Illinois Tool Works Inc. (ITW) Earnings Call Transcript & Summary

Welcome to the 2020 Annual Meeting for Illinois Tool Works Inc. I will now turn the call over to your host, Scott Santi, Chairman and CEO of Illinois Tool Works. Mr. Santi, you may begin.

Good morning, and welcome to the company's 2020 annual meeting. Due to the public health impact of the coronavirus outbreak and to protect the health and well-being of our stockholders and our people, we are conducting this annual meeting in virtual-format only, and our stockholders have joined through the web portal. Before we begin the formal business of the meeting, I think it's important to acknowledge that we are in the midst of a period of unprecedented disruption and uncertainty, both from a human health and an economic perspective. Our thoughts are with everyone affected by this pandemic. At this point in time, it remains highly uncertain as to how long the global pandemic and related economic challenges will last or how quickly our customers and end markets will recover. However, your management team, your Board of Directors and I are confident that the strength and resilience of ITW's financial position, our business model, our diversified business portfolio and our dedicated team of ITW colleagues around the world put us in a position of significant strength to deal with whatever lies ahead. It is now shortly after 9:30 a.m. Central Time, and I call this meeting to order. We will conduct the business portion of the meeting first. And at the end of the meeting, we will provide an opportunity for stockholders to ask questions. [Operator Instructions] For more information, refer to the rules of conduct posted on the web portal. I would also like to remind you that we released our first quarter results on Tuesday of this week and filed it with the filing of our Form 10-Q yesterday. We refer you to our first quarter earnings presentation and accompanying webcast, which are posted on our website, for information relating to our strategy for managing through the pandemic and updates regarding our financial condition, including the suspension of our previously announced guidance for 2020, given the uncertainties regarding the impact and duration of the COVID-19 pandemic. Please note that this meeting is being recorded and a webcast playback will be available for 60 days on our website within the next 24 hours. Recording of this meeting is otherwise prohibited. The purpose of this meeting is to consider and vote on the proposals described in our proxy statement, and we will go through them in more detail in a few minutes. If you sent in your proxy form or voted by telephone or the Internet and do not wish to change your vote, your vote has been cast, and you do not need to take any further action. For all other validated stockholders, the polls will open at 9:35 a.m. I would like to begin this meeting by introducing the members of our Board of Directors who are joining us today. Daniel J. Brutto, retired President of UPS International and Senior Vice President of United Parcel Service, Inc.; Susan Crown, Chairman and Chief Executive Officer of Owl Creek Partners, LLC; James W. Griffith, retired President and Chief Executive Officer of The Timken Company; Jay L. Henderson, retired Vice Chairman, Client Service of PricewaterhouseCoopers LLP; Richard H. Lenny, non-Executive Chairman of Conagra Brands, Inc.; David B. Smith, Jr., Executive Vice President for Policy & Legal Affairs and General Counsel of the Mutual Fund Directors Forum; Pamela B. Strobel, retired Executive Vice President and Chief Administrative Officer of Exelon Corporation and President of Exelon Business Services Company; Kevin M. Warren, Chief Marketing Officer of UPS International; Anré D. Williams, Group President, Global Merchant & Network Services of American Express Company; and myself, Scott Santi, Chairman and Chief Executive Officer of Illinois Tool Works Inc. As indicated in our proxy statement, Mr. James A. Skinner is retiring from our Board of Directors effective today. On behalf of all of our Board of Directors, I would like to take this opportunity to recognize Jim for 15 years of service as a member of our Board, including 3 years as our Lead Independent Director. We thank Jim for all his guidance, insight and many contributions to our company. I would also like to introduce Harold B. Smith, who retired as a Director in 2010 after serving as a member of our Board for over 42 years, and is currently our Emeritus Director. Finally, it is my pleasure to acknowledge the members of our executive leadership team. Our Vice Chairman, Chris O’Herlihy; our Senior Vice Presidents, Norm Finch, General Counsel and Secretary; Michael Larsen, Chief Financial Officer; and Katie Lawler, Chief Human Resources Officer; and our Executive Vice Presidents, Axel Beck, Kenneth Escoe, John Hartnett, Steve Martindale, Lei Schlitz, Sharon Szafranski and Mike Zimmerman. Now I would like to ask Norm Finch, Senior Vice President, General Counsel and Secretary to attend to certain formal matters.

