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FLSmidth
2020 Strategy
Insert picture here
10/03/2016 1
Executive summary
10/03/2016 2
Today Tomorrow Impact
• Cost efficient • Integrated solutions • Ready for the economic
upturn
Downward cycle in industry
11.1Bn DKK
Global market leader, present in 50 countries
… Decrease leadtime … Sustainable innovation
EXECUTIVE INSIGHTS SOLUTION IMPACT
Environment and sustainability is important for customers and valueable for FLS
10/03/2016 3
6% of CO2 pollution stems from cement production…
EXECUTIVE INSIGHTS SOLUTION IMPACT
Increased damage if they’re not more energy efficient- WWF
CO2 and sustainability are already important issues
for our customers, and we think these factors will
become even more significant in the future
Bo Steffensen, CLO FLSmidth
FLS have 3 fundamental values;
• Competence • Co-operation • Responsibility
Decreased leadtime differentiates FLSmidth from its low-cost competitors
10/03/2016 4
32 % of market in 2009
1-3% of market in 2005
FLSmidth’s Chinese competitors
40% lower prices
FLSmidth’s reduced 14 months of leadtime
300+ mio. DK increase in customer value
Months
10
20
30
2005 2012 2020
EXECUTIVE INSIGHTS SOLUTION IMPACT
10/03/2016 5
How should FLSmidth position themselves to become sustainable market leaders and be ready for a clean future?
10/03/2016 5 EXECUTIVE INSIGHTS SOLUTION IMPACT
Decreasing leadtime and sustainable innovation serves as best strategic solution
10/03/2016 6
High
Low
Low High
Feasibility
B A
C
A
B
C
Increased focus on customer service
Decrease leadtime, sustainable innovation
Sell cement – forward integration
EXECUTIVE INSIGHTS SOLUTION IMPACT
Impact
Creating customer value through 2 initiatives
10/03/2016 7
Decrease leadtime Sustainable innovation
EXECUTIVE INSIGHTS SOLUTION IMPACT
Shorter leadtimes will create value for customers through better investment cases
10/03/2016 8
Creating customer value
• Reduce costs of project implementation: Engineering, installation and commissioning
• Reduce costs of operation and maintenance (quality)
• Reduced lead times - customers start making money at an earlier date
Components of customer value
Project competiveness dependent on ability to improve customer business/investment case: • Lead time being most important – decreasing lead time
Project NPV
EXECUTIVE INSIGHTS SOLUTION IMPACT
Managing leadtime components to achieve 12 months average production time
10/03/2016 9
1
2
3
4
5
16 Months
12 Months
Impact 80 m
Standardised processes and modules – moving to delivering plant solutions
Drivers for reduction in lead-time
Project management, education of more sufficient experienced project managers
Improved IT tools, improved basis for control, planning, execution & integration of processes across functions
Inventory levels, increase inventories to facilitate lean and agile plant production Process gains:
• Fewer resources employed • More predictably • Better quality Customer Value =
Cost decrease =
Engineering time clarifying all deliverables, dependencies and durations, considerable reductions can be created
1
2 3 4
5
EXECUTIVE INSIGHTS SOLUTION IMPACT
Creating customer value through 2 initiatives
10/03/2016 10
Decrease leadtime Sustainable innovation
EXECUTIVE INSIGHTS SOLUTION IMPACT
In the long-term FLS must provide environmental friendly and energy efficient solutions
10/03/2016 11
Reduce emissions Energy efficiency Distruptive technology
(advanced materials)
EXECUTIVE INSIGHTS SOLUTION IMPACT
.. Which will be done through integrated innovation efforts
10/03/2016 12
In-house
Foundation for Innovation
Collaboration
Create foundation for continuous innovation to avoid future disruption
Open innovation
• Recruitment • Formalize innovation processes
• Customers • NGOs • Tech leaders
• University research grants • Competitions
EXECUTIVE INSIGHTS SOLUTION IMPACT
How would this look in practice?
10/03/2016 13
Oscar Meeting with sales
R&D Manager Deploys team Novacem
Research grants Disruption!
?
