2010 Keynote Address from Lewis Booth

From Treasury & Risk's 15th Annual Alexander Hamilton Best Practices Awards

LEWIS BOOTH:  If I’m your definition of a rock star, you guys need to get a life.  Okay.  I’m delighted to be here, and I was just sitting on the plane last night rehearsing the presentation.  I thought, I’m really glad it’s this year we’re doing it rather than two years ago when I became CFO, because two years ago it was just after Lehman Brothers had gone bankrupt, and we were really beginning to wonder what the rest of the world was going to look like. 

So I’m going to try and take you through the turbulent times we’ve been navigating, actually for about the last five years for Ford.  Because we had our own turbulence before the world economy fell apart.  I’ve simplified, I’m going to talk about the automotive company only.  I’m not going to talk about how we kept Ford Credit Finance, because frankly that’s also been a pretty interesting tightrope walk, but I couldn’t cover all of that.  I’m not going to cover selling Jaguar Land Rover to Toyota and selling Volvo to Geely, because again that’s another story. 

And then right in the middle of this, we went to Washington to support GM and Chrysler’s request for funds.  We asked for a standby line of credit, because we didn’t know how bad things were going to get.  And then right at the end of the year, the outgoing administration provided loans to GM and Chrysler to keep them going until the new administration could decide what they wanted to do with them.  And then I think the unthinkable happened with this very, very fast, and I think extremely well-orchestrated bankruptcy of, first of all Chrysler, and then GM.  And at the same time for us equally worrying, we were going through a number of major suppliers’ bankruptcies as well.  So these were very tough times.

So having just given you the backdrop, let me just tell you what we were doing about it.  By the end of 2006, early 2007, we had a plan, and the plan as you’ll see was aggressively restructuring to operate profitably at current demand and changing global mix.  We had no idea that the current demand was going to drop as far as it was, but the discipline we put in place is, we were going to stop shipping cars to dealers that customers didn’t want to buy.  We were going to stop building cars that nobody wanted, and that was a real significant step forward for Ford.

We knew we had a plan that was going to improve the business, but we wanted to make sure that lack of liquidity didn’t stop us making the fundamental changes to our business model that we needed.  And I think although we didn’t anticipate that the recession was going to be so deep, that raise of liquidity back in December 2006 frankly is the big difference between where we find ourselves now, and where some of our competitors find themselves. 

So we went out in December and raised $23.5 billion of liquidity:  $11.5 billion of a five- year secured revolver;  $7 billion of a seven-year secured loan; and then $5 billion of senior convertible debt.  We mortgaged everything, you know, right down to the Ford Oval, to our banks, and we had frankly a fantastic response from our banking partners to provide us with these loans.  They bought into the plan; we took them through the plan.  They bought into the recovery actions we were taking, and they provided us with all this financing to ensure that we could get through these really tough times. 

The bottom line of this is we think by derisking our pension plan, we managed to avoid about a $7 billion increase in unfunded status of our pension plans around the world, so a very, very important piece of derisking, and a really nice job by the treasury team.  

And then into 2008, we thought the plan was beginning to work.  We made money in the first quarter, and then after the first quarter things began to go pretty sour as the industry starts falling down.  As you can imagine, we’re a capital-intensive business with very, very high fixed costs.  If you take the industry down by as much as 50%, we start burning a huge amount of cash, not just because of our high breakeven, but also our payables were running off very fast as we stopped buying parts from our suppliers.

So the first quarter of 2009 was really about protecting our precious liquidity.  The first major decision we made in the first quarter was to draw down our remaining revolving line of credit.  We were concerned about this because again, if you can remember two years ago, the banking system was under great stress.  We were very concerned that drawing $10.1 billion out of the banking system was going to put further stress on the banking system, and we spent a lot of time as we drew the revolver making sure the banks knew why we were doing it, and they had warning that it was coming. 

We didn’t need the funds for day-to-day expenditures.  We determined that we thought during 2009, we could manage our internal cash flow to insure that we did not dip into our minimum operating cash levels, but we were also concerned that if we waited any longer, with the fragility of the banking system, that we may lose more capacity if we had another bank go under.  So this was a big decision to draw down the revolver, and we did that in January, and got the cash into our accounts early in February.

And then after the first quarter, we set about rebuilding our liquidity.  The nice thing was as soon as we’d done our agreement with the UAW, as soon as we’d done the debt restructuring, our stock price started improving.  Our stock price had got down to, I think, a closing point on one day of about $1.28, and as soon as we got past the debt restructuring, it popped up to sort of $5 or $6.  So we began to think that our investors were beginning to recognize the progress we were making.  They were beginning to feel that our business was beginning to improve.  So that gave us some choices.

And the first choice was we could start raising some equity, and in May—and in an extraordinary piece of timing, this was the month after Chrysler had gone into Chapter 11, and the month before General Motors went into Chapter 11, we went to market and raised equity for a domestic auto company.  And I think that really was for us the turning point in terms of the investors beginning to believe in the Ford story, because they were prepared to put their money where our mouths were at that stage. 

So as we got into this year, as our business started to operate more profitably, and we were generating positive operating related cash flow, we started the journey that we’ve been on all year of paying down our debt.  You will see that publications have noticed that the benefit for GM and Chrysler of going bankrupt is they have much, much cleaner balance sheets than we have.  And we’d already decided our balance sheet was too heavily burdened with debt, but I think the attention that is being paid now on comparing us with the other guys has brought additional attention to our debt position.  I think we’ve made remarkable progress, and I’ll talk about that as I go through.

