Illinois Tool Works Inc. · NYSE:ITW
Illinois Tool Works — Investor Day (December 2018)
138 slides from Illinois Tool Works's investor day presentation, Dec 7, 2018
Slide 1: 2018 Investor Day
2018 INVESTOR DAY December 7, 2018
Slide 2: Safe Harbor Statement
F O RWA R D - L O O K I N G S TAT E M E N T SAFE HARBOR STATEMENT This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding the expected impact of tariffs and raw material infla
Slide 3: Agenda
AGENDA ITW’S ENTERPRISE STRATEGY Our Path to Full Potential | Finishing the Job A DIVISION’S PATH TO FULL POTENTIAL Division Examples: Instron Static | Hobart Germany | Hi-Cone PORTFOLIO DISCIPLINE Differentiated Portfolio Examples: Auto OEM | Test & Measurement and Electronics FINANCIAL PERFORMANCE
Slide 4: Presenters
PRESENTERS SCOTT SANTI CHRIS O’HERLIHY MICHAEL LARSEN Chairman & CEO Vice Chairman SVP & CFO 36 CEO SINCE 29 VICE CHAIRMAN SINCE 6 CFO SINCE YEARS 2012 YEARS YEARS 2013 WITH ITW WITH ITW 2015 WITH ITW 4
Slide 5: Presenters
PRESENTERS SUNDARAM NAGARAJAN STEVE MARTINDALE EVP Automotive EVP Test & Measurement OEM and Electronics 27 16 YEARS YEARS WITH ITW WITH ITW 5
Slide 6: Presenters
PRESENTERS PATTY HARTZELL AXEL BECK KENNETH ESCOE VPGM Group President VPGM Instron Static Global Ware-wash Hi-Cone 20 29 4 YEARS YEARS YEARS WITH ITW WITH ITW WITH ITW 6
Slide 7: ITW's Enterprise Strategy: Our Path to Full Potential
ITW’S ENTERPRISE STRATEGY: OUR PATH TO FULL POTENTIAL 7
Slide 8: Enterprise Strategy Began in Late 2012
E N T E R P R I S E S T R AT E G Y B E G A N I N L AT E 2 0 1 2 STARTED WITH A BASIC QUESTION: What truly differentiates ITW? What are the “DIFFERENCE-MAKERS” that only ITW has? 8
Slide 9: ITW's Business Model Is Our Competitive Advantage
ITW’S BUSINESS THE ITW BUSINESS MODEL: MODEL IS OUR COMPETITIVE • A POWERFUL and PROPRIETARY A D VA N TA G E set of strategic, operational and cultural practices ITW • Has been in a continual state of BUSINESS development and evolution MODEL inside ITW for over 30 years Decentralized, • Is the VALUE
Slide 10: The ITW Business Model Delivers
THE ITW BUSINESS MODEL DELIVERS: ADVANTAGED COMPETITIVE POSITION IN ITW 1 THE INDUSTRIES IN WHICH WE OPERATE: BUSINESS MODEL • Superior performance and value for our “80” customers Decentralized, • High quality growth with best-in-class Entrepreneurial Culture margins and returns ADVANTAGED PERFORMA
Slide 11: ITW Segment Operating Margin vs. Peer Average
1 I T W ’ S B U S I N E S S M O D E L I S O U R C O M P E T I T I V E A D VA N TA G E ITW SEGMENT OPERATING MARGIN VS. PEER AVERAGE* 2018E 27% 28% 27% 26% 25% 24% 23% 20% 17% 16% 14% 12% 13% 11% Auto OEM Test & Meas Food Polymers Welding Construction Specialty and Elect ** Equipment & Fluids ** Prod
Slide 12: ITW's Business Model = Enduring and Sustainable Competitive Advantage
2 I T W ’ S B U S I N E S S M O D E L = E N D U R I N G A N D S U S TA I N A B L E C O M P E T I T I V E A D VA N TA G E ITW’S 80/20 FRONT-TO-BACK + CUSTOMER-BACK INNOVATION TSR Since 1987: ITW = 14% + S&P 500 = 10% DECENTRALIZED ENTREPRENEURIAL CULTURE 12
Slide 13: ITW's Enterprise Strategy
I T W ’ S E N T E R P R I S E S T R AT E G Y 1 PORTFOLIO DISCIPLINE: Operate only in industries where we can generate significant differentiated competitive advantage from the ITW Business Model long-term Launched QUALITY OF 80/20 FTB PRACTICE: 2 Operate with excellence in the practice of ITW’s 80/2
Slide 14: Enterprise Strategy Execution to Date
E N T E R P R I S E S T R AT E G Y E X E C U T I O N TO D AT E : TRANSFORMED OUR BUSINESS SIMPLIFIED AND SCALED UP ESTABLISHED A STRATEGIC PORTFOLIO OUR OPERATING STRUCTURE SOURCING FUNCTION • Made sustainable • 800 business units to 87 • Generated ~$540M in total differentiation a “must-have” globa
Slide 15: 2012 to 2018 Performance
2 0 1 2 TO 2 0 1 8 P E R F O R M A N C E OPERATING MARGIN AFTER-TAX ROIC EARNINGS PER SHARE +860 +1300 15% bps bps CAGR 24-25% 27-28% $7.55- 15.9% $7.65 14.5% $3.21 2012* 2018E 2012** 2018E 2012** 2018E * As reported in the 2012 Form 10-K 15 ** See Appendix for GAAP to non-GAAP reconciliations
Slide 16: ITW's Enterprise Strategy Progress
I T W ’ S E N T E R P R I S E S T R AT E G Y 1 PORTFOLIO DISCIPLINE: Operate only in industries where we can ~90% complete generate significant differentiated competitive advantage from the ITW Business Model long-term More work to be done in order to 2 QUALITY OF 80/20 FTB PRACTICE: Operate with ex
Slide 17: ITW's Enterprise Strategy: Finishing the Job
ITW’S ENTERPRISE STRATEGY: FINISHING THE JOB 17
Slide 18: Our "Finish the Job" Agenda
OUR “FINISH THE JOB” AGENDA: COMPLETE ONGOING: END OF 2022: Fully leveraging 4. Selective High-Quality the potential 1. Further Portfolio Refinements Acquisitions to 2. 80/20 FTB Practice Excellence of the ITW Supplement ITW’s Long- ― Continued Customer-Facing Term Growth Potential Business Model Pe
Slide 19: Finishing the Job
FINISHING THE JOB = 1-2 percentage points of additional improvement in enterprise organic growth rate + 3-4 percentage points of additional structural margin improvement 19
