Agenda Optimizing Working Capital September 24, 2014

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Agenda

Optimizing Working Capital

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Speakers

Cassio Calil

International Corporate Client Banking J P Morgan 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

A li ’ M i U i i d b h l ’ d i E i f B il’ M k i U i i

Australia’s Macquarie University and a bachelor’s degree in Economics from Brazil’s Mackenzie University.

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 g g , g Deakin University.

Steven Delahunt

Treasurer, Cabot Corporationp

“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

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Agenda

 Setting the Scene

 Th I t f W ki C it l 1

 The Importance of Working Capital

 About Cabot Corporation and Cabot’s Working Capital Optimization Strategy

 Where to From Here?

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 Where to From Here?

 Participant Q&A

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Setting the Scene

Operating performance for most firms has been relatively stable over time. However,

financial risks have increased in pursuit of higher returns.

Setting the Scene

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 significant revenue.

By improving working capital performance, corporations can free up cash and enhance their

entire value chain.

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Working Capital Levels Are Improving

S&P 500¹ Balance Sheet 1999 S&P 500¹ Balance Sheet 2007 S&P 500¹ Balance Sheet 2014

S&P 500¹ Balance Sheet – 1999

Other Assets Equity

A/R Other Liabilities

Inventory ST Debt

Cash A/P

Other Assets Equity

Inventory ST Debt

Cash A/P

Other Assets Equity

Inventory ST Debt

Cash A/P

$6.308bn $6.308bn 635

630 505 803 758 $8,312bn $8,312bn $3,478bn $3,478bn 540 2,107 473 522 463 ₆₄₅ 2,777 2,875 206 1,196 229 429 167 302 $3,478bn $3,478bn 4,832 3,034 6,244 4,272 T H E S CE NE 1,551

Asset Liabilities + Equity

Source: Bloomberg; J.P.Morgan

Asset Liabilities + Equity Asset Liabilities + Equity

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G 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

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Profitability and Poor Working Capital Management

S&P 500¹ Revenue and Net Income ($ trn) S&P 500¹ Accounts Receivables and Payables ($ B)

10.0%

10 0 12.0

Net income Revenues NI/revenues

8.00% 9.00% $1,600

A/R A/P AR / Assets AP / Assets

6.0% 8.0% $8.0 10.0 5.00% 6.00% 7.00% 1,200 4.0% 4.0 6.0 3.00% 4.00% 800 2.0% 2.0 1.00% 2.00% 400 T H E S CE NE 0.0% 0.0

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0.00% 0

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

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

SE T T I N G 6

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Working Capital and the Cash Conversion Cycle (CCC)

Days sales outstanding Days payables outstanding

Working Capital and the Cash Conversion Cycle (CCC)

Consumer Discretionary Consumer Staples Accounts Receivables and Payables

S&P 500¹DSO vs. DPO

Days sales outstanding Days payables outstanding Consumer Discretionary Consumer Staples

Energy Financial Services

Health Care Materials & Processing

N.A Producer Durables

Technology Utilities

52 51 53 ₅₁

48 48 48 49 48 ₄₆ 49 ₄₇ ₄₇ 47 48 47

12%

9% 5% 12% 15% 30% 4% 9% 38% 10% 12% 6% 11% 4% 5% '99 A/R 14 A/R -57 -50 -68 -54 -64

-56 -51 _-59

-63 -56 -64 _-67 -72

-61 -59 -54

28% 6% 5% 31% 10% 4%

'99 A/P

24% 7% 16% 7% 13% 11% 8% 6% 14 A/P

92 102 79 95 75 85 95 83 76 83 78 71 66 80 81 86

DSO/DPO ratio (%) T H E S CE NE

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 _0% _20% _40% _60% _80% _100%

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

SE T T I N G 7

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Polling Question #1

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How important is working capital to your overall organizational strategy?

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Working Capital Continues to Be a Global Priority

for CFOs

Abilit t f t lt

for CFOs

Top Concerns for CFOs

Att ti d t i i lifi d

Ability to forecast results

Working capital management

Maintaining morale/productivity

Attracting and retaining qualified

employees

Paying down debt

during economic downturn

Cost-cutting

Cost of health care

Investing existing cash

Improving governance

Protection of intellectual property

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Cost of health care

“Getting serious about working capital means making it an integral part of operational processes and the corporate

i d d i i i i ”

“Getting serious about working capital means making it an integral part of operational processes and the corporate

i d d i i i i ”

Protection of intellectual property

O RK I N G C A P I T

A mindset and not treating it as a one-time exercise.”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 optimization usually has a less disruptive effect on the organization and employee morale.”