Mr. Chairman, we are joined today by Stacy Janiak, our Audit Partner from Deloitte & Touche LLP, the company's independent public accounting firm. We're designating Glen Wittenberg from Broadridge Financial Solutions, our proxy service provider and tabulator; and Randall Scheuneman, our Vice President and Chief Accounting Officer, as a Committee to canvas and report as to the shares of common stock represented in person or by proxy. The Board of Directors set March 9, 2020, as the record date for this meeting. Certified list of the stockholders entitled to vote at this meeting is available to validated stockholders on the web portal. Proxy materials or notice of availability of proxy materials were sent to all stockholders as of the record date and an affidavit as to the mailing has been delivered. Supplement to the proxy statement regarding the change to a virtual meeting was filed with the Securities and Exchange Commission. Mr. Scheuneman and Mr. Wittenberg advised that approximately 89% of the shares of common stock outstanding as of the record date are represented in person or by proxy. Therefore, a quorum is present, and the meeting is officially open for business. Mr. Scheuneman and Mr. Wittenberg will also serve as voting inspectors to tabulate and certify voting results. This next slide, you'll see the proposals to be considered and voted upon at this meeting that are described in detail in our proxy statement, and they are in the same order as they appear on the screen to the right of the web portal. The company has not received timely notice of any additional director nominations but did receive a stockholder proposal. The proposal is to permit stockholders to act by written consent, and it's included in the proxy materials. I'll now turn the meeting back to the Chairman.

Thank you, Norm. The first matter before this meeting is the election of 10 director nominees. Since introductions have been made and no additional nominations were received within the time period provided by -- in the bylaws, I declare the nominations closed. The second matter before this meeting is the ratification of the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020. The third matter before this meeting is an advisory vote to approve the executive compensation of the named executive officers as disclosed in the proxy statement. The fourth matter is a nonbinding stockholder proposal to permit stockholders to act by written consent. Our Board of Directors has recommended that ITW stockholders vote against this proposal for the reasons outlined in the company's proxy statement. I will recognize the sponsor of this proposal at this time and ask the operator to please allow the sponsor to address the meeting to make a statement. You have 3 minutes to make your statement.

Thank you, Mr. Chairman. This is [ James McRitchie ]. I'm presenting this proposal on behalf of [ John Chevedden ], right to act by written consent, proposal #4. Illinois Tool Works shareholders request our Board of Directors take steps necessary to permit written consent by shareholders in the same minimum number of votes that would be required at an actual meeting. Taking action by written consent in place of the meeting allows shareholders to raise matters outside the normal meeting -- annual meeting cycle like the election of director. Hundreds of major companies enable shareholder action by written consent. This proposal is also more important because Scott Santi holds both Chair and CEO positions, a fundamental conflict of interest. He also received the highest negative votes in 2019. The Board's opposition statement speaks of engagement, but engagement with shareholders who don't have the right of written consent is like engagement where shareholders have one hand tied behind their back. The Board's opposition statement also assumes a false equivalency between the rights of written consent and special meeting. However, any shareholder, regardless of how many shares she owns, seek to solicit written consent on proposal. By contrast, calling a special meeting requires a longer process. First obtain the support of other shareholders. Once the meeting is called, distribute the proxies on the proposals to be presented at the special meeting. This 2-step process can take more time and expense than the one-step process of soliciting written consent, especially at Illinois Tool Works, which allows only investors with 20% of outstanding shares to call a special meeting instead of 10% as allowed by many companies. Similar proposals to this one won more than 50% of the vote recently at Stanley Black & Decker, Berry Global Group, Flowserve, JetBlue, United Rentals, Capital One, Cigna, Applied Materials and Nuance. Please vote for proposal #4 to increase shareholder value, vote for our right to act by written consist. Thank you very much.

