differentiated business model = differentiated...
TRANSCRIPT
Differentiated Business Model =
Differentiated Performance
Christopher A. O’Herlihy, Vice Chairman
Michael M. Larsen, SVP & CFO
June 9, 2016
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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 product line
simplification activities and enterprise initiatives, future financial performance, operating performance, growth in
free cash flow, organic and total revenue growth, operating margin growth, growth in diluted income per share,
restructuring expenses and related benefits, tax rates, exchange rates, timing and amount of share repurchases,
after-tax return on invested capital, end market economic conditions, and the company’s related 2016 guidance.
These statements are subject to certain risks, uncertainties, and other factors which could cause actual results
to differ materially from those anticipated. Important risks that could cause actual results to differ materially from
the company’s expectations include those that are detailed in ITW’s Form 10-K for 2015.
Non-GAAP Measures
The company uses certain non-GAAP measures in discussing the company’s performance. The reconciliation of
those measures to the most comparable GAAP measures is detailed in ITW’s press release for the fourth
quarter of 2015, which is available at www.itw.com, together with this presentation.
Forward Looking Statement
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ITW is a “Business Model Centric” Company
• A set of highly powerful and proprietary business practices and capabilities
• The core source of our competitive advantage … drives our ability to win with customers and deliver long-term differentiated returns for our shareholders
• ITW’s “secret sauce,” and through the execution of our Enterprise Strategy, we are focused on leveraging it to its full potential
• By doing so, we are positioning the company to deliver solid growth with best-in-class margins and returns on capital
• ITW’s strong results in 2015 and since the launch of our Enterprise Strategy in 2012 gives us confidence that we are on the right track
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The ITW Business Model is Composed of Three Elements
• Radically simplify and focus on high value items (the “80”)
• Apply to the whole business (not just manufacturing)
• Unique to ITW, deeply embedded in the culture and executed
in multiple business contexts, extremely difficult to replicate
→ Best-In-Class margins and returns
• Focus on solving “80” customer “pain points” by inventing solutions
• Higher velocity, lower risk, serial innovation
• High level of product differentiation with IP/patent protection
→ Solid above-market organic growth
• One company/one team focused on executing ITW’s Enterprise Strategy
• Divisions have “flexibility within the ITW framework”
→ A culture of execution and performance … “ITW gets things done”
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• Vs. Industry or Geography Centric
• A key corporate Portfolio Management role is to make
thoughtful choices to insure we are only investing and
operating in industries that have great raw material for
leveraging the ITW Business Model into strong
sustainable competitive advantages and differentiated
financial performance:
– Sustainable differentiation a must-have with minimal
commoditization risk over the medium to long term
– End customers with sophisticated/complex needs
– Long term core market growth at GDP or above
ITW’s Strategic Focus/Approach is “Business Model Centric”
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Automotive
OEM
Test &
Measurement
and Electronics
Food
Equipment
Polymers &
FluidsWelding
Construction
Products
Specialty
Products
2015
Operating
Margin24.2% 16.3% 23.7% 19.6% 25.2% 19.9% 23.3%
vs. 2012
(bps) +480 +140 +660 +380 (20) +830 +380
ITW’s “Business Model Centric” Portfolio Strategy
*Test & Measurement and Electronics and Polymers & Fluids include 410 and 440 basis points, respectively, of unfavorable operating margin impact of amortization
expense from acquisition-related intangible assets.
Solid Above-
Market Organic
Growth
Best-in-Class
Margins &
Returns
Comprehensive
Strategy
Review
2011-2012
Shift Primary
Growth
Engine to
Organic
Leverage ITW
Business
Model to
Deliver
Best-in-Class
Margins &
Returns
Accelerate
Organic
Growth
2016-
Forward
Prepare to
Accelerate
Organic
Growth
2014-2016
BSS/
Scale-Up
2013-2014
Realign
Portfolio
2013-2016
Strategic
Sourcing
2013-Forward
80/20 Excellence
2015-Forward
ENTERPRISE
STRATEGY
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Portfolio Management
We have aligned our portfolio with our organic growth focus
• Exited businesses operating in low-growth commoditized markets
• ITW is now focused on seven core segments that each have strong sustainable competitive
advantages and favorable long-term growth fundamentals
• Our portfolio is both highly profitable and highly diversified. As a result, ITW is well-positioned
to perform at a high level across a wide range of economic scenarios.
