Deloitte Belgian CFO Survey Corporates are defensive Benchmarking corporate financial attitudes CFO Services Second quarter edition - July
Content 4 Summary 6 Confidence drops 10 Disappointing financials 12 Corporates defensive 14 Credit conditions weaken 17 Equity recovers 18 Eurocrisis deepens 21 Implications for the CFO "Little of the optimism the survey reported last quarter remains. Worries about recession and a breakup of the euro have knocked business confidence again"
Key points from the survey The general level of economic and financial uncertainty has gone up again in the second quarter. The increase in optimism in the first quarter has not sustained: CFOs are significantly less optimistic today about the financial prospects of their own organisation than they were three months ago. CFOs do not expect the economy to recover soon: only 2 of CFOs expect demand for their products and services to take up before the end of the year down from 6 three months ago. 25% do not expect improvement before 2014. Halfway through the year 6 of surveyed CFOs report financials are lagging behind budget, up from already 4 at the end of the first quarter and significantly more than in the previous years. On balance, bank borrowing is perceived as neither attractive nor unattractive. Although overall CFOs are not overly concerned with external financing, 4 currently perceive credit as costly and hard to get. Going forward, two thirds of CFOs anticipate harder pricing and/or lending terms for bank borrowing. CFOs remain focused on defensive strategies such as boosting cash flow and cutting costs. Capital expenditure and mergers and acquisitions are not top of the list. Although 4 believe one or more countries might leave the Eurozone in the next 12 months, only a quarter reports that their company is changing its plans to deal with the risk of the euro stress. One third of the CFOs, mainly representing large organisations, who foresee at least some effect on their business from a breakup of the euro, have at least made some preparations in the event it would happen. However only few are already well prepared. The macroeconomic backdrop to the Deloitte CFO Survey The euro area crisis intensified, driven by the political instability in Greece and market concerns over Italian and Spanish solvency. Although the European Union agreed to bail out Spanish banks, level of financial and sovereign stress remained elevated. The OECD warned that the euro debt crisis has become the most important source of risk to the global economy. Outside the euro area, a series of weak economic data from the US and the emerging market economies compounded concerns over global growth prospects. Ian Stuart, Chief Economist Deloitte UK Deloitte Belgian CFO Survey Corporates are defensive 3
Volatile. If there is one word that best describes the current financial and economic environment, this might be it. The general level of economic and financial uncertainty has further increased in the second quarter. Little of the optimism the survey reported last quarter remains. Worries about recession and a breakup of the euro have knocked business confidence again. But CFO pessimism is not just driven by the mood of the day. Many organisations report disappointing financials halfway through the year. Old certainties are being questioned, and decisions made several months ago are now being reconsidered. Defensive strategies are on top of the agenda. Mood swings Things were looking up again in the first quarter of the year. Many CFOs seemed to have shaken much of the gloom displayed at the end of last year. Well almost. The increase in CFO optimism in the first quarter has not sustained. CFOs are again significantly less optimistic today about the financial prospects of their own than they were three months ago. The underlying causes of Europe s debt crisis uncompetitive economies and indebted governments remain, and will not be solved in the short run. The future of the Eurozone remains at risk. Consumer demand is far from reassured and projections for growth for many of the European countries - but also the US - are challenged. High growth economies such as China are slowing down as well. CFOs expectations on the timing of the recovery of the Belgian economy have been pushed back by at least half a year. And unlike the previous quarters, CFOs are no longer more optimistic about the prospects for their own company than for the economy as a whole. Today only 2 of CFOs expect demand for their company s products and services to take up again before the end of this year down from 6 three months ago. 25% anticipate a very slow recovery and see no significant improvement before 2014. Not a