The Service Leap · With The Service Leap, FLSmidth can reach its targets EXECUTIVE INSIGHTS SOLUTION IMPACT SUMMARY CBS | 2 Facing a challenging market with low margins in cement

The Service Leap Winning in the long-term with a focus on service

Jarl Greve | Nadine Raida | Morten Juhl | Sebastian Kersting

With The Service Leap, FLSmidth can reach its targets

EXECUTIVE INSIGHTS SOLUTION IMPACT SUMMARY 2 CBS |

Facing a challenging market with low

margins in cement and mining.

Revenues have been declining for

FLSmidth

“How can FLSmidth regain above-

market growth together with ROCE

above 20% and EBITA between 10-

13% by 2020?”

Product business Project business Service business

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Time

The Service Leap


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e

Time

20%

30%

10,000

0 0%

30,000

10%

20,000

mDKK

2016 2015 2017 2020 2018 2019

28,256

7%

19,682 21,158

22,745

26,285 24,451

7% CAGR

20%

11% 10%

ROCE

Revenue

EBITA Margin

FLSmidth has experienced large volatility in ROCE and is

currently at a downturn


ROCE

20%

5%

10%

15%

0% 2013 2014 2015 2012

ROCE

Source: Annual Reports

Since the volatility follows profitability, high margin segments

has to be prioritized to meet target


ROCE MARGINS

20%

5%

10%

15%

0.0

2.0

3.0

0%

1.0

2013 2014 2015 2012

PM

ROCE

Turnover rate

Minerals Cement Product

Companies Customer

Services

13.2% 13.0%

2.5%

-7.2%


Cyclical market constitute a challenge to FLSmidth in

generating stable income


Revenue Commodity Prices CAPEX

How can FLSmidth generate stable growth over the cycle?

0

5

20

25

15

10

30 bDKK

2015 2005 2010

40

20

0

140

160

180

120

60

80

100

b$

2010 2015 2005

100

0

50

250

300

350

400

150

200

MG Base Metal Index (MGM)

2010 2015

Source: Annual Reports, UBS

Shifting from equipment to services has proven generate high

returns for equipment manufactures


Service share of revenues

Ave

rag

e c

om

po

un

d T

SR

Source: The Boston Consulting Group

7.1

5.0

+2.1

%-points

1.5

3.1

2.1x

9.8

23.0

+13.2

%-points

34.0

25.0

+9.0

%-points

CAGR 2006-2012 (%)

Annual revenue grow th

Variance, 2006-2012

Average revenue drop

due to economic crisis(%)

Average gross margin,

2012 (%)

