Liquidity Management 2010 Transcript

TOM DUGGAN: Our first topic of this year’s award is the liquidity management category. This year our sponsor is Northern Trust and please to allow me to introduce John Konstantos with Northern Trust.

John has over 15 years of experience in financial services and currently is the senior relationship manager for the balance sheet and operations asset group, which is part of Northern Trust’s asset management business focus on corporate and institutional clients. John is responsible for the overall sales and servicing strategy in the East region.

You look at differentiating factors and some of the things they did, thinking outside of the box, foresight, working within the organization, and just the commitment to execute a business plan. And all those things, I think, were important for them to kind of accomplish what they were able to accomplish. I mean, luckily for us, things have improved significantly from last year and certainly from two years ago when we were here. You know, last year we were sitting here, we were fresh off near-financial ruin. Markets were frozen, there was no trust among counterparties -- some serious issues.

And you flash-forward to today and you look at companies and they’re just flush with cash, just hoarding cash. Over $1 trillion on balance sheets right now for corporates and cash. It’s now the first line of defense. There’s no more reliance on banks or capital markets. You’re looking—it’s not a rainy day fund. You’re looking to have a hurricane day fund.

But banks are definitely still hedging their bets with CDS pricing. They still have some issues to worry about, whether it’s the capital requirements that they’re going to need, constraints, bad loans still on their books. So that’s still some murky waters.

As I think through all this, I think the common theme is still there’s a lot of uncertainty. So in times of uncertainty, you need to do your best to make sure that you have enough liquidity.

So when I got here, how did we solve these issues? We outsourced it. We gave it to a third-party bank and we let them handle it. In that case, those invoices would come to us. We would go to the bank. They would take those five invoices, hedge them out, each one individually. Ford would then pay the bank. The contracts would be closed out and the payments would be made to the subsidiaries. And for this, we paid a lot of fees. We had a fee for the contract; we had a fee if they didn’t pay on time; if we had to roll over contracts, gains and losses—surprisingly enough, gains got shared with the bank, losses came to us.

So, and for scope purposes, we’re talking 400 to 500 customers we’re billing in 12 different currencies across 30-odd countries. And this worked fine, but one of the things that happened was the third-party bank didn’t have the ability, given the way their systems work, to solve the credit issue.

So I’ve made that much cleaner for our back office folks, and I don’t have to worry about them. So all that cash comes through, and it flows straight through, and now I’m holding on to a lot of different currencies, all notionally pooled, all the dollars come back to me.

Now, remember, and this is an internal system issue, we didn’t want to, I didn’t want to be making these 5,000 payments a month that were coming in under the old system. So we built our own internal system to say when payments come in through that IBAN account, we got a BAI file.

KONSTANTOS:  Thanks, Tom. Next up is our Silver winner from Freeport McMoRan Cooper & Gold. Presenting will be Kathleen Quirk. Kathleen is an executive vice president, chief financial officer and treasurer. She’s been in that role since 2003 and EVP since the acquisition of Phelps Dodge in ‘07.

Kathleen joined Freeport in 1989 holding various positions through that tenure, from tax, investor relations, treasury, corporate finance and business development. She holds a bachelor’s of science in accounting from Louisiana State. Kathleen, congratulations.

This is the history of our stock price. John mentioned we acquired Phelps Dodge. This was a major transaction that we had done in 2007. We acquired it for $26 billion and did it mostly in a leveraged transaction through debt. But over time or very quickly after the acquisition, we paid down the debt.

So we were in a good position going into the crisis from a debt standpoint. But the issue we had was making sure we had liquidity to operate in what could be a protracted period of weak prices. But you see what happened to our stock price between late ‘06 and leading up to this: we had gone from roughly $60 to $120 and then very, very quickly moved down. At one point, we were below $20 a share.

Unfortunately, we had to make some tough decisions on head counts. We lost about a third of our U.S. workforce during this time, but we also idled equipment. Our consumables went down as a result of that. We used less energy, etc., etc. And that resulted in operating cost savings of roughly $800 million.

We suspended a number of projects. You know, we had committed capital to buying lots of trucks, shovels, we were buying new mills to increase our capacity. And we had to move very quickly to work with our suppliers to cancel equipment orders and work with them to make sure that we had liquidity so that long term, their businesses also could benefit.

So we filed with our shelf, it sounds like Ford did some of the same things, a dribble-out program, so that we could sell shares into the market from time to time without picking a certain day to sell it in. And that was a highly successful program. We —raised $750 million in gross proceeds from this offering over a 10-day period.

And actually over that 10-day period, our stock was up 22%. Usually, as you know, when you issue equity you have to face a declining stock price. But that was a very efficient way to raise capital in a very tough environment. And so we took all these actions. It was a coordinated fashion with our operating teams, and it was very successful.

When times are tough is when you really learn the business at a very detailed level and you learn how people address issues and challenges and how they execute. And so as an organization, it was a very good exercise for us, as well.

So it was a tough time but we feel like we learned a lot as a company going through it and we rebounded and have a great outlook for the future. That was it. Thank you.

The overall idea being to provide transparency and visibility into our true liquidity position to our stakeholders internally and externally.

So what was our strategy for the execution? We used the classic framework of people, process and tools. Firstly, as far as liquidity risk management goes, it was being managed before the crisis in more of the front office, which had been closest to the market while we reorganized our structure and treasury to form a separate independent liquidity risk team to manage and measure this risk.

This really provided us with the guardrails and the trigger points and helped us implement alternate funding sources in a very quick manner. As a result, we went back into the securitized borrowing markets after having been out of those markets for seven years. We also further increased our contingent funding sources by adding a larger size portfolio of our more liquid assets.

So all in all, this helped us bring in the required funding, thereby enabling us to continue funding our customers and dealers through the recall as well as post-recall.

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