Executive Chairman, Illinois Tool Works Inc.
Illinois Tool Works CEO: Ratio For Success | Mad Money | CNBC
The earnings parade continues! Illinois Tool Works has rallied 10 percent in three months with another big move today. Jim Cramer sat down with the CEO to see if the company has the right tools to head higher.
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About E. Santi
In a 2017 interview on CNBC's Mad Money, E. Santi, then Chairman and CEO of Illinois Tool Works (ITW), discussed the company's performance and strategy. He attributed ITW's ability to raise margins to its "8020" operating system, which focuses on the small percentage of customers and product lines that generate the majority of revenue while eliminating associated cost and complexity. Santi noted that this "laser-like focus" allows the company to improve profitability even in mature business segments. Santi also addressed specific market conditions and product development. He described ITW's automotive business as a "value-added problem solver" for OEMs, noting that the company's current content of about $35 per car leaves room for growth toward a $200-per-car addressable market. He reported a surge in European demand, with broad-based growth in construction and automotive. To address a shortage of skilled welders, Santi said ITW has developed technologically sophisticated welding equipment that is easier for less-experienced operators to use. He characterized the company's recent progress as the result of a multi-year pivot toward organic growth, combined with favorable macroeconomic conditions.
Transcript (9 segments)
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Host0:11
Industrial that perhaps you've never heard of. For those of you who still aren't familiar with this one, come on, wake up. Illinois Tool Works makes specialized industrial equipment for a variety of niche markets. Their products are involved in everything from deep sea oil rigs, bridges, wind turbines, healthcare, automobiles, construction, aerospace, and mobile devices. The company's got great management, terrific margins, and a fabulous track record. And just this morning, Illinois Tool Works reported yet another excellent quarter. The company posted a 9-cent earnings beat at $1.45, basis higher than expected. Revenue even better, it gave you 3.5% organic growth, and management raised full-year sales and forecast for 2017. Put all together, you can understand why the stock is volleying close to five bucks or more than 3% today, climbing to a brand new all-time high. So should you be worried that you missed this one, or is it possible that there's a lot more upside? Let's take a closer look with Scott Santi, the Chairman and CEO of Illinois Tool Works.
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E. Santi1:10
Automotive is a good business, but it's not the kind of business that's generating the kind of return that you are. What are you taking share? New products? How does it work?
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Host1:19
Well, the automotive story specifically, Jim, is all about the niche that we play in that space. So we are a value-added problem solver for the OEM customer. We participate in a very limited, niche-y space in the industry. High engineer content, high level of problem solving for our customers. To give you an example, the average bill of material in a car is roughly $155,000. We have maybe $35 a car, so very niche-y but very engineered. We step in and solve a problem when the OEMs need one.
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E. Santi1:52
Okay, and on that $35, to your point on the terms of growth potential from there, we feel like the...
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Host2:10
I want if people understand 80/20, they'll know why it's not too late to buy. Yeah, okay, so 80/20 is the operating system that we use inside every ITW company. It's been around, started up inside ITW back in the mid-80s, and it's been something we've been practicing across the company ever since. And it really is built around a phenomenon that we see over and over again in our kinds of companies, our kinds of businesses, which is the fact that typically 20% of a business's customers and product lines generate 80% of revenue, and the inverse is also true. So over 80% of a business's customers and product lines typically only generate roughly 20% of their revenue. So what we do with that insight is radically simplify the business by focusing on that small, relatively small proportion.
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E. Santi3:11
And that's how you can keep raising margins, which is really the ITW story. I mean, a lot of people felt that it was impossible to continue to take margins up. Welding, these are old businesses, but you're able to keep wrenching it out.
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Host3:26
Yeah, and it really comes about from that ability to really laser-like focus on those larger customers and more dominant product lines that really drive the bulk of the profitability in any business. You still, you're seeing some good demand. I mean, one of the things that stood out here, especially in the day when France, which you had good numbers when French government changes here, the surge in Europe is really quite extraordinary. That just, they're doing better, more demand. We saw a nice uptick in Europe in the quarter, up 6% overall across the company. It was fairly, you know, was the quarter for us was also that we saw a nice uptick in the business spending parts of our portfolio. So welding, tested measurement globally, where we've had a fairly anemic environment in terms of business investment, at least you know in the quarter, we saw some signs of that perking up a little bit. So the organic growth, which is rather extra, I'm going to cover all the industrials. You've got the so far 3.5 in a kind of sluggish environment. That's inventions and also catering, listening to the customers.
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E. Santi4:38
Absolutely, yeah. And as we've talked about a lot, we've had a big pivot in the company going on over the last four years in terms of really driving towards a much more concentrated effort on building an organic front end in the company. So part of the progress is just the result of that effort. It's working, and then some of the macro help we got in the quarter in terms of...
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Host5:10
Many years of apprenticing as a welding, now that's just something where you listened to what people had to say and you came up with a better mousetrap. That's right, big shortage of skilled labor in a lot of industries. We see it also beyond welding in construction right now, where it's one of the limiters in terms of that market is the ability for contractors to find qualified labor in the construction arena. Similar in welding. So a big part of what we're on in terms of value add is to try to build our equipment that has a high level of sophistication in terms of technology, but to make it easier and easier for a less experienced welder to get up to speed. You've done an amazing job. This is a great American industrial that we should all be very proud of, with a stock that I think can still go much higher. That's Scott Santi, the Chairman and CEO of Illinois Tool Works, simple as ITW.