NKT Group strategy. Our background - more than 120 years of industrial development

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1 NKT Group strategy NKT - ACTIVE, INDUSTRIAL OWNERSHIP Our background - more than 120 years of industrial development NKT was founded by the Dane Hans Peter Prior in 1891 and became a listed company in Over the next 90 years NKT became one of Denmark s leading industrial conglomerates, focusing primarily on cable production but also active in the production of nails, screws, and other hardware. Long-term investment in existing businesses and acquisitions of industrial companies with global presence around 1990 accelerated the transformation of NKT whose mission today is: Creating value by exercising long-term, active ownership in businesses where NKT is the best owner. Long-term and active transformation of businesses - our core competence NKT s core competence is through active ownership to drive long-term value creation. The tools - NKT s knowledge and experience of industrial operations, global mindset and business acumen - are applied consistently. Typically, the value creation is realised through strategic re-focus, targeted investment, stringent financial governance and organic growth combined with mergers and acquisitions. When NKT no longer considers itself the best owner, a rigorous search is conducted to find the best alternative for the future development of the business concerned. Such alternatives may be divestment, de-merger or a strategic partnership with a view to optimising value creation. NKT Holding A/S Extract of the 2014 Annual Report - NKT Group Strategy 1/13

2 Examples of NKT s successful exercise of long-term active ownership Establishment: NKT Elektronik Acquisition: Nilfisk Establishment: NKT Holding Establishment: Photonics Group Establishment: GIGA Acquisition: Lauritz Knudsen (LK) Establishment: NKT Flexibles Divestment: NKT Elektronik (profit DKK 850m) Divestment: GIGA (profit DKK 4.9bn) Divestment: Lauritz Knudsen (LK) (profit DKK 2.8bn) Divestment: NKT Flexibles (profit DKK 1.4bn) Going forward, this mindset will be used to further develop NKT s core businesses. Key targets are: To become amongst the leaders in the respective industries To achieve above-market growth NKT Holding is operated as a lean centre of excellence for the Group. Specialist functions play an active role in value creation in close partnership with the Board of Directors and the management teams of the individual businesses. Services hosted by NKT Holding include M&A, Investor Relations, compliance, indirect procurement, treasury, finance, and legal services. To realise improved profits and superior value creation This also implies that NKT will exploit opportunities to grow through acquisitions - both within its current businesses, and potentially also within adjacent business areas that offers synergies with the existing business portfolio. NKT s active ownership model The NKT active ownership model is a key component in driving value creation NKT s active ownership model, whereby the company s business units report directly to the Board of Directors, is designed to increase value creation through exercise of long-term active ownership. NKT s Board members possess a number of specific competences relating to international industrial management and business development, along with industry-specific knowledge in areas where NKT s businesses operate. These competences are used to drive the development of our businesses and are exercised directly through committees set up for each individual business unit as well as committees supporting the governance structure of the listed company; including audit, remuneration, nomination and the Chairmanship. COMMITTEES BOARD OF DIRECTORS BUSINESS UNITS GROUP FUNCTIONS Each business unit committee consists of two Board members with experience of the particular type of business, supported by representatives of Group Functions. Frequent meetings are held with the businesses at which both strategic and operational issues are discussed with an intent of delivering a more efficient, flexible and transparent decision-making process. 2/13 NKT Group Strategy - Extract of the 2014 Annual Report NKT Holding A/S

3 Annualised total shareholder return ( ) Company count st quartile: 14.7% NKT: 16.5% 200 Median: 10.0% 100 3rd quartile: 4.8% C20: 9.2% Annualised NKT Nilfisk peer NKT Cables peer Photonics Group peer C20 TSR in % Background curve based on 400 individual companies within S&P 500 Source: Bloomberg. TSRs are 31 December 1999 to 31 December 2014 NKT s structure supports stronger value creation NKT s structure is considered a significant factor of the Group s proven value creation. In the period the NKT share generated an annual total shareholder return (TSR) of 16%, which is above the return of our peers and 6%-points above the median return. NKT believes that superior long-term value creation is driven by the ability to create an industrial platform for our investments which offers a stable environment supporting the long-term development of the businesses. This no end-of-life setup encapsulates our competitive advantage compared with other investment vehicles. NKT s strengths! COMPETENCES & TALENT ACCESS TO CAPITAL OPERATIONAL SYNERGIES REDUCED RISKS Ability to attract members for the Board of Directors and the Executive Management Group Excellence Centre: Legal, M&A, IR, Finance, Treasury, Indirect procurement Talent sharing Balance sheet strengths Capital market access Lower financial costs Long-term transformation/ investments Global market footprint Group functions; e.g. indirect procurement Best practise sharing Reduced portfolio risk Risk management Compliance NKT Holding A/S Extract of the 2014 Annual Report - NKT Group Strategy 3/13

