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

Good afternoon. This is the Annual Meeting of Illinois Tool Works Inc. We'll now turn the meeting over to the Chairman and CEO.

Good afternoon. My name is Scott Santi, Chairman and CEO of Illinois Tool Works Inc. Welcome to the company's 2021 Annual Meeting. Due to the continued public health impact of the coronavirus pandemic, we are conducting this annual meeting in virtual format only, and our stockholders have joined through the web portal. It is now shortly after 1:00 p.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, I will provide an update on the company, and we will allow our stockholders an opportunity to ask questions. Only validated stockholders may ask questions by submitting them in writing in the designated field in the web portal. For more information, please refer to the rules of conduct posted in the web portal. 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 1:05 p.m. in just a few minutes. I would like to begin this meeting by introducing our director nominees who are joining us today. First, 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; Darrell L. Ford, Executive Vice President and Chief Human Resources Officer of UPS International; 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 and 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; Anré D. Williams, Chief Executive Officer, American Express National Bank and Group President, Enterprise Services; and myself, Scott Santi, Chairman and Chief Executive Officer of Illinois Tool Works Inc. 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 who is currently our Emeritus Director. Finally, It is my pleasure to introduce 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; 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 Seema Pajula, our audit partner with Deloitte & Touche LLP, the company's independent public accounting firm; we are designating Sara Blaser 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 represented in person or by proxy. The Board of Directors set March 8, 2021 as the record date for this meeting. A certified list of the stockholders entitled to vote at this meeting is available to validated stockholders on the web portal. Proxy materials or notices of availability of proxy materials were sent to all stockholders as of the record date, an affidavit as to the mailing has been delivered. Mr. Scheuneman and Ms. Blaser advise that 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 Ms. Blaser will also serve as voting inspectors to tabulate and certify voting results. The proposals to be considered and voted upon at this meeting are described in detail in our proxy statement in the same order as they appear on the screen on 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 is included in the proxy materials. I'll now turn the meeting back to the Chairman.

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 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 2021. 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 his statement. You have 3 minutes to make your statement.

Well, this is John Chevedden. Can you hear me okay?

We can.

Yes. Maybe just speak up a little.

Yes. Thanks for the negative introduction. Really appreciate it. Proposal 4, shareholder right to act by written consent. Shareholders request that our Board of Directors take the steps necessary to prevent written consent by the shareholders entitled to cast minimum number of votes that would be necessary to authorize an action at a meeting at which all shareholders entitled to vote thereon were present and voting. Taking action by written consent in place of a meeting is a means shareholders can use to raise important matters outside the normal annual meeting cycle like the election of a new director. Mr. Scott Santi received the most negative votes of any director in 2020. Management talked about its track record in corporate governance but failed to mention anything new in the last 5 years. It currently takes 25% of the shares that vote at the annual meeting to call for a special shareholder meeting, plus the role of a shareholder meeting has been downgraded with the switch to online shareholder meetings. A major advantage of special shareholder meetings as an alternative written consent has been completely blown out of the water since the publication of the 2020 ITW Annual Meeting proxy. A cornerstone of the 2020 ITW argument regarding written consent was that special shareholder meetings provide an opportunity for all shareholders to be heard. With the new universal use of tightly-controlled online shareholder meetings, which can be only 10 minutes of sheltered formality, shareholders are severely restricted in engaging with management and making their views known because all challenging questions and comments can be screened out by management. For instance, Goodyear management hit its mute button right in the middle of a formal shareholder proposal presentation at its 2020 shareholder meeting. Plus AT&T management would not even allow any shareholders to speak at their 2020 and 2021 online annual meetings. Another cornerstone of the 2020 ITW argument was that issue should be decided with notification of all shareholders. This means that the Chair of the ITW Governance Committee was of ignorant of the fact that written consent can be structured so that all shareholders receive notice. If we are to believe the annual meeting proxy, shareholders have nothing but kind words for management, and shareholders have not made one meaningful suggestion to improve management's performance. If we are to believe the annual meeting proxy, the greatest usefulness of shareholder engagement in the last year was to purportedly show a lack of support for our shareholder proposal. Shareholder engagement is a process that has no rules and no independent oversight. The dynamics of shareholder engagement that management purportedly relies on are precarious. If management telephones shareholders and does a sales pitch against the shareholder proposals, many shareholders would be tempted to tell the caller they support management just to get rid of the caller. The results of the purported engagement does not even disclose whether the so-called engagement came with a sales pitch for the management status quo. Please vote yes, shareholder right to act consent, proposal 4.

Thank you for your statement. I will now pause to provide validated stockholders with an opportunity to make comments regarding any of the proposals. If you would like to make a comment, please submit your comment in writing in the designated field in the web portal.