O RTAN CE O F W O

“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.”

TH E I M P O

Source: Deloitte CFO Signals 2012

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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

Time

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DSO

Reduce Reduce

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DSO DPO

CCC

Extend

Shorten

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CCC should be used to benchmark and track an organization over time

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O CCC should be used to benchmark and track an organization over time.

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Polling Question #2

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How successful has your organization been in reducing days sales outstanding (DSO)?

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US

Working Capital Survey Results by Industry

US—Working Capital Survey Results by Industry

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18 3

15 Computer & peripherals

Wireless telcom services

Opportunity cost too great to ignore

Payables Payables 18 26 33 15 15 23 Diversified telecom services

Oil, gas & consumable fuels

H h ld d t proving

 DPO remains flat for 2013

 Continued improvements achieved post-recession unable to be sustained

33 94 57 30 85 52 Household products Biotechnology

Containers & packaging

Im  DPO has settled at 32 days

ReceivablesReceivables 40 89 27 42 95 29 Electric utilities

Aerospace & defence

Media

n

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 DSO improved by half a percent since 2011—this follows several years of increases

 Companies are efficiently managing credit

B ER S… 32 59 4 29 35 65 Gas utilities

Metals & mining

Diversified consumer services

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n  Companies are efficiently managing credit

and collection processes

Inventory Inventory CAPI TAL NUM B 4 61 5 74 Diversified consumer services

Internet software & services

DWC 2011 DWC 2012

 Inventory increased by $56 billion in 2013

 Inventory turnover remained flat

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Polling Question #3

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How successful has your organization been in reducing days payables outstanding (DPO)?

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Europe

Working Capital Survey Results by Industry

Europe—Working Capital Survey Results by Industry

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93 21

Media

Life sciences tools & services

Opportunity cost too great to ignore

Payables Payables 93 29 27 114 34 32

Life sciences tools & services

Food products

Automobiles

p

roving

 DPO fell to 43 days, from 45 days

 Figures suggest pressure on supplier payments 28 39 40 32 45 46

Oil, gas & consumable fuels

Multi-utilities

IT services

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 Lowest levels in 10 years, at 47 days

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Receivables 50 78 44 46 48 73

Commercial services & supplies

Energy equipment & services

Beverages

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 Very large gap between top performers and rest of companies

InventoryInventory B ER S… 86 37 15 40 79 31 Beverages Semiconductors (including equipment)

Computers & peripherals

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 Decrease of one day year-over-year, to 37 days

 Heading to pre-recession levels

CAPI TAL NUM B ₁₅ 15 11 9 Transportation infrastructure Marine

DWC 2011 DWC 2012

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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

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Discussion: Cabot’s Working Capital Optimization Strategy

Discussion: Cabot s Working Capital Optimization Strategy

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Steve Delahunt

Fabian Khoshbakht

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Polling Question #4

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How much working capital do you believe is locked up globally within organizations?

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Optimizing Working Capital Is Not a One time Process

Optimizing Working Capital Is Not a One-time Process

Strong Governance

Strong policy and procedures from executive management

Develop management reports/dashboards to track and monitor compliance

P t ith i t l dit t

Scale Appropriately

Comprehensive end-to-end review of operations

Ensure accuracy of data to initiate remedies

Partner with an internal audit team

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

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Continuous Process Management

Monitor and enhance processes

Retool workforce with ability to continue to improve on metrics

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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 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 payable, accounts receivable, procurement, etc.), banking partners and IT.  Connect the Dots

 Education through a top-down approach (senior managers to employees) to understand

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the meaning of “effective working capital” down to roles and responsibilities.  Create an Action Plan

 Establish practical and measurable plans that have accountability and target dates.

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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

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O  Leverage to show earnings potential for adoption within each area of focus.

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Participant Q&A

To submit a question via the meeting room, please open up the Q&A panel,

i i h b d li k h d b W ill dd

type your question in the text box and click the send button. We will address

as many questions as time permits.

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