Illinois Tool Works Inc. · NYSE:ITW
Illinois Tool Works — Investor Day (December 2013)
45 slides from Illinois Tool Works's investor day presentation, Dec 6, 2013
Slide 1: 2013 ITW Investor and Analyst Day
Meaningful Progress in Year One: ITW’s Enterprise Strategy at Work 2013 ITW Investor and Analyst Day E. Scott Santi, President & CEO David C. Parry, Vice Chairman Michael M. Larsen, Senior Vice President & CFO New York, December 6, 2013
Slide 2: Agenda
Agenda 9:00 am Welcome John Brooklier, Vice President Investor Relations 9:10 am Enterprise Strategy Update E. Scott Santi, President & CEO David C. Parry, Vice Chairman Michael M. Larsen, Senior Vice President & CFO 10:30 am Break 10:45 am Q&A E. Scott Santi, President & CEO David C. Parry, Vice Ch
Slide 3: Forward Looking Statements and Non-GAAP Measures
Forward Looking Statements The remarks made by ITW representatives at this meeting contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding the expected impact and timing of strategic initiatives
Slide 4: Presenters
Presenters E. Scott Santi, President & Chief Executive Officer ● 31 years with ITW ● Named president & chief executive officer in 2012 David C. Parry, Vice Chairman ● 19 years with ITW ● Named vice chairman in 2010 Michael M. Larsen, Senior Vice President & CFO ● Joined ITW in 2013 ● Previously CEO/
Slide 5: Enterprise Strategy Overview
Enterprise Strategy Overview Differentiated Differentiated Business Model Performance 80/20 Business Solid Growth Process Key Enterprise Initiatives • Portfolio Management Customer-Back • Business Structure Strong Returns Innovation Simplification • Strategic Sourcing Decentralized Best-in-Class Ent
Slide 6: The Starting Point of ITW's Enterprise Strategy
The Starting Point of ITW’s Enterprise Strategy 2010-2011 Key factors: ● External: Growing intensity/ composition of global competition → Portfolio Management → Strategic Sourcing ● Internal: With growth, ITW had become complex and fragmented … acquisition-led growth at current size/scale difficult
Slide 7: Differentiated Business Model
Differentiated Business Model Differentiated Differentiated Business Model Performance 80/20 Business Solid Growth Process Key Enterprise Initiatives • Portfolio Management Customer-Back • Business Structure Strong Returns Innovation Simplification • Strategic Sourcing Decentralized Best-in-Class En
Slide 8: ITW's 80/20 Business Process
ITW’s 80/20 Business Process A differentiated operating model that identifies key profit drivers and structures entire business to fully leverage them • Simplify first / eliminate complexity, then improve • Focuses efforts on highest value “80” items • Applied to the entire business • Proprietary Me
Slide 9: ITW's 80/20 Business Process
ITW’s 80/20 Business Process Customers Revenue & Products & Profit ● Focus ● Innovate 20% Basic Principles ● Grow ● 20% of the activity drives 80% 20 80% of the results % ● Outsource ● Complexity drives unnecessary ● Minimize overhead cost 80% resources ● Eliminate 20% Simplify and focus on key driv
Slide 10: ITW's 80/20 Business Process
ITW’s 80/20 Business Process 80/20 business process shapes business strategy Determine current position with ‘80’ customers: • Growth potential with ‘80’ customers • Growth potential with similar customers Re-design business to leverage resources & improve operational performance around ‘80’ custome
Slide 11: ITW's 80/20 Business Process
ITW’s 80/20 Business Process Revenue/Margin Revenue/Margin Revenue/Margin Overhead Costs Overhead Costs Overhead Costs Operating Profit Operating Profit Operating Profit Meaningful Progress in Year One: ITW’s Enterprise Strategy at Work 11
Slide 12: Why ITW's 80/20 business process is unique
ITW’s 80/20 Business Process Why ITW’s 80/20 business process is unique Continuously evolving Built on 30 plus years of practice Difficult to replicate Meaningful Progress in Year One: ITW’s Enterprise Strategy at Work 12
Slide 13: ITW's 80/20 Business Process: operating margins
ITW’s 80/20 Business Process Financial Performance Benefits of 80/20 Best-in-class High levels of Strong operating capital ROIC margins efficiency Consistent application of 80/20 delivers best-in-class results Meaningful Progress in Year One: ITW’s Enterprise Strategy at Work 13
Slide 14: Customer-Back Innovation
Customer-Back Innovation Customer-Back Innovation • Focused on solving “80” customer problems • Customer-focused vs. technology-centered • Lower investment, lower risk, higher velocity Meaningful Progress in Year One: ITW’s Enterprise Strategy at Work 14
Slide 15: Decentralized Entrepreneurial Culture