Slide 20: 87 Divisions at Full Potential
87 DIVISIONS AT FULL POTENTIAL AT FULL POTENTIAL 80/20 FRONT-TO-BACK FULL POTENTIAL PRACTICE EXCELLENCE ORGANIC GROWTH 20
Slide 21: A Division's Path to Full Potential: Instron Static
A DIVISION’S PATH TO FULL POTENTIAL EXAMPLE #1: INSTRON STATIC A division within Test & Measurement and Electronics 21
Slide 22: Instron Static: What Our Products Do
I N S T R O N S TAT I C : W H AT O U R P R O D U C T S D O Characterize the performance of new Ensure products and materials perform materials and products as expected …WHICH IMPROVE PRODUCT SAFETY AND RELIABILITY 22
Slide 23: Division Overview: Instron Static
D I V I S I O N O V E RV I E W : I N S T R O N S TAT I C TRUSTED MARKET LEADER IN MATERIALS TESTING EQUIPMENT KEY FACTS 2018E SALES • Headquarters/ Main operation Equipment Service 63% 22% near Boston • Deep knowledge in 15% Parts materials testing • 50%+ of staff in OUR HISTORY WITH ITW engineering
Slide 24: 80/20 Front-to-Back Simplifies Our Business Portfolio
8 0 / 2 0 F R O N T - TO - B A C K S I M P L I F I E S O U R B U S I N E S S P O RT F O L I O EXAMPLE: LOAD FRAMES WHAT WE SAW.. WHAT WE DID.. WHAT WE GOT.. • 40 load frames; • Eliminated or consolidated • 21 load frames; 149 variants “20” models using PLS 54 variants • Increased capabilities of “80
Slide 25: 80/20 Informs Where We Choose to Play
8 0 / 2 0 F R O N T - TO - B A C K I N F O R M S “ W H E R E W E C H O O S E TO P L AY ” FOCUS ON STRATEGIC MARKETS “80” Markets: • Large end markets with attractive growth rates - Biomedical • Industries where cost of failure is high or brand is critical - Electronics • Significant share potential
Slide 26: 80/20 Guides Our Operations Strategy
8 0 / 2 0 F R O N T - TO - B A C K G U I D E S O U R O P E R AT I O N S S T R AT E G Y WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • High inventory • Separated “80” • Throughput on frames products from “20” improved from 1 week to • Lack of process flow products 1 day • “80”s and “20”s mixed • Point of u
Slide 27: 80/20 Guides Our Organizational Structure
8 0 / 2 0 F R O N T - TO - B A C K G U I D E S O U R O R G A N I Z AT I O N A L S T R U C T U R E WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • Organization was • Aligned skillsets to match • Better alignment and designed around customer needs within insight with “80” product technology, each segment cus
Slide 28: Organic Growth Framework
ORGANIC GROWTH FRAMEWORK 1 “80” Focused Market Penetration 2 Customer-Back Innovation 3 Strategic Sales Excellence 28
Slide 29: "80" Focused Market Penetration: Pick 5 Program
1 “ 8 0 ” F O C U S E D M A R K E T P E N E T R AT I O N : EXAMPLE: “PICK 5” PROGRAM WHAT WE SAW... WHAT WE DID… WHAT WE GOT… • Premium margins in • Created a specific list of • “Pick 5” program alone targeted industries customers in targeted accelerated organic industries growth by ~100 bps • Compa
Slide 30: Customer-Back Innovation: Proprietary Testing Software
2 C U S TO M E R - B A C K I N N O VAT I O N EXAMPLE: PROPRIETARY TESTING SOFTWARE Customer Solution Pain Point • Ergonomics • Touch-based dashboard • Lost time moving from mounted to frame test frame to PC • Adjustable for various operator heights • Training new users • Flatter, simpler UI • Time t
Slide 31: Strategic Sales Excellence
3 S T R AT E G I C S A L E S E X C E L L E N C E WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • “80” markets • Added sales resources • Accelerated organic underserved into regions rich with growth; outpacing “80” markets market by 230 bps • Varying levels of • Using sales resources expertise across • Repo
Slide 32: Overall Enterprise Strategy Impact
O V E R A L L E N T E R P R I S E S T R AT E G Y I M PA C T Throughput on Op Margin “80” Products Organic Growth CAGR Improvement 1 Week <1 Day 1.0% 5.7% 760 bps 2012-2018E 2012-2016 2016-2018E 2016-2018E ENTERPRISE STRATEGY DRIVES CUSTOMER AND FINANCIAL BENEFITS 32
Slide 33: 87 Divisions at Full Potential
87 DIVISIONS AT FULL POTENTIAL AT FULL POTENTIAL 80/20 FRONT-TO-BACK FULL POTENTIAL PRACTICE EXCELLENCE ORGANIC GROWTH 33
Slide 34: "Front-to-Back" Refers To: Front-to-Back Practice
“FRONT-TO-BACK” REFERS TO: Refined and re-invigorated proprietary approach to 80/20 • 2013-2014: Studied, evaluated, and codified best practices into a single ITW 80/20 FTB framework 80/20 • 2015: Began implementation in a focused way Front-to-Back • 2015-2018: Evolution: Today we have a very Practi
Slide 35: 80/20 Front-to-Back Practice Excellence
8 0 / 2 0 F R O N T - TO - B A C K P R A C T I C E E X C E L L E N C E 80/20 FRONT-TO-BACK 80/20 FRONT-TO-BACK PROCESS PHASE 1 PROCESS PHASE 2 Identify the Redesign the entire Division’s “80” division around the “80” to maximize performance, returns, and high-quality organic growth 35
Slide 36: 80/20 Front-to-Back Process Phase 1
