Agenda Optimizing Working Capital September 24, 2014
Speakers Cassio Calil International Corporate Client Banking, J.P. Morgan Setting the Scene Calil manages the International Corporate Client Banking team for J.P. Morgan Commercial Banking. Prior to his current role, he was president of J.P. Morgan Asset management in Brazil, where he was responsible for accelerating the growth of institutional, retail and corporate clients. He holds a master s degree in Economics from Australia s Macquarie University i and a bachelor s degree in Economics from Brazil s Mackenzie University. i Fabian Khoshbakht Client Solutions Specialist, J.P. Morgan The Importance of Working Capital Khoshbakht is a Client Solutions Specialist for J.P. Morgan Commercial Banking. Fabian has over 17 years of experience in the financial services industry, and he specializes in: working capital, treasury management, in-house banks, shared service centers, business process re-engineering, payables and receivables migration strategies, and account structuring and rationalization. He holds an MBA from Australia s Deakin University. Steven Delahunt Treasurer, Cabot Corporation Cabot Overview and Working Capital Optimization Strategy Delahunt is Treasurer of Cabot Corporation. In this role, he is responsible for Cabot s global treasury activities, including capital structure, capital markets issuance, interest rate and foreign exchange risk management, working capital management, treasury operations, cash flow forecasting, bank relationship management and global pension and 401(k) plans. He holds a bachelor s degree in Finance and an MBA from Boston University. 2
Agenda Setting the Scene The Importance of Working Capital 1 About Cabot Corporation and Cabot s Working Capital Optimization Strategy Where to From Here? Participant Q&A 3
Setting the Scene Operating performance for most firms has been relatively stable over time. However, financial risks have increased in pursuit of higher returns. There is increasing scrutiny on financial performance that s associated with managing working capital. It can be difficult for companies to measure the effectiveness of working capital management relative to peers. Although it does not appear on the income statement, working capital can amount to significant revenue. By improving working capital performance, corporations can free up cash and enhance their entire value chain. THE SCENE SETTING 4
Working Capital Levels Are Improving S&P 500¹ Balance Sheet 1999 S&P 500¹ Balance Sheet 2007 S&P 500¹ Balance Sheet 2014 Other Assets A/R Inventory Cash Equity Other Liabilities ST Debt A/P Other Assets A/R Inventory Cash Equity Other Liabilities ST Debt A/P Other Assets A/R Inventory Cash Equity Other Liabilities ST Debt A/P $8,312bn $8,312bn $6.308bn $6.308bn 635 803 758 630 505 463 645 473 522 540 2,777 $3,478bn $3,478bn 2,107 167 229 206 302 429 6,244 1,196 4,832 4,272 2,875 3,034 THE SCENE SETTING 1,551 Asset Liabilities + Equity Asset Liabilities + Equity Asset Liabilities + Equity Source: Bloomberg; J.P.Morgan ¹ Represents 345 companies from the S&P 500 constituents as of 7/25/14 that were publicly listed as of Dec 31, 1999; Excludes financials 5
Profitability and Poor Working Capital Management S&P 500¹ Revenue and Net Income ($ trn) S&P 500¹ Accounts Receivables and Payables ($ B) Net income Revenues NI/revenues A/R A/P AR / Assets AP / Assets 12.0 10.0% $1,600 9.00% 8.00% 10.00 8.0% 1,200 7.00% $8.0 6.00% 6.0% 5.00% 6.0 800 4.00% 4.0% 4.0 3.00% 2.0 2.0% 400 2.00% 1.00% THE SCENE 0.0 0.0% 0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Source: Bloomberg; J.P.Morgan ¹ Represents 345 companies from the S&P 500 constituents as of 7/25/14 that were publicly listed as of Dec 31, 1999; Excludes financials 0.00% SETTING 6
Working Capital and the Cash Conversion Cycle (CCC) S&P 500¹ DSO vs. DPO Accounts Receivables and Payables Days sales outstanding Days payables outstanding Consumer Discretionary Consumer Staples Energy Financial Services Health Care Materials & Processing N.A Producer Durables Technology Utilities '99 A/R 12% 15% 4% 38% 10% 6% 4% 52 51 53 51 48 48 48 49 48 46 49 47 47 47 48 47 14 A/R 9% 5% 12% 30% 9% 12% 11% 5% -57-50 -68-54 -64-56 -51-59 -63-56 -64-67 -72-61 -59-54 '99 A/P 28% 6% 5% 31% 10% 4% DSO/DPO ratio (%) 92 102 79 95 75 85 95 83 76 83 78 71 66 80 81 86 14 A/P 24% 7% 16% 7% 13% 11% 8% 6% THE SCENE SETTING 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 0% 20% 40% 60% 80% 100% Source: Bloomberg; J.P.Morgan ¹ Represents 345 companies from the S&P 500 constituents as of 7/25/14 that were publicly listed as of Dec 31, 1999; Excludes financials 7
Polling Question #1 How important is working capital to your overall organizational strategy? 1 8
Working Capital Continues to Be a Global Priority for CFOs Top Concerns for CFOs Ability to forecast results Working capital management Maintaining morale/productivity during economic downturn Cost-cutting Cost of health care Attracting ti and retaining i qualified employees Paying down debt Investing existing cash Improving governance Protection of intellectual property THE IMPO RTANCE OF WO RKING CAPITA L Getting serious about working capital means making it an integral part of operational processes and the corporate mindset and not treating it as a one-time exercise. Working capital optimization usually has a less disruptive effect on the organization and employee morale. Working capital management and optimization can be embedded into corporate culture by providing workforce training, considering the impact in day-to-day strategic decision making. Source: Deloitte CFO Signals 2012 9
