DEARBORN - Ford Chief Financial Officer Bob Shanks delivered the keynote speech Wednesday at the J.P. Morgan Annual Auto Conference in New York, which is attended by more than 300 institutional equity and credit investors.
Shanks’ presentation focused on the capital strategy that underlies Ford’s One Ford plan.
“The success of our One Ford plan requires a robust capital strategy that is completely aligned with our business strategies and that commands appropriate returns on the capital we deploy,” he said. “We evaluate the long-term success of our One Ford plan by measuring total shareholder return.”
At the core of the company’s capital strategy is developing, then maintaining, a strong balance sheet that progressively achieves the strongest possible investment grade ratings over time. Ford presently targets to have on hand an average ongoing automotive cash balance of about $20 billion and about $30 billion for total automotive liquidity.
“We have made significant progress over the past few years in strengthening our balance sheet and remain well on track to achieving these mid-decade targets,” said Shanks. “As we do, we will continue to work to strengthen further our balance sheet and improve our investment grade ratings, but the amount of incremental capital required to do this will diminish over time as we achieve by mid-decade our target debt levels and fully fund and de-risk our global funded pension plans.”
With regard to pension plans, Shanks said Ford’s strategy is to fully fund the plans and migrate the asset mix to about 80 percent fixed income and about 20 percent growth asset investments to better match the interest rate sensitivity of the associated liabilities.
“Based on present assumptions, our average annual contributions to our funded pension plans over the next three years are expected to range between $2 and $3 billion,” he said. “This includes both required and discretionary contributions.”
The second principle of Ford’s capital strategy is to finance the One Ford plan, targeting returns in excess of the cost of capital.
According to Shanks, Ford will increase the ongoing amount of capital spending to support products, growth, restructuring and infrastructure to about $7.5 billion annually.
“We are increasing our capital expenditures from the prior mid-decade guidance of about $6 billion annually in recognition of our momentum and numerous product opportunities to grow our business and to earn returns in excess of our cost of capital,” he said. “Our ability to increase our capital investment is facilitated by our improved near-term cash flows and supports accelerated growth plans for products to be brought to market in the latter part of this decade.”
Shanks said Ford’s plan includes developing new products and technologies to maintain the freshest showroom with best-in-class products across a full family of vehicles while aggressively growing the business in developed and emerging markets.
At the heart of Ford’s product plan is providing consumers with vehicles that offer excellence in the four pillars – quality, safe, green and smart – while also providing great value as perceived by customers.
“In addition to offering outstanding products and technologies that our customers want and value through two strong brands – Ford and Lincoln – we are progressing our efforts to unlock the value of our increasing scale, optimize our global footprint and improve its flexibility, and achieve fully competitive costs, all driven by a skilled and motivated team,” said Shanks.
This year more than 85 percent of Ford’s volume will be based on nine global core platforms.
“The benefits of this are more products, faster product cadence and better profitability,” said Shanks.
The third principle of Ford’s capital strategy is achieving profitable growth for all with a priority of providing attractive returns for shareholders, said Shanks.
“In 2012, we resumed our dividend, then doubled the per share amount in the first quarter this year. Since dividends were reinstated, we will have returned $2 billion to shareholders based on dividends paid or declared so far this year,” he said.
Shanks said that Ford continues to target a regular dividend that grows with earnings and is sustainable over an economic or business cycle.
“We expect the One Ford plan to continue to deliver over time an improving investment grade balance sheet, a growing business with strong operating margins, and sustainable dividends as we invest our capital in opportunities that generate returns in excess of the cost of capital,” he said, summing up his presentation. “As we continue to do this, we expect to provide attractive total shareholder returns.”