The Dutch Deloitte CFO Survey Flexibility drives optimism in uncertain times

Transcription

1 The Dutch Deloitte CFO Survey Flexibility drives optimism in uncertain times 2009 Q3 results November 2009

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3 Contents Optimistic, but uncertainty rules 4 Financial outlook 6 Shift in financing preferences 8 Equity less undervalued 11 Uncertainty enhances the need for a flexible enterprise 12 A note on methodology 14 Contacts 14 The Dutch Deloitte CFO Survey Flexibility drives optimism in uncertain times 3

4 Optimistic, but uncertainty rules We are proud to present our third quarterly survey of Chief Financial Officers (CFO) in the Netherlands, as part of the Deloitte CFO Initiative. The survey gauges attitudes to valuations, risk and financing, and looks at trends which are on the rise and business (cycle) turning-points. The theme reported in the second quarter survey (Q2) was cautious optimism. CFOs were a little more optimistic about the financial prospects for their companies and assessed funding conditions as tough. In the longer term, CFOs expected an increase in the level of M&A activity and the stock market index (AEX). Funding is expensive, but gradually more accessible The results of the third CFO survey (Q3) show a clear improvement in CFO sentiments about the business environment. However, the recovery will presumably be slow and CFOs will remain cautious and alert. In the European Central Bank (ECB) Monthly bulletin of October 2009, the Governing Council reported that: the euro area economy is stabilizing and is expected to recover at a gradual pace. However, uncertainty remains high. The results of the special questions included in this CFO Survey focus on uncertainty and confirm the view of the Governing Council. Expectations for M&A and Private Equity activity remain high It s the perception of most CFOs that equity in general is still undervalued, but less undervalued than in the second quarter of The AEX-index is still increasing, and a vast majority of CFOs (75%) expects the AEX to rise further over the next 12 months. CFOs have become more optimistic about their own company s financial prospects. A majority of 84% expect M&A activity to increase in the next 12 months which is comparable to the second quarter (88%). This is consistent with improved company prospects and still-undervalued asset valuations. 7 of the CFOs expect an increase in Private Equity acquisition over the next 12 months. Although the overall sentiment seems to be improving, CFOs remain cautious and alert. A huge majority of 88% believe that now is not a good time to be taking greater risks on their balance sheet. This percentage roughly equals the corporate risk aversion of Q1 and Q2. The Dutch Central Bank reports in their news bulletin of 1 October 2009 that corporate lending decreased again in August, which means that more loans were paid-off than granted, and that banks are still cautious about lending money. In the beginning of November, the Governing Council decided to leave the key ECB interest rates unchanged again at the current historic low levels. According to the third quarter CFO Survey results, CFOs believe that funding conditions are improving. The costs are still high, but funding is becoming gradually more accessible. CFOs especially perceive bank borrowing as expensive, and not easily accessible. Bank borrowing is out of favour relative to corporate bond and equity as sources of new funding. 4

5 The flexible enterprise (quarterly special questions) As a result of the continuously changing economic climate, uncertainty about growth in their own industry has increased over the last 12 months according to 8 of CFO s. This uncertainty affects decision making, like the strategy or budget planning process. As a result of this uncertainty, CFOs want to make their organization more flexible. Low-hanging fruit has already been picked by most organizations, like postponing investments (64%), introduction of scenario planning (7), or increased flexibility of the workforce (57%). As a next step CFOs contemplate to take measures with more impact to make their organizations even more flexible. Survey results show that CFOs seriously consider entering into alliances or joint ventures with business partners (41%), or increasing organizational efficiency by introducing shared services (36%). In spite of this increasing uncertainty, CFOs are reluctant to introduce options which will impact business. Long-term planning remains intact. Threequarters of CFOs will not consider offshoring, 54% will not adjust their business models, or divest activities (52%). CFOs want to steer a steady course. Key points from the 2009 Q3 Survey Optimism regarding the financial prospects of the corporate sector has increased substantially. Almost three-quarters of the CFOs (73%) expect their operating or free cash flow to increase over the next 12 months. Shareholders will not profit immediately from a positive change in operating cash flow. Cash return to shareholder ratios will remain low according to 65% of CFOs. Bank borrowing is still out of favour while corporate bond and equity issuance are increasingly in favour. More CFOs state that now is a good time for corporates to issue equity or debt. Credit cost and availability have improved over the last year, but most corporates continue to rate credit as costly and hard to obtain. In the next year companies are likely to be more financially conservative, running lower levels of corporate gearing. In September the AEX reached the highest index closing (313.88) in Three-quarters of CFOs expect a further increase and believe that the index will be higher in a year s time. 84% of the CFOs think M&A activity will increase during next year. 8 of the CFOs report to be more uncertain about growth expectations in their own industry than 12 months ago. Activities to make the organization flexible, e.g. postponing investments or increasing the flexibility of the workforce have already been initiated. According to CFOs the next steps to increase flexibility are the introduction of shared services and business partnering with 3rd parties. Most CFOs adhere to their long-term strategy. The Dutch Deloitte CFO Survey Flexibility drives optimism in uncertain times 5