Faster growth

Greater

Predictability Greater resilience

Greater

Profitability

Service

Equipment

FLSmidth should increase its presence in customer services


Minerals Cement Product

Companies Customer

Services

13.2% 13.0%

2.5%

-7.2%

20%

37%

25%

18%

Cement Product Companies

Customer Services Minerals

10%

5%

55%

30%


2015 2020

With a focus on service, FLSmidth can become less cyclical



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The Service Leap

Cement

Minerals

Product companies

Services

Cement

Minerals

Product companies

Service

9 CBS |

Overall goal to move from products to services

EXECUTIVE INSIGHTS SOLUTION IMPACT SUMMARY

Products Solutions

Outputs Outcomes

Transactions Relationships

Elements Ecosystems

From a world of … To a world including …

VISION

The Service

Leap

10 CBS |

4 initiatives will improve FLSmidths service offerings now

and in the long term


Products Solutions

Outputs Outcomes

Transactions Relationships

Elements Ecosystems

From a world of … To a world including …

1

2

3

4

Short-term

Long-term

Reverse supply chain

Improved service

Big data

Relationship pricing

Timeline

VISION INITIATIVES

The Service

Leap

3 initiatives will drive short-term impact of new vision

11 CBS |

Relationship Pricing

Reverse supply chain

Improved service

WIN

WIN

CUSTOMER

FLSMIDTH

EXPENDITURE PRODUCTION AGILITY

REVENUE COST KNOW-HOW 1

3

2


12 CBS |

Through partnership FLSmidth can exploit opportunities of big

data and create value for customers


Data

Center

Local

Service

Center

Customer

Data Status report

Required service,

maintenance and

parts

or

Outcome

Outcome

Outcome

1

3

2

Predictive to Preventive O&M Downtime decrease

Continuous optimization Improve productivity

Safety & Environment Decrease risk of accidents and energy use

Source: Bloomberg, IBM, General Electric, SAP

“The service leap” will be implemented and incorporated

gradually till 2020

13 CBS |

2016 2017 2018 2019 2020

PRODUCT TO

SERVICE

BIG DATA

Must win battles

Service activities in 2 key

markets at Q2 2017 1 2 3 Achieve 50% of revenue from

customer services by 2020

Establishing strong

partnership by Q4 2016

Internal implementation, hiring and training

Offer service initiatives in key markets

Training of personnel and internal implementation

Development of IT infrastructure

Constant feedback for continuous improvement and development

Form and negotiate big data partnership


Expand to global markets

Pilot project with selected customers

Increasing service offerings will give FLSmidth a ROCE of

20% by 2020


A focus on services will increase EBITA to 11% by 2020

Increase in revenue p.a.

Increase in capital

employed

Revenue from customer

services

7,5%

5%

55%

20%

30%

10,000

0 0%

30,000

10%

20,000

mDKK

2016 2015 2017 2020 2018 2019

28,256

7%

19,682 21,158

22,745

26,285 24,451

7% CAGR

20%

11% 10%

ROCE

Revenue

EBITA Margin

KEY ASSUMPTIONS

Pivotal risks has to be accounted for


Lik

lih

oo

d

Impact

C

A

B

High Low

Low

H

igh

Lack of customer

interested

Market

dow nturn

Finding the right

partner

… but thorugh mitigation FLSmidth can succeed the

probability and impact


Making sure to clearly communicate the benefits of new

service initiatives emphasizing down-time, stable cash flows, productivity etc.