8 0 / 2 0 F R O N T - TO - B A C K P R A C T I C E E X C E L L E N C E 80/20 FRONT-TO-BACK A DATA DRIVEN APPROACH TO: PROCESS PHASE 1 PHASE 1 • Simplify the business Identify the • Understand where we make our money Division’s “80” • Identify products/customers where we have strong differentiation/c
Slide 37: 80/20 Front-to-Back Process Phase 2
8 0 / 2 0 F R O N T - TO - B A C K P R A C T I C E E X C E L L E N C E 80/20 FRONT-TO-BACK REDESIGN THE DIVISION FROM “FRONT-TO-BACK” PROCESS PHASE 2 • Re-deploy resources to focus on the “80” Redesign the entire division around the • Using proprietary ITW techniques, redesign all core business proc
Slide 38: 80/20 FTB: Expected Outcomes
80/20 FTB: EXPECTED OUTCOMES BEST-IN-CLASS “80” CUSTOMER- BEST-IN-CLASS FINANCIAL Division Scorecard FACING PERFORMANCE: PERFORMANCE: • Quality • Profitable Organic Growth • Delivery • Margins • Value • ROIC • FCF A DIFFERENTIATING COMPETITIVE ADVANTAGE FOR ITW 38
Slide 39: 80/20 FTB: Progress to Date
8 0 / 2 0 F T B : P R O G R E S S TO D AT E FIVE YEARS IN… THIS IS REFLECTED IN: We have made considerable • Improving divisional performance metrics progress across the in every segment Enterprise in our path to • Meaningful impact on Enterprise margin full potential application of improvement the
Slide 40: 80/20 FTB: Divisional Scorecard
80/20 FTB: DIVISIONAL SCORECARD 90% 50% 80/20 FRONT-TO-BACK DONE 80/20 FRONT-TO-BACK DONE PROCESS PHASE 1 PROCESS PHASE 2 Identify the Redesign the entire Division’s “80” division around the “80” to maximize performance, returns, and high-quality organic growth WE ARE 70% DONE ON OUR PATH TO “80/20
Slide 41: A Division's Path to Full Potential: Hobart Germany
A DIVISION’S PATH TO FULL POTENTIAL EXAMPLE #2: HOBART GERMANY A division within Food Equipment Group 41
Slide 42: Division Overview: Hobart Germany
D I V I S I O N O V E RV I E W : H O B A RT G E R M A N Y Provide Industry Leading Commercial Dish Washers With Best-in-Class Wash Performance and Lowest “Total Cost Of Ownership” in Any Commercial Kitchen Environment KEY FACTS 2018E SALES • Located in Offenburg, Germany 35% Restaurant Institutional
Slide 43: Products & Key Markets Served
P R O D U C T S & K E Y M A R K E T S S E RV E D UNDER COUNTER HOOD TYPE RACK & FLIGHT TYPE RESTAURANTS RETAIL INSTITUTIONAL Customer Needs: Customer Needs: Customer Needs: • Wash Performance & Food Safety • Wash Performance & Food Safety • Wash Performance & Food Safety • Quality / Reliability • La
Slide 44: 80/20 Front-to-Back Simplifies Our Business Portfolio
8 0 / 2 0 F R O N T - TO - B A C K S I M P L I F I E S O U R B U S I N E S S P O RT F O L I O EXAMPLE: UNDER COUNTER WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • 185 Product variants • PLS: “20” Products • 50 Product variants, of which 5 are “80”s • Simplified design of “80” products • Positioned us to
Slide 45: 80/20 Informs Where We Choose to Play
8 0 / 2 0 F R O N T - TO - B A C K I N F O R M S “ W H E R E W E C H O O S E TO P L AY ” FOCUS ON STRATEGIC MARKETS “80” Markets: • Big enough > $300M - Restaurant • Dynamic growth rates - Retail • Significant share potential - Institutional WHERE CUSTOMERS VALUE AND PAY FOR DIFFERENTIATION “80” Pro
Slide 46: 80/20 Guides Our Operational Strategy
8 0 / 2 0 F R O N T - TO - B A C K G U I D E S O U R O P E R AT I O N A L S T R AT E G Y WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • Complex assembly • Standardized • Optimized manufacturing for process components “80” products • “80” and “20” • Separated “20” variants • “80” on-time delivery of 98% va
Slide 47: 80/20 Guides Our Organizational Structure
8 0 / 2 0 F R O N T - TO - B A C K G U I D E S O U R O R G A N I Z AT I O N A L S T R U C T U R E WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • Product-focused • Realigned organization • Sales and marketing focus on business structure around strategic end- strategic end markets markets • Lack of focus on
Slide 48: Organic Growth Framework
ORGANIC GROWTH FRAMEWORK 1 “80” Focused Market Penetration 2 Customer-Back Innovation 3 Strategic Sales Excellence 48
Slide 49: "80" Focused Market Penetration: QSR and Retail Chains
“ 8 0 ” F O C U S E D M A R K E T P E N E T R AT I O N : 1 Q S R A N D R E TA I L C H A I N S : H A N D WA S H I N G TO A U TO WA S H I N G WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • Significant share of • New key account • 5-year CAGR >15% revenue QSR and retail chain structure growth customers still
Slide 50: Customer-Back Innovation: Serial Innovator
2 C U S TO M E R - B A C K I N N O VAT I O N : S E R I A L I N N O VATO R 2014 2016 2018 2020 2022 New Gen. Refresh UC Care Smart Technology New Gen. Refresh Under- counter New Gen. Smart Technology Refresh New Gen. Hood Type Refresh New Gen. Smart Technology Refresh Rack/ Flight type 300 BPS IMPROV
Slide 51: Strategic Sales Excellence
3 S T R AT E G I C S A L E S E X C E L L E N C E WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • Two distinct market • Fragmented market: • End market focused sales ― Change from direct to structure with sales structures: distribution talent/incentives aligned with ― Fragmented market ― Channel development
