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Building Fundamentals ®

Building Fundamentals ®. Important Questions. How much do you know about Freeport-McMoRan Corporation’s Key Success Measures ? Let’s find out!. Pop Quiz. (Write your answers on Page 8-9). For fiscal year : 2010. 1 - How much Cash was on hand? $ ______

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Building Fundamentals ®

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  1. Building Fundamentals®

  2. Important Questions How much do you know about Freeport-McMoRan Corporation’s Key Success Measures? Let’s find out!

  3. Pop Quiz (Write your answers on Page 8-9) For fiscal year: 2010 1 - How much Cash was on hand? $______ 2 - How much Cash was generated by Operating Activities? $______ 3 - What was our Total Revenues? $______ 4 - What was our Operating Margin? ______% 5 - What was our Net Margin?______% 6 – What was our Copper Reserves (billion lbs.)?______ 7 – What was our total equity ratio?______% 8 - How much did Total Revenue change YOY? ______% 9 - How much did Net Income change YOY? ______% 10 - How much did Earnings Per Share (EPS) change YOY? ______% 11- What was FCX’s Total recordable incident rate (TRIR)? ______ 12- Where would you go to get access to this information? ______

  4. Group Activity • What’s your knowledge ofBusiness terminology? Let’s find out!

  5. Group Activity! (Write your answers on Page 10-11) Its OK to guess! • A. Revenue Growth B. Cash Flow C. Growth D. Cash E. TRIR • F. Operating Income G. Revenue H. Net Income I. Equity Ratio J. EBITDA • K. Net Income Growth L. Cooper Reserves M. Asset N. Liquidity O. EPS

  6. Learning Objectives • Accuratelydefine pertinent business and financial terminology such as revenue, cost of goods sold, gross profit, net income, unit costs, etc. • Demonstrate in a team setting, an understanding of the 5 key drivers (cash, profit, assets, growth, people), that every business must focus on and how each driver influences business success. • Accurately describethe key measures and metrics used to assess business performance. • Identifyand define each line item on a Basic Profit & Loss statement. • Articulateto one’s team the importance of business and financial acumen and how their individual role impacts the business.

  7. Business Can Be Tough! • Only 5-10% of business start-ups survive past 5 years. • 16% of CEOs lose their job every year. Booz Allen Hamilton 5th annual Study • 70% of merger and acquisition activity do not live • up to expectation. Wall Street Journal 2007 • Why do businesses fail?

  8. Introduction to the 5 Drivers Every business must focus on fivebusinessdrivers. • If they do, they will be successful. • If they don’t, they’ll fail. Let’s Start a Business! 7

  9. Sources of Cash • Earn it • Cash from Operation • Sell Assets • Cash from Investing • Borrow it • Cash from Financing Pro: No Cost -Con: Time Pro: Immediate -Con: Reduces Assets Pro: Immediate -Con: Cost (Interest) Can a company have too much cash? 13

  10. Challenges of Too Much Cash Cash Can a company have too much Cash? More attractive in a buy-out. Low return. Shareholders don’t like it. May make poor decisions. 13

  11. Cash: Definition Definition: What is required to Grow and Maintain the business. • How much cash should a company have? • “Companies ought to keep just enough cash to cover their • Operational expenses • Interest expenses • Capital expenditures • ….plus a little bit more in case of emergencies.” ~Investopedia ® 12 Fred Smith - FedEx

  12. Cash: Measures • Key Measures Cash (Cash position): “The bills and coins in the register, petty cash, and cash in the bank. It also includes cash equivalents, like CD’s and other highly liquid investments, that is easily converted into cash within 90 days.” Cash Flow: “Cash generation or “cash flow” is the difference between the cash that flows into the business and the cash that flows out of the business in a given period of time (month, quarter, annual)” 12

  13. Cash: Related Terms Cash generation or Cash from Operations refers to cash flow. Core operations or operating activities means the primary activities we perform in our business. What are our core operating activities? • Cash generated from operations activities • Cash generated from investing activities • Cash from financing activities • Cash management • Liquidity • Cash Equivalents 13

  14. Cash: Where Measured Balance Sheet - Entry: Cash and Cash Equivalents (some companies add short-term and long-term investments/securities when considering their Cash Position. Statement of Cash Flows – Entry: From Operations, or Cash Generated from Operations.

