you're familiar with. We would create a basket or portfolio of products for them that they need to cover MRO applications across -- really, across the country. So that -- when we talk about distribution, that is the strategy and that is what we cover. And lastly, we add industrial retail stores really to those 3 types of products. So this is where our Parker stores play and where they perform. So when you add all that up globally, there's almost 16,000 independent companies that might have many different branches that are our partners with us today in roughly 97 countries. So a very broad breadth of competitors. What makes us successful? Really, it's focus and alignment, and it is the broad technology portfolio of Parker Hannifin. We are unique in our space, and we say that all the time. But to bring all these technologies together and have a high wallet share with our distributors is key. We work very closely together. This channel throughout the world, and especially in North America, is -- it's decades in the making. We used the word 60 years. I'm not sure if it's not 75. It's a long, long time. It is an incredible off-balance sheet asset, as I said. But our success -- in 2015, we talked about growing global distribution, and I'm going to share our results with you on that. But our success, going forward, is really on expanding international distribution and bringing digital leadership to that channel around the world. So expanding international distribution, in 2015, in New York, we talked about this being a key driver for profitable growth in the company. And we always knew that our mix in North America was greater than our mix outside North America, and we wanted to grow international distribution to give us really margin resiliency throughout the world and help grow organically. This was our split, 65% to 35%. In FY '19, where we've moved that 500 basis points, so 100 basis points a year going up. We've added significantly to the dedicated regional leadership to really drive the sales, 480 new distributors and then 165 new team members came on board. These are Parker-trained team people that have left and gone to work for distribution or started up distributors. And we love it. I mean that's how we've been successful in North America in the past. They understand what we do and how we work. So we've shifted the mix by 100 basis points per year, and we expect that 100 basis points per year to continue going forward. We've got great momentum happening there, and we'll keep building on that. So expanding just from international distribution is a key strategy going forward. We'll continue with the dedicated global leadership team. We will expand the capabilities of the existing channel. So if you go back to that front page, there are many different capabilities we can add to that distribution footprint internationally that aren't in service today, Onsite containers, ParkerStores, et cetera. So we've got some momentum behind us there. We'll continue to focus on developing markets around the world, which Parker carries a great brand name with it, and then we'll continue to support our Parker team members. So again, I just want to emphasize, we feel comfortable we can continue -- in the near term to continue to grow that 100 basis points per year. And then lastly, I want to touch on digital leadership through the channel. Tom talked about digital leadership on front on The Win Strategy. I mean this is the way our customers connect with us today. This is the way new customers connect with us today. And we've used the whole thing about wanting to have a Google-like experience on search and finding product, an Amazon experience like buying products inside the company. And for an industrial leader, if we can do that, I think it will really set us apart. So there's 2 key initiatives that we've worked with, with distribution. One is content syndication from Parker to our distribution network. We really don't want our distribution network replicating and ad hoc-ing the products that they support. We want to give them the content that supports all the engineering requirements and everything they need. So we've got a common digital experience on the front page around the world. So we're doing that, and it leads to a lot of benefits like demand generation, et cetera. And then second is creating this personalized portal for our distributors and for our OEM customers, where you come into Parker Hannifin, you have your own landing page. And the idea is you have the content there that is pertinent to you and the ability, as we progress with this, to place orders, see delivery, see inventory, et cetera. Very exciting, and we're working on rolling this out as we speak right now, but it gives us a consistent experience around the globe. So just recapping strategies, going forward, we'll continue to focus on international distribution. It doesn't mean we're not growing North America, we are, all the time. But the run rate, what we see in international is something that I just wanted to highlight for you. This digital leadership is important, and we'll continue to take -- continue to support our margin expansion across the company. Now I'm going to pivot to a strategy around margin expansion and really an enabler for growth inside the company. And I put this under the title, A Culture of Continuous Improvement Inside Parker Hannifin. And I'll explain what that means. But this is really the bedrock, in the core, the soul, if you will, of what we do from an operating standpoint in this company every single day. And all the elements are aligned on The Win Strategy for this. So everything that Tom and I covered earlier that drives this culture of continuous improvement is on The Win Strategy. And it's really congruent with everything that we do in the company. But what sets us apart, I think, is the way we build this inside our company. It all starts with our Parker Lean System. This is -- I'm going to take you through each one of these in a little more depth. But this is the basic tools, if you will, to drive lean transformation organization. But what's different for us is how we couple high-performance teams, our associates within a facility, to drive the execution of the Parker Lean System. And how we've created this culture of kaizen in the organization, it's really driving change for the better throughout the company. So it gives us sustainable financial performance, and I'll share with you some results as we go through this. Let me take you through each one of these building blocks, so you can understand this. I think the first thing before I go to the next page, though, is this starts inside our company with safety and engagement. It's the first thing we talk about inside the company. And this is a big driver for that. When we have safety and engagement, we get quality, cost and delivery as a key output, as we organize around this. So first off, the Parker Lean System. We introduced this. If you followed us for a long time, this was Win Strategy Don Washkewicz 1.0, if you will. We -- a big driving for lean in the organization. It's based on the Toyota production system. These are the tools inside our company. These are the tools we use to drive value stream mapping in the organization and really drive lean. But we take those tools, and we couple it with high-performance teams. So let me just orientate you, for a second, on how a Parker facility would run. You would go into a Parker facility, and it would be organized into value streams. And the value streams are nothing more than the commonality of products and processes put together so products can run down a line. In those value streams, we've got our team members. And those team members could be just 8 people to a value stream. It could be 16 people to a value stream or 24, but they may be broken up into different cells in those value streams. Whatever that common grouping is within those value streams, we would pull that team together and form a high performance team. The star you see on the graph here would be the measurements that team would be looking at: safety, delivery, cost engagement and quality. They would work collectively together. We would coach. We would teach. And it would give them the ownership to act and feel like owners in the organization, driving continuous improvement and really creating that high-performance culture. We couple that, lastly, with this culture of kaizen in the organization. This is rolling up your sleeves, going to genba, driving change in the organization, putting the operator #1, putting those teams #1, taking away impediments that are not creating flow, not adding value, eliminating waste. And the speed that we do this is just -- it's fun, flat out just fun. Last week, we -- last year, we had 317 kaizen weeks. You could think about every kaizen week maybe having 5 to 6 different teams going on. But if you think about it, in calendar year 2019, with 8,000 people, these are just not people working -- our team members working on the shop floors, people from the office, it's myself and Tom going to what we call a Presidents Kaizen Week, checking in with the team and really supporting everybody in the organization. So what are the results of that? Tom showed you the operating margin walk over time. This is part of that. Top safety -- top quartile safety performance from 2015 to this year. It allows us to quickly integrate acquisitions. We come in with our culture of continuous improvement, and we drive that in the organization. It gives us strong margin performance. I don't like to talk about decrementals because that always means we've got headwinds. But it gives us a strong capability to work on decremental margins, and it's constantly proving and eliminating waste, giving operating margins. So a strong culture of continuous improvement. Here is the secret sauce, if you will, it's the Parker Lean System; high-performance teams; culture of kaizen, giving us quality, cost, delivery, starting with safety and engagement. Thank you.