And by the way we don’t—I get asked this question so I’ll answer it before I get asked it again—we don’t think of our debt burden as a disadvantage compared to GM or Chrysler.  I think none of us, including GM and Chrysler, none of us think Chapter 11 is a good business strategy.  We went through this very tough period under our own steam, and in return for not being able to get rid of debt, we have an intact management team, we have an intact business plan, we have intact product investments, we have intact relationships with our dealers, our suppliers, our employees, our retirees, all the stakeholders.  And I think as you can see in our business results, we’ve also been able to use this as an opportunity to encourage people to go into the Ford showrooms and look at Ford vehicles. 

And then just to summarize the metrics that I look at.  We’ve been managing cash very carefully; we started at the beginning of this period at $33.5 billion.  We got to the low point at the end of 2008 at $13 billion of cash, and after we pay back the VEBA, we’ll be at $20 billion of cash on Friday.  Our debt, you can see, has gone down overall over the period, but had this spike in 2009, and cash net of debt, we went to quite negative at the end of 2008, down to $2.5 billion net debt at the end of October, and we guided in our call on Tuesday that we expect to be about net debt neutral at the end of the year.  And our liquidity was started very high, because of the home improvement loan of $46 billion, and now is still at $26 billion.  We still have some more work to do on reducing debt, but I think this has been just a magic year this year.

So that’s our turbulent times.  You can see the stock price at the end of 2005 was $8.58.  You can see in November 2008, it got down to into day trading at $1, I can’t tell you how demoralizing that was to work for a company that had a stock at a value of a dollar and a penny, and it closed yesterday at $14.23.  And the other message of this is, we’ve been watching our liquidity, and at times our liquidity has given us chances to do things where the timing opportunity opened up, we had enough liquidity to do it.

I still look at our cash balances every day, and I share it with the operating team once a week, and we have a projection for the month, and we show where we are every day against that projection.  Accelerating development of new products our customers want and value—this is a product business.  You know, you can have all the fancy treasury actions you like, but if you can’t sell the cars you can’t make money, and the treasury doesn’t have a job either.  So this is a product business.

So we carried on spending money on products, and this is just an example of the number of new products we’ve been able to launch around the world in these troubled times.  And I think that more than anything is the reason you see market share growth from Ford in North America.  And we’re doing it much more efficiently as a result of One Ford.  In the past, we used to develop cars that looked pretty similar, but shared very little in the way of parts. 

And then just working together—you may have heard of the Ford process where we now, every Thursday the whole business meets as a group, so the business unit heads in the Americas, Europe, Asia-Pacific and Ford Credit, and the skill team leaders from product development through finance and communications.  We go through the entire business in two hours, with the intent on understanding what’s changed. 

It’s probably a deck of 300 or 400 slides that we go through, but they’re completely consistent in a common format, and we show changes in a separate color, so we only spend time on changes.  And the purpose of the review is to identify where we have problems.  It’s not a congratulatory process; we’re not interested in where things are going well, although we will celebrate success, but the intent is to have complete transparency of the way we operate. 

But every time we were thinking about doing something we’d go to the board, and say, ‘You know there’s going to come a time when we need to buy back debt or issue equity.’  And we would have maybe two runs at the board before we actually needed an approval, and we found that by doing that, when we actually needed approval we could get approval almost instantaneously from the board, and that actually supports a bit further down in the page of good timing is vital. 

When we went to the markets to buy back our debt, we did pick—actually there’s an element of luck here—but we did pick when the debt was almost as cheap as it got. And when we went to the board, it was a very short discussion, because we’d taken them through the rationale of what we wanted to and the explanations several times before they actually had to make a decision about it.

But this is just such a fantastic time at Ford, because if you can imagine at the end of 2008, when things were looking so terrible.  Well, I’ve had all these opportunities that the company has given me, and we’re risking not giving the next generation the same opportunities.  And that felt such an enormous responsibility on us to—I think I want the next generation of people who join Ford to have the opportunities and the pleasure of working for Ford that I’ve had.  So that’s, if you’d like, that’s the higher level reason for it.

This is such a fantastic story.  I mean we wrote this out last week, and it was like a thriller.  They’re galloping towards the cliff, and they’re going to go over, no, no, you know, all that.  And it’s really been like that, and what you’re actually seeing is Ford operating, I think, absolutely cohesively and coherently as a team, and all our problems are shared. 

Q    Your efforts to derisk the pension fund; how did the growth of the alternative asset investment category worked out for you?  Did that contribute to diminishing the risk in the plan, did that impact it?  Did it perform as well as equities?  How’s that worked out for you in terms of derisking the plan?

BOOTH:  I’m going to ask Kathleen Gallagher, who will be here this afternoon, who was one of the architects of the plan, to talk about that in more detail, but we’ve seen benefits from alternatives.  We’ve been a bit slower to get into them than I think we originally envisioned.  The allocation I showed you as our target, we’re not there yet, but it has reduced the volatility of our asset base.  But Kathleen will be delighted to answer all your questions, and she is our director of asset management, and she is just a magic guardian of our—I mean this is a huge responsibility, because we’re acting as guardian for other people’s benefits, and we’re very pleased to have her.  So she’ll talk about that this afternoon. 

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