Slide 52: Overall Enterprise Strategy Impact
O V E R A L L E N T E R P R I S E S T R AT E G Y I M PA C T Lead Time on “80”s Organic Growth CAGR Op Margin Improvement 5 Days 1 Day Warranty Cost (50)% 4% 6% +640 bps 2012-2018E 2006-2012 2012-2018E 2012-2018E ENTERPRISE STRATEGY DRIVES CUSTOMER AND FINANCIAL BENEFITS 52
Slide 53: 87 Divisions at Full Potential
87 DIVISIONS AT FULL POTENTIAL AT FULL POTENTIAL 80/20 FRONT-TO-BACK FULL POTENTIAL PRACTICE EXCELLENCE ORGANIC GROWTH 53
Slide 54: Divisional Growth Framework
DIVISIONAL GROWTH FRAMEWORK 1 “80” FOCUSED MARKET Execute Targeted PENETRATION Growth Initiatives 2 CUSTOMER-BACK Serial Innovation Focused INNOVATION on “80” Customers and End Markets STRATEGIC SALES High Performance 3 Sales Function EXCELLENCE 54
Slide 55: "80" Focused Market Penetration
1 “ 8 0 ” F O C U S E D M A R K E T P E N E T R AT I O N EXECUTE TARGETED GROWTH INITIATIVES • More intentional focus on executing Divisional market penetration ― “80” Products to “80” Customers Growth ― Average market share 15-25% Framework ― New “80” Customers ― With similar pain points to our exi
Slide 56: Customer-Back Innovation
2 C U S TO M E R - B A C K I N N O VAT I O N SERIAL INNOVATION FOCUSED ON “80” CUSTOMERS AND END MARKETS • Stronger strategic screen around the “80” driven by our FTB process Divisional • Re-invigorated process … based on comprehensive review: Growth ― Leveraging good practice across Enterprise ― St
Slide 57: Strategic Sales Excellence
3 S T R AT E G I C S A L E S E X C E L L E N C E HIGH PERFORMANCE SALES FUNCTION • Ensure that each division has a high performing sales function, considering: Divisional ― Go-to-market strategy Growth ― Sales force talent and incentives ― Sales processes Framework ― 80/20 mindset 57
Slide 58: A Division's Path to Full Potential: Hi-Cone
A DIVISION’S PATH TO FULL POTENTIAL EXAMPLE #3: HI-CONE A division within Specialty Products 58
Slide 59: Division Overview: Hi-Cone
D I V I S I O N O V E RV I E W : H I - C O N E Packaging Systems for Global Beverage Markets KEY FACTS 2018E SALES • Products & Services: Non-Alcoholic Beer ― Multi-Pack Ring Carriers Beverages 50% 45% ― Equipment ― Service and Parts Other 5% • Geographical Mix: ― NA: 60% ― EU: 25% OUR HISTORY WITH
Slide 60: Products & Key Markets Served
P R O D U C T S & K E Y M A R K E T S S E RV E D PLASTIC BOTTLE MULTIPACKS CAN MULTIPACKS APPLICATION EQUIPMENT NON-ALCOHOLIC BEVERAGES BEER Customer Profile: Customer Profile: • Global beverage companies with brand portfolios • Global beer companies with brand portfolios • Soft drinks, sports drink
Slide 61: 80/20 Front-to-Back Simplifies Our Business Portfolio
8 0 / 2 0 F R O N T - TO - B A C K : S I M P L I F I E S O U R B U S I N E S S P O RT F O L I O EXAMPLE: RING CARRIERS WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • 205 Product variants • PLS – “20” Products • 111 Product variants • Consolidated regional • PLS > 45% of Products; designs to global <1% los
Slide 62: 80/20 Informs Where We Choose to Play
8 0 / 2 0 F R O N T - TO - B A C K I N F O R M S “ W H E R E W E C H O O S E TO P L AY ” FOCUS ON STRATEGIC MARKET SEGMENTS • Big enough > $500M globally “80” Markets: • High Volume Production / Economies of Scale - Non-Alcoholic Beverage • Packaging Mix: Small Multipacks (4-12) - Beer “80” Products
Slide 63: 80/20 Guides Our Operational Strategy
8 0 / 2 0 F R O N T - TO - B A C K G U I D E S O U R O P E R AT I O N A L S T R AT E G Y WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • “80”s and “20”s mixed • 3 of 4 plants • Lead time on “80” products in production manufacture only from 2 weeks to 2 days “80” products • Build-to-order • On-time/complete
Slide 64: 80/20 Guides Our Organizational Structure
8 0 / 2 0 F R O N T - TO - B A C K G U I D E S O U R O R G A N I Z AT I O N A L S T R U C T U R E WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • Customers with global • Realigned organization • Deeper understanding of growth strategies / around markets common pain points regional execution and customers •
Slide 65: Organic Growth Framework
ORGANIC GROWTH FRAMEWORK 1 “80” Focused Market Penetration 2 Customer-Back Innovation 3 Strategic Sales Excellence 65
Slide 66: "80" Focused Market Penetration: Mexico Beer Market
1 “ 8 0 ” F O C U S E D M A R K E T P E N E T R AT I O N EXAMPLE: THE MEXICO BEER MARKET WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • Growing middle class/ • Used multipacks to help • Revenue growth ~20% consumption “80” customers sell CAGR (2013 – 2018E) more beer • Modernization of retail • Expanded s
Slide 67: Customer-Back Innovation: Proprietary Carrier Packaging
2 C U S TO M E R - B A C K I N N O VAT I O N PROPRIETARY CARRIER PACKAGING Customer Hi-Cone Pain Point Solution • Traditional • Fanfold® packaging packaging allows continuous requires line production for up to changeovers every 10 hours 8-15 minutes • Skilled labor • Revenue growth shortage and CAGR