[ There is no comment ].

There being no comments, let's proceed with voting. Any stockholder who has not yet voted or who 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 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 a 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 94% 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. In these unprecedented times, our business teams around the world are leveraging the power and resilience of the ITW business model to navigate the challenges brought about by the global pandemic while continuing to deliver best-in-class operational and financial performance. Early on, as the pandemic unfolded, we narrowed the focus of the entire company down to 2 core imperatives: first, to protect the health, safety and well-being of our people; and second, to continue to serve our customers with excellence. I am very proud but not surprised to report that our people are executing extremely well on both of these imperatives. Their dedication to keeping themselves and their ITW colleagues safe has been truly inspiring. And there is no question that we have further differentiated ourselves with many of our key customers through our ability to sustain our world-class quality and delivery performance despite the many operational challenges brought about by the pandemic. We are also continuing to make good progress in the execution of our long-term enterprise strategy. Since we launched our current enterprise strategy in 2012, we have come a long way in our efforts to position the company to deliver solid growth with best-in-class margins and returns. In fact, at this point, we achieved clear best-in-class performance versus our industrial company peer group on a number of key profitability and return on capital metrics. That being said, we are not done, and the Board and your management team remain firmly committed to taking ITW all the way to the company's considerable full potential. And in doing so, further solidifying ITW's position as one of the world's best performing, highest quality and most respected industrial companies. With respect to the company's near-term performance, the demand environment is continuing to improve across a broad cross-section of our business portfolio, and the ITW team continues to execute at an extremely high level, as reflected in the first quarter results that we announced last week. While a number of significant issues and uncertainties remain on the path to recovery from the pandemic globally, I am highly confident that your company is well positioned to both seize the opportunities and deal with the challenges that lie ahead as we move through the balance of 2021. With that, we will now be happy to address questions from validated stockholders submitted through the web portal. Please note that we will attempt to answer as many questions as time allows, and we ask that you limit yourself to 1 question and 1 follow-up question.

Mr. Chairman, the Carpenter pension funds (sic) [ Carpenters Pension Fund ] hold a total of 153,870 shares of the company's stock. As long-term investors, we strongly believe that the company's executive compensation plans should be designed primarily to drive the successful execution of the Board's long-term strategic business plan. Today's public company executive compensation plans are largely formulaic peer-related plans with simplistic annual say-on-pay voting reinforcing plan homogeneity. Would you or the Chair of the Compensation Committee speak to whether Illinois Tool Works might be better served by an executive compensation plan tailored specifically to the company's particular circumstances and its unique long-term strategic business plan?

Making -- having no opinion about the broad assertion there in terms of what other companies might do, I can absolutely say with certainty that from the perspective of ITW's executive compensation plan under the leadership and supervision of our Compensation Committee, I can think of no plan that is better aligned with our long-term enterprise strategy. And I just, in my comments a minute ago, talked about the core tenet of our enterprise strategy being positioning the company to deliver solid growth with best-in-class margins and returns. That's been the core tenet tenant back when we started on this path in 2012, and it remains so today. And I think if you would care to look at the details of our compensation plan and our proxy statement, you would be hard-pressed to find a performance metric not related to solid growth, best-in-class margins and returns anywhere in the plan. And the last thing I'll say that with respect to ITW's compensation plans, is we do not grant any time vested full value awards. So every bit of our executive officers' incentive plans are all based on performance in alignment with our pay-for-performance philosophy. Thank you.

Mr. Chairman, the topic of stakeholder capitalism as an alternative to shareholder capitalism has received considerable attention recently. As long-term pension fund investors, the Carpenter funds appreciate the sentiments embodied in the stakeholder capitalism perspective but feel that execution could be complicated. Could you discuss the Board's perspective on the concept of stakeholder capitalism? And what principles the Board would use to balance the interest of varied stakeholders as it develops and implements the company's long-term business strategy?

Yes. I would simply say that ITW has been in existence for -- we're about to celebrate our 109th anniversary. I think the Board's view for today is what it's been throughout the entirety of our history. And that is that we believe that over the long term, the interest of our stakeholders and interest of our shareholders are completely aligned, and our stakeholders include our employees, our customers, our suppliers and our communities. I think if you examine the company's track record over a very long period of time, we have lived up to that position and that view long before the current management team. But there is no management team more dedicated to serving the needs of our stakeholders broadly and seen that as being aligned with the best interest of our shareholders over the long term than this management team. As I -- I think the best representation I can give you of that is to look at our CSR -- our newly-issued CSR report, which is on our website at itw.com. Thank you.

Please provide an example or two of product innovation in the past year.