6 Financial outlook CFOs, both in the UK and in the Netherlands, have become much more optimistic about the financial prospects for their own business. In the Netherlands the net balance (positive % minus negative %) has shifted from 27% to 45%, which is a significant change. The UK experienced a similar shift from 22% to 38%, which is the highest level since the CFO Survey started in September Chart 1. Financial prospects Net % of CFOs who are more optimistic about the financial prospects for their company now than three months ago. More optimistic % 22% 45% 38% Less optimistic % Q1 2009Q2 2009Q3 NL UK The optimism about financial prospects is also reflected in the expectations of the operating cash flow. Almost three-quarters of the CFOs (73%) expect an increase in their operating or free cash flow over the next 12 months. Almost half of the CFOs (46%) expect a modest increase between 1% and 1. Chart 2. Change in operating or free cash flow over the next 12 months? Percentage of respondents who expect the operating or free cash flow for their company to change over the next 12 months. 5 45% 35% 3 25% 15% 1 5% % 1 11% 16% 22% 34% 46% 16% 13% 13% 7% 6% Decline No change Increase by 1% - 1 Increase by 11%- Increase by more than 2009Q1 2009Q2 2009Q3 6

7 The financial outlook of CFOs is more optimistic than before, and the operating income is expected to increase in the next 12 months. Chart 3. Level of cash return to shareholder ratios Percentage of respondents who think that cash return to shareholder ratios are, relative to normal levels, high / low. For the meantime however, CFOs do not expect that cash returns to shareholder ratios will increase. A higher operating cash flow will probably be used to finance company activities, or for repayment of debt. Shareholders will eventually benefit from this, but not via direct payments % 16% -54% -56% 6% -65% Q1 2009Q2 2009Q3 Low High The Dutch Deloitte CFO Survey Flexibility drives optimism in uncertain times 7

8 Shift in financing preferences Chart 4 shows a significant increase in the attractiveness of corporate bonds and equity issuance as a source of funding. Bank borrowing however remains on about the same level of unattractiveness as the previous quarters. Chart 4. Favoured source of corporate funding Percentage of respondents reporting the following sources of funding as (un)attractive % of Dutch CFOs still characterize the cost of short term borrowing from banks as high. The Governing Council of the ECB decided at its meeting on 5 November 2009 to leave key ECB interest rates unchanged. The ECB reported in their last Euro area Bank Lending Survey (October 2009) that 85% of the banks reported that their credit standards as applied to the approval of loans or credit lines to large enterprises remained basically unchanged. However, the percentage of banks which tightened their credit standards decreased considerably from 26% to 14% over the past 3 months. For the third quarter of 2009, euro area banks expect a further lowering of the net tightening of credit standards for loans to enterprises % 54% 33% 31% 3 31% 32% 35% 34% -33% -32% -21% -21% -41% -5-54% -5-39% Bank borrowing Corporate debt Equity Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Unattractive Attractive Bank borrowing is still the least attractive source of funding. Is now then a good to time to issue corporate debt or equity? Chart 5 shows a shift upwards in the percentage of CFOs who think that now is a good time to issue debt or equity. CFOs think more positively of issuing debt than equity. The sentiment for debt issuance (net balance) increased from minus 54% to plus 6%, which implies a minor positive sentiment. Chart 5. A good time to issue debt / equity? (2009) Percentage of respondents who think now is (not) a good time to issue debt / equity. 6 31% 23% 53% 9% 19% 42% The sentiment for equity issuance is still negative (net balance minus 16%), suggesting that more CFOs think now is not a good time to issue equity. However, this is a smaller group by far than last quarter when the net balance was still minus 62% % -77% -47% -91% -81% -58% -10 Debt Equity Q1 Q2 Q3 Q1 Q2 Q3 No Yes 8