Slide 68: Customer-Back Innovation: Environmental Sustainability
2 C U S TO M E R - B A C K I N N O VAT I O N EXAMPLE: ENVIRONMENTAL SUSTAINABILITY WHAT WE SEE… WHAT WE ARE DOING… WHAT WE EXPECT TO GET… • Waste from • Investing to increase 2018+ plastic packaging recycling rates Recovery & Reuse poorly managed of carriers • Consumer and • Using recycled plastic 2
Slide 69: Strategic Sales Excellence
3 S T R AT E G I C S A L E S E X C E L L E N C E WHAT WE SAW… WHAT WE DID… WHAT WE GOT… • Direct sales calling on • Dedicated key • Monetized customer value “80” and “20” customers account teams for propositions for 4 distinct “80” customers stakeholders • Selling process focused ― Brand Owners on o
Slide 70: Overall Enterprise Strategy Impact
O V E R A L L E N T E R P R I S E S T R AT E G Y I M PA C T Op Margin Lead Time on “80”s Organic Growth CAGR Improvement 2 wks 2 days (0.8%) 6.4% ~Flat 2008-2013 2013-2018E 2008-2013 2013-2018E 2013-2018E ENTERPRISE STRATEGY DRIVES CUSTOMER AND FINANCIAL BENEFITS 70
Slide 71: 87 Divisions at Full Potential
87 DIVISIONS AT FULL POTENTIAL AT FULL POTENTIAL 71
Slide 72: Path to Full Potential: Organic Growth
PATH TO FULL POTENTIAL ORGANIC GROWTH DIVISIONAL PERFORMANCE Q3 2018 YTD CATEGORY # OF DIVISIONS % OF REVENUES ORGANIC GROWTH Ready to Grow/Growing 44 (51%) 55% +7.6% Ready to Grow/Not Yet Growing 36 (42%) 39% (2.6)% Long-Term Growth-Challenged 7 (7%) 6% (4.6)% Total Company 87 100% +2.6% HALF OF OU
Slide 73: Divisions Are "Ready to Grow and Growing"
44 DIVISIONS ARE “ R E A D Y TO G R O W A N D G R O W I N G ” AT O R N E A R F U L L P O T E N T I A L DIVISION CHARACTERISTICS: • Highly differentiated • Strong execution: ― 80/20 FTB ― Organic growth framework ― Market Penetration ― Customer-Back Innovation ― Strategic Sales Excellence +7.6% 28% (
Slide 74: Divisions Are "Ready to Grow but Not Yet Growing"
36 DIVISIONS ARE “ R E A D Y TO G R O W B U T N O T Y E T G R O W I N G ” DIVISION CHARACTERISTICS: • Highly differentiated with solid 80/20 FTB Achievement of performance but… 3% growth in ― More complex or fragmented starting point and/or these divisions ― Quality of growth framework execution imp
Slide 75: Divisions Are Long-Term Growth-Challenged
7 DIVISIONS ARE LONG-TERM GROWTH-CHALLENGED Have made some progress over the last 5 years, but • We have a challenging path to achieve growth rates consistent with ITW targets • We are currently evaluating our options, including potential divestiture of these divisions • Organic growth YTD: (4.6)% 7
Slide 76: Finishing the Job
FINISHING THE JOB = 1-2 percentage points of additional improvement in enterprise organic growth rate + 3-4 percentage points of additional structural margin improvement 76
Slide 77: Portfolio Discipline
PORTFOLIO DISCIPLINE 77
Slide 78: Differentiated Elements of ITW's Portfolio
DIFFERENTIATED ELEMENTS OF ITW’S PORTFOLIO • Consistent, solid organic growth • Diverse end market and geographic exposures • Strong, enduring competitive advantages • No “weak links” 78
Slide 79: Our Business Segment Criteria
OUR BUSINESS SEGMENT CRITERIA 1 End markets with strong and sustainable differentiation attributes 2 Positive long-term macro fundamentals 3 Strong and durable competitive advantages with relevance to key end market trends 4 Significant potential for ITW to drive above market organic growth 5 Abilit
Slide 80: ITW's Industry-Leading Operating Segments
I T W ’ S I N D U S T RY - L E A D I N G O P E R AT I N G S E G M E N T S HIGH-QUALITY BUSINESSES THAT IN THE AGGREGATE CAN GENERATE CONSISTENT AVERAGE ORGANIC GROWTH OF 3 TO 5% AT THE ENTERPRISE LEVEL Automotive Test & Food Welding Polymers Construction Specialty OEM Measurement Equipment & Fluids
Slide 81: No "Weak Links"
NO “WEAK LINKS” END MARKET “FIT” + EXCELLENCE IN CONSISTENT PERFORMANCE ACROSS BUSINESS MODEL PRACTICE = ITW’S BUSINESS PORTFOLIO ITW SEGMENT OPERATING MARGIN 2018E 28% 27% 27% 26% 25% 24% 23% Auto OEM Test & Meas Food Polymers Welding Construction Specialty and Elect * Equipment & Fluids * Products
Slide 82: Diversification = Resilience
D I V E R S I F I C AT I O N = R E S I L I E N C E Q3 2018YTD CONSUMER/INDUSTRIAL EQUIPMENT/ GEOGRAPHY END MARKETS CONSUMABLES/SERVICE 3% 9% 17% 37% 28% 51% 63% 63% 29% Consumables Equipment North America EMEA Consumer Industrial Service & Parts Asia Pacific South America 82
Slide 83: Differentiated Business Portfolio Example #1: Automotive OEM
DIFFERENTIATED BUSINESS PORTFOLIO EXAMPLE #1: AUTOMOTIVE OEM 83
Slide 84: Automotive OEM
A U TO M O T I V E O E M OVERVIEW ENTERPRISE STRATEGY IMPACT ORGANIC GROWTH DRIVERS 84
Slide 85: Automotive OEM Overview
A U TO M O T I V E O E M 16 DIVISIONS STRATEGIC FOCUS ~$3.4B ~23% ~6.0% 2018E 2018E 2012-2018E revenues operating margin Organic Growth CAGR Highly focused niche supplier of components and fasteners to the global auto OEMs where we are a trusted GLOBAL REVENUES partner providing unique innovation on
Slide 86: Automotive OEM: Consistent Above-Market Organic Growth