Thank you, Lee. So we're going to move to the last section for me before Cathy gets up. We'll talk about the portfolio, and we'll talk about our capital deployment strategy. So if you look at where we stand, we are 11% market share. We're #1 in a $130 billion space. Now we've been -- recently updated this, it's slightly over $130 billion, but the space is about the same. The key takeaway on this slide is all the other space that we can swim in. There's lots and lots of space to grow organically and inorganically when you're at only 11% share. We do not need to move outside of the space. So when you think about our portfolio, this is the space we need to be in, and we can excel in the space. We have an unmatched breadth of technologies, and you've heard me talk about this before, but we have 8 motion control technologies. The big advantage we have is that we can use all these to help solve a problem for a customer. Most of our competitors have either one single technology or they have one single product within that technology. And can you imagine when you go and make a sales call, if you're trying to talk about solving a problem on safety, quality, cost, et cetera, you can solve a lot more problems than you can bring more technologies to bear. And that's our big advantage. You've heard me talk about this stat, and we actually checked it again. It's slightly over 60% prefer -- to make it easy to remember, 60% of our revenue comes from customers that buy from 4 or more of these technologies. Our customers would not be doing that if they do not see the value in this technology offering. So I got 2 examples to try to bring this to life in an application. Again, when the Presidents give you an update, they're going to show you this in more detail, and you'll get 6 of them. But on the left-hand side is kind of the index of this slide. It shows you 6 of the 8 motion control technologies. And they're color-coded, so you can find the color for electromechanical, and you'll see the application on this. This is, obviously, an aerospace application, a helicopter, and you can find those electromechanical applications. And you can just read to the whole thing. Imagine if you're the OEM for this, and if you just came in and all I had was thermal management. How many problems can you solve if that's the only trick you have in the bag? If you can do all of this, the cost of ownership, reliability issues, the customer may have sustainability issues, they have -- this is how we win. This portfolio has been thoughtfully crafted over decades and is one of our key competitive advantages. So that's an aerospace application. And if you look on the industrial side, here's a utility lift vehicle. Again, the same index. This happens to have also 6 of the 8 technologies on it. And when you think about lift vehicles in electrification and 5G, this is going to be a vehicle that's going to get a tremendous amount of use going forward. And the fact that we have so much content on these is a fantastic thing for the company. And we would not be winning as much on these if all we did was provide a product. The fact that we could do multiple of these things is why our OEMs want us. We can solve their bill of material problems. Okay. Moving to the deployment side of things. This list look very familiar to what we've talked about historically. At the top of this list is dividends. We are not going to break our track record of increasing dividends. That is not going to happen. We're going to continue -- try to continue to target 30% to 35% of net income. We're then going to fund organic growth and productivity that factor in the future investments that we're making. We're fortunate, again, that I talked about earlier, our business model doesn't need a huge CapEx to do that, but we're going to invest in that. We're going to offset dilution with our 10b5-1 and with the acquisitions that we've done. We're going to focus on debt reduction. And we're going to focus on debt reduction until we get that gross debt-to-EBITDA leverage at around 2.0. When we get to that point, we'll go back to looking at acquisitions versus discretionary share repurchase. And we've always worked hard to make the best decisions on behalf of our shareholders and what will give the best return for the company. If we do pick acquisitions, this is our strategy. We want to be the consolidator of choice. So that pie graph I showed you has got a lot of room to swim in, we would like to be at that. Doesn't mean we're going to swim in everything, but we'd like to be the consolidator of choice. All things being equal, there's 4 operating groups that we'd like to look at: aerospace, engineered materials, filtration, instrumentation is our internal name, and instrumentation is home for process control and climate control. So you've seen us do this. We had bought companies in this space: Exotic, LORD, CLARCOR. We are following suit with what we've been saying for the last couple of years. But then we also want to look at targeted investments on, if there's some key electrification technologies, that would make sense. We always will look at acquiring versus building these technologies in any natural adjacencies that happen to come up that makes sense. I'll hand it over to Cathy.

Thanks, Tom. Good afternoon, everybody. Thanks for joining us today. You've heard a lot from Tom and Lee about our strategy. Hopefully, you can feel the energy that, that brings for us. And hopefully, you can sense the value that, that's creating. I'd like to show you some of the numbers. So 2 years ago, when we had our Investor Day, we set these targets that we hope to achieve by fiscal year '23. We said that we will grow 150 basis points faster than the global industrial production index. We set a target of 19% segment operating margin; 20% EBITDA margin; free cash flow of greater than net income, 100% conversion every year; and an EPS CAGR of more than 10%. So how are we doing? On segment operating margins, I'm showing you here, both as reported in the yellow bar, and then topping it off with the adjustments we make to our numbers to show you our continuous comparable margins on an ongoing basis. I started with fiscal year '16 to take you back to the last recession period, so you can see how well we've improved the floor in our margins from the FY '16 floor of 14.8%. We are forecasting a 16.2% operating margin on an adjusted basis for fiscal year '20. That's 140 basis improvement in the floor. We have more room to grow. You can see we intend to still meet our target of 19% by fiscal year '23 by growing another 180 basis points. I'd like to point out that since we set that target of 19%, we have added a weight of 90 basis points of amortization through the acquisitions we've done. We're still confident that we're going to meet that 19%, however, with all of the tools you heard about in The Win Strategy and from the high-margin business that we brought in with LORD and Exotic. Even better performance in EBITDA. You can see here, again, comparable to the recessionary period of FY '16, we've raised EBITDA by 390 basis points. And we have more room to grow to get to that 20% target. By fiscal year '23, we intend to add that 140 basis points in that time. Cash flow conversion. So Tom has mentioned how well we do with cash flow. I wanted to point it out here. I showed 2 columns. The yellow bar shows the dollars of free cash flow. The blue bar shows net income. I wanted to demonstrate our resilience in both periods of high growth and in recessionary periods. So fiscal year '19 for us was a high-growth period. We hit a record net income that year of $1.5 billion. Our free cash flow conversion that year was 115%. Now we don't guide to our cash flow number. But based on where we are so far this year, and looking at our historical trend, we generate 60% of our cash in the second half of the year. First half of the year, we generated $826 million, so that puts us at a rate, adding 60% in the second half of cash flow from operations of $2 billion this year, that'll be 14% of sales. A high number, higher than we've typically achieved. We're doing that during a recessionary period, as you see, the lower net income. So net income isn't contributing much, but we intend to earn free cash flow of $1.8 billion in FY '20. All of those results help us with our EPS CAGR goal of greater than 10%. And coming off the recessionary period, we estimate that we will grow EPS 13%, getting to a $15.10 by fiscal year '23. So all of those show -- demonstrate that we have been pretty good about being -- meeting our goal of being great generators of cash, and that allows us to then be great deployers of cash. So let's talk about that. We set the goal just coming into fiscal year '19, and over that 5-year period, our targets show that we will generate cash flow from operations of $11.1 billion. Add to that, the debt that we activated, we utilized the balance sheet, took on the debt of $5.4 billion this year, for a total capital able to deploy over these 5 years of $16.5 billion. That allows us to pay $2.5 billion back to the shareholders in dividends, invest in ourselves $1.5 billion to support the growth and the margin improvement we are planning to do. We want to bring the balance sheet back down to a more manageable level of 2x gross debt-to-EBITDA. If we pay -- when we pay back $3.9 billion of that debt, we'll be down to that 2.0 level before the end of fiscal year '23. We will continue to offset dilution in earnings per share by buying back through our 10b5-1 program, $200 million a year, which would be $1 billion over these 5 years. We did the investment in LORD and Exotic, not only did they bring in good, high-margin, resilient business, but they are also great generators of cash contributing to this. That leaves us, in this 5-year period, with over $2 billion to reinvest in further strategic acquisitions or buying back more shares. Wanted to show you how well we've been utilizing the balance sheet. Tom talks about it a lot when he talks about our capital deployment strategy. We want to stay -- we want to utilize the balance sheet maybe better than we have historically. So when we wanted to do the CLARCOR acquisition, we had the strength in the balance sheet to do the borrowings. We took the gross debt-to-EBITDA multiple up to a 3.6 multiple. By the end of that fiscal year, we got it down to 3.2. And I'm proud to say that in an 18-month period, we brought the leverage back down to 2x, just after the end of fiscal year '18. That allowed us then to go into and be interested and acquire both LORD and Exotic. The strength was there in the balance sheet to do that. We used the balance sheet. We levered back up. We will end this year at a 3.6 multiple gross debt-to-EBITDA. That will only have 7.5 months of EBITDA from the acquisitions. So that will come down quickly once we pull in 12 months of their EBITDA. And we're pretty confident that by the -- even before the end of fiscal year '23, we'll have the multiple back down to 2x, great use of the balance sheet. So how are those acquisitions performing for us? CLARCOR just passed their 3-year anniversary with us. When we announced CLARCOR, as I mentioned, we delevered in 18 months after the acquisition of CLARCOR. When we purchased or acquired CLARCOR, we gave a pretty aggressive number for what synergy savings we were going to achieve. A year later, we even raised that target, and I'm very proud of the team because by the end of this fiscal year, they will meet that target. They will achieve $160 million of synergy savings and $100 million of revenue synergies. The LORD and Exotic integration teams are doing as well. LORD is ahead of schedule so far. I want to remind you that LORD came in as a very high-margin, resilient business. And by the end of fiscal year '23, they will meet $125 million of synergy savings for us. Exotic Metals, a little bit of a headwind with the 737 MAX being shut down for a while. But yet, they are still on target or on track with their integration. And by the end of fiscal year '23, they will bring us $13 million of savings, all going very well. I want to remind you of our good dividend history. So when we pay a fourth quarter dividend this year, that will be 64 years of raising the dividend year-after-year. We have a goal of paying out 30% to 35% of our net income. And with the 11% increase that we're paying out in this fiscal year, that will be at the 35% 5-year average of payout. Now some of you have had conversations with us, but I'd like to announce today that starting with next fiscal year, fiscal year '21, we intend to change the way we give you our disclosures for core ongoing segment operating earnings and earnings per share. So beginning with July 1 with our fiscal '21, we will include in our adjustments the acquisition-related intangible asset amortization expense. We think this is a better representation of our core operating earnings year-over-year. We've -- as we've been acquisitive, the amortization has become a material amount to the earnings, and we think it's a distraction. And we think we'll be better comparable to our peer companies that are also acquisitive. So starting with next year, we will make this change to the adjustments we make to our earnings. Now I want to point out that you can look at our cash flow statement today and see an amortization amount. Starting with the third quarter disclosures, we will be breaking that amount into 2 different pieces so that we can more clearly show you the amortization that relates purely to the acquisition-related intangible amortization expense. There's a little bit more in there. It's not much, but there's a little more in that number. So starting in the third quarter cash flow disclosures, you will see a more defined amortization-related amortization. So we'd like you to wait until we give you more guidance on what that annual amortization is and not start your estimates until fiscal year '21 on this new method. I will share with you that our estimates are that amortization in fiscal year '21 will be $315 million. And I'd also like to point out that as we progress to fiscal year '23, that drops down to just below $300 million. So that's about the level of adjustment we'll be including in the adjustments we make to earnings. But please wait until your -- for your estimates and not start until fiscal year '21. So what will that do? And where does all that take us in our target metrics. Looking back at revenue growth, we had told you before that we'd grow at a 3.2% CAGR over the 5-year period. I decided to start with this year, where we're guiding to $14.3 billion. I annualized the LORD and Exotic contribution to that to set a consistent base year period. And we believe that between the end of fiscal year '21 and fiscal year '23, we will grow 3.6% CAGR. That is above what we estimate GIPI to be at 1.5%. So that's 210 basis points higher than GIPI. The $16.4 billion is our best estimate today. I should mention that we set this before the coronavirus became a pandemic. So things might change, but hopefully not. What does that do? That will keep us on target to meet our goal of 150 basis points higher than GIPI. The last time we gave the targets, we did them on an as-reported basis, and we'd like to change that to an adjusted basis so that it aligns with the way we will be showing results going forward. So that changes segment operating margin to 21%. The EBITDA performance has been very good. The adjustment we're making to disclosures doesn't have that much impact, but we feel confident in our performance enough to raise that target from 20% to 21%. That all allows us to have more cash flow to utilize. The cash flow target now is $2.3 billion by fiscal year '23. And that also helps bring up our earnings per share to a new stated number of $16.90 by fiscal year '23, all meeting the targets. We're very confident that we'll be able to meet these. So on a cleaner look, this is the targets that we're shooting for by fiscal year '23. 21% segment operating margin, 21% EBITDA margin, free cash flow conversion greater than net income by more than 100% and earnings per share CAGR of more than 10%. What I want you to remember from today's presentations, we've demonstrated that we are transforming the value of the company in the metrics that I just showed you. And with what you heard in Win Strategy 3.0, we plan for that to continue even further. You see that in good periods and in slowdown periods, our cash flow is very resilient, very strong and gives us the capability to lever the balance sheet, use it for growth and delever back quickly. We will be, as a reminder, changing our disclosures starting in fiscal year '21 by adjusting out the acquisition-related amortization expense. And I just want to reiterate that we are confident that with The Win Strategy tools, we will be on track to meet those targets by fiscal year '23. I'm going to turn it back to Tom for closing comments.