EXECUTIVE INSIGHTS SOLUTION IMPACT
The initiatives will generate 31.6 BnDK in revenue and provide 9% CAGR
10/03/2016 14
0,0
5,0
10,0
15,0
20,0
25,0
30,0
35,0
2016F 2017F 2018F 2019F 2020F
Forecasted revenue - BnDKK
The strategy will enable FLS to reach revenue of 31,6 BnDK … Derived by
20.5 Bn DKK
2020F
Total Revenue growth
11.1BnDK
2015 Status Quo
6.8
3.4
31.6 Bn DKK
lead time
4.3 BnDKK additional
revenue from our initiatives
Innovation
0.9
EXECUTIVE INSIGHTS SOLUTION IMPACT
FLSmidth will obtain 3.2BnDKK in EBIT with an EBIT CAGR of 23.7% and a ROCE of 21.3%
10/03/2016 15
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2015 2016F 2017F 2018F 2019F 2020F
Forecasted EBIT- BnDKK
This strategy will enable FLSmidth to reach an EBIT-margin of 10.2% … With the following Capital Employed
14,9
15,0
15,0
15,1
15,1
15,2
15,2
15,3
15,3
15,4
15,4
2015 2016 2017 2018 2019 2020
Forecasted capital employed
Our recommendation enables FLSmidth to increase revenue, while decreasing capital employed: • Thereby FLSmidth obtains a ROCE > 20% by 2020
EXECUTIVE INSIGHTS SOLUTION IMPACT
Implementation plan - Monday morning
10/03/2016 16
Must win battles:
1 Success communication of
strategic importance
2 Education of project managers 3 Set up innovation programme
Increase
innovation
2016 2017 2018 2019 2019
Decrease
leadtime
In-house
Plan & communicate
srategic priority
2020
EXECUTIVE INSIGHTS SOLUTION IMPACT
Collaboration
Open innovation
Steering committee and project lounge
Educate project managemers
Source IT solutions
Standardize process and moduls
Development of standard plans
Leverage initiative
Leverage initiative
Key takeaways
10/03/2016 17
Situation Solution Impact
Has been the marketleader for almost
130 years but must navigate strategically
through downward cycle
to maintain position
Decrease leadtime and implement
sustainable innovation
11.1Bn DKK increase in revenue by 2020
EXECUTIVE INSIGHTS SOLUTION IMPACT
Q&A Insert picture here
10/03/2016 18
Appendix
10/03/2016 19
1FLSmidth 2.Executive summary 3.Environment and sustainability is important for customers ... 4.Decreased leadtime differentiates FLSmidth from its low-co... 5.Key question 6.Decreasing leadtime and sustainable innovation serves as ... 7.Creating customer value through 2 initiatives 8.Creating customer value by decreasing plant leadtime from ... 9.Shorter leadtimes will create value for customers through... 10.Managing leadtime components to achieve 12 months average... 11.In the long-term FLS must provide environmental friendly ... 12... Which will be done through integrated innovation efforts 13.How would this look in practice? 14.The initiatives will generate 31.6 BnDK in revenue and pr... 15.FLSmidth will obtain 3.2BnDKK in EBIT with a EBIT CAGR of... 16.Implementation plan - Monday morning 17.Key takeaways
1.Leverage spill-over/derrived effects from reduction in le... 2.Rating of solutions 3.Competitor analysis 4.De-construction of elements to achieve 12 months average ... 5.Advanced materials: Green cement by storing carbon dioxid... 6.Development in EBIT 7.Decomposition of capital employed 8.In-house efforts 9.Innovation through collaboration 10.Open innovation 11. Creating customer value by decreasing plant leadtime from... 12.Decomposition of Net Working Capital 13.Detailed revenue and EBIT forecast 14. PNL statement 15. All strategies contain risks that must be considered ..
Presentation Backup slides
Leverage spill-over/derrived effects from reduction in lead-time initiative
10/03/2016 20
► Leveraging increased economic customer gain to decrease payment duration terms ► Free up receivables, currently 25% of revenue
► leverage plant offering to increase customer service penetration ► Service solutions increase through customer relationship improvement & contact
Increasing overall demand for service solutions
Decreasing payment terms to free receivables
1 2
Impacting revenue CAGR and ROCE
Rating of solutions
10/03/2016 21
Solution Capabilities Alignment
with strategy Feasibility Impact Time Risk
Overall rating
Increased focus on customer service
7 9 8.5 3 4 5 6,1
Decrease leadtime, increase innovation
6 9 8 7 7 6 7,2
Sell cement – forward integration
6 6 2 8 5 3 5,0