Decentralized Entrepreneurial Culture Allowing our businesses significant decision-making autonomy within ITW’s strategic framework • Low bureaucracy / fast decision making • Fosters entrepreneurialism and innovation • Provides flexibility within a framework Meaningful Progress in Year One: ITW’s En
Slide 16: 2012-2017 Enterprise Strategy
2012-2017 Enterprise Strategy Differentiated Differentiated Business Model Performance 80/20 Business Solid Growth Process Key Enterprise Initiatives • Portfolio Customer-Back Innovation Management Strong Returns • Business Structure Simplification Decentralized Entrepreneurial • Strategic Sourcing
Slide 17: Portfolio Management
Portfolio Management Move sustainable differentiation from desirable to must-have Objectives Deliver organic growth 200bps above market Fully leverage ITW’s differentiated business model Divested ~20 non-core businesses since 2011 Progress Initiated Industrial Packaging sale process On t
Slide 18: Divested ~20 Non-Core Businesses Since 2011
Divested ~20 Non-Core Businesses Since 2011 Industrial Packaging on track for mid-2014 divestiture Meaningful Progress in Year One: ITW’s Enterprise Strategy at Work 18
Slide 19: Strategic Acquisitions in 2013
Strategic Acquisitions in 2013 • Chinese Western cooking manufacturer • Accelerates entry to faster growing end market in key emerging market • End-of line automated packaging solutions • Complements higher growth warehouse automation platform • Manufacturer of specialty welding filler metals • Supp
Slide 20: High Quality Portfolio
High Quality Portfolio Segment Automotive Test & Food Polymers & Welding Construction Specialty OEM Measurement Equipment Fluids Products Products and Electronics % of ’13F Revenues ~17% ~15% ~15% ~14% ~13% ~12% ~14% Core Operating Margins ’13F** ~21% ~19% ~20% ~21% ~26% ~15% ~23% y/o/y change** +13
Slide 21: Solid Growth Above Market
Solid Growth Above Market Key Drivers Growth by 2017 Highly differentiated, faster growing business portfolio Selective 1/3 Acquisitions Favorable long-term market trends e.g. Welding, Automotive, T&M, etc. Scaled up, global divisions investing in +200bps growth in more impactful way 2/3 Con
Slide 22: Business Structure Simplification
Business Structure Simplification Simplify organizational model Objectives Larger scale global divisions Better leverage resources Solid progress on business integration Progress Strong leadership in place Meaningful contribution to overall margin expansion Meaningful Progress in Year On
Slide 23: Business Structure Simplification
Business Structure Simplification Simpler, more competitive structure … while maintaining decentralized and entrepreneurial culture # of Divisions Avg. Division Revenue ~$150M ~800 ~$25M ~90 2010 2013F 2010 2013F Meaningful Progress in Year One: ITW’s Enterprise Strategy at Work 23
Slide 24: Business Structure Simplification
Business Structure Simplification Welding and Food Equipment segments were the templates Welding Food Equipment • Revenue: $1.8B in 2013F • Revenue: $2.1B in 2013F • Three platforms: • Four Platforms: 1 Oil & Gas 1 Service 2 Industrial 2 Warewash / Refrigeration 3 Commercial 3 Cooking 4 Retail • 11
Slide 25: Construction Products
Construction Products Commercial Construction North America Strategic Benefits Operational Benefits • Optimized product portfolio • From 3 separate businesses to 1 division • Focused innovation resources • 3 GMs to 1 VP/GM • Simplified offering of strongest brand • 50% reduction in facilities names
Slide 26: Polymers & Fluids
Polymers & Fluids North America Sealants Strategic Benefits Operational Benefits • Focused on environmentally • From 5 operating units to 1 division sustainable roofing market with innovative technologies • 4 GMs to 1 VP/GM • R&D dedicated to global growth • 27% reduction in overhead positions initi
Slide 27: Strategic Sourcing
Strategic Sourcing Leverage global sourcing spend Objectives Reduce costs Embed sourcing as a key capability Sourcing teams in place Progress Ahead of year one targets Steady flow of projects at segment and commodity level Meaningful Progress in Year One: ITW’s Enterprise Strategy at Wor
Slide 28: Strategic Sourcing
Strategic Sourcing ITW already managed operational purchasing well … Operational Purchasing or “Strategic Sourcing” “Buying” More Fragmented, coordinated, Under Highly leveraged leveraged Strategic sourcing effort is creating another lever to scale up performance and margins Meaningful Progress in Y
Slide 29: Strategic Sourcing
Strategic Sourcing ~$8B Spend in 2014 Indirect Comments • Goal: average of ~1% improvement 30% in spend per year for 5 years • 80/20 applied heavily throughout 70% process • Managing pace of improvement…bigger benefits to come later in five-year plan Direct Slightly ahead of plan for 2013 … good mom