Thank you, Cathy. And so I appreciate everybody that's been watching, hanging there with us for 1.5 hours. I've got 2 slides before we move to take a very short break for Q&A. So I'm back to the beginning, back to the message we talked about. The change we made 5 years ago, 2.0, drove significant improvement. Hopefully, we have you all as believers between the data that you've seen and the data we showed you today. The portfolio changes, you've heard about the 3 acquisitions that we made, gave you some insight into the portfolio and the strength and how that is a huge competitive weapon for us. That stair steps that we showed, 800 basis point improvement over the cycle, we're much better in bad times, and we'll be better in good times. And 3.0, the Purpose Statement and the momentum we have and everything else that's on this page, we have a lot of self help that we can do regardless of the environment to drive performance improvement of the company, and we're confident in these '23 targets that Cathy talked about. So I want to just close my comments with a quote that I wrote in the annual report in 2015, which I'm not big on trying to talk about quotes that I did, but I think this is a fantastic quote, if I had to say so myself, "It is the Parker culture and values, more than any strategy or measure, that will determine our success in the future." It's not cliché. We believed it 2015. We believe it today. And it is the key difference as to why people join Parker, as to why people stay a partner. And with that, I'll give it over to Robin.

Thank you, Tom. Actually, thank you, Tom, Lee and Cathy, for excellent presentations. I'm sure that you're feeling the enthusiasm that we are here in the Parker living room. So this is the time where we're going to transition now to get ready for the Q&A with Tom, Lee and Cathy. So if you've not already done so, then I would invite you to dial into the Q&A call queue. The phone number, as a reminder, has been provided to you when we sent the virtual meeting notice. So as we transition, we are going to take an opportunity to showcase one of Parker's Purpose in Action examples, and Tom was alluding to that earlier with a brief video. So with that, please run the video. [Presentation]

So welcome back. I hope you enjoyed the video. And it's such a powerful example of engineering breakthrough, in this case, an example that is demonstrated through fluid connectors, design and implementation of such a powerful product that is not only improving but saving the lives of so many out there. So pleased to be able to share that with you. So as you can see, we are now set up for the Q&A with Tom, Lee and Cathy. Hopefully, you've had an opportunity to dial in to the queue. Prior to starting, though, I think Tom wants to make a few comments. So Tom, I'll pass it to you.

Yes. Thank you, Robin. So while this meeting is designed to talk more about strategy, longer-term vision, given what's going on, I know a lot of questions would be, hopefully, still on the longer-term side, will be questions on what's going on right now. So I wanted to make a quick comment about Q3. We feel very good about Q3, and we are affirming today our Q3 guidance on EPS. So the adjusted EPS of $2.36 that we told you at the last earnings call, we are very confident we can deliver that. The teams have done a great job in responding to the coronavirus. Obviously, our first and most important thing is the safety of our people, and we're thankful that our people have been safe through this situation. Our operations in China are up to 95% utilization of where they were before the virus, and we didn't miss a beat in Italy or in Korea. And the order entry that we anticipated to support the Q3 guide has come in. I would remind you that when we did the guidance the last time we talked to you, we factored in some element of the coronavirus. Now recognize we did our best job at trying to estimate what that was going to be, but that's pretty much playing out to be true, what we had anticipated. So we feel good about Q3 and are confident we can deliver. So I'll let you turn it over to Q&A.

