The only one of the Big Three U.S. auto manufacturers to avoid government aid during the financial crisis, Ford Motor Co. has since dramatically reduced its debt and prepped for growth. Lewis Booth took over the CFO seat in November 2008, not long after Lehman Brothers filed for bankruptcy and just as the financial crisis was unfolding. Booth, who’s retiring at the end of the month, discusses how the crisis has impacted Ford’s long-term financial strategy and how that involves integrating operations.
T&R: What policies have emerged in the wake of the financial crisis?
Booth: The controls we put on inventory and working capital are still in place. The attention we pay to them is still done at every forecast. I’d say our policies and scrutiny of cash flow remain unchanged from what was developed during the financial crisis.
Our intent, frankly, is never to lose the focus on cash and cash flow. Since the crisis we’ve discussed with our business operators metrics, such as operating margins, that give them other perspectives on the business. But that doesn’t mean we’ve given up our focus on cash.
T&R: Any new finance-related initiatives since the financial crisis?
Booth: There’ve been a couple of things. One is the continued progress in improving the balance sheet. Between the end of 2009 and the end of 2011 we reduced debt by $20.5 billion, to $13.1 billion. Our cash net of debt went from negative $8.7 billion at the end of 2009 to positive $9.8 billion at the end of 2011.
We also just amended and extended our revolving credit facilities, moving the expiration date back two years, to Nov. 30, 2015. And lastly, we’re now taking steps to fund the pension scheme, and as it approaches being fully funded, we aim to de-risk it as well. That’s another significant balance-sheet improvement…. This strategy will reduce balance-sheet and cash-flow volatility and improve the risk profile of the company by lowering our liability and asset exposure.
T&R: When might the pension fund be fully funded?
Booth: We’ve said toward the end of our planning period, and that’s typically five years. But it is subject to returning to more normal discount rates, which are extraordinarily low now. As part of the de-risking actions, we’re also adding some discretionary contributions to the pension plan. So this year, for example, our pension cash contributions will be about $3.5 billion, of which about $2 billion will be discretionary contributions.
T&R: Did the financial crisis impact Ford’s liquidity strategy?
Booth: It reinforced our strategy. The first step is to make sure you have adequate liquidity already in place, because if you don’t, it is impossible to get when you need it. Secondly, we now spend more time stress testing plans to ensure we feel comfortable with our liquidity support, even in a stressed environment.
T&R: What kind of stress tests do you use?
Booth: A simple example would be a significant change to the production volume outlook for industries around the world, or a change in interest rates or commodity costs. So we’ll stress test the plan and what we’ll typically do is develop an economic scenario that includes low volumes and the expected impact on commodity costs and interest rates and discount rates and the like. Then we’ll rerun our business plan with those new assumptions to see if we have the liquidity to support our business through that period.
T&R: Did Ford perform those tests before the crisis?
Booth: We did, as demonstrated by the major borrowing we did in 2006. I think the testing is more visible now, and we discuss it regularly with the business operators. This is not something that’s just done by the finance team.
T&R: You’ve said that liquidity is ultimately won through operations. How so?
Booth: It comes back to mapping the physical metrics to cash flows. One of the biggest lessons from the crisis is that finance and business operators working together can help the company improve its businesses as well as better understand liquidity needs. Making sure the business operators understand that, and we all work together to operate in a cash-efficient fashion, was a lesson for us.
T&R: Has the role of the CFO changed?
Booth: I think we’ve seen that the CFO is in a very good position to think of the financial and strategic issues and come to agreements with the operating teams on the plans to manage through those. For me, the CFO role at Ford has become much more a part of the operating team than perhaps it was in the past. We’ve tried to demystify some of the balance-sheet issues, so the operators can understand what we’re trying to achieve. At the end of day, the business is run by business operators, not the CFO.
When you’re going through the sort of period we’ve just been through, there’s just one very focused goal, and that’s managing your way through the crisis. In a growth phase, there are choices to make: Where do you grow, how fast, where do you allocate your capital, etc. So there are different goals, but a company must approach growth opportunities with the same intensity as the challenges of the last few years. So for us at Ford, we’re approaching the future with the same intensity that allowed us to survive the recent past.
T&R: What do you mean by same intensity?
Booth: If you were looking at cash every day during the survival period, then you must look at cash every day going forward, because cash is a scarce resource and in a growth period it’s all about capital allocation. We all gave up things we used to like to do in the business when things were really tough, and I think it’s important not to reinstate those things. If we could live without them then, we have to continue that, so that all our investments go toward growing the business.