Rated on a scale of 1 to 10,
10 being positive, 1 negative
Competitor analysis
10/03/2016 22
Social
ThyssenKrupp
Services include consulting, process-
engineering, research and development
Cement and other basic industries (including
chemical, refinery, coal plants, and port handling
facilities
Full integration
Metso Oyj
A heavy equipment company offering maintenance and support services
Paper, energy and mining
Full integration
Social
FIVES
Designs and supplies machines, process
equipment and production lines
Aluminium, steel, glass, automotive, aerospace, logistics, cement and
energy sectors
Full integration
Industry
Value chain
De-construction of elements to achieve 12 months average production time
10/03/2016 23
► Securing compatibility and interface consistency ► Mutual applicability in different plant designs ► Unify technical infrastructure & divisions
Standardised processes and modules
1
► Development of standard plans enabling project proposals and projects can be initiated earlier. ► Cross functional collaboration program (up to 15 departments engage at same time)
Decrease engineering time
2
► Project management tools focus on education/ knowledge sharing ► KPIs for project completion development (non existing)
Project management
3
► Best practise logistic and supply capabilities of products/components ► Flexible global coverage ► Unify technical infrastructure & divisions
Inventory levels increase
4
► Development of standard plans enabling project proposals and projects can be initiated earlier. ► Cross functional collaboration program (up to 15 departments engage at same time)
Improved IT tools
5
10/03/2016 24
Advanced materials: Green cement by storing carbon dioxide in cement
► Cement production to absorb more carbon dioxide than it emits ► Acting as a vehicle for carbon capture and sequestration ► For every ton of cement produced, two-fifths of a ton of carbon dioxide is stored
► Heating pulverized limestone, clay, and sand to 1,450 °C with a fuel such as coal or natural gas. ► The process generates a lot of carbon dioxide ► One metric ton of commonly used cement releases 650 to 920 kilograms of it
Tradition cement industry New Green Cement
The old World The New & Green World
► ""All we need is water and pollution." ► “We probably have the best carbon capture and storage technique there is by a long shot." ► Invloved institutions, Stanford, U.N., EU, Northwestern University &
now FLSmidth
New Green Cement insights
Development in EBIT
10/03/2016 25
EBIT 2016 2017 2018 2019 2020
Total before additional costs 1,51 1,79 2,16 2,65 3,12
Additional R&D costs -0,33 -0,34 -0,38 -0,37 -0,37
Fewer resources 0,16 0,34 0,37 0,41 0,46
Total from operations 1,3 1,8 2,2 2,7 3,2
1 => 2% of variable costs
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2016 2017 2018 2019 2020
Assumptions
Decomposition of capital employed
10/03/2016 26
14,9
15,0
15,0
15,1
15,1
15,2
15,2
15,3
15,3
15,4
15,4
2015 2016 2017 2018 2019 2020
Total capital employed Capital Employed schedule 2015 2016 2017 2018 2019 2020
Intangible assets 10,1 10,1 10,1 10,1 10,1 10,1
Tangible Assets 2,6 2,6 2,6 2,6 2,6 2,6
Net working Capital 2,6 2,6 2,7 2,6 2,5 2,4
Assumptions Intangible assets: No influence - includes goodwill patents and customer relations Tangible assets: No inflence Net working capital: Better management of inventory decreases NWC
EBIT Margin 6,4% 8,0% 8,9% 10,1% 10,6%
In-house efforts
10/03/2016 27
Innovative minds
In-house innovation
Formalized innovation process
- Attract new engineers & talent though meaningful job vision - New technology & competences
- Platform for collection of Feedback (Virtual knowledge-sharing)
- Bi-monthly meetings between sales people and R&D division
Create foundation for continuous innovation to avoid future disruption
Knowledge Plaza
Innovation through collaboration
10/03/2016 28
Tech leaders • First-movers • Universities • Start-ups
Gaining key insights and knowledge through collaborative partnerships promoting sustainable innovation
NGO • Environmental • Industry • Societal
• Guidelines &
knowledge sharing
Customers • Long-time • Integrated • Emerging +
consolidated markets
• Monthly engineers + sales rep. visits