Slide 30: 2012-2017 Enterprise Strategy
2012-2017 Enterprise Strategy Differentiated Differentiated Business Model Performance 80/20 Business Solid Growth Process Key Enterprise Initiatives • Portfolio Management Customer-Back Innovation • Business Structure Strong Returns Simplification • Strategic Sourcing Decentralized Best-in-Class En
Slide 31: 2012-2017 Enterprise Strategy: Differentiated Performance
2012-2017 Enterprise Strategy: Differentiated Performance Financial Goals by 2017: Portfolio Management Robust competitive advantages 200bps Solid Growth organic growth Strong sustainable differentiation Positive long-term fundamentals above market World-Class Operating Efficiency Best-in-Clas
Slide 32: 2013 Financial Performance Summary
2013 Financial Performance Summary ● ITW is executing well in ’13 … on track to deliver Q4 and FY13 EPS guidance ● Good momentum on enterprise initiatives and margin expansion … +90bps y/o/y 1 Portfolio Management on track … ~25% of non-core revenues divested by ’14 2 BSS progressing … key driver of
Slide 33: 2013 Financial Summary
2013 Financial Summary ($’s in billions, except EPS) +12% 2013 Highlights ~$3.60 • Adjusted total revenues* up 1.5% y/o/y EPS $3.21 • Operating margin* at ~17.8% … ~$14.1B +90bps driven by BSS and sourcing Revenues $13.9B • ROIC** +170bps • Free op. cash flow** > 100% of net income • $1.8B buy-back
Slide 34: Strong Cash Generation
Strong Cash Generation Free Operating Capital Allocation Priorities Cash Flow*** 1 Organic investments fully funded % of Net >100% - Growth, capex, R&D, restructuring Income Acquisitions ~$375M 2 Committed to attractive dividend - 50+ years of consecutive increases** Share ~$1.8B 3 External investme
Slide 35: Progress on Financial Performance Goals
Progress on Financial Performance Goals 2013 Performance goals by 2017 Comment progress Organic growth 200bps > market +/- Ramping up to 2017 goal +90bps margin expansion… 20%+ Operating Margin + ~17.8% operating margin 20%+ ROIC + +170bps … ROIC ~16.2%* BSS / Sourcing Initiative + On track for $600
Slide 36: Financial Framework for 2014
Financial Framework for 2014 Expected Growth & Margins Key Assumptions ● Macro environment … cautiously ● IPG divestiture by mid-’14 … EPS optimistic dilution partially offset by share repurchase program ● 2% to 3% organic revenue growth ● Additional leverage in 1H’14 … limited – North America: 2-3%
Slide 37: 2014 Financial Guidance Summary
2014 Financial Guidance Summary ($’s in billions, except EPS) +19%-25% Highlights $4.30-$4.50 • Organic revenues up 2%-3% EPS $3.60 ~$14.6B • Operating margin at ~19% … +120bps Revenues ~$14.1B driven by BSS and sourcing • ROIC* at ~17.5% … +130bps • Free op. cash flow* > 100% of net income 2013F 20
Slide 38: Strategic Enterprise Model 2012 - 2017
Strategic Enterprise Model 2012 - 2017 2017 Comment Target Total annual growth rate ~5-6% 2%-3% organic in ’14 Organic growth rate +200bps > market Steady ramp-up Enterprise initiatives impact $600-$800M Evenly split over 5 yrs. Operating margin 20%+ ~19% in ’14 Free op. cash flow* conversion > 100%
Slide 39: Summary
Summary ITW executed well in 2013 … reaffirming EPS guidance for Q4 and FY13 Well positioned for 2014 … EPS guidance $4.30-$4.50, up 19%-25% 2012-2017 enterprise initiatives on track Strong cash flow and disciplined capital allocation On course to deliver long-term targets for 2017 ITW is
Slide 40: Break
Meaningful Progress in Year One: ITW’s Enterprise Strategy at Work Break
Slide 41: Q&A
Meaningful Progress in Year One: ITW’s Enterprise Strategy at Work Q&A
Slide 42: Appendix
Meaningful Progress in Year One: ITW’s Enterprise Strategy at Work Appendix
Slide 43: Definitions
Definitions Free Operating Cash Flow The company uses free operating cash flow to measure cash flow generated by operations that is available for dividends, acquisitions, share repurchases and debt repayment. Free operating cash flow represents net cash provided by operating activities less internal
Slide 44: 2012 GAAP to Non-GAAP Reconciliation
2012 GAAP to Non-GAAP Reconciliation 2012 Full Year $ in Billions, except per share amounts Total Operating Diluted Revenue Margin EPS Actual Results (GAAP) $14.8 16.7% $ 4.72 Decorative Surfaces net gain - - 1.34 Decorative Surfaces equity interest (2012) - - (0.04) Decorative Surfaces operating re
Slide 45: Total Debt to Adjusted EBITDA
Total Debt to Adjusted EBITDA The Company uses the ratio of total debt to adjusted EBITDA to measure its ability to repay its outstanding debt obligations. The ratio of total debt to adjusted EBITDA represents total debt divided by income from continuing operations before interest expense, gain on s