Focus on managing these headwinds by improving

and enhancing customer services during down market

Thorough assessment of several options based on

company capabilities and experience

MITIGATION

A

B

C

Lik

lih

oo

d

Impact

C

A

B

High Low

Low

H

igh

Market

dow nturn

Finding the right

partner

Lack of customer

interested

The Service Leap will enable FLSmidth to live up to its vision

and reach set targets



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ve

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Time


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The Service Leap

1 2 3

Questions & Answers

Insights Solution Impact Appendix

02. Executive

04. ROCE and Profitability

05. Cyclical Market

06. Service provides best

returns

07. Increase services % of

revenue

08. Decrease cyclicality

10. From Product to

Service

11. Short-term initiatives

12. Long-term initiative

13. Implementation

Timeline

14. Financials

16. Risk

17. Summary

20. CAPEX and

depreciation to CAPEX

over time

21. Service part of revenue

and TSR

22. Gradual prioritization

of implementation

23. Assessment of service

need

24. Competitive landscape

25. Rating of Big Data

partners

26. Revenue Split

27. Forecast and

segmentation

28. Sensitivity analysis

29. Risk analysis

19 CBS |

Mining CAPEX shows cyclical behavior over last 40 years

APPENDIX 20 CBS |

Source: UBS

Service part of revenue and TSR

APPENDIX 21 CBS |

Source: The Boston Consulting Group

Gradual prioritization of implementation

22 CBS |

EU NA

SA

AS

AF

OC

Priority

1

2

3

Source: Annual Report

APPENDIX

Assessment of service need

23 CBS |

1. North America: largest demand for

services

2. South America: Large demand for

services

3. Asia: Medium demand for services

4. Africa: Medium demand for services

5. Oceania: Low demand for services

6. Europe: Low demand for services

Source: Annual Report

APPENDIX

Competitive landscape

APPENDIX 24 CBS |

HIG

H

LOW HIGH

Eq

uip

me

nt

Service

LO

W

ThyssenKrupp

Atlas Copco

Outotec

Metso

Sandvik

FLSmidht

Source: Market Line

Rating of Big Data partners

APPENDIX 25 CBS |

Parameter Capabilities Experience Global Engaged with

Competitors

Source: Bloomberg, IBM, General Electric, SAP


55% customer service

30% product companies

15% minerals and

cement

FLS can gain up to 12bDKK from services and products by 2020

2020 segment breakdown

Higher share of service in the product portfolio will increase

profitability and secure growth in revenues for FLS

Customer

service

2020 Product

Companies

Minerals and

cement

2015

3.508

28.256 8.301

19.682 -3.235

Source: Team Sauder analysis

Forecast and segmentation

APPENDIX 27 CBS |

Customer Services

Product Companies Minerals Cement Average EBITA Margin

2015 37% 25% 18% 20% 7,3%

2016 40% 26% 16% 18% 8,0%

2017 45% 27% 13% 16% 8,9%

2018 47% 28% 10% 14% 9,5%

2019 50% 29% 7% 12% 10,2%

2020 55% 30% 5% 10% 11,0%

EBITA margin 13,0% 13,2% -7,2% 2,5%

mDKK 2015 2016 2017 2018 2019 2020 Assumptions

Capital employeed 15162 15285 15438 15592 15748 15906 1% growth

Service 5577 6114 6947 7328 7874 8748

Product 3828 3974 4168 4366 4567 4772

Minerals 2744 2446 2007 1559 1102 795

Cement 3013 2751 2470 2183 787 1591

Revenue 19.682 21.158 22.745 24.451 26.285 28.256 CAGR 7,5%

EBITA 1444 1684 2026 2315 2670 3118

ROCE 10% 11% 13% 15% 17% 20%

Revenue 2015 19.682

Minerals & cement -3235

Product companies 3508

Customer service 8301

Revenue 2020 28.256

Source: Annual reports & transparency market research

Sensitivity analysis

APPENDIX 28 CBS |

mDKK ROCE EBITA/Capital employed 17.203/g=3% 16.544/g=2% 15.906/g=1% 15.162/g=0% 14.564/g=-1%

2.543/9% margin 15% 15% 16% 17% 17%

2.826/10% margin 16% 17% 18% 19% 19%

3.108/11% margin 18% 19% 20% 20,5% 21%

3.391/12% margin 20% 20% 21% 22% 23%

3.673/13% margin 21% 22% 23% 24% 25%

Source: Annual report

Risk analysis

APPENDIX 29 CBS |

Risk

Likelihood

Impact

Strategic importance

Mitigation

Customers not interested in our new service initiatives

3 4 12

Making sure to clearly communicate the benefits of new service initiatives emphasizing

down-time, stable cash flows, productivity etc.

Market conditions for both Mining and Cement industries 3 4 12

Focus on managing these headwinds by improving and enhancing customer services

during tough market conditions

Establishing partnership with big data analytics provider – finding the right partner

2 5 10

Thorough assessment of several options based on company capabilities and experience

Maintaining high quality standards in products and services every time 2 3 6

Role out plan focusing on creating a strong quality mindset, thus continuously measuring, developing, and improving quality performance

Hiring the right people for new initiatives 1 2 2

Thorough assessment of potential candidates through experience, knowledge, and merits


Breakdown of ROCE & ROE

APPENDIX 30 CBS |


EVA model ROE= ROCE= PM Turnover ratio

2015 20% 10% 8% 1,30

2014 23% 12% 9% 1,36

2013 14% 6% 4% 1,79

2012 27% 19% 10% 1,99

The Service Leap · With The Service Leap, FLSmidth can reach its targets EXECUTIVE INSIGHTS SOLUTION IMPACT SUMMARY CBS | 2 Facing a challenging market with low margins in cement

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