A U TO M O T I V E O E M : CONSISTENT ABOVE-MARKET ORGANIC GROWTH Revenues ($M) ~$3,400 $3,271 +0.5% $2,864 +4.1% $2,529 $2,590 $206 F/X headwind +5.1% ~6% $2,396 Organic $2,171 +8.9% +5.8% Growth +9.5% CAGR Organic Growth (%) 2012 2013 2014 2015 2016 2017 2018E Consistently Delivered 200-400 bps Pe
Slide 87: Auto OEM: Organic Growth Opportunity
A U TO O E M : O R G A N I C G R O W T H O P P O RT U N I T Y WHY IS THIS AN OPPORTUNITY? HOW BIG IS THE OPPORTUNITY? • Industry in the midst of significant change; ADDRESSABLE $230/car increases vehicle complexity ― Emission regulation… electric vehicles CURRENT $ 36/car ― Safety ― Customer experie
Slide 88: Auto OEM Organic Growth
A U TO O E M O R G A N I C G R O W T H Deep engineering partnerships with Auto OEMs Complex injection-molding capability Sophisticated metal forming capability Ability to execute “copy exact” solutions globally ITW Business Model 88
Slide 89: Auto OEM Organic Growth: Penetration
A U TO O E M O R G A N I C G R O W T H : P E N E T R AT I O N $/vehicle BODY & FASTENERS POWERTRAIN TOTAL INTERIOR 2017 PENETRATION $15 $13 $8 $36 ADDITIONAL OPPORTUNITY AMERICAN OEMS 2 2 1 5 EUROPEAN OEMS 4 3 1 8 CHINESE OEMS 6 9 6 21 LINE OF SIGHT $27 $27 $16 $70 89
Slide 90: Auto OEM: Serial Innovation Pipeline
A U TO O E M : S E R I A L I N N O VAT I O N P I P E L I N E Pipeline (Develop + Deploy): ~$230M Discover Create Develop Deploy Screwless Fixations Fast Cap Fir Tree Serviceability / Re-use Comp Nut CenterLok Metal-to-plastic Next-gen Door Module ~2% points Locking Sealed Thermal Management Push-pus
Slide 91: Auto OEM Organic Growth: China
A U TO O E M O R G A N I C G R O W T H : C H I N A 2018 Global Build Forecast CHINA AUTOMOTIVE REVENUE N. America Other 18% $M ~$385 30% $365 Europe 23% ~17% $292 Organic China Growth 29% CAGR $211 $196 $167 $121 Automotive OEM Revenue Sources Other China 11% 2012 2013 2014 2015 2016 2017 2018E 11%
Slide 92: Auto OEM Organic Growth: Electric Vehicles
A U TO O E M O R G A N I C G R O W T H : ELECTRIC VEHICLES CURRENT PRODUCTS NEW PRODUCTS ITW Content ~$200/car ~$40/car Potential Internal Combustion $230/car Headrest Screwless ECU EV $240/car Fasteners Bezels Auxiliary Cooling Hybrid $250/car Air Hi-flow degas PRVs Registers tank for hybrids Multi
Slide 93: Auto OEM: Key Messages
A U TO O E M : K E Y M E S S A G E S • Auto has a highly-differentiated portfolio of products that will help sustain above-market organic growth at ITW-caliber margins • Our organic growth potential remains as strong as ever ― Significant opportunity remains between current content and the addressab
Slide 94: Differentiated Business Portfolio Example #2: Test & Measurement and Electronics
DIFFERENTIATED BUSINESS PORTFOLIO EXAMPLE #2: TEST & MEASUREMENT AND ELECTRONICS 94
Slide 95: Test & Measurement and Electronics
TEST & MEASUREMENT AND ELECTRONICS OVERVIEW ENTERPRISE STRATEGY IMPACT ORGANIC GROWTH DRIVERS 95
Slide 96: Test & Measurement and Electronics Overview
TEST & MEASUREMENT AND ELECTRONICS 15 DIVISIONS STRATEGIC FOCUS ~$2.2B ~26.5% 3-5% 2018E 2018E organic growth revenues operating margin* potential Design, sell, and service a range of equipment and related consumables focused on demanding GLOBAL REVENUES research and development, process improvement
Slide 97: Test & Measurement and Electronics: Our History with ITW
TEST & MEASUREMENT AND ELECTRONICS OUR HISTORY WITH ITW 2007 2010 2005 Loma Systems, Ion Systems, 2012 Instron M&C Specialties North Star Imaging Brooks Instrument Acquisition Acquisitions Acquisitions Acquisition 2006 2008 2011 2012-2018 Buehler, QSA Global, Teknek, Enterprise Speedline Technologie
Slide 98: Test & Measurement: What We Do
T E S T & M E A S U R E M E N T: “ W H AT W E D O ” Test physical properties of materials via Precise measurement of gas destructive and non-destructive methods and liquid flow ‐ Automotive ‐ Semi / LED ‐ Biomedical ‐ Chemicals ‐ Electronics ‐ Oil & Gas ‐ Metals ‐ Pharmaceutical ‐ Composites ‐ Gener
Slide 99: Electronics: What We Do
E L E C T R O N I C S : “ W H AT W E D O ” Contamination control in critical clean Electrostatic control and cleaning of room applications moving webs and flat sheets ‐ Semi / LED ‐ General Ind. ‐ Life Sciences ‐ Semi / LED ‐ Healthcare ‐ Life Sciences ‐ Consumer ‐ Electronics electronics ‐ Chemical
Slide 100: End Market Diversification
E N D M A R K E T D I V E R S I F I C AT I O N REVENUE BY END MARKET REVENUE BY PRODUCT TYPE 3% General Industrial 15% 11% 22% Microelectronics Electronic Assembly 40% Ground Transportation 13% 4% Electronic Components 27% 4% Life Science / HC Food and Beverage 4% 11% Aerospace 5% Manufacturing 5% 1
Slide 101: Test & Measurement and Electronics Enterprise Strategy Impact
TEST & MEASUREMENT AND ELECTRONICS E N T E R P R I S E S T R AT E G Y I M PA C T ~26.5% 19.1% • ~4% Organic Growth CAGR over the past two years +740 bps • Operating Margin expansion ~740 bps 2012-2018E … with more to come 2012 2018E SEGMENT OPERATING MARGIN* * Excludes 420 bps and 270 bps, respectiv