4 GROUP STRATEGY AND TARGETS Business opportunities based on megatrends NKT also drives its businesses based on a close monitoring and analysis of megatrends. This influences how we optimise our investment and divestment decisions, but also how the existing businesses are operated and improved. NKT s strategic direction is based on megatrends such as urbanisation, sustainable energy supply, and healthcare demand, which we believe will remain strong macro drivers in the coming years and represent opportunities for further development of our businesses. Group strategic targets NKT drives its businesses via ambitious, long-term strategic targets in addition to its specific business unit targets. NKT also actively explores investment and divestment opportunities for selected parts of its business units. Materialisation of such opportunities depends on factors such as strategic fit and valuation, all based on the assessment of whether NKT is the best owner. LONG-TERM STRATEGIC TARGETS Organic growth above the market RoCE of +15% Annual dividend of approx. one third of the profit for the year Megatrends URBANISATION ENERGY SUPPLY HEALTHCARE DEMAND MACRO DEVELOPMENT: Rising welfare Infrastructure expansions OPPORTUNITIES: Automated cleaning processes Increased use of cleaning equipment High-speed railways Fire detection in e.g. tunnels MACRO DEVELOPMENT: Need for reliable, efficient and flexible electricity Demand for sustainable energy sources OPPORTUNITIES: On- and offshore energy cables Cable monitoring Wind sensors MACRO DEVELOPMENT: Increase in lifestyle diseases Early-stage health diagnostics Rising need for treatment and treatment facilities OPPORTUNITIES: Increased need for early-stage imaging technologies Increased need for efficient healthcare cleaning 4/13 NKT Group Strategy - Extract of the 2014 Annual Report NKT Holding A/S

5 Strategic themes of our businesses All NKT s businesses are characterised by key strategic themes that will define and lead their development in the coming years. For all businesses the long-term ambition is to be amongst the best in the industry in terms of customer satisfaction, growth, profitability, and RoCE. In Nilfisk, efficient business management has made the company the market leader and one of the most profitable in its industry. In the coming years, increased focus will be placed on accelerating growth through investment in sales and service and M&A. In NKT Cables, the DRIVE efficiency improvement programme has made a successful start. DRIVE is a key element in the transformation towards increased profitability and improved return on capital employed. Capital structure and dividend policy NKT s capital structure must at all times support its strategic targets of long-term profitability and value creation. NKT operates with a capital structure target of 2.5x operational EBITDA, although deviations are acceptable to allow for strategic flexibility in our businesses. The capital structure aims to maintain a credit quality considered by stakeholders as investment grade in the BBB segment, which is considered to be the best balance between financial flexibility and an attractive cost of capital. NKT aims to give shareholders an attractive return on investment and at the same time to reinvest part of its profit in new growth opportunities. By providing growth while focusing on value creation to maximise shareholder value. NKT s dividend policy of one third of the profit for the year is complemented with share buyback, both contingent of sufficient financial headroom. In Photonics Group, focus will be on further building of core business and expansion in the value chain via strong organic growth - and via acquisitions if deemed strategically attractive to support longer-term development. Strategic themes PROFITABILITY DRIVE efficiency improvement programme Transformation process Capital efficiency GROWTH Commercial Excellence Front-end investments M&A VALUE CREATION COMMERCIAL SCALE Execute on core business strategy System offerings NKT Holding A/S Extract of the 2014 Annual Report - NKT Group Strategy 5/13

6 Accelerate Growing our company to lead the industry Nilfisk s growth strategy 6/13 Nilfisk Strategy - Extract of the Q Interim Report