surprise that the economic recovery is the CFOs main concern, next to securing their competitive position in the market. Poor performance and outlook Close to 6 of CFOs now report that the actual performance of their company is lagging behind the budget, up from already 4 at the end of the first quarter. To put this into a longer term perspective: in only 2 of CFOs reported worse than expected performance in the second quarter, in it was 3. Today, this percentage has doubled compared to. On average, CFOs expect only marginal top line growth and further decreasing operating margins going forward. Taking into account that CFOs were already very pessimistic in the fourth quarter of - when many prepared their budgets these second quarter results illustrate the significant challenges that many organisations face. No appetite for risk CFOs do not think the time is right to take on additional risk on the balance sheet. Risk appetite has plummeted back to the low levels we reported coming out of the recession in the first quarter of 2009. Fewer CFOs plan to reinvest surplus cash back into the business. With financial and economic uncertainty significantly above normal levels, CFOs remain focused on defensive balance sheet strategies such as boosting cash flow and cutting costs. CFOs see hiring and discretionary spending declining over the next year. Capital expenditure and mergers and acquisitions are hence not top of the list. In search of growth and to avoid stagnation, expansion into new markets or products remains important for more than one third of the respondents. 4
Financing The attractiveness of the major forms of financing equity, bank borrowing and corporate debt - has lowered somewhat compared to the first quarter. On balance, bank borrowing is perceived as neither attractive nor unattractive. Although overall CFOs are not overly concerned with external financing, 4 currently perceive credit as costly and hard to get. Macroeconomic uncertainty and the outlook for demand appear to have greater influences on capital spending than the availability of finance. Going forward two thirds of CFOs anticipate harder pricing and/or lending terms for bank Euro worries The Eurocrisis is not over. Over 4 of the survey respondents assign a high rating to the likelihood of one or more member states leaving the Eurozone in, and a quarter reports that their company is changing its plans to deal with the risk of the euro stress. Although one out of three CFOs expect a significant effect on their business in the event of one or more member states leaving the euro, only 6% of the respondents expecting at least some effect from this event, consider themselves well prepared for this event. 27% of those respondents, mainly representing large organisations, have made some preparations. uncertain economic environment. Economic uncertainty is the biggest constraint on corporate expansion. The challenge for companies is to find sources of growth in a volatile macroenvironment. CFOs need to develop playbooks to ensure the availability of cash and value, navigate the current downturn, renew growth under varied economicrecovery scenarios, and manage risk. Here is how you could get started. A critical priority for most CFOs is to assure sufficient cash for their company to operate without interruption. In the current environment, CFOs must also secure financing in the coming three to five years and identify opportunities to improve access, cost and flexibility of financing. Forecasting near-term revenues and providing earnings guidance is another key challenge for CFOs. Strong revenue-forecasting tools are essential to successfully managing finances and cash flow. Thierry Van Schoubroeck, Partner Wage indexation CFOs endorse most of the recommendations the European Commission has made to the Belgian government at the end of the first quarter. First priority for the CFOs is the reform of the system of wage bargaining and wage indexation. The political reactions on the recent Central Bank report on the wage indexation system predict a difficult debate. What CFOs can do Companies are faced with specific challenges in today's Deloitte Belgian CFO Survey Corporates are defensive 5
Confidence drops Worries about recession and a breakup of the euro have knocked business confidence again. The more optimistic mood witnessed in the first quarter of has not sustained: CFO optimism has seen the sharpest fall since the CFO survey started in 2009. Net % of CFOs who are more/less optimistic about financial prospects for their company More optimistic Less optimistic 6 5 53% 44% 4 4 25% 26% 3 22% 17% 2 8% 12% 1-1 -2-18% -3-4 -34% -5-42% -6-7 -8-75% '09 '09 '09 '09 '10 '10 '10 '10 '11 '11 '11 '11 12 12 The volatile pattern in CFO optimism coincides with the general level of external financial and economic uncertainty amongst CFOs. 85% of Belgian CFOs believe their businesses face a high or above normal level of uncertainty. CFOs rating on the general level of external financial and economic uncertainty facing their business 2% 13% 32% 53% High level of uncertainty Above normal level of uncertainty Normal level of uncertainty Below normal level of uncertainty 6