  15. Cash: Insights & Importance Cash is King! “Cash is a company’s oxygen supply.” -Ram Charan “Cash is more important than your mother."Al ShugartFormer Seagate CEO What happens to a company who runs low on cash?

  16. Cash Freeport McMoRan Corporation (In Millions) 13

  17. High Cash vs. Low Cash High Cash % of Revenue LowCash % of Revenue 75% 2.0% 42% 1.8% 32% 1.7% • WHY? • They sell commodities • Short sales cycle • Predictable business model • WHY? • Acquisitions • Long sales cycle • High risk industries (pharma, tech) S&P 500 Average: Cash = 14% 13

  18. Cash Examples (In Millions) S&P 500 Average: Cash = 14% 13

  19. Key Ways to Increase Cash & Cash Flow To increase CASH: • Paying slower • Collecting faster … with the same sales revenues and costs. To increase CASHandCASH FLOW: • Increase revenues/sales • Reduce/cut costs • Adjust inventories 13

  20. Action Plan: What Single Action are You Committed to do to Positively Impact CASHand CASHFLOW? • Review: • CASH: • Increase Profits by increasing sale and/or reducing costs (next section) • Pay slower/JIT: (to Vendors strategies – A/P) • Collect faster (from customers strategies – A/R) • Manage inventory levels • Scrutinize capital expenditures • Increase sales/revenues • Compress A/R – Extend A/P • Increase operational efficiencies • Control expenses • Reduce waste, re-work • Manage/Reduce OT • Maintain schedule/ship dates • Vendor owned/Managed inventory • Better training/faster ramp up • Increase employee/customer retention • Have clear policies & procedures that will enable better efficiencies • Reduce/conserve utilities • Reduce conflicts (systems, people, processes, IT technologies) •  Your own idea… 38

  21. Profit: Definition Definition: The money made after all expenses are subtracted from your sales. It can be expressed in dollars ($) or as a percent (%). You can improve profit in two fundamental ways: ® Increase Sales Price (Revenues) Reduce Expenses 14

  22. Profit: Measures • Key Measures Gross Profit/Margin: Total Revenues (Sales) less Cost of Goods Sold. Operating Profit/ Margin: Reflects earnings before interest and taxes. Net Profit/Net Profit Margin: Profit after all expenses have been subtracted from sales. ® Earnings Per Share (EPS): Profit allocated to each outstanding share of Common Stock. 14

  23. Difference Between Profit ($) & Margin (%) Sales Price: $1.50 Water - .04 Label - .11 Bottle & cap - .15 Packaging - .20Direct Labor Total: ( .50) $1.50 - .50 = $1.00 Gross Profit 66.7% Gross Margin Rent - .03 Salaries, Gen, Admin. (SG&A) - .30 Marketing - .08 Shipping - .19 Depreciation /Amortization - .02 Total: ( .62) $1.50 - $.50 - $.62 = $.38 EBIT (Operating Income) 25.3% Margin Interest Expense - .04 Taxes - .06 Total: ( .10) $1.50 - $.50 - $.62 - $.10 = $.28 Net Profit 18.6% Net Profit Margin COGS Controllables Life Spring Artesian Water Less-Controllables

  24. Profit: Related Terms • Profit = Earnings = Income • Gross profit, gross margin, gross income: • Sales from core operations less direct costs associated with those sales (before deducting overhead or indirect costs). • Net profit, net margin, net income: • Total sales/revenue less all expenses. • All these terms represent what is left over after certain categories of expense are deducted from revenue. 15