• After executing more than 30 divestitures, we are in the final stages of our portfolio
repositioning efforts as our businesses complete the exiting of slower-growth product lines and
begin to transition their focus to accelerating organic growth
We have scaled-up our divisional structure to accelerate organic growth
Divisional structure needed sufficient scale to support investments in engineering,
marketing, and sales resources necessary to drive accelerated organic growth
• 800+ regional to 84 global divisions in a well-planned, deliberate, and well-executed process
• Significant emphasis on maintaining customer, operational, and financial performance
throughout
Created scaled-up, more focused divisions able to
compete and drive accelerated organic growth globally
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Business Structure Simplification/Scale-Up
Delivering high-quality growth consistently and sustainably requires a strong
foundation of operational and financial performance.
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Prepare for Accelerated Organic Growth
• All ITW businesses must demonstrate that they are serving existing customers with excellence
and delivering acceptable financial performance to be deemed “ready to grow”
• Through the re-application of 80/20 at all of our scaled-up 84 global divisions, we are ensuring
that every business can fully leverage its growth investments and organic growth potential
• In 2015, 60 percent of our businesses achieved “ready to grow” status … we expect to have
85 percent or more of our businesses “ready to grow” by the end of 2016
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Accelerate Organic Growth
• All “ready to grow” divisions are now executing growth strategies and action plans for
all three growth levers in our organic growth framework:
– “80” focused selling … sell more to existing customers
– Core market expansion … identify and sell to customers that are like our “80” customers
– Customer-Back Innovation
• In 2016, we expect to deliver meaningful progress on our path to accelerated organic
growth and our long term organic growth goal of 200 bps or more above market
• Through our more differentiated business portfolio, scaled up operating structure and
growth investments, our strong foundation of operational execution and financial
performance, and a tight focus on our most compelling long-term growth
opportunities, we are confident that ITW is well-positioned to deliver on our growth
goal.
Bolt-on Acquisitions that support our organic growth focus
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• In alignment with our Enterprise Strategy and disciplined capital allocation, we will
use bolt-on acquisitions selectively to reinforce and further enhance the organic
growth potential of our seven core segments.
• In January, 2016 ITW announced the acquisition of Engineered Fasteners &
Components (EF&C) business from ZF TRW
– Annual revenues of $470 million, ~10% EBIT margin
– Highly complementary addition to ITW’s Automotive OEM segment
– Broadens our ability to serve global and regional automotive OEM/tier customers and
expands our long-term growth potential
– Significant potential to improve the performance of EF&C through the application of ITW’s
80/20 business management system
– Expect to generate returns on invested capital of 16 - 20% by year 7
ITW’s Performance Goals
200+ bps
Organic revenue
growth above global
GDP
20%+
After-tax ROIC
23%+
Operating margin
ITW Performance Goals
12-14%
Total shareholder
returns
The focus of ITW’s Enterprise Strategy is to position the Company for solid growth
with best-in-class margins and returns
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BEYOND 2017
Best-in-class business model = Best-in-class financial performance
Enterprise Strategy will generate best-in-class financial performance
and create sustainable, long-term shareholder value
ITW Business Model Delivers 12-14% TSR Beyond 2017
Earnings Per
Share
Operating
Income
3% Global GDP
Total
Shareholder
Returns
+200 bps
~9-10%~10-12%
~12-14%
+~2%
DIVIDEND
YIELD
+1-2%
SHARE
REPURCHASE/
ACQUISITIONS
~35%
INCREMENTAL
MARGINS
~5%
ORGANIC
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Operating Margin After-tax ROIC Earnings per Share (CAGR)
2012
21.4%
15.9%
2015
+550 bps
2012
20.4%
14.5%
2015
+590 bps
17%
2012 – 2015
Notes:
2012 Operating Margin as reported in the 2012 Form 10-K.
After-tax ROIC : see ITW’s fourth quarter 2015 press release for the reconciliation of non-GAAP measurements.
12.4%
Peer Group
Average
13.9%
Peer Group
Average
4%
Peer Group
Average
Progress since launch of ITW’s Enterprise Strategy
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1 Year 3 Year 5 Year
95.7%
56.6%
Peer Group
Average
62.8%
36.5%
Peer Group
Average
0.1%
(9.7)%
Peer Group
Average
Differentiated Total Shareholder Returns