And thank you for your statement. I will now pause to provide validated stockholders with an opportunity to make comments regarding any of the proposals. [Operator Instructions]

There being no comments, Scott, so you can proceed further.

Any stockholder who has not yet voted or wishes to change their vote may do so by clicking on the voting button on the web portal and following the instructions there. If you sent in your proxy form or voted by telephone or the Internet, you do not -- and do not wish to change your vote, your vote has been cast, and you do not need to take any further action. We will now pause for voting. [Voting]

Now that everyone has had the opportunity to vote, I declare the polls closed. I will now ask Mr. Scheuneman to report on the preliminary voting results.

Mr. Chairman, the voting results are all director nominees were elected, proposals 2 and 3 were approved, and proposal 4 was defeated. The approximate percentage of the vote in favor of each proposal is the following. For proposal 1, the vote is approximately 96% or more in favor of each director nominee, approximately 99% of shares voted in favor of proposal 2, approximately 95% of shares voted in favor of proposal 3, and approximately 36% of shares voted in favor of proposal 4. The final voting results will be provided in a Form 8-K filed with the Securities and Exchange Commission within 4 business days of this meeting. I'll now turn the meeting back to the Chairman.

There being no further business, this concludes the formal portion of the meeting, and I declare the meeting officially adjourned. Now we will address questions from validated stockholders submitted through the web portal. Please note that we will attempt to answer as many questions as time allows. [Operator Instructions]

Mr. Chairman, the first question is, are employees working? If so, are they provided with protective equipment? And if not, are they being paid?

The answer to that question is yes, our employees are working. We are all, as you might expect, or many of us are adjusting and working from home. However, over 95% of our manufacturing facilities around the world remain open because they have been designated in many cases as essential and, therefore, are needed to remain open. We are very much focused on ensuring that our work -- that our people that do have to come to work are more than adequately protected and have a number of programs in place to ensure that they have all the proper personal protective equipment that they need. And with regard to compensation, to this point, we are providing full compensation and benefit support to all of our people around the world and are going to do our best to continue that at least through the end of the second quarter because we think that it's the right thing to do and also because we have a significant investment that we have made for the last 7 years or longer in terms of attracting, retaining and developing a terrific group of colleagues around the world, and we're committed to doing our best to protect that investment despite the difficult conditions of the times.

Very good. Two related questions to one another. Is the dividend secure in future quarters? And what is ITW's liquidity position?

Yes. As you would imagine, this is -- given the unique circumstances that we are all going through as a result of the pandemic, primarily related to a very quick and abrupt contraction in the economy, we have done extensive work around evaluating the company's financial strength and liquidity position across a wide range of potential scenarios, and I'm pleased to report that your company is in extremely strong financial position and is in -- and as a result of that is in position to withstand anything that we can contemplate over the next quarter, which we expect to be the worst of it, but certainly from there going forward and under all the various scenarios that we have run, sitting here today, we don't see any scenario in which we would reduce the dividend or need to reduce the dividend.

Very good. A related question to the current pandemic, given the company seems to have operated okay with much of the admin folks working from home, will there be consideration given to continuing that practice and saving money on reducing brick-and-mortar for admin, particularly at corporate and regional corporate offices?

Well, first of all, we have no regional corporate offices. So we have -- ITW, for those of you that have followed the company for a long time, has always operated with a very lean structure. In fact, the corporate office for a company of roughly 45,000 employees today has less than 400 people in it. The broader answer is, I have no doubt that we will have some -- we will learn some things in terms of the -- some of the adapting that we have had to do in the short run in terms of how to best do the work of the company. But it's too early to tell exactly how that might ultimately inform how we adjust ourselves on a go-forward basis.