  25. Profit: Where Measured Consolidated Statement of Operations: Also referred to informally as the Profit and Loss Statement or P&L. Profit (earnings) is usually measured in dollars. Margin is frequently stated as a percent of sales (as in, “6% Profit Margin”) meaning Profit is 6% of Sales/Revenues. 15

  26. Profit: Insights & Importance “Every business must earn a return that is greater than the cost of using other people’s money.” ~Ram Charan “No Margin, No Mission.” ~Stephen R. Covey 15

  27. Profit Freeport McMoRan Corporation (In Millions) 11

  28. High Margin vs. Low Margin High Margins Low Margins 8.0% 32% 3.6% 28% WHY? They sell commodities. “If you’re not unique, you better be cheap!” 22% 1.7% WHY? They offer something Unique! S&P 500 2011 Averages: Net Margin = 13% To drive Profit($) you need either: High Margin(%) or High Volume 15

  29. Profit Examples (In Millions) 9

  30. Profit in Action United Parcel Services (UPS) – Avoiding left-hand turns • 92,000 trucks worldwide • Saved over 28,541,472 miles • Saved 3 million gallons of fuel • Reduced insurance premiums • Reduced maintenance frequency • and costs 11

  31. Increase product sales prices Increase company sales Increase accessory sales (higher margin sales) Reduce/eliminate color copies Reduce expenses Decrease utilities Decrease equipment returns Decrease equipment replacement Decrease discounting Decrease credits Action Planning: (Personal action plan - page 11) What Single Action are You Committed to do to Positively Impact PROFIT? • Effective management of operational costs • Educate employees on company products to enhance up-selling and cross-selling • Manage/Reduce OCC’s (Other Credits & Charges) • Decrease delinquent customers • Book flights 4 wks in advance • Faster on-boarding • Reduce 0 – 12 month turnover ($24,000) • Reduce overall company turnover • Effective training 38

  32. Assets: Definition Definition What we have and how well we use what we have. Asset Strength: The ability to remain viable during ups and downs in the marketplace. Asset Utilization: The ability to remain viable during ups and downs in the marketplace. ® 16

  33. Asset: Measures • Key Measures • Asset Strength (Have) • People: • Property: • Cash: • Inventory: • Plant & • Equipment: • Information: • Asset Utilization • (Use) • Increase employee • productivity. • increase usage with • lower number of • buildings. • Buy back stock, acquire • another company, invest • in higher returns. • “just in time” inventory • increasing inventory • turnover. • Decrease cycle time. • Increase number of • patents per year. Copper Reserves (Billion Lbs.) total estimated proven and probable copper reserves remaining Equity Ratio: indicates what proportion of equity and debt the company is using to finance its assets 17

  34. Assets: Related Terms • Assets: • Resources, investments, property. • Asset Strength: • Liquidity, risk, measurement, risk profile. • Asset Utilization: • Efficiency, effectiveness, operations, return on investment, return on assets, return on equity, return on investment, sales per employee, income per employee, worker productivity, process efficiency, process improvement. ROA = Net Income Total Assets Inventory Turnover = Sales Inventory 17

  35. Assets: Where Measured Balance Sheet - Entry: Current assets, and other (long-term) assets, Measurements include current ratio, quick ratio, debt-to-equity ratio, and others ratios and their trends, return on assets (ROA), return on equity (ROE), and return on investment (ROI). 17

  36. Assets: Insights & Importance • Assets are what the company has to work with to generate revenue. Asset Utilization is directly related to profitability. • Leaders must balance Asset Strength with Asset Utilization. • Asset Strength • (Have) • Solid base of liquidity • Low debt • High capital • Low risk • Asset Utilization • (Use) • Efficiencies/Productivity • Higher Inventory Turnover • Higher ROA (Return on Assets) 17

  37. Assets Freeport McMoRan Corporation (In Millions) Bought Phelps Dodge = 49.5% Equity Ratio = Total Equity $14,560 Total Assets $29,386 17