Thank you, Tom. So similar to the way that we conduct Q&A with an earnings call, we are going to have an operator, Andrew, who is going to be facilitating today's queue. So Andrew, I will hand the cast over to you and ask that you provide instructions to everyone.

[Operator Instructions] Our first question comes from the line of Ann Duignan with JPMorgan.

Just getting to the like the longer-term outlook, can you talk a little bit about -- a little bit more in-depth about what specifically is different about this version of Win Strategy? I mean what specifically is in there that was not there in the earlier version?

Yes. So if you go back to the things we showed in green, Ann, through the presentation under engaged people, ownership and kaizen, ownership was a quality we've been building on. It's becoming a more significant part of the strategy. Kaizen, we just rolled out in the last 12 months underneath customer experience, digital leadership, so that multipronged look at digital leadership around the website, digital products, digital ops and the new one around AI and the use of what we could do there. On a profitable growth, it's Strategic Positioning and acquisitions, which is not a new aspect of the Strategic Positioning piece. It's clearly new. And underneath financial performance, we have Simplification, and in particular, Simple by Design being a big change there. Now we changed the metrics. We changed a bunch of metrics. We changed the incentive plan, which we went through. And we changed our FY '23 targets. And we've put it an underpinning there of the purpose, too, which creates a more of an inspirational goal alignment for people. And I would tell you, it's hard to point one particular thing. That engagement graph I showed at the beginning, I think, is a cumulative effort of us getting the top quartile from all the things we did on engaged people, the original Win Strategy 2.0, all those type of things. But kaizen and the Purpose Statement are things we specifically did since The Win Strategy changes to 3.0. And you saw, if you look -- go back and look at those slides, a dramatic improvement in the last 12 months on engagement. That bodes well because there's a clear linkage to engagement to business results on what's going to happen in the future.

I totally appreciate that. And just a quick follow-up, and then I'll get back in line. Do you think that the whole mission statement, the leading with purpose and the enabling engineering breakthroughs, has that been the biggest driver of the improvement in engagement? Or is it just the maturity of all of these things we've been working on over the last decade?

Yes, we talked about this just as a leadership team. The leadership team is sitting behind the camera here. It would be a little bit of everything. We did a focus in the last 2 to 3 years on our frontline leaders, recognizing that the bulk of the organization reports to that person. So how do we help them be more successful? How do we coach them? We then raised that up to say we need to focus on the site leader because that person is the king or queen of that whole plant, and that's a key leadership. So we focused on that. Kaizen, the Purpose Statement, so there's a lot of things that happened. And then we did a good job of listening. We've been -- the mantra we've been trying to focus on is our people said something, we did something. So you said, we did. And so that builds credibility over time that when people take this survey and give you a feedback, that you actually do something with it. One of the hugest frustrations people have when they fill out surveys in life is they think nobody's on the other side of the survey, nobody cares. And people -- we measure that. We have a separate index, which I didn't bore with you guys with today, that shows that behavioral change that -- did people see us change, and that score is very high. So I appoint a lot of things on that. I couldn't necessarily one thing, Ann, but we're pretty proud of that. And again, as shareholders and analysts, that is a beacon of what's going to happen in the future. That engagement score is going to spell better results going forward.

Okay. And I wish you guys luck on that. I'll leave it there and get back in line.

Thanks.

And our next question comes from the line of Jamie Cook with Crédit Suisse.

I guess my first question relates to Win 3.0, and you talked about the opportunity on design cost. Is there any way you could sort of help us understand how that contributes to your new margin target of 21% or sort of size the opportunity? And is it greatest across a different product platform? I'm just trying to understand how to think about that. And my second question, sorry, is more short term. Understanding you reaffirmed the third quarter, I guess, I'm just surprised, given March is generally an important month and just given what's been going on over the last week. So can you tell us why you're so confident to enter certain businesses or, for whatever reason, performing better than you thought EBITDA margins have been a little weaker?

Yes. No, I'll start. Maybe I'll start with that one, Jamie. So Q3, you're absolutely right. And I probably should have made that comment upfront that March is always such an important month. But that being said, we still feel very good about hitting that number. I would remind you that we made a pretty big adjustment to the guide in Q3 for the coronavirus, and particularly, within our international. Our organic growth guide in Q3 was minus 16%, and we feel pretty good about that. And this is -- and then we've had good performance across the rest of the company. And I think our resilience of our -- I would just speak to the resilience of our supply chain. We have not seen much of supply chain disruptions. I would characterize it as minimal. We're not impervious, but it would be minimal. And we've been able to weather this. And our strategy has been, we want to have a supply chain that's local for local. So we don't do a lot of cross-border movement. And the fact that we have done a good job historically at risk mitigation, looking at where we have too much concentration and we have a single or sole source issue there, and that's been -- being done for years, has put us to where we have a pretty robust supply chain that has weathered the storm. Our people, the plants, we've put in stronger hygiene techniques, as you might expect, have done quite well. So we feel -- again, remember, we reset the bar, and we feel good about that. If I go back to design, so Simple by Design, and I knew people are going to ask me just what -- "How much money is this going to save?" And some of you heard me say this, it's big. I'm not going to be any more specific that you're probably not going to like that, Jamie.

We want more than big.

I know. And let me give you that example, that -- a couple of examples that I showed you. The cost that it would have been, if we had let that cost go and try to price that, et cetera, would have been twice the FET coupler. So we basically cut that cost in half when we redesigned it. Is that to say that's going to happen with every time we do it? Absolutely not. But it just shows you that it's very powerful. Now we purposely, this time, did not try to triangulate x bps for kaizen, x bps for Strategic Positioning, x bps for Simple by Design. Because frankly, the gauges are -- and that's too hard. It's impossible to come up with. I would tell you here between now and FY '23, it's going to have an impact. But I would actually tell you that Simple by Design has a bigger impact even beyond '23 because as we design things is where we had the big impact. We are going to work backwards as well. So a lot of what we started with is on new designs, but we'll look at existing designs as well, and that will be the next revision of Simple by Design coming up in the next quarter. But it's very hard to quantify because, as you can imagine, it varies product by product and what the opportunity is. But having designed stuff years ago, a long time ago, this is such a huge tool. The process and the software is going to liberate our engineers. We wish just to add a division last week. And even though they haven't gotten all the tools yet, they've watched our video, and it has changed our engineers' thinking about how they design things. And that's going to reap a lot of the benefits for us. So I apologize, I'm not going to tell you it's x number of bps, but we basically have to grow margins. If you go back to where we were before this current correction, we were around 17%. I'm going to use round numbers. So we have to grow margins 200 basis points. And everything we went through today on Win 3.0 and the momentum we have on 2.0 and buying companies that have higher margins is why we're standing here saying we can do this. I'm not going to give you the splits, but we -- there's a lot that can overpower the results to get there.

And our next question comes from the line of Julian Mitchell with Barclays.

Maybe just the first question around the concept of Simplification and also Strategic Positioning. You've talked about both, and understand the M&A aspect of Strategic Positioning, but I guess if I think about the current existing portfolio, it may be the notion of Simplification of [ tying ] to the portfolio as it stands today. How have your thoughts developed in that regard? And maybe just remind us what attributes you look for in a business for it to remain part of the portfolio. And whether the Eaton Hydraulics' sale to Danfoss -- any comments at all you would like to provide on that, given the linkage between electrification and hydraulics.

