Capital Markets

Eat My Dust

Ford's Lewis Booth on cash flow, corporate culture, and the competitive spirit.
Scott LeibsFebruary 1, 2010

When Lewis Booth was a boy in Liverpool, England, he pumped gas at his father’s car dealership. It wasn’t as easy as it sounds. “Back then, the pumps told you how much gas you served, but not the price,” he says. “And we had the ha’penny, so you had to calculate in two-gallon units to get to a viable figure.”

These days, Booth is still, in a sense, filling the tank, measuring not in ha’pennies but in billions of dollars in his role as CFO of Ford Motor Co. The company topped off its corporate coffers just ahead of the Great Recession, loading up on $23 billion in debt at a time when credit was cheap. Ford took plenty of heat as critics charged that it was literally mortgaging its future, but the move proved to be, as Booth says, “brave and prescient.”

Prescient indeed. The auto industry was just beginning a slide that would see new-vehicle sales reach a 25-year low, forcing Ford’s Detroit rivals to seek first bailouts and then bankruptcy protection. Ford avoided both, earning plenty of public goodwill in the process even as its significantly refreshed roster of vehicles has racked up enough “Best-ofs” and similar accolades to fill an F-150. Although the company ended 2009 having sold 300,000 fewer vehicles than the year before, it gained market share for the first time since 1995, and its December sales were up by more than 33%, capping a second half in which sales rose for five out of six months. Its stock, meanwhile, is near a five-year high.

Booth can’t take credit for the company’s deep dive into the credit markets; that move was orchestrated in late 2006 by his predecessor, Don Leclair, and newly hired CEO Alan Mulally. But Booth, a 32-year Ford veteran whose career has taken him all over the world, nimbly stepped into the CFO post in late 2008 and continued the company’s relentless focus on working capital throughout 2009. Ford tapped a $10 billion revolving line of credit (a difficult decision made more so by the implosion of one key lender, Lehman Brothers, which caused nearly $1 billion of Ford’s total revolver capacity to disappear), restructured another $10 billion in debt, renegotiated its contract with the United Auto Workers, and raised $1.4 billion in an equity offering. And that was just through May. Later in the year it tapped the equity markets again for $565 million, issued $2.5 billion in convertible bonds, amended and extended its revolver to alleviate a massive repayment scheduled for 2011, and announced that over the next 12 months it will do another $1 billion equity offering.

This fixation on cash would seem to verge on the obsessive, even for a CFO, but Booth points out that Ford’s needs run deep. “The assignment for finance,” he says, “has been to manage cash through this period to ensure that we continue to invest in new products and simultaneously begin to repair the damage to the balance sheet stemming from the big losses we’ve incurred.” The mere fact that Ford can turn its attention to balance-sheet repair may indicate that the worst is over, but there are still, as vice president and treasurer Neil Schloss notes, “a lot of things out there that can derail us, which is why we need liquidity.”

Ford suffered far less than its Detroit rivals in the 2009 market.

Getting in Sync

Although Ford’s savvy cash management highlights the value that a finance department can bring to a company, Booth is quick to put those actions into context. “This is a product-driven business, not a financially driven business,” he says. “If customers don’t want your products, all the finance work in the world won’t fix that problem.”

While Ford has burned through a fair amount of its cash simply to stay afloat, it has also channeled significant sums into product development, investing in everything from hybrid powertrains to voice-activated controls.

The latter, dubbed Sync, was on full display in January, when Ford CEO Mulally gave a keynote speech at the Consumer Electronics Show (as he also did in 2009) during which he described a raft of “in-car connectivity” features so comprehensive that the company’s new slogan might well be, “Have you logged on to a Ford lately?”

Analysts have taken note. “Who would have thought a Rust Belt CEO would keynote the Consumer Electronics Show two years in a row?” says Mike Wall, director of global financial services at CSM Worldwide, an automotive forecasting firm. “Ford has done a masterful job of integrating technology into its vehicles.”

A week later, at the North American International Auto Show in Detroit, Ford presented the newest versions of the Focus and Fiesta, highlighting the company’s vow to round out its truck- and SUV-heavy lineup with a broader range of compact and subcompact vehicles. In just three years, Ford has gone from having cars account for 30% of sales to 60%, according to director of corporate strategy Matt O’Leary.

At the same time, under Mulally the company has advanced a “One Ford” vision that seeks to instill the same efficiency across Ford’s global operations that Toyota and Honda have so successfully leveraged. The goal is to build cars on a single platform that can be modified to meet regional market needs. “The company has known it needed to do that for some time,” Wall says, “but it’s one thing to agree on it and another thing to execute. Ford had a culture where each region went its own way and you ended up with, say, 15 different door handles for nearly identical vehicles.”