Open innovation
10/03/2016 29
► Case competitions ► Start accelerator programs
► Funding of Master and PHD studies ► Faculty research funding
Research grants Competitions
1 2
Open innovation will secure external perspectives on R&D and innovation efforts
Creating customer value by decreasing plant leadtime from 16 to 12 months
10/03/2016 30
• Sales price 1 tonne 375 • Varible cost 125 • Contribution margin per tonne 50
(Assumption production of 3000 tonnes per day)
Customer value of one day’s production is DKK 0.75 million Customer value of one month’s production is DKK 20 million
• Productivity driving customer value • Differentiating product offering from low cost competitors
Cost impact
Value driver
Margin breakdown
Decomposition of Net Working Capital
10/03/2016 31
Net Working capital changes 2015 2016 2017 2018 2019 2020
Net Working capital in 2015 2,58 2,62 2,65 2,63 2,53 2,37
Additional inventory 0,26 0,26 0,20 0,13 0,06
Work in progress -0,1 -0,1 -0,1 -0,1 -0,1
Decrease in Trade Receiveables -0,1 -0,1 -0,1 -0,1 -0,1
Trade payables -0,03 -0,03 -0,03 -0,03 -0,03
Total changes 0,03 0,04 -0,03 -0,09 -0,16
Assumptions Additional Inventory: From 10-2,5% increase due to decreasing load time initiative, decreasing over time Work in progress: Decrease in lead time – more plants build Decrease in trade receiveables: Quicker payment, since customers obtain positive cashflows quicklier Trade Payables: Economies of scale argument
Detailed revenue and EBIT forecast
10/03/2016 32
Revenue 2013 2014 2015 2016F 2017F 2018F 2019F 2020F
Customer Service 7,565 7,061 7,3 7,6 8,1 8,9 9,8 10,8 Part of total growth
Current targeted growth 2,5% 5,0% 7,5% 7,5% 7,5% Market growth Additonal growth 1,0% 2,0% 2,5% 2,5% 2,5% 7,5%
Total growth 3% 4% 7% 10% 10% 10%
Product Companies 5,5 5,7 5,9 6,2 6,8 7,3 7,9 Market growth Current targeted growth 2,5% 5,0% 7,5% 7,5% 7,5% 7,5%
Additonal growth 0,8% 0,8% 0,8% 0,8% 0,8% #50% of sa les is aftermarket Total growth 3% 3% 6% 8% 8% 8%
Minerals 9,3 4,9 3,6 3,7 4,0 4,6 5,3 6,2 Market Growth 1,5% 3,0% 4,5% 4,5% 4,5% Market growth Additonal growth in number of customers 1% 2% 2,5% 2,5% 2,5% 4,5%
Additional growth from increase in price 1,3% 2,7% 3% 4% 5%
Total growth -28% 4% 8% 14% 16% 18%
Cement 5,2 4,0 3,9 4,0 4,3 4,9 5,6 6,6 Market Growth 1,2% 2,3% 3,5% 3,5% 3,5% Market growth Additonal growth in number of customers 1% 2% 2,5% 2,5% 2,5% 3,5%
Additional growth from increase in price 1,3% 2,7% 3% 4% 5%
Additional growth from innovation (increase in price) 3% 4% 5% Total growth -1% 4% 7% 13% 15% 17%
Total 22,0 21,5 20,5 21,2 22,7 25,1 28,0 31,6
EBIT-margin 2014 2015 2016F 2017F 2018F 2019F 2020F Assumptions
Customer Service 11,7% 10,8% 11,1% 11,6% 12,5% 13,6% 14,2% Primarily after sales, huge increase + high margin
Growth -8% 2% 5% 8% 9% 4%
Product Companies 10,8% 12,1% 12,2% 12,5% 13,0% 13,5% 13,8% Same as customer service but only 50% aftersales - therefore estimated 15% growth
Growth 12% 1% 2% 4% 4% 2%
Minerals -3,1% -11,9% -3% -1% 0% 2% 3% Return to previous margins in 2016, thereafter Increase with shorter load time as FLSmidth has done previously
Growth na na na na 50%
Cement 3,9% 1,3% 2% 2,3% 3,10% 3,9% 4,5% Returning to previous margins, thereafter a marginal increase with shorter load time
Growth 35% 28% 35% 26% 15%
P&L statement
10/03/2016 33
Profit and loss - BnDKK
Without strategy 2015 2016 2017 2018 2019 2020
Revenue 20,5 20,9 21,8 23,1 24,6 27,6
Gross profit 4,9 5,1 5,3 5,8 6,3 6,9
EBIT 1,1 1,1 1,2 1,4 1,6 1,9
Strategy 2015 2016 2017 2018 2019 2020
Revenue 0,0 0,2 0,8 1,7 2,8 4,3
Gross profit 0,0 0,2 0,5 0,9 1,3 1,8
Incremental EBIT 0,2 0,5 0,7 1,0 1,3
Combined 2015 2016 2017 2018 2019 2020
Revenue 20,5 21,2 22,5 24,8 27,4 31,9
Gross profit 4,9 5,3 5,8 6,7 7,6 8,7
EBIT 1,1 1,3 1,8 2,2 2,7 3,2
Margin 5,4% 6,3% 7,9% 8,7% 9,8% 10,1%
All strategies contain risks that must be considered ..
10/03/2016 34
Lik
lih
oo
d
Impact
C
A
B
High Low
Lo
w
Hig
h Issue
Change in customer value
drivers
External stakeholder pressure
Failure to reduce leadtime
Mitigation
Close customer relationship
feedback loop
Communication
Management priority and
ressource allocation
A
B
C
Issues
10/03/2016 34 EXECUTIVE INSIGHTS SOLUTION IMPACT