Yes. So maybe, Julian, let me start with Strategic Positioning. Strategic Positioning, obviously, helps on what acquisition will look like, but it is more slanted towards organic growth. And the observation that the 3 of us had over the last number of years, The Win Strategy is so powerful within the company back from when we first launched it in 2001, that, in a way, it became so powerful that it became, by default, the division strategy. And we never intended it to be the division strategy. We intended it to be the business system that help made all 84 divisions better, but we expect the divisions to still supplement on top of that with their specific unique division strategy. And by putting it in writing -- again, this speaks to the power of this document. This document is very much institutionalized within the company. You put a word on there, you take a word off, it's like a rifle shot going through the company. And by putting those 2 words on there, we sent a very loud message to the general managers that this is your responsibility. You are to put in The Win Strategy and all those changes, but you own Strategic Positioning. And this is really more of an organic strategy. But obviously, part of that positioning is what technology would you might want to acquire in your competitive landscape. And the 3 of us are hosting reviews at a certain cadence with all the GMs to come in and review their Strategic Positioning. So that's why this has become so powerful. It's actually connected the ability for us to talk strategically, much more effectively with our general managers. So we're going to be that much better off as a result of it. On the Simplification side, I think most of your questions were on the portfolio simplification of things. We like the 8 motion control technologies. We don't see a need -- or one of those that doesn't make sense anymore. They fit hand in glove. Those examples I tried to give create a compelling value proposition versus our competitors. And actually, the fact that we had the broadest breadth of technologies allows us to solve any kind of technology change. So this whole electrification change is obviously a big change. But it's a very good change for us because we're energy-agnostic. We can provide hydraulic, electrohydraulic, electromechanical and medical, whatever energy source you need, and it's best for the application that we can provide. Nobody else can do that. Everybody else is more single-line type of technologies. Then we can bring in engineering materials and filtration to round that all out, was a much more compelling application. We don't ever want -- we would be dumbing down the portfolio if we became all these separate single-line competitors. We would not want to do that. Now on the portfolio change with Eaton, I think it made sense for them. Because if you look at their portfolio, and obviously, Craig has articulated before, they have moved more into a power management company. And this business made less sense to them. But for us, it's -- we are a motion control company. We are 100% motion and control company, and everything fits in it. And we like our chances from a competitive standpoint with that transaction. But with -- and you asked about the criteria, we'll look at to review those. So what we look at, and we do -- the 3 of us do a best owner review annually. We have a formal one as well as Lee is looking at this all the time. They have to have the right kind of returns. They -- we've got to -- they all got to get to the new number, 21%. And we don't accept anybody to be a laggard. And it's not because you helped round up the portfolio, no, we tolerate none of those. So you got to hit the operating margin target, you got to hit the right kind of return targets that we want, and we look at that all the time. So on the portfolio, because we've been so thoughtfully designed over the years, there's no major tree trunks, as you and I talked about when I was at the Barclays Conference, take them off. You will see us do tree trimming, occasionally, like we got out of automotive onboard, with the exception of engineered materials, because we didn't like the value proposition. We'll continue to look at that, but we like the portfolio as it stands today.

That's very helpful. Maybe just 1 quick follow-up. The segment margin aspiration for fiscal '23, is there any 1 of the 3 external reporting segments where you're looking for the sort of largest increase? Maybe just help us understand kind of the weighting of the increase across the 3.

Yes. I'll let Cathy take on it if she wants to, but we're not going to get into disclosing it by segment. I would just say that the goal is we want all of them to get there. And you've seen over time that -- how international has closed the gap to North America and is almost there. And aerospace has been, in a lot of cases, ahead in North America. The goal is to have all 3 of them get there within a reasonable band. I don't know if you have any thing to add.

I'll just remind us -- you that when -- with the addition of LORD, they're much more resilient and at a higher growth rate than we typically have been. So they help add to that growth that we are confident we'll achieve.

And our next question comes from the line of John Inch with Gordon Haskett.

Hey, Tom and Lee, in the past, I recall an initiative to move smaller direct service customers, they are the -- these were ROE customers into distribution. And I'm curious where that stands. I think the thinking at the time was they cost a lot of money to service. We mentioned, obviously, the 1% distributor mixing. Is that part of that? And how does this help sort of your margin target progression?

Yes. John, it's Lee. I'll take that. So good memory, for one. That's all part of that revenue simplification that we've done as a company. And we have done quite a bit of that. We go through a portfolio analysis with every one of the businesses, what makes sense for distribution to handle, and we have moved that. That would not be material in that 100 basis points improvement I show with you. It's happened in North America, and it's happened, to some extent, in Europe. But it would not -- I wouldn't call it material to that improvement -- that 100 basis points improvement.

And how far along are you, Lee, in the process? At what innings than what you had originally set out to do?

John, I would still call it first or second inning on that. This is constant involvement, yes.

Yes. And then, Tom, just thinking about sort of China, Asia, this stuff kind of started with trade wars, and then we've obviously got coronavirus. Lee, you've put a lot of effort into your Asian expansion strategies and so forth. How are you guys thinking about the footprint in that part of the world? And particularly, maybe supply chain integrity, does it require sort of a future work around in China just because of, obviously, events that have happened? I'm just -- just any color you could provide would be helpful. And maybe this has something to do with The Win Strategy or maybe you can [ invoke ] The Win Strategy as you actually look at the stuff.

I thought you're going to take it?

Oh, John, so I'll start then if Lee wants to pile on. So we like the supply chain integrity aspect. Our ability to handle this current situation is indicative of what's happened there. So we are fortunate that we are not doing a lot of cross-border type of movement on supply chain. We are in the country for the country. And we've also designed a supply chain that doesn't -- we would try to mitigate risk as we will go through and look at our supplier evaluation, do we have the right kind of competitive tension and balance and risk mitigation in there. So we've been doing it, and that has helped us, both on material and logistics. The relationships we've had enabled us to weather the storm. So I don't really see a lot of big changes that we need to make there because we've already been working on that for years in advance. Now on the footprint, you're right, we did make some pretty big investments, if you go back 10 years ago, to build up the footprint in Asia. And actually, I would say, the last 3 or 4 years, there's a few plant closures that we've made as part of our consolidation. We like the footprint structure we have today, and we like our capacity utilization. We have ample room to grow, but we don't think we need to do much more on the footprint side. We've ramped up. We made some consolidations over the last 3 or 4 years, and I think we're positioned the right way to cover that going forward.

And our next question comes from the line of David Raso with Evercore.

Quick question on -- clarification, really. It must be my fault. I can't toggle back between the slides. Did I see the slide correctly that the adjusted segment margin target for '23 is 21%? And that's essentially becoming like an EBITA margin?

Correct.

And then the EBITDA target margin is also 21%. Is that correct? Because you think the D adds almost another 200 bps. So it must be my error. I just want a clarification on it.

No, that's very perceptive, David. It's a little bit of rounding up and rounding down. So it's a matter of the numbers are close. We're sticking to 21% on both of those. But you're right, depreciation is currently about 100 bps.

It's a little hard to know, and I'm just trying to understand it. So it is what it is. I mean there's a cushion in there or how everyone interpret it, but it doesn't make sense there -- that they're the same necessarily, but I appreciate it's 3 years away, so thank you. The coronavirus impact, I appreciate the affirming current quarter. But at a minimum, just given what's unfolding here, can you at least rank the risk and, obviously, ideal if you can quantify a little bit where the risk appear to be greatest? Is it commercial aero on the MRO side? China, you already had a good amount of coronavirus impact in the guide, but the incremental that maybe you're seeing out of that. And obviously, particularly important also, Europe now. Some sense of the risk and, if you quantify it, is that just logistics costs? Or you are assuming already some demand destruction? And then lastly, of course, North America, same kind of question. So if -- at a minimum, if you can rank the risk and the sense of magnitude on this last quarter for the fiscal '20.

David, you're talking about Q4?

Correct.