Thursdays with Alan

Ford also had a culture in which finance and operations didn’t sync up particularly well; in fact, tension between the two groups was a veritable company tradition that could be traced all the way back to Henry Ford’s hiring of controls-focused finance experts who didn’t know a transmission from a tailpipe.

That began to change in 1995, when the company embarked upon “Ford 2000,” a grand plan intended to make Ford the world’s leading carmaker. Part of that effort included a complete restructuring of the finance department. As we noted in our March 1995 issue, one player in that project was “Lewis Booth, a British finance executive now assigned to manufacturing.”

Booth has spent three decades moving back and forth from finance to operations jobs, a background that would serve nearly any CFO well but which may be essential in the car business. “When I went to college, I majored in mechanical engineering,” Booth says. “I told my father that I wanted to get into car design, and he was horrified. He said, ‘You’ll spend your entire career designing a headlight cowl.’”

Upon graduation, Booth went to work for British Leyland as a product planner, but soon moved to Ford as a financial analyst in product development. And thus the die was cast.

“Lewis is first and foremost a car guy,” O’Leary says approvingly. “The first question out of his mouth isn’t about cost, it’s about fuel economy, or emissions, or some other aspect of the vehicles.” Booth is such a car guy, in fact, that he occasionally wanders down to product development and volunteers his design help. “They find my offer quite resistible,” he laments.

So perhaps it’s not surprising that Mulally resisted any temptation to bring in an outsider upon Leclair’s retirement (a strategy clearly in play at General Motors, which just named Microsoft CFO Chris Liddell as its new finance chief), and instead tapped the veteran Booth. With that single stroke Mulally not only got a finance chief with substantial global operations experience, but also reinforced the view that, as O’Leary says, “Ford has the talent in-house — we just need to focus it.”

Much of that focusing takes place every Thursday morning, at the weekly “business plan review” meeting. “To my mind it’s the most useful management tool we have,” Booth says. “We go through every element of the business, both by business unit and by skill team, and we look at every metric.”

And he means every metric. In two and a half hours, the team blasts through more than 300 slides that cover every conceivable aspect of operations, from R&D to marketing to evolving emissions standards. Each item is coded red, yellow, or green, and the team collaborates to turn reds (indicating problems) into greens as quickly as possible.

That may sound obvious, but in fact it represents a seismic shift within Ford’s corporate culture, where a shoot-the-messenger attitude long prevailed, prompting most executives to keep mum about potential problems. The company has done a complete 180 on that front. “The emphasis now is on being totally transparent,” Booth says. “Alan has been relentless about that. So you don’t have to be courageous to mark yourself down as red on an item. In fact, you have to be stupid not to. You can’t manage a secret.”

As a result, defects are addressed before cars reach showrooms, and production levels are trimmed at the first sign of trouble. The latter has paid off handsomely for Ford in the past year, in two respects. By keeping inventory levels in line with actual demand, the company has avoided having to offer large buyer incentives to move merchandise, helping Ford enjoy higher margins than many of its competitors. It has also been good for its dealers, who have their own financial worries. Keeping a lid on stock allows dealers to secure only the financing they need versus having to scrape up credit for row upon row of unsold cars.

Balance-Sheet Tutorials

Booth also fosters greater transparency by making sure that more employees understand the link between finance and operations. Within a month of assuming the CFO post, he began to walk Ford’s senior-most executives through the grim realities of the company’s balance sheet. A month later, he extended that tutorial to an additional 400 Ford managers. “When I was in operations, the balance sheet was really viewed as a finance problem,” he says. “We’ve managed to make it a collective responsibility.”

Booth’s aim was not to make Ford more finance-centric but rather to “identify what we thought was an appropriate road map” for restructuring the balance sheet. “We didn’t get too explicit in terms of what we were going to do, or when,” he says. “The goal was to show where we are, where we want to be in three to four years, and what contribution to that effort can come from operations” versus the treasury department.

The message, Booth says, is that “it’s not about borrowing more money, it’s about making more money so you can pay back some of those debts.” Indeed, debt is perhaps the top challenge of Ford now. GM and Chrysler face the same hurdle but to a much smaller degree, thanks to their respective bankruptcy agreements. One analyst estimates that debt servicing adds $1,500 to the cost of every vehicle Ford sells. Booth takes issue with that particular metric, arguing that “it’s not particularly helpful to frame debt in $X-per-vehicle terms. I view it more in terms of what you will pay over the period of a given product program, because that excites people and keeps us focused on why we’re in debt in the first place: to invest in new products.”