Cash Conversion Cycle (CCC) Is Key to Managing Working Capital Purchase Raw Materials Payments Made Finished Goods Sold to Payment Received from for Manufacturing to Suppliers Customers and Invoiced Customers Reduce Time DIO Reduce Extend DSO DPO Shorten THE IMPO RTANCE OF WO RKING CAPITA L CCC should be used to benchmark and track an organization over time. 10 CCC
Polling Question #2 How successful has your organization been in reducing days sales outstanding (DSO)? 1 11
US Working Capital Survey Results by Industry CAPITAL NUMB ERS Computer & peripherals 5 3 Wireless telcom services 18 15 Diversified telecom services 18 15 Oil, gas & consumable fuels 26 23 Household products 33 30 Biotechnology Containers & packaging Electric utilities 40 42 Aerospace & defence Media 27 29 Gas utilities 32 35 Metals & mining Diversified consumer services 4 5 Internet software & services DWC 2011 DWC 2012 57 52 59 65 61 74 94 85 89 95 Im proving Worsen ning Opportunity cost too great to ignore Payables Payables DPO remains flat for 2013 Continued improvements achieved postrecession unable to be sustained DPO has settled at 32 days Receivables Receivables DSO improved by half a percent since 2011 this follows several years of increases Companies are efficiently managing credit and collection processes Inventory Inventory Inventory increased by $56 billion in 2013 Inventory turnover remained flat WORKING Source: REL 2013 US Working Capital Survey 12
Polling Question #3 How successful has your organization been in reducing days payables outstanding (DPO)? 1 13
Europe Working Capital Survey Results by Industry CAPITAL NUMB ERS WORKING Opportunity cost too great to ignore Payables Payables DPO fell to 43 days, from 45 days Figures suggest pressure on supplier payments Receivables Lowest levels in 10 years, at 47 days Very large gap between top performers and rest of companies Inventory Inventory Decrease of one day year-over-year, to 37 days Heading to pre-recession levels Source: REL 2013 Europe Working Capital Survey Imp proving Worsenin ng 14 Media Life sciences tools & services Food products Automobiles Oil, gas & consumable fuels Multi-utilities IT services Commercial services & supplies Energy equipment & services Beverages Semiconductors (including equipment) Computers & peripherals Transportation infrastructure Marine 12 21 15 11 15 9 29 34 27 32 28 32 39 45 40 46 50 48 44 40 37 31 DWC 2011 DWC 2012 93 78 73 86 79 114
About Cabot Corporation NYSE: CBT Founded in 1882 Global specialty chemicals and performance materials company 42 manufacturing sites in 21 countries Core technical competencies in fine particles and surface modification FY2013 sales: $3.5 billion 15
Discussion: Cabot s Working Capital Optimization Strategy 1 Steve Delahunt Fabian Khoshbakht hb 16
Polling Question #4 How much working capital do you believe is locked up globally within organizations? 1 17
Optimizing Working Capital Is Not a One-time Process Strong Governance Scale Appropriately Strong policy and procedures from executive management Develop management reports/dashboards to track and monitor compliance Partner with an internal audit team Comprehensive end-to-end review of operations Ensure accuracy of data to initiate remedies Set Performance Measures Company, department, team and individual levels Do not measure too broadly be specific Adjust Incentive Programs Bonuses, incentives and commissions should be aligned to working capital Component linked to cash flow management should also be considered Implementation and Roll Out Define segments and identify rollout process Be aware of resistance it will exist WHERE TO FROM HERE? Continuous Process Management Monitor and enhance processes Retool workforce with ability to continue to improve on metrics 18
Considerations for a Successful Working Capital Program An Ongoing Approach to Working Capital Optimization Senior Sponsorship Is Critical Identify a champion at the executive level to demonstrate to the organization the priority attached to working capital by the executives. Be Inclusive Include corporate and local finance/functional teams (sales, accounting, accounts payable, accounts receivable, procurement, etc.), banking partners and IT. Connect the Dots Education through a top-down approach (senior managers to employees) to understand the meaning of f effective working capital down to roles and responsibilities. Create an Action Plan Establish practical and measurable plans that have accountability and target dates. WHERE TO FROM HERE? Aim for Low-hanging Fruit Develop plans for subsidiaries, departments or countries where quick wins are possible. Leverage to show earnings potential for adoption within each area of focus. 19
Participant Q&A To submit a question via the meeting room, please open up the Q&A panel, type your question in the text box and click the send button. We will address as many questions as time permits. 20
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