Okay. So Q4, I mean, I'm not necessarily going to comment about the Q. I'll give you some general comments because, as you might imagine, with 6 weeks more information and as fluid and dynamic as things are, we're going to benefit greatly and give you much more accurate and insightful information when we do the earnings call. However, when you start to think about Q4 -- and just let's take a couple of things at a time. Aerospace. So we had taken the MAX out of aerospace for the full year. But we are now working with Boeing. They're going to start some slow ramp-up in Q4 so April, May, June. It will be small. It is not going to be that material, but it will be higher than 0. So today, it's 0. We have some incremental positives on the MAX coming in aerospace. You are right that, obviously, one of the things the coronavirus and the travel restrictions around the world are going to impact is MRO activity. So if you look at our aerospace business, it's 68% OEM, 30% MRO. This is now updated with the exact numbers. Take the 32% and split it into commercial and military. So that 32% is 21% commercial, 11% military. Let's take military first. So the military is not going to be impacted by this, and we have a 17-month backlog, so we're in pretty good shape there. On the commercial side, yes, it's at risk. We have a 2-month backlog there. So we have some backlog going into Q4 but probably not enough to cover all Q4. So we'll be smarter in a couple of weeks as we see that play through. I think the commercial MRO impact is more into FY '21 by the time that happens. And obviously, by the time we do the FY '21 impact, our update to you will be a lot smarter because we'll have a chance to have seen -- see that. International, we took a pretty big haircut with the coronavirus based on what we saw on Q3. And we'll have to see whether what we gave you last time on Q4 is enough. We'll have to see -- time will give us the insight there. I don't want to comment one way or the other on that. I would just tell you that the international team, especially Asia, has just done a fantastic job handling this, from how they -- and really, I would say, the first part, everybody has. We have business continuity teams in every country in the world looking after the safety of our people and communicating to them, and it's been just dynamite with the speed of how we've addressed things. But the operating side of what's happened in Asia is part of why I was comfortable telling you that we're going to hit Q3. And that will obviously continue because the worst for Asia, I think, was in Q3. So I think they will get -- they have a little bit more hope in Q4 as things are starting to stabilize. What we didn't fully anticipate that we have some, obviously, downward numbers in there for Q4 in North America and particularly the rest of international and Europe. And what we need to see is how does this play through because when we did the guide for you, when we did a Q2 update, it was more thinking that, hey, this is kind of isolated into Asia. But we were pretty conservative on North America and Europe. And the question is, was our conservatism enough? We'll have to see when we get -- when we see the numbers. So the jury is out, David. But I think our team, our resilience and what we're going to be able to show from a MROS and just the capabilities of our team, you'll see that's what we've seen so far in the quarter. That's why I was confident to tell you we'll hit the EPS number for Q3. Q4, we need more time, but I try to give you an idea of where I think the pressure points are. I'm not sure that's enough to help you, but that's my thoughts.

Well, I mean, Thomas, that detail is helpful. I guess the question is have you seen enough already on what's unfolding to not rely on the initial thoughts about 3Q and 4Q to proactively maybe manage the distributor inventory down? Or whatever it may be, I'm just curious if -- are we still trying to be reactive to 4Q? But you did a better job than most companies by at least having some hit in the numbers when you gave guide last time. But I'm just curious what we're seeing unfold, is there any proactive actions being taken versus the old guide?

Oh, yes. I mean we're doing lots proactively internally as far as how we run that business. What I have not seen enough data for is to say I want to make a Q4 change to guidance. I think we need more time. And I don't necessarily think that the original Q4 guidance is that far off. But we'll be smarter 6 weeks from now to actually tell you that.

And our next question comes from the line of Joel Tiss with BMO.

So just 2 questions. I wondered, in the beginning, Tom, when you were talking about developing specific products for customers, like how do you keep the products from getting so specific that they're not applicable to anyone else? And then also in that same vein, is there any sort of a mechanism built in so that the newer products can -- that you can eliminate all the older products, like the complexity that's built into the system to kind of clean it out? And then I have 1 more.

Okay. So on that end, Joel, as we do new product designs, as part of what we will look at things, obviously, at a division, but we'll also look at platforms. So we have -- if you take the Motion Systems group, they have a team that looks at all the rotating parts as a technology platform, to try to do a more coordinated design road maps for that, to look at all the valve things as a group. Every one of our engineers can see what's going on across the company. We have -- for each one of the group Presidents, they have a VP of Technology, and their job is to do those communities of practice across or so. That's structurally how we try to do it. But the use of AI will allow the engineers to see this as well. So that's still -- we have a couple of multiple tools that will allow them to see similarity on materials, similarity on processes. If they want to design a new ball valve, they'll be able to use based on geometry, they can see how many other balls have been designed the same way. So we have a lot of things around Simple by Design that will solve some of that and reduce the complexity. But we continue to work at -- we can design things simpler, so we make sure we don't add any new complexity, but we're continuing to look at all the stuff we've already designed and where we've got duplicate part numbers, where we can have distributors cover some of these, where we can have high-runner part numbers be substitutes instead of these other ones, where we can price them differently, where we're going to have different processes to create the experience for these customers. We're doing that all the time, and that's a big part of the 80/20. So it's 3 things on Simplification structure, 80/20 on Simple by Design. And they all get at what you're talking about, making the business simpler and not having redundancies in part numbers, et cetera.

Okay. And then just sort of more generally, in extraordinary times, which we kind of feel like every single day sitting here, if a strategic deal comes up, someone that you've been looking at for a long time, and I know your balance sheet is a little more stretched than you want it to be, but is that something that you would look at? Or you're just very focused on getting the -- your debt-to-EBITDA down 2x? Or maybe there's a creative solution to try to combine? Just how are you thinking about that? And maybe what are you seeing out there a little bit? Is there any real strategic opportunities?

And Joel, I'm going to talk about your question, but I want to make a comment about extraordinary times because I wanted to make this comment when I was talking about the quarter. And this comment is more about the future. There's a lot to your point, Joel. There's a lot of uncertainty, and this is a unique time. I mean I've been around a fair amount of time. I've seen a fair amount of recessions. This is unique, but this is not permanent. This is temporary. And the underpinning of society, business, et cetera, is going to survive and going to continue to flourish. And I would tell you a couple of things for people to think about. First is we will continue to see coronavirus cases grow. We all know that. That's a fact. But as soon as they start to plateau and turn, that will be another indicator of how long temporary is going to be. And that will be the first shot in the arm, positive shot in the arm, for people's psyche, business stability, business and investment. So that's the first thing. The second thing is don't underestimate the resilience of human nature. If you go back and just look at the last 100 years, there is a remarkable amount of stress and tremendous unique situations that have happened. You can just go open up the history book, a tremendous amount of this. We survived every one of those. And so we will do this on this one as well. And part of that will be people will become saturated with all this information, and they will get used to living in the new world that we're in right now during this temporary period. And as soon as people start to feel a little more comfortable, that's another thing that will help certainty. And then lastly, in my view, is when the vaccine is developed for this. That will be the next thing that will be a shot in the arm in this. So I recognize the seriousness of this, and we're going to respond as a company, focusing first on our people and how do we protect our shareholders. But I also recognize this isn't going to last forever. So that -- I want to make that comment on that. But referencing extraordinary times, and if the deal of the century walked by, we are open-minded. However, we have a balance sheet that we are very much focused on deleveraging. And that is, first and foremost, it would have to be the most remarkable property that we've ever wanted and will require a unique structure to pull that off. That being said, the focus is on paying down the debt.

And our next question comes from the line of Joe Ritchie with Goldman Sachs.

So maybe just kind of starting off here, Tom, a little surprised at the end of last week with the Saudis and Russia and the impact that that's had on oil prices. Recognize that you guys are not the same company today than the company we saw during the 2014 to 2016 recession, but can you give us just a little bit on the exposure that you guys have today to oil and gas? And then secondly, how do you think about the knock-on effect potentially to industrial CapEx as well?