The Road Ahead

Nonetheless, despite a 2009 that proved better than even its biggest boosters could have hoped for, Ford’s bond rating remains in junk territory and “their debt burden is a reality that can’t be dismissed,” says Rebecca Lindland, an analyst with HIS Global Insight. While she has a favorable view of Ford’s prospects overall, one near-term problem, she says, is that “the car market is still not out of intensive care.” Her firm estimates that American car buyers will purchase 11.5 million vehicles in 2010, a 10% rise from 2009, but still vastly short of the 15.5 million to 16 million units she says would normally sell, based on historic demand, demographics, and other factors.

Another lingering problem for Ford is its agreement with the United Auto Workers, which has used the company’s recent success against it, rejecting contract changes that would allow Ford to reduce job classifications, freeze the pay of new hires, and be relieved of the threat of a strike over the next six years. The Ford vehicles that have advanced furthest in quality scores, meanwhile, are built by nonunion workers in Ford’s Hermosillo, Mexico, plant, a fact that suggests no easy resolution to the labor problem.

And, as noted earlier, Ford has launched ambitious corporate makeovers before — to no avail. As we noted in 1995, under the Ford 2000 plan, 1999 model year vehicles would herald an era in which “all regional boundaries are supposed to vanish, along with superfluous rungs of corporate hierarchy and $2 billion to $3 billion of overhead.” A decade later, the company is still promising the imminent appearance of a global platform.

Booth acknowledges that while Ford ended 2009 on several high notes, it is only in the middle of what will be a long and complicated transformation. Success, he says, will hinge on a “religious adherence” to the processes that Ford now has in place. “Let’s not kid ourselves,” he says. “Our previous processes weren’t getting the results we needed, and we knew we had to change. We do want to be different.”

It’s curious, perhaps, that a veteran of 30-plus years is playing such a key role in reinvigorating the company. But if the One Ford vision that Mulally champions is to take hold, then the automaker will have to adopt at Dearborn many of the practices that its often more nimble overseas operations have practiced for years. Booth was directly involved in much of that overseas success.

And, while one gets the distinct impression that his heart remains very much in operations, as he says, “When the boss asks you [to take the CFO post] and things are tough, you say OK. I love the job I’m doing now. To not have been in Detroit over the last 12 months would have been to miss the most extraordinary times that I’ve ever seen in the motor industry.”

The next 12 months may be more extraordinary still, as Ford prepares to reap the rewards of what it has sown during the past two years. No one will be watching the results more closely than Booth. “Cars are in my blood, for better and worse,” he says.

Who knows? If things go well, the guys in product development may even let him design a headlight cowl.

Scott Leibs is editor-in-chief of CFO.

Road Kill

No doubt about it, 2009 was a monumental clunker for auto sales. Analysts expect a postrecession rebound, but it won’t happen overnight. That gives rise to the question: Which carmaker will be best-prepared to capitalize when it does?

14.8 million — Average number of cars sold annually in U.S., 1980–2008
10.4 million — Number sold in 2009

30% — Decline in sales, 2009 versus 1980–2008 average
40% — Decline in sales from best year (2000)

13% — Anticipated rise in sales, 2009–2010
42% — Anticipated rise in sales, 2009–2012
56% — Anticipated rise in sales, 2009–2014
2012 — Year in which car sales match recent average

Source: CMS Worldwide

A World of Difference

While working at one of America’s largest companies certainly has its advantages — Lewis Booth has held posts on four different continents and been responsible for operations in a fifth, for example — there are some lessons that may be hard to learn. One of them, as Booth notes, “is straight from Business 101, but easy to lose sight of,” and that is the importance of cash.

Fortunately, Booth got a crash course during one of his overseas postings. In 1997 he became group managing director of the South Africa Motor Corp. (Samcor) in Pretoria, a joint venture that was enduring some tough times. “The industry was down and we were losing money and we had borrowing limits,” Booth says. “We had to watch very closely to make sure we could pay the wages every month.” Booth admits that “up until then, cash wasn’t a rationed resource at the bigger units of Ford where I had worked.” But in having to sweat the bills each month, he says he developed “sort of a visceral feeling about cash that’s much harder to get in a big company.”

That experience served him well when he was tapped to become CFO at Ford, where, as vice president and treasurer Neil Schloss notes, “he keeps us all focused on cash and cash flow, even as he brings finance and operations together in a common mission.” — S.L.