This is a company where we are innovating on a daily basis. I think you can go to our website and see numerous examples. I prefer not to cite any specific ones because I will exhibit some favoritism over some parts of our company and slight slide some others. I think broadly, what I can -- innovation has been the lifeblood of ITW. In fact, it was founded on solving our customers' problems in an innovative way back in 1912. It is -- it remains the lifeblood and the core of who we are as a company, I think the best representation, rather than a couple of examples, is I can point you to how active our patent activity as we filed -- we have a patent portfolio of over 18,000 patents, annual filings in the 1,500 to 2,000 range or so. And I think that's a sort of better reflection of the aggregate innovation in the company as opposed to just citing a couple of examples. So I think I'll leave it there. Thank you.

Does ITW plan any acquisitions?

We're not only planning an acquisition, we have one in motion currently awaiting regulatory approval. We announced back in -- so late December, early January -- in early January that we were going to acquire the test and simulation business of a company called MTS. And this is a business that is highly complementary to our Test & Measurement segment. And we'll also, we believe, have great synergy with our ITW business model. We expect that business and members of that team to join us probably midyear or so. And beyond that, we are always interested. Although organic growth remains the core growth focus of the company, we are always interested in supplementing that with high-quality acquisitions that fit our business model and our company strategy. Thank you.

Mr. Chairman, are there examples of cost-cutting measures taken in 2020?

Absolutely, there were cost-cutting measures taken in 2020, as just about everybody had to adjust to the effects of the pandemic. For example, we didn't travel as much as -- anywhere near as much as a company as we normally did because of the restrictions around COVID. But rather than focus on cost-cutting in 2020, what I'd like to point out is the fact that we actually made the decision early on in the pandemic to not initiate major headcount or other cost-cutting programs across the company and in fact, committed to offering full pay and benefits to all of our people around the world through the entirety of the second quarter when the effects of the pandemic were at their most severe. We did that because we felt like it was -- the circumstances were such that it was an opportunity for us to have our people's backs through a very difficult time. What I would say, though, is it also turned out to be a very good business decision for us as the economy recovered. The recovery from the pandemic began early on in July. And we are still benefiting today as the economy continues to recover from the fact that we remain fully staffed, and we're well positioned to continue to serve our customers as their demands and their requirements continue to recover from the pandemic.

Mr. Chairman, are there programs to encourage employees to be vaccinated?

Sure. We are encouraging all of our employees to be vaccinated. We are -- this is -- this tends to be -- certainly, while it's of national importance, there are -- the actual execution of it is very local. So all of our businesses around the country, in fact, around the world, are doing everything they can to help their employees who want to be vaccinated find locations to be vaccinated. We offer paid time off to go get a vaccination. And so we are certainly doing everything we think we can do in order to facilitate both opportunities and the ability of our people to get their vaccination. So we -- and we hope they all do, for sure.

There's a general question, Mr. Chairman, regarding when the company stopped doing share buybacks and then has started doing share buybacks again.

Sure. So in the -- actually, about this time last year as the effects of the pandemic were starting to take hold, we made the decision to suspend our share buyback program out of an abundance of caution, not knowing that the pandemic being a fairly unprecedented event. We certainly, like I think most companies, thought it was prudent to preserve our resources to see how it all was going to ultimately unfold. And in the first quarter of this year, the recovery has -- and the company's performance has recovered to a point where we are very comfortable resuming the share buyback program as a part of an overall, very balanced and strategic capital allocation program.

And finally, Mr. Chairman, there's a question that says that you've done exceedingly well in dealing with the COVID situation and surely learned many lessons. What lessons have you learned as a company?

Well, I'll go back to sort of what I talked about before, as I think the importance in challenging times like this. Look, I'll say it this way. We have built up, through the competitive fire power of our business model, a financial fortress as an industrial company. We are an incredibly strong and resilient position. And I think we were reminded through the last year how important -- everybody focuses on growth, but I think the importance of resilience in a world that is becoming nothing but more risky and more volatile, let's just say, that this ability to run the company in a way where we are not only best-in-class from the standpoint of growth and returns and margins, but also that we are resilient in a way that allows us to stay invested in our people, in our business strategy, in some of the most challenging times anybody can remember. I think that was certainly a big lesson learned over the course of the last year, a big lesson reinforce for us is our need to think long term and leverage the full suite of strengths and capabilities that we've developed as a company in order to maintain our ability to do so. Thank you.

Mr. Chairman, there are no further questions.

Thank you, Norm. Let me close then by offering our deepest thanks to all of our ITW colleagues around the world for their exceptional ongoing performance and dedication. We also thank you, our fellow shareholders, for your continued support.