Yes. Joe, it's a good question. Obviously, it's something we've been think -- taking very seriously and looking at. So a couple of things I would just help frame for, Joe, and obviously, this is a question probably on everybody's mind. First, oil and gas represents, from a direct standpoint, less than 2% of the total company, if we look at where we are now versus the last time we had a sharp price correction. So the last oil and gas peak was 2014, that price correction took us into '15, a little bit in the beginning of calendar '16. We went down 40%. We've never come back to that original '14 number. We're only up 20%, so we're still halfway down from where we were. So the point there is we're not jumping off as high a cliff. That cliff is a lot lower. So I'm not trying to de minimize that this is going to be a stress to the oil and gas system, but we're at a much lower point. The other part is that the composition of our oil and gas has changed pretty fundamentally. So the composition at the peak was 85% upstream, 15% downstream -- down- and midstream. And for those of you that aren't familiar with that jargon, obviously, upstream is extraction, exploration. Downstream is refinery. Midstream is transferring it from extraction into the refineries. Today, because this is one of the beauty at CLARCOR, besides many other things that are positive at CLARCOR, we acquired a very large presence in that midstream section, filtering natural gas from extraction, taking out impurities to get it to the pipeline into the refinery. So now our mix went from 85% upstream to 65%; mid-, downstream, 15% to 35%. The point for shareholders is that, that 35% is a hell of a lot more resilient than that 65%. And so our composition is much better. So starting at a lower point, still a relatively small part of the company, and the mix is much better to our favor. Now the knock-on effect, difficult to say. That was -- what we saw before, that was -- there's a knock-on effect there. So that, we'll have to watch and see. But I still think, again, because we're starting at a lower point, and all that -- all of those sub-tier people are starting at a lower point as well, is going to help us a little bit. We will not be impervious to a down cycle. We will be a lot more resilient, though, this time around.

That's helpful, Tom. And maybe my follow-on question, just referring back to the commentary you made earlier on commercial aerospace aftermarket, and so that roughly, call it, 20% of your business that's levered to that, what do you expect your customers to do? Are they typically going to park planes here that are about to go into shop visits? I would imagine that they're going to be pretty cash flow sensitive at this point. I guess any kind of commentary that you can have on what peak-to-trough aftermarket could look like in this kind of environment would be helpful.

Yes. So they will, obviously, be sensitive to cash. That's a big deal to them. There's a certain regulatory requirements you have to do. There are certain maintenance requirements that you have to do at shop visits, and those will get done. If planes are not flying, then you're not putting the revenue passenger kilometers on those planes, and hence, you won't need to maintain them as frequently as you may have thought. And so that's what we'll have to watch and see what happens. If you look at other downturns, the financial crisis, 9/11, they've -- SARS, they've floated in that 15% to 25% correction of commercial MRO. What will happen with this one? We don't know. I can assure you that we are going to plan -- in all my comments that I was making earlier about the duration of this and trying to give hope to people, we are going to plan for a long duration because that's the smart thing to do from a business standpoint and err on this it's going to happen faster. So our team knows that they're going to work on planning for a sharper correction. Roger Sherrard that leads that business knows he's going to work for a tougher commercial MRO environment. But we have other things that can help us. We still have a nice backlog, and we've won a ton of business on commercial OE. We have a fantastic military platform on the OE side on -- with the F-35. We are on the marquee platform. And with Exotic, we just doubled our position in that. And the military MRO is still very strong. So while it's important, the other legs of that aerospace platform had the opportunity to help offset some of that. So we'll see. We'll be smarter. I don't think you'll see a large impact in Q4, but we need to give you a more thoughtful guidance when we talk about FY '21.

And our next question comes from the line of Andrew Obin with Bank of America.

Hey, just a question, just a follow-up. I think Cathy said -- in terms of free cash flow guidance for this year, she said $2 billion, and then she said $1.8 billion. I just want to understand is the guide $2 billion or $1.8 billion for 2020 for free cash flow?

Okay, Andrew. Yes. And I want to clarify, we don't intend to start guiding to cash flow. But I did show you that we expect $1.8 billion of free cash flow, and I talked about $2 billion of operating cash flow. Sorry, if I phrased it incorrectly, but it's $2 billion of operating cash flow, $1.8 billion of free cash flow.

Got you. And in the same vein, a follow-up question. Tom, I think one of the stories that's underappreciated at Parker has been the cash flow generation and, particularly, the stability of cash flow generation through the cycle. If you guys have done your business review, and as you've updated your framework, I'm sure you've looked at it, but -- and I'm not asking you to sort of say, one, there is a recession. Within your framework, what do you view sort of, a, your normalized average free cash flow in a given year, however you want to express that, absolute numbers, percent of net income? But also more importantly, in a standard recession, however you define that, what should we expect from cash flow? And the reason I'm bringing it up because I think one of the examples you sort of bring up is sort of this decremental margin on the free cash flow that you had over the past 15, 20 years, how cash flow is just getting less and less cyclical.

Yes, Andrew, I'll answer that. So you could see that we're doing better with cash flow even than we have in the past. It is very resilient. We tend to do a great job of managing the working capital. The tools in The Win Strategy helped with that. So during a slowdown, we're reducing the capital going into inventory. And obviously, there isn't as much needed in receivables, for example. So we generate cash pretty well during a down cycle. I'm most proud of how well we generate cash during an up cycle. With the addition of LORD and Exotic, who both bring in mid-teens cash flow from operating activities, that's boosting our cash flow forecast going forward. I mentioned 14% of sales as cash flow from operating activities for this year. And I expect that, that will be the ongoing trend after that. So you take out the capital expenditures, that takes it down to maybe a 12% free cash flow projection.

So how should I think about just absolute number of cash flow conversion in a recession, however you want to answer that question?

Well, in a recession, it -- the conversion this year, for example, we had quite a hit to net income with a lot of the transaction expenses that we incurred to close LORD and Exotic. So low net income, our conversion rate is going to be about 150%. I don't think that's normal because of the low net income. But on a normal recession, if you look back in history, it's been over 100% year after year, and it will continue to do that. We're very good at managing the working capital in either ups or downs.

I tried.

Sorry.

And our next question comes from the line of Nathan Jones with Stifel.

I'd just like to start on the international distribution expansion. Percentage of revenue up 500 basis points over the last 5 years is obviously good from a stability of revenue kind of angle, also good for margins because I think the distribution margin is probably at least 10 points kind of higher than the OEM revenue. Can you talk about the strategies you've implemented to drive that growth in distribution, what you're doing to continue to drive that growth in distribution, particularly internationally? Are there costs associated with this or anything like that?

Yes, Nathan, it's Lee. So I think the strategies have been consistent since 2015. It starts with dedicated leadership, not only globally but regionally. So we've got dedicated teams focused and leading this effort. They report out to myself, Tom and Cathy; for me, monthly, but for all of us, on a quarterly basis. And it's really moved the needle. And within the regions, too, they're very focused on having teams looking at different trading areas and making sure we can develop distribution partners to cover that region. As you know, Asia Pacific and, specifically, China was really underdeveloped in this area. I mean it's an emerging economy and robust distribution, like we know it, had not developed. It is fun today to go and visit some of these key technology partners that we have there. I mean if you close your eyes -- or look around, you would think you're a North America distributor partner, I mean, and it become that robust. So it's doing that. It's constantly focusing on all the emerging market regions, ASEAN area, Vietnam, et cetera, just looking in facilitating trading partners. And the thing that really helps us with this is Parker's brand name. I mean it is an incredibly well-known brand name around the world. People want to be associated with it. In terms of added cost, there's really none. I mean the cost to do this have been the same costs that we've been doing since 2015. There's really nothing incremental going on there. And I would say it's becoming more efficient as we go forward. It's really -- so I mean, I think, that's -- unless, Tom, you've got to add something to that?

No, I think that's good.

Just a follow-up. You guys had -- I think the last time we did Analyst Day, you were looking at 150 basis points of revenue outgrowth over IP. The target through '23 is 210 basis points of outgrowth. Is that just simply just a mix of the acquisitions growing at a faster rate? Or is there something structurally that's changed within what you're doing that's driving an expectation of a higher outgrowth?

Yes, a combination, Nathan, of higher growth rates from the acquisitions. Both of them have historically and consistently had resilient growth. And with the long-term contract of Exotic, that their growth will be steady over that period. And it's, to some extent, coming off of a recessionary year, FY '20, which was the base I used. So ongoing, we expect that we will be growing 150 basis points more than GIPI. But in this particular period, coming off of a recessionary period, it's a little bit accelerated growth getting us to FY '23.

And our next question comes from the line of Nicole DeBlase with Deutsche Bank.