7 LONG-TERM FINANCIAL TARGETS Organic growth of 2-3% above GDP RoCE of 18-19% In Q1 2015, Nilfisk launched Accelerate, a new growth strategy for the period Accelerate is strongly focused on growing market share and features a number of growth-generating initiatives. The Nilfisk strategy is based on six key trends shaping the industry 1 COMMODITISATION Entry barriers on the product side are low in the cleaning industry. Product differentiation is also generally low The long-term financial targets are an organic growth of 2-3% above GDP and RoCE of 18-19%. Analyses indicate that the average growth for the industry is slightly below the global GDP growth, due to customer s general focus on more cost effective cleaning solutions. In this context the organic growth target is considered ambitious. Furthermore Nilfisk aims to play an active part in the global consolidation of cleaning equipment industry and potential acquisitions are expected to dilute the return on capital employed on the short run, while the integration of the businesses occur. The new strategy builds on the foundation established by the strategy and the goal of becoming Customers Preferred Choice. Under the previous strategy, Nilfisk successfully increased customer satisfaction levels and strengthened market coverage by launching a number of initiatives to enlarge its sales and service capability and build closer customer relations NEED FOR BASIC PRODUCTS Higher growth is observed in the mid-market where customers require lower prices, and simpler and less durable products PRESSURE ON CLEANING COST Cleaning is in many instances seen as a necessary evil, and total cost of ownership is therefore increasingly important for products and solutions as well as when selling cleaning equipment BATTLE FOR DISTRIBUTION With products being commoditised, access to customers is becoming even more important TECHNOLOGY CHANGE Technology will play an increasing role and gradually find its way into cleaning products. Examples are fleet management solutions CAPITALISATION ON EMERGING MARKETS Significantly higher growth rates are observed in emerging markets due to GDP growth, increasing living standards, and cleaning requirements Extract of the Q Interim Report - Nilfisk Strategy 7/13

8 Accelerate Growing our company to lead the industry Grow market share Strengthen front-end Drive competitive offerings Build strong brands Power supply chain performance Agile and commercial organisation Growth aimed at market leadership Through its new strategy Nilfisk will seek to grow market share by targeting lucrative market opportunities, by investing in business growth and by making the company s offerings clear to the customers. The overlying ambition of global market leadership includes initiatives to strengthen the company s leading position in the high-end market of professional cleaning equipment. This will be backed by a strengthened focus in the mid-market for more basic cleaning products, e.g. through expansion of sales channels. Professional cleaning equipment Strategic levers to support growth These growth initiatives are supported by four strategic levers which set the direction for priorities in the upcoming strategy period: 1. Strengthen front-end 2. Drive competitive offerings 3. Build strong brands 4. Power supply chain performance High-quality, full-range, high service level and quick service response time High-end Market value size ~45% The foundation for realising these levers is the development of an agile and commercial organisation. Basic reliable products at a fair price with service option Mid-market ~40% Lowest possible price Lowend ~15% Continued investments in sales and marketing activities in emerging markets will strengthen the company s reach and position in these markets. Nilfisk also aims to play an active part in the global consolidation of the cleaning equipment industry and continues to seek relevant opportunities for mergers and acquisitions. 8/13 Nilfisk Strategy - Extract of the Q Interim Report

9 Strengthen front-end As part of continued focus on matching the needs and requirements of its customers, Nilfisk will make further front-end investments, including sales and service resources and supporting systems. The Commercial Excellence programme will be rolled out in markets across the world, implementing new processes and methods to improve efficiency and increase sales. In addition, new initiatives will be implemented to support sales growth such as global rollout of joint CRM (Customer Relation Management) and field service management systems. Drive competitive offerings Increased focus on competitive offerings is another critical lever by which Nilfisk will identify new market opportunities and expand its current, competitive products. This initiative will include developing a strong, innovative portfolio that continues to provide customers with improved value, implementation of a global R&D organisation, and reduced time to market. At the same time, steps will be taken to carefully simplify the product range, rendering the company s offerings even more accessible to and easier for customers to understand, while paying continuous attention to the total cost of customer ownership. Build strong brands Strong brands are essential to market success, and Nilfisk will continue to strengthen its worldwide recognised brands. On 1 April 2015 the company changed its name and corporate brand from Nilfisk-Advance to Nilfisk, and this step will be further supported by initiatives to unify the company s global product brands. In January 2016 the Nilfisk-ALTO product line will be rebranded as Nilfisk. This will strengthen brand awareness and value as well as leverage the full Nilfisk product portfolio. The future brand will consist of two product lines; blue and grey. By doing so, Nilfisk will be able to offer a comprehensive portfolio of cleaning solutions covering both its professional and consumer businesses under a single strong global brand. GREY PRODUCTS Full range of cleaning solutions for both professionals and consumers BLUE PRODUCTS High-pressure washers Floor-care Vacuum cleaners Power supply chain performance The global supply chain transformation programme will continue to further improve the customer delivery experience, while significantly reducing cost-to-serve and working capital. Launched at end-2013, this programme is improving existing processes and also introducing new ones. Focus will be on improving the full customer experience as well as end-to-end supply chain efficiency. Agile and commercial organisation Accelerating growth demands a strong and firm foundation consisting of a highly engaged workforce focused on performance. Nilfisk will continue to work to improve and add to the skills of its employees and to support the roles of its managers. Initiatives supporting the development of an agile and commercially oriented organisation include a new leadership training programme, a global sales academy and enhanced focus on e-learning for all Nilfisk entities. Nilfisk competitive advantages The Accelerate strategy builds on four strong Nilfisk competitive advantages: 1. Product range. Nilfisk has the broadest, most complete and most attractive product range in the industry 2. Brand. The Nilfisk brands are well-known in the industry and an advantage to the company in its market place 3. Market coverage and sales channels. Nilfisk has the strongest professional footprint in the industry when looking at the number of sales people in the field in combination with the number of countries with own sales companies 4. After-sales. Nilfisk has the largest number of service engineers in the industry, with a particularly strong service setup in Europe Extract of the Q Interim Report - Nilfisk Strategy 9/13