Slide 102: T&M/E Organic Growth Drivers
T&M/E ORGANIC GROWTH DRIVERS • Advancing global quality standards • Increasing focus on product safety / protecting brand reputation • Increasing regulation • Advanced new material R&D and new material applications • Growing use of electronics (Auto, IoT, AI, 5G, Industry 4.0, etc.) • Speed of innov
Slide 103: T&M/E Competitive Advantages
T & M / E C O M P E T I T I V E A D VA N TA G E S • Market leading technology and product differentiation • Strong customer-back innovation • Great brand strength • Global scale • Significant aftermarket service and support capability • Sophisticated solutions solve our customers most challenging pr
Slide 104: T&M/E: Key Messages
T&M/E: KEY MESSAGES • T&M/E is a very strong space for ITW • Confident in our ability to grow 3-5 % organically ― Attractive end market trends ― Further share penetration opportunity (15-25%) ― ITW specific competitive advantages • Despite strong gains to date, we expect further margin improvement 1
Slide 105: Selective High-Quality Acquisitions
SELECTIVE HIGH-QUALITY ACQUISITIONS TO SUPPLEMENT ITW’S LONG-TERM ORGANIC GROWTH POTENTIAL 105
Slide 106: Acquisitions
ACQUISITIONS HIGHLY SELECTIVE ACQUISITIONS THAT ARE ACCRETIVE TO THE LONG-TERM ORGANIC GROWTH POTENTIAL OF THE COMPANY We will use Acquisitions ONLY • TIGHT STRATEGIC FIT: Highly targeted acquisitions that to Reinforce and expand ITW’s long-term organic growth potential Further Enhance AND ... ITW’s
Slide 107: Acquisition Criteria
ACQUISITION CRITERIA 1 Great “raw material” = substantial opportunity to generate significant differentiated competitive advantage from the ITW Business Model long-term 2 Strong potential for sustained above-market organic growth 3 Substantial margin improvement potential from 80/20 FTB 4 Bolt-on or
Slide 108: Further Portfolio Refinement
FURTHER PORTFOLIO REFINEMENT 108
Slide 109: Potential Divestiture of 7 Long-Term Growth-Challenged Divisions
POTENTIAL DIVESTITURE OF 7 LONG-TERM GROWTH-CHALLENGED DIVISIONS • Potential divestitures of up to ~$1B in revenues • EPS dilution would be offset by incremental share repurchases +50 bps +100 bps EPS Organic Operating Growth Rate Margin Neutral 109
Slide 110: Product Line Simplification (PLS)
P R O D U C T L I N E S I M P L I F I C AT I O N ( P L S ) ANNUAL IMPACT ON ITW’S ORGANIC GROWTH RATE 110 BPS 90 BPS 90 BPS 70 BPS 70 BPS 50 BPS ~30 BPS 30 BPS IN FULL POTENTAL DIVISIONS 2013 2014 2015 2016 2017 2018E ITW @ Full Potential FINISH THE JOB: APPROACHING ONGOING MAINTENANCE PLS OF (30) B
Slide 111: Capital Allocation Framework
CAPITAL ALLOCATION FRAMEWORK 111
Slide 112: High Quality of Earnings
HIGH QUALITY OF EARNINGS FREE CASH FLOW CONSISTENTLY 100%+ OF NET INCOME $2,500-2,600 $2,160 $2,105 $1,979 $2,015 $2,029 Free Cash Flow* $M 2013 2014 2015 2016 2017 2018E FCF Conversion 129% 110% 106% 100% 125% 100%+ * See Appendix for GAAP to non-GAAP reconciliations 112
Slide 113: Disciplined Capital Allocation
D I S C I P L I N E D C A P I TA L A L L O C AT I O N • We only invest in areas of opportunity where we can leverage Underpinning our the ITW Business Model to create a compelling competitive Enterprise Strategy… advantage and deliver differentiated financial performance • Investment is more than ca
Slide 114: Disciplined Capital Allocation: Priorities
D I S C I P L I N E D C A P I TA L A L L O C AT I O N OUR PRIORITIES SINCE 2013: % OF OPERATING CASH FLOW INTERNAL INVESTMENTS to support organic 20-25% 1 growth and sustain core businesses 35-45% 2 An ATTRACTIVE DIVIDEND 35-40% 3 EXTERNAL INVESTMENTS 114
Slide 115: Disciplined Capital Allocation: Internal Investments
D I S C I P L I N E D C A P I TA L A L L O C AT I O N TOP PRIORITY: INTERNAL INVESTMENTS THAT SUPPORT ORGANIC GROWTH AND SUSTAIN OUR CORE BUSINESSES • All internal investments that meet our criteria are fully funded • Capital is allocated to discrete projects and strategies, not “lump sum” to the bu
Slide 116: 55-Year History of Dividend Growth
5 5 - Y E A R H I S TO RY O F D I V I D E N D G R O W T H ANNUALIZED DIVIDEND PER SHARE $4.00 17% +28% CAGR $3.12 +20% ~50% $2.60 Payout Ratio* $2.20 +18% $1.94 $1.68 +13% $1.52 +15% +11% 2012 2013 2014 2015 2016 2017 2018E AN IMPORTANT COMPONENT OF THE TOTAL RETURNS ITW GENERATES FOR SHAREHOLDERS *
Slide 117: Share Repurchases
SHARE REPURCHASES $4.3B • $13.4B of surplus capital returned to shareholders since 2012 $3.2B $2.1B $2B $2B ~$2B • ~$1.5B normalized run rate going forward $0.75B $1.1B $1.2B $1.5B $1B • Significant capacity $1.1B $1.25B for additional share $0.9B $0.8B repurchases/ Normalized Run Rate $0.6B acquisi
Slide 118: "Finish the Job" Financial Performance
“FINISH THE JOB” FINANCIAL PERFORMANCE 118
Slide 119: Incremental Performance Improvement from "Finishing the Job"
I N C R E M E N TA L P E R F O R M A N C E I M P R O V E M E N T F R O M “FINISHING THE JOB” ORGANIC GROWTH STRUCTURAL MARGIN IMPROVEMENT Current Growth Rate 2 to 3% Current Operating Margin 24 to 25% + All divisions at full potential 1.5 to 2% + 80/20 FTB Excellence 1.5 to 2.5% + Potential divestit
