Chuck McLane doesn't mince words. Named CFO of Alcoa in early 2007 and then promoted to executive vice president by the end of the year, he found himself confronting a crisis in 2008. "Commodities are 80% of our business, and aluminum prices had fallen 60% between late 2008 and the first quarter of 2009," he says, "and demand from our customers in almost every region but China was down 20% to 50%. It was a case of, if we don't do something, we won't be here in a few years."
Alcoa, with $26 billion in 2008 sales, was "in a bad state" in terms of liquidity, McLane says. The global economic crisis caught the company just as it was finishing a major growth program, resulting in free cash flow of negative $1 billion in the first two months of 2009.
McLane's solution was to institute what he called a cash sustainability program, aimed at getting the company back on its feet by the end of 2010 and reassuring investors, who had watched the once shining Alcoa drop to the lowest investment-grade credit rating.
On the financial side, McLane says Alcoa made plans to cut its dividend, for projected savings of $400 million, sell assets worth $1.1 billion, and issue new equity in hopes of raising $1 billion. The plan also called for $2 billion in procurement savings by the end of 2010, $400 million in overhead savings through layoffs over the same period and $850 million of savings by reducing capital expenditures.
In fact, the plan worked better than expected, McLane reports. Alcoa reduced its headcount by 24,600, down from 129,000 worldwide, saving $412 million in 2009 alone, while the equity issue brought in $1.4 billion, 40% more than anticipated, and procurement savings in 2009 totaled $2 billion. Alcoa also reduced its debt, from $10.6 billion to $9.8 billion by the end of 2009. Most importantly, cash on hand rose from $762 million at the start of 2009 to $1.48 billion at the end of the year.
"The key to our success," says McLane, "was that we communicated to every person in the company. We had to have everyone agree that we had a crisis, but not a panic situation." One way that was made clear was by selecting free cash flow as the financial factor on which employee bonuses were determined in 2009, he says.
This year, McLane says, things are looking a lot better at Alcoa. "We're still trying to save, but we've added profitability to our incentives," he reports, adding, "But this experience has changed the whole mind-set of the company.
"We were a company where a lot of people tried to get as much product out as possible," he says. "Now people try to decrease costs as quickly as demand crashes. That's a new way of thinking."
Asked if Alcoa's experiences held any lessons for other CFOs facing a crisis, McLane was quick with an answer: "Try to find a way to sleep at night!"