10 NKT Cables EXCELLENCE 2020 strategy 10/13 NKT Cables Strategy - Extract of the Q Interim Report

11 VISION: By driving excellence we will be the best power cable company by 2020 in the eyes of our customers and our people EXCELLENCE 2020 In September, NKT Cables launched its EXCELLENCE 2020 strategy focused on obtaining excellence with the aim of increasing profitability and accelerating targeted growth. The strategy features overall must-win battles to meet the ambitions set out below, supported by a number of initiatives for each business segment. Strategic targets Overall, NKT Cables tracks its ambition of becoming the best in the eyes of its shareholders, customers and employees in terms of: Realising RoCE >15% Becoming customers preferred choice Obtaining an employee trust index of >80% The long-term financial target of RoCE >15% is expected to position NKT Cables on par with top industry performance and builds on profitability improvement achieved since the launch of the DRIVE efficiency improvement programme at end Furthermore, NKT Cables strives to become customers preferred choice based on offering excellent expertise as well as superior products and solutions. This target is strongly supported by the aim of attracting the best employees in the industry and being an attractive workplace with annually measured employee satisfaction well above the industry average. EXCELLENCE 2020 builds on the foundation already established by the DRIVE efficiency improvement programme, initially a three-phased concept designed to reduce costs, strengthen competitiveness and increase value creation. With the first phase of DRIVE focusing on cost savings already well on track, the coming strategy period will centre on increasing profitability and accelerating growth. Extract of the Q Interim Report - NKT Cables Strategy 11/13

12 NKT Cables holds strong market positions NKT Cables has a strong market position in several businesses. In the building wire and low- and medium voltage cables segments NKT Cables is a leading player in the Nordic region and a significant manufacturer in Central Europe. Furthermore, the company is global market leader in the catenary railway business and an acknowledged player in the offshore wind market with a state-of-the art plant in Cologne that has the option of enlarging capacity by up to 45% if warranted by market demand. EXCELLENCE 2020 ADDRESSES THE KEY TRENDS SHAPING THE INDUSTRY: Slow growth in traditional core business Decreasing potential to differentiate Harsh outlook for utilities Cable market in transformation NKT Cables operates in a global market characterised by constant transformation that is changing the traditional rules of business operations and the competitive landscape. This shift includes increased cost pressure and competition, demand for and use of new technologies as well as changing market and customer developments New material technologies Wholesaler consolidation Technology focus by big players 12/13 NKT Cables Strategy - Extract of the Q Interim Report

13 Must-win battles defined with aim to become best in class NKT Cables seeks to meet the market challenges and position itself for future growth and profitability through its new strategy. Four cross-organisation must-win battles have been defined and are considered paramount to realise the ambition of becoming the best-in-class cable company: 1. Safety, people and organisation Safety, Improved People working environment, an agile, engaged & workforce, Organization a leaner organisation and excellent management and leadership skills 2. Operational and commercial excellence Operational Strive for leaner and more efficient operations by implementing & e.g. Commercial lean production and supporting functions, obtain best-in-class Excellence sales capabilities, review and improve product offerings 3. Material and product development Material Development & Product based on customer needs, e.g. proactive and systematic Development portfolio management, and differentiation from competitors, e.g. in use of compound material 4. Digitalisation Digitalization Optimisation of internal production processes and customer service interfaces Initiatives to streamline business segments EXCELLENCE 2020 includes a detailed plan for each business segment. The magnitude, scope and development potential of each segment differ. Three overall directions have therefore been defined: DEVELOP AND GROW FOCUS ON PROFITABILITY TURNAROUND High-voltage offshore Building wire & Low-voltage High-voltage onshore Accessories Railway Medium-voltage & Automotive APAC Cables Extract of the Q Interim Report - NKT Cables Strategy 13/13