  38. Assets: High-Low ROA (In Millions) FCX ROA = Net Income = 4,336 = 14.8% Total Assets 29,386

  39. Growth: Definition Definition An increase over a period of time such as year, quarter, or month. Growth is most commonly measured by: Sales Profit Earnings Top-Line Bottom-Line Per-Share There are two types of Growth: Organic Growth:Comes from a company’s existing business Inorganic Growth:Comes from a merger or an acquisition “In today’s business world, no growth means lagging behind in a world that grows every day…” ® 18

  40. Growth: Measures • Key Measures Revenue Growth: Increase in revenues/sales Net Income Growth: Increase in Net Income EPS Growth: Earnings per share increase ® 18

  41. Growth: Related Terms • Organic Growth: Growth that comes from company increase. • Inorganic Growth: Growth through acquisitions. • Top Line Growth: An increase is sales/revenues. • Bottom Line Growth: An increase in net income, or profit. • Other Terms: Merger & acquisition (M&A), expansion, business development, customer base, number of employees, number of offices, asset growth. 19

  42. Growth: Where Measured Any financial statement or other report can be used, by comparing figures from one time frame to another time frame. For example: Year over year, quarter over quarter, month over month, etc. 26.2% 16.7% 16.1% 5.7% 19

  43. Growth: Insights & Importance Business in Growth Mode Business in Rapid Decline • Attracts/Retains the best & brightest! • Productivity goes up = more profit = more cash = more ability to grow! • Morale is typically higher. • You have the ability to grow in your career! • Best & brightest leave first • Productivity goes down • Morale goes down • Costs are cut, which limits ability to grow, and the company becomes less profitable.

  44. Growth Freeport McMoRan Corporation (In Millions) 19

  45. Growth: High-Low Revenue Growth (In Millions) FCX Revenue Growth = 2010 Rev - 1 x 100 = 26.2% 2011 Rev

  46. GROWTH= Increase: -Sales, and/or -Profits, and/or -Earnings per share (EPS) for public companies. Quarter over quarter, or year over year increases Organic growth: comes from a company’s existing business Inorganic growth: comes from merger and acquisitions. Increase: customers, revenues, and product offerings Up sell product sales Increase R2B sales Reduce churn (retain customers!) Increase subscribers/customers Increase add-a-line sales Sell value Create customer loyalty Action Planning: What Single Action are You Committed to do to Positively Impact GROWTH? • Increase global services • Increase network forecasting • Provide exceptional service (Int’l & Ext’l) • Increase open protocol • Invest in employees • Better utilize marketing utilization • Play a part in culture shaping and acquisition integration • Hire talent that is strong and adaptable • Develop great leaders • Anticipate employee needs that will support a growth strategy 38

  47. People: Definition People • People: • The “external customer” or consumer of your product. • The “internal customer” or employees. Many great organizations have stumbled because they failed to anticipate their customers changing needs. In a competitive world wide market place, a company’s ability to innovate around customers needs or to improve the efficiency of core processes depends on having the right people. Keeping the right people requires having the right leaders. “Communicate a persons potential so clearly that they are inspired to see it within themselves.” 20

  48. People: What is more important than meeting customer expectations? Exceeding? Anticipating Customer Needs & Expectations! “If I would have asked my customer what they wanted, they would have said a faster horse!” ~Henry Ford 21

  49. Anticipating External People What companies have failed to anticipate customer expectations? What were the results? What limits companies from anticipating their customers’ wants and needs?

  50. People: Measures • There are no direct measures on financial statements. Revenues on the P&L measure customer sales and cost categories such as labor, measure associate payroll expenses and benefits. • Companies keep track separately of data on external customers such as numbers of customers, patients, members, or other consumer and users of products and services; Customer satisfaction levels; turnover rates of customers; and numbers of new customers per period. Employees, or internal customers, are measured by management as to their satisfaction levels, turnover, productivity, etc. 21

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