A few weeks ago, I shared some finance insights from Philip Widman, CFO of Terex, a $4 billion construction equipment company that saw half of its revenues disappear in the downturn's 2008 fury.
I think you may find interesting the following abstract of our interview with Mr. Widman. Few CFOs will ever encounter the business meltdown that Terex's CFO experienced firsthand.
BF: What were some of the critical steps you took to manage finance through the downturn?
Widman: We really had always been focused on return on capital and cash flow, but in a downturn you need to think about things like whether the banks are going to be there when you need them, or will you have to come up with your own devices when it comes to cash flow?
We really went after reducing our working capital. We began weekly calls about receivables and inventory levels and payables, and we tried to generate the cash internally. Then we got ahead of our bank agreement, because covenants can be pretty difficult when you can't predict your future, and we couldn't predict our earnings outlook because we had dropped so much. We dropped 50 percent in revenues during '09 versus '08, so we renegotiated our covenants out until mid-2011. We took out any earnings calculation in the covenants, so we had access to our cash and some liquidity, and getting ahead of that as opposed to waiting until it was too late was certainly important.
We also accessed the capital markets to raise cash when the markets were open. In the second quarter of 2009, we raised over $600 million in the external markets before the downturn really significantly hit us. Most recently, in the past 6 to 9 months, we've gone about reassessing our portfolio of businesses to make certain that we had the right businesses for the long term. We divested a mining business that was going to require us to make a pretty significant investment to keep it ourselves. It was profitable, but it was still an investment, so we decided to sell it to Bucyrus [International], which could grow it better than we could without an investment.
BF: How did you initially respond once you knew what was happening to the economy?
Widman: Well, we began with the costs that were variable and stopped production in a lot of cases, shut down factories, went to short workweeks where we could — depending on the laws — and terminated contracts to stop incoming supply from suppliers and push back inventory. So you try to push at one end in terms of your production base while trying to accelerate your customer deliveries at the other end. We went from 24,000 to 16,000 people (employees) in about 18 months. We took out $1 billion of manufacturing and S&A costs on a run rate basis. Meanwhile, reducing our inventories created some cash flow that helped to offset some of the operating losses. I should say that this was not really the finance organization — it was the whole team.
BF: Does it remain challenging to predict demand?
Widman: It's still hard to predict demand. We don't have large back orders in lot of our business. We've been doing more planning with customers to determine what is going to trigger their buying patterns. It is very important to keep in touch with your customer links, and it still isn't easy because the factors that seem to have driven demand in the past don't seem to be driving it right now. People are holding on to their equipment longer before replacing it. We've gotten a lot more aggressive in seeking out business as opposed to waiting for it to come to us. During a big pickup in business like we had in 2008, we had only to pick up the phone almost, and you could get business. Now, you have to search for the pockets of demand. When we saw the availability of capital to our customers in short supply, we went ahead and invested in our financial services group to try to bridge the gap from external financial institutions that we partner with to maybe taking some more of the risk on our own balance sheet — calculated and underwritten — to help our customers get over the hump to buying equipment.
We describe our business as a high return on invested capital business in terms of how we structured ourselves … and we do not have a lot of fixed costs. This downturn has proven that we can take costs out very quickly. However, we were still unprofitable and lost a lot of money in 2008 due to the severity of the downturn.
This is a company that prior to 2009 grew by 25 percent annually (CAGR) for about 12 years, and then we hit the wall. The shift is now back to our customers as we seek to discover what will reveal their buying patterns. We've done some surveys and self-analysis that looks at our service attributes. Are we on time with our parts deliveries? What is the level of reliability? What is driving their decision to buy from us? How do we differentiate ourselves from our competition? How do we understand the buying patterns of our customers? We have been growing as a global company. Today, we have about a third of our revenue from Europe and a third from the United States and a third coming from everywhere else, but having access to global markets is terribly important to us because we cannot just rely on the developed markets. It's the same for a lot of industrialized companies. ###