Slide 120: ITW's Core Business in 2023
ITW’S CORE BUSINESS IN 2023: 3 - 5% 100+% ~28% ~40% Free Cash ~50% Operating After-tax Organic 35% 7 - 10% Flow as Dividend Growth Incremental EPS Margin ROIC % of Payout Ratio Margin Growth Net Income incl. 30 bps PLS SOLID ORGANIC GROWTH WITH BEST-IN-CLASS MARGINS AND RETURNS … CONSISTENTLY 120
Slide 121: Finishing the Job: What It Will Mean
F I N I S H I N G T H E J O B : W H AT I T W I L L M E A N OVER ANY 5-YEAR PERIOD: Organic Growth . . . Peer Group Average or Better EPS Growth . . . . . Top Quartile of Peer Group Dividend Growth . . Top Quartile of Peer Group Best-in-class Margins and ROIC Free Cash Flow 100%+ of Net Inc
Slide 122: Preliminary 2019 Guidance
PRELIMINARY 2019 GUIDANCE 122
Slide 123: 2018 EPS Guidance: On Track
2018 EPS GUIDANCE: ON TRACK 15% EPS GROWTH YEAR-OVER-YEAR $7.55 - $7.45 - $7.65 $7.05 - $7.65 $7.25 $6.59* 2017 Dec-2017 Jan-2018 Dec-2018 Investor Day Earnings Call Investor Day * See Appendix for GAAP to non-GAAP reconciliations. 123
Slide 124: Preliminary 2019 Guidance
P R E L I M I N A RY 2 0 1 9 G U I D A N C E +6% • Organic growth of 2 to 4% EPS $7.90 - $8.20 - Automotive OEM ~flat - PLS (80) bps $7.55 - $7.65 $14.9 to • EPS growth of 6% at the mid-point $15.1B REVENUE $14.7 • Enterprise Initiatives ~100 bps to $14.9B • Free Cash Flow 100%+ 2018E 2019E • Share
Slide 125: 2019 Price/Cost
2019 PRICE/COST • Raw material cost inflation has continued to moderate in 2H’18 – Planning for 2-3% raw material cost inflation in 2019 vs. ~3% in 2018 • Expect pricing actions to more than offset raw material cost inflation in 2019 on a $ for $ basis – 2019 margin dilution impact expected to impro
Slide 126: Summary / Moving Forward
SUMMARY / MOVING FORWARD 126
Slide 127: ITW: Our Path to Full Potential
I T W : O U R PAT H TO F U L L P O T E N T I A L • Powerful and Proprietary Business Model • Diversified High-Quality Business Portfolio • Strong Cash Generator and Disciplined Allocator of Capital • Additional Long-term Growth Optionality from Selective High Quality Acquisitions • Consistent Top-ti
Slide 128: ITW: Our Path to Full Potential
I T W : O U R PAT H TO F U L L P O T E N T I A L By end of 2022: • Powerful and Proprietary Business Model • 1-2% of additional ― Differentiated and sustainable competitive advantage improvement in ― Executing a well-defined and focused plan to leverage it to enterprise organic full-potential growth
Slide 129: ITW: Our Path to Full Potential
I T W : O U R PAT H TO F U L L P O T E N T I A L • Powerful and Proprietary Business Model • Diversified High-Quality Business Portfolio ― Consistent long-term performance ― Resilience in the face of inevitable market fluctuations/cycles ― No “weak links” • Strong Cash Generator and Disciplined Allo
Slide 130: ITW: Our Path to Full Potential
I T W : O U R PAT H TO F U L L P O T E N T I A L • Powerful and Proprietary Business Model • Diversified High-Quality Business Portfolio • Strong Cash Generator and Disciplined Allocator of Capital ― Fully invested to support full-potential performance, innovation and growth across all 87 of our div
Slide 131: ITW: Our Path to Full Potential
I T W : O U R PAT H TO F U L L P O T E N T I A L • Powerful and Proprietary Business Model • Diversified High-Quality Business Portfolio • Strong Cash Generator and Disciplined Allocator of Capital • Additional Long-term Growth Optionality from Selective High Quality Acquisitions ― Opportunities to
Slide 132: ITW: Our Path to Full Potential
I T W : O U R PAT H TO F U L L P O T E N T I A L • Powerful and Proprietary Business Model • Diversified High-Quality Business Portfolio • Strong Cash Generator and Disciplined Allocator of Capital • Additional Long-term Growth Optionality from Selective High Quality Acquisitions • Consistent Top-ti
Slide 133: ...to Finishing the Job!
I T W : O U R PAT H TO F U L L P O T E N T I A L SIX YEARS IN… We are better than we’ve ever been on many key performance dimensions BUT WHILE WE’VE MADE A LOT OF PROGRESS… We’ve got more work to do in order to reach our full-potential (90%/70%/60%) WE ARE 100% FOCUSED ON TAKING ITW ALL THE WAY TO F
Slide 134: Break
BREAK ITY ™
Slide 135: Q&A
Q&A 135
Slide 136: Appendix
APPENDIX 136
Slide 137: GAAP to Non-GAAP Reconciliations
G A A P TO N O N - G A A P R E C O N C I L I AT I O N S Operating Margin % Test & Measurement and Electronics Polymers & Fluids Q3 YTD Q3 YTD 2012 2013 2014 2015 2016 2017 2018E 2018E 2018 2018 Total Operating Margin 14.9% 14.8% 15.4% 16.3% 18.9% 22.4% 23.9% ~24% 21.4% ~21% Amortization expense from
Slide 138: GAAP to Non-GAAP Reconciliations
G A A P TO N O N - G A A P R E C O N C I L I AT I O N S Diluted EPS For the Year Ended Adjusted Return on Average Invested Capital For the Year Ended December 31, 2012 December 31, 2012 Dollars in millions Operating income, as reported $ 2,475 As reported $ 4.72 Adjustment for Decorative Surfaces (1