9 Following the conclusions of the previous chart, chart 4 shows that 44% of CFOs is likely to issue debt over the next 12 months (positive net balance +13%), and 21% of CFOs is likely to issue equity (negative net balance -27%). Nevertheless this is a sharp increase in intended equity issuance in comparison with last quarter. This has also been confirmed by recent announcements of companies which plan to issue equity in the coming months. Chart 6. Likely to issue debt / equity? (2009) Percentage of respondents who are (not) likely to issue debt / equity over the next 12 months % 37% -46% -44% 44% -31% 11% 1-74% -77% 21% -48% Debt Equity Q1 Q2 Q3 Q1 Q2 Q3 Unlikely Likely Funding is still considered expensive by two thirds of CFOs (65%). Nevertheless this is a small decrease in comparison with the last quarter. 43% of CFOs report funding to be easily available. A significant increase in comparison with the previous quarters. The availability of funding has reached a turning point. Both response groups (positive and negative) are now about the same size (net balance 2%). Funding is becoming more accessible, but not yet readily. The ECB Bank Lending Q3 Survey reports: Net demand for loans by enterprises continued to decline in the second quarter of 2009, but the decline was somewhat smaller than in the first quarter. Debt restructuring as well as loans from other banks or non-banks tended to support the net demand for corporate loans in the second quarter. Chart 7. Cost and availability of credit Percentage of respondents reporting funding for corporates is expensive/cheap and hard to get/easily available Funding for corporates is: cheap 4% 8% -8-81% 11% expensive Q1 Q2 Q3 Funding for corporates is: easily available 24% 17% -65% -69% -77% 43% -41% hard to get Q1 Q2 Q3 The Dutch Deloitte CFO Survey Flexibility drives optimism in uncertain times 9

10 45% of CFOs report a decrease in their level of financial risk on their balance sheet. Furthermore 88% of CFOs think now is not a good time to take greater risk on their balance sheet. This level remains about as high as in the past two quarters. Chart 8. Change in financial risk on balance sheet Percentage of respondents reporting the level of financial risk on their balance sheet increased/decreased over the last 12 months. 6-48% % 34% 32% - 45% Q1 2009Q2 2009Q3 Decreased Increased The increase in the gearing level started in Q2 is not continued in the third quarter. The group of CFOs who aim for a reduction in their level of gearing increases to 41%. Almost one third of CFOs (29%) expect to increase their gearing level, similar to last quarter. Chart 9. Level of gearing Percentage of respondents reporting an intended rise or reduction of their debt / equity ratio over the next 12 months. Earlier it was reported that more CFOs expect their operating cash flow to increase over the next year. Besides that cash return to shareholders will remain low. Also more CFOs are likely to issue debt or equity. CFOs may use all of these options to influence the level of gearing % 3 29% -3-41% The Dutch Central Bank reports in their news bulletin of 1 October 2009 that corporate lending decreased again in August, which means that more loans were paid-off than granted. Reduce 2009Q1 2009Q2 2009Q3 Rise 10

11 Equity less undervalued Most CFOs still perceive equity in general as well as the equity of their own company as undervalued. However, chart 9 shows a sharp decrease in the level of CFOs who perceive Dutch equity in general as undervalued in comparison to the second quarter (44% against 72% in Q2). 24% of CFOs perceive equity already as overvalued this quarter. The sentiment is still inclining towards undervaluation, but are we moving towards a neutral balance or even a shift towards overvaluation? A changing sentiment is not yet visible in the valuation of the equity of the own company. The AEX index increased this quarter from an average of (Q2) to an average of and noted already a highest closing at % of CFOs expect the AEX index to increase over the next 12 months, consistent with the last 2 quarters. Chart 10. General equity valuations and equity of own company Percentage of respondents rating Dutch equity valuations in general and equity of own company as over- or undervalued % -8-72% 24% -44% General equity valuations 2% 2% 2% -62% -49% -47% Equity of own company Q1 Q2 Q3 Q1 Q2 Q3 Undervalued Overvalued CFOs keep an optimistic outlook on M&A activity and Private Equity acquisition in the next 12 months. 7 expect an increase in PE acquisition, and 84% expect increased M&A activity. This is a small, marginal decrease in comparison with the last quarter (Q2). Chart 11. M&A activity and Private Equity acquisition Percentage of respondents expecting M&A activity and PE acquisition to increase or decrease % 88% 84% 38% 77% % - 2% - 2% -34% - 3% -9% - M&A activity PE acquisition Q1 Q2 Q3 Q1 Q2 Q3 Decrease Increase The Dutch Deloitte CFO Survey Flexibility drives optimism in uncertain times 11