A couple of questions related to where can stockholders find information related to the tenure of our current directors?

Yes. So that information is available in our proxy statement, which can be found in the Investor tab on itw.com.

Good. Two questions from one shareholder. How much was spent on R&D in 2019 compared to 2018? If we can provide that information. And are stock buybacks authorized for 2020?

Yes. From an R&D standpoint, I don't have that available specifically. I think it can be found in our SEC filings in terms of detail, but I think it's safe to say that it was up modestly in '19 versus '18. And in 2020, one of the advantages provided to us given the financial strength that we have is our ability to stay fully invested in the things that we think are most critical to executing ITW's long-term strategy in driving ITW's long-term performance. So we will continue to invest R&D and in other areas of the company in 2020. But some of those investments will obviously be reprioritized, given the current situation. But certainly, we have the capacity to remain fully invested in the things that we believe really matter most to ITW's performance over the long haul and...

Stock buyback -- are stock buybacks authorized for 2020?

So we certainly have an open authorization, what we've said and did so publicly as of our -- on our earnings call on Tuesday, is that we have suspended our share repurchase program as of the end of the first quarter, and we'll not resume it until we have more clarity and certainty as to the pace and slope of the recovery from here forward.

There's a question here. Given the current environment in ITW's strong financial position, would it be a good time to pick up some discounted priced acquisitions?

Well, what I would say would largely be a reason it would be subject to what the reason for the discount and valuation was. We are -- we have a very clear strategy in terms of -- that we've articulated previously in terms of where acquisitions fit in our overall long-term strategy. That criteria does not change given the environment. There is certainly the possibility that the environment will, as is implied by the question, result in some adjustments around valuation that might make things that we were interested in before but from a valuation standpoint weren't things that we access that may become available, and we certainly have the capacity to execute on those opportunities should they emerge going forward.

Very good. Mr. Chairman, the Carpenter Union Pension Funds with combined assets of $70 billion have a collective ownership position of 150,452 shares of the company's common stock. As long-term investors, we appreciate the company's actions to address the difficulties being experienced by employees, customers and other important corporate stakeholders related to the COVID-19 pandemic. We would like to extend our best wishes to James Skinner on his retirement and our thanks for his first-class service to the company. The recent dramatic growth in the size of passive mutual funds, corporate ownership interest in U.S. corporations raises important public policy and corporate governance issues. Certainly, BlackRock holds 6% and Vanguard holds 8% of the company's outstanding shares. Does the Board see this growing ownership concentration as a positive or negative development as regard to long-term corporate planning and performance?

I think we are -- our view is, we don't see it as a positive or negative. Our job is to run the company to the best of our ability in the service of all of our shareholders. I think the index funds are -- their emergence is ultimately a function of the market and the way investors want to invest. And our job is certainly not to try to weigh in on any of that. Our job is strictly to do the best job we can over the long-haul for all of our shareholders.

Very good. Mr. Chairman, there are no further questions in the queue.

Thank you all. And before we conclude, I want to offer our deepest thanks to all of our ITW colleagues around the world for the incredible level of care and commitment that they are bringing to keeping their coworkers safe while continuing to serve our customers with excellence in the face of unprecedented difficulty and disruption. While much remains uncertain as to the depth and duration of the pandemic, it is likely that we're going to be dealing with its effects and aftermath for some time. I have no doubt that ITW will rise to the challenge as we always have over the course of our 108-year history, and that we'll come out the other side ready to resume our quest to firmly establish ITW as one of the world's highest-quality, best-performing and most respected industrial companies. We thank you, our shareholders, for your continued support, and we wish you good health. Thank you very much.

That concludes the meeting.

That now concludes the meeting. Thank you for joining, and have a pleasant day.