So I just want to ask one on the fiscal '23 target. The organic growth is like 3.6% from '19 to '23. Just curious about the scenario built into that. So is the expectation that we return to growth in 2021? Or anything that you guys can say about like the economic scenario that you've built into that medium-term guidance?

Yes, Nicole, as I mentioned, when we built the model, we had not anticipated the pandemic and the effect that, that might have. But we were -- as if you go back to our earnings call off of the second quarter, we looked at the trend hitting bottom. We were hoping hit bottom in this third quarter and coming out of that. So the model we've built had us recovering slowly for the second half of this year, not necessarily to positive but coming off the bottom, and then growing more aggressively in fiscal year '21, and then that growth slowing down a little bit in '22 and '23. But again, we had higher growth anticipated with LORD and Exotic built into there as well.

Okay, got it. And then for my follow-up, can we just talk a little bit about your exposure to Italy, major facilities in the region or the actions that you guys are taking after last night's news?

Yes, Nicole, it's Tom. So on Italy, Italy is a very small percentage of our total sales, so it would not necessarily be material from a -- impact to the company. We have operations in Northern Italy. We have a sales company there, and we have distributors, obviously. But Italy has not missed a beat. We -- our operations have run 100% through there. We've had a few people that were in quarantine from normal safety precautions, but everybody is fine. We've done all the same kind of best practices that we've learned throughout the world but really started in China on personal hygiene and communications and restrictive travel practices, et cetera. And the Italy team is doing the best job that they can. Now we haven't fully seen, obviously, the current impact and what it might be on demand, but our plants are running, and all of our people are safe, and things right now are operating fine. We'll just have to see as we go forward, especially over the next 6 weeks, when we give you the latest guidance what does that do for demand. And we don't know enough yet.

And our next question comes from the line of Stephen Volkmann with Jefferies.

Cathy, I apologize, I have a little bit of connectivity issues. The new numbers that you gave for the 2023 target, is the only difference between those in the previous numbers just the amortization?

Well, we went from an as-reported target to an adjusted target. So there is also a little bit of adjustment for restructuring activities, anticipated restructuring. And we got more aggressive. The EBITDA target, we bumped up because of the performance we've been achieving and the nice margins that come in with LORD and Exotic, and then that led to raising the cash and the EPS.

Okay. And then I think one of you, Tom and Lee, maybe Lee said, which I think we've heard this before, that 60% of revenue touches 4 or more of your business areas, I think. And I'm curious, it's easy to see how a lot of those things overlap. But the one -- there's a couple that kind of stand out, but I'll just ask you about the refrigeration piece because it's a little harder to see how that one sort of overlaps with everything else. And so I'm curious if there's as much kind of flow-through to the rest of the business from that or if it's a little more specialized? And obviously, I'm trying to think about sort of what the portfolio might look like longer term, and whether that's a business that is potentially a longer-term source of cash or something?

Yes, Steve, so that was me that talked about the 60%. And you're right, on the climate control side, probably fewer of those multi-technology applications. However, there's common technologies that we share. So all the valving technology, whether it's solenoids, check valves, expansion valves, is similar technology that we do pneumatically or hydraulics. So the reason why that is a no-brainer for us is it's the same technology, it's just going into a different end market. And we happen to like that end market because it's very resilient. So people need food, and they need refrigerated food because of the perishable nature of things. So we like that space very much. And it is very accretive to us from a profit standpoint, cash flow. So it is not on the list to look at. I can assure you of that. It's one of those examples of similar technologies to the other ones, with a nice natural adjacency from an end-market standpoint.

Okay, great. That makes sense. And then I think this is a Lee question on distribution. The 100 basis points of mix in international, is that sustainable through the 2023 forecast period?

Yes, Steve, that's exactly what I said, 100 basis points going forward and in the near term, and that's what I'm thinking is through FY '23.

And are you growing North America as well, mix?

We are growing North America. I'd have to go look at those numbers again. It would be in normal times. The one I've -- the one that just sticks out for me because of where we started is what's happening with rest of world.

Andrew, we have time for one last question.

Our last question comes from the line of Mig Dobre with R.W. Baird.

One question on international. I don't know if I missed this in your prepared remarks, but can you comment on the margin differential between international and North America? And as -- if you're looking at your '23 target, yes, what sort of the walk here in terms of what needs to happen in international to get to that higher-margin level? Is this a factor of mix? Is there something else going on that we need to be aware of? I'll start there.

Mig, it's Tom, you didn't miss it. I think we didn't give that kind of details as far by splits. To get to that 21% number, the expectation is North America, international aerospace are all going to glide to that. Obviously, there'll be some variation around that number. It's not going to be perfectly linear, but we have expectations that international should look like North America. Some of the things that Lee talked about around changing the mix, so most of that mix change is going to happen in international. A lot of that restructuring that I talked about from FY '14 to '16 at the beginning was heavily targeted at international to change the footprint, to change our ability to be more elastic, to have a leaner, more agile structure there. That's happened. And you've seen evidence of that over the last, really, a year or 2. International margins have come closer and closer to North America. There are still some subtle structural differences. We haven't completely closed that gap. But we expect these to really take all these existing segments and move them up 200 basis points. That's what we're hoping to do. I mean that's in round numbers. We got to get from where we were at the last peak in FY '19 at 17% to 19%. That's, again, before adding back amortization. Add the amortization, you get to 21%. So we want all of them to grow, and you should see them stay within a certain band. International will probably lag a hair, but our expectation is that everybody is going to pull their weight.

But is it fair to say that other than mix, which is pretty clear, as there are no structural -- other structural differences in international versus North America that would hamper margins?

Where there are still a structural difference, we've taken a lot of that out. But you can't change the fact that in Europe, you have a multilingual, multicultural, and you have to operate that way. In North America, obviously, with Canada and the U.S., it's a little bit easier with English being the common denominator and closer culture similarities. So some of those things require some extra structure, but we've been working in both Asia and Europe and Latin America to have it look more like the structure we have in North America. And that's why you've seen the margins become more equalized between the 2.

I see. Then last question on coronavirus, I guess, or rather, I should say, with all the uncertainty more broadly than just that. I understand that you can't predict the future, but I'm trying to get a sense for exactly what it is that you're doing from a planning perspective. Are you essentially looking at all this recent volatility as kind of a short-term situation that will sort of remedy itself? Or are you starting to contemplate something that's more material, more significant from a restructuring standpoint that would have, call it, more approximated the prior downturns, the more traditional industrial downturns that we had seen?

Yes. I think, Mig, the beauty of what we've done over the last -- I would go back even before the last 5 years -- is we've done a tremendous amount of restructuring to get the company leaner, more agile. So -- and if you go back, when you get a chance to look at the webcast, on that stair-step change in operating margin, we're in a lot better position to weather this storm. Yes, we will probably have to look at some restructuring depending on the duration and depending on particular end markets that might impact it more. But you get ready for whatever the next crisis is by what you've been doing in the last x number of years to get ready for it. Because once it hits, you can do some interim things, but you're already behind the 8 ball, and we don't like being behind the 8 ball. So we're always working on the next recession, the next big change concurrently. And I don't think you're going to see us announce some big, giant restructuring program. I think we've done a lot of that to get ready, but some of it will depend on what happens over the next 60, 90 days. But I'm optimistic because this is clearly going to be more of a temporary phenomena, and I made a lot of comments early on about how long that will be. The jury's out. We'll see. But we are a much more fit company to weather this than we've ever been.

I appreciate that. Sorry for missing your earlier comments. Good luck.

Very good. So this concludes the Q&A portion. Tom, Lee, Cathy, thank you very much. On behalf of Tom, Lee and Cathy, I would like to thank you very much for joining us today on the videocast. We hope that you have found the information and the discussion to be informative. We also want to thank you again for your flexibility in pivoting with us to this virtual format. The videocast, together with the slides, will be posted immediately following the meeting on phstock.com. And of course, you're welcome to follow-up with any questions. Call me or call Jeff Miller, and we will be happy to field those. So with that, this concludes our program. And thank you very much. Have a great day.