12 Uncertainty enhances the need for a flexible enterprise Three-quarters of CFOs report to be more uncertain than 12 months ago in their expectations of 3-year growth of the economy at Euro-level, affected by the current economic climate. The uncertainty increases to 8 when it concerns their own industry. Chart 12. Level of uncertainty 2009 Q3 Percentage of respondents who are more / less uncertain in their expectations of 3-year growth than 12 months ago % 77% % -4% -5% Economy (GNP) EU Economy (GNP) NL Your industry More uncertain Less uncertain This estimate of uncertainty affects the decision making process, e.g. the strategic planning process, the budgeting process, but also the strategy itself. Chart 13. Influence of uncertainty on decision making 2009 Q3 Percentage of respondents who report that their estimate of uncertainty affects: 78% of CFOs confirm that increased uncertainty in growth expectations affects their strategy somewhat or even very much so. The data indicates a clear correlation between the level of uncertainty about the growth expectations in their own industry, and the impact this will have on their strategy. More uncertainty implies more impact on strategy % 21% 23% Strategy 54% 21% 25% Strategic planning process 5 21% 29% Budgeting process Not all Somewhat Very much so 12

13 The economic climate was turbulent in the past year. This makes it very hard for CFOs and their organizations to plan for the future. More strategies are possible as a result of different external economic scenarios. Organizations need to increase flexibility in order to respond to external change. What measures are the CFOs considering? Chart 14 presents the means which are already being used, and which means they want to be using soon. This shows the focus of CFOs and their organizations in the nearby future. The results indicate that most of the quick wins have been realized, e.g. introducing scenario planning, postponed investments, or increasing the flexibility of the workforce (1). CFOs indicate that the next step is increasing flexibility. Moving forward, business partnering / joint ventures, shared services, outsourcing, or M&A activity are their most preferred measures.(2) Chart 14. Company s flexibility to react What means are considered / introduced to respond to external change and increase the company s flexibility to react? Current and planned usage Therefore searching ways to increase flexibility... Partnering/JVs Shared Services M&A Outsourcing Increase innovation and R&D Demergers/divestiture Reconsider business model Offshoring 3... But radical changes not yet in the picture Scenario planning Increase flexibility of workforce Postpone investments Quick wins realized Current usage 1 More radical changes like reconsidering the business model or offshoring, are not yet very popular (3). Their current and planned usage is low. Three quarters of CFOs do not want to consider offshoring, and 54% of the CFOs do not want to reconsider the business model at all. Apparently, most CFOs believe that current trading conditions and the corresponding uncertainty do not yet justify radical changes in their strategies or their business models. Their long-term planning remains intact. The Dutch Deloitte CFO Survey Flexibility drives optimism in uncertain times 13

14 A note on methodology To enhance readability not all survey questions are reported in each quarterly survey. Survey questions are selected in response to the current financial economic situation. If you would like to receive information about non-reported questions, please do not hesitate to contact us. All graphs are based on a minimum representative number of 50 observations unless otherwise annotated. The Deloitte CFO Survey is also executed by Deloitte UK and Deloitte Belgium. Comparisons are made when relevant. Some of the charts in the Dutch Deloitte CFO Survey show the results in the form of a net balance. This is the percentage of respondents reporting, for instance, that bank credit is attractive minus the percentage saying bank credit is unattractive. This is a standard way of presenting survey data. Due to rounding, answers may add up to 100. The 2009 Q3 survey took place between 30 September and 26 October. A total of 56 corporate CFOs completed our survey, representing a net turnover of approximately 140 billion, divided into the following categories: less than 100 million (9%), million (3), million (21%), billion (), more than 5 billion (15%), Unknown (5%). Approximately one third of the participating CFOs represents a listed company. Two thirds are CFOs of large private companies. The participating CFOs are active in a variety of industries (Healthcare, Construction, Retail / Wholesale, Real Estate, Consulting, Leisure / Entertainment, Technology, Communication, Energy & Utilities, Manufacturing and Banking / Finance / Insurance). We would like to thank all participating CFOs for completing our survey. We trust that the report makes an interesting read and highlights the challenges facing CFOs. We also hope that it provides you with an important benchmark to understand how your organization rates among your peers. Contributors: Vincent Oomes, Arnoud Oltmans, Jan Buné and Helen den Held. Source: Deloitte Marketing Research Contacts Jan de Rooij Partner Deloitte CFO Services janderooij@deloitte.nl Wilten Smit Partner Deloitte Corporate Finance wismit@deloitte.nl Liesbeth Bax Deloitte Marketing Research lbax@deloitte.nl Eva van der Heijden Deloitte Press Officer evanderheijden@deloitte.nl

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