On average CFOs expect very little growth for the Belgian economy in. Expectations are in line with earlier communicated forecasts made by Belgian and European authorities. Half of the survey respondents expect flat growth, between -0.1% and 0.1%. CFOs expectations for the Belgian economic growth in 3% 3% 7% 8% 27% 52% Greater than 1% 0,6% to 1% 0,2% to 0,5% -0,1% to 0,1% -0,5% to -0,2% -1% to -0,6% Less than -1% The expected timing of recovery of the Belgian economic growth has significantly shifted back compared to the previous quarter. CFOs expect the recovery to be slow: only 45% believe the Belgian economy will take up again in the next 12 months, down from 8 three months ago. CFOs expectations about timing of recovery of the Belgian economic growth 5 45% 4 35% 3 27% 25% 2 1 35% 44% 22% 33% 28% 27% 15% 1 5% 12% 13% 39% 6% 2% H1 H2 2013 H1 2013 H2 2014 Deloitte Belgian CFO Survey Corporates are defensive 7
The expected timing for the acceleration of the growth in demand for their own organisations' products and services has shifted back as well. Unlike in the previous quarter, CFOs are no longer more optimistic about the prospects for their own company than they are for the economy as a whole. Expected timing for acceleration of growth in demand for products and services of CFOs businesses 5 45% 4 35% 39% 35% 3 25% 2 15% 2 18% 24% 18% 16% 25% 1 5% 3% H1 H2 2013H1 2% 2013H2 2014 It is not a surprise that the economic recovery is the CFOs main concern, next to securing their competitive position in the market. The challenge for companies is to find sources of growth in a volatile macroenvironment. Concerns about the impact of the Belgian government s financial and economic policy making have eased somewhat. CFOs perception on the greatest concern for their business in 12% 8% 5% 1 3% 2% 2% 3% 5% 27% 35% Economic recovery Competitive position in the market Impact of Belgian financial & economic policy making One or more member states leaving the Eurozone Increasing sovereign risk Access to capital Interest rates Changes in regulation Commodity prices Slow-down in China 8
"After six months, actuals are disappointing for many organisations: almost 6 of the CFOs report that their organisation is already performing worse compared to budget" Deloitte Belgian CFO Survey Corporates are defensive 9
Disappointing financials Halfway through the year almost 6 of the CFOs report that financial performance is not in line with budget. Comparison of the surveyed organisations' actual performance versus budget 1 19% Significantly better than expected 47% 24% Somewhat better than expected As expected 27% Somewhat worse than expected Significantly worse than expected Compared to the first quarter, the percentage of CFOs reporting worse than expected performance, has increased significantly. In the first quarter of, only 2 of CFOs reported worse than expected performance. In the second quarter of it was 3. Today, this percentage has doubled compared to. These figures give reason to worry, also because CFOs were very pessimistic at the end of when many of them were preparing the budget. Comparison of the surveyed organisations' actuals performance versus budget 10 9 8 7 6 5 4 3 2 38% 18% 41% 12% 35% 53% 29% 37% 5 49% 23% 22% 37% 39% 57% 24% Worse than expected 2 1 42% 41% 34% 27% 29% 24% 19% As expected Better than expected A similar trend can be observed when looking at the actual turnover and operating margin versus the budget: both metrics are worse than expected for about half of the organisations. Comparison of the surveyed organisations' actual turnover & operating margin versus budget 6 5 47% 51% 4 3 36% 34% 2 17% 15% 1 Turnover 10 Better than expected As expected Worse than expected Operating margin
On balance, CFOs see operating margins further shrinking over the next year. The general expectation is that turnover will remain flat. Net % of CFOs expecting an increase/decrease of the following key metrics for their companies in 4 31% Increase 2 1 22% 4% 27% -2-18% Decrease -4-4 39% -6-8 -74% Revenues Operating margins CFOs have again become significantly more negative on the outlook for cash flow. While at the end of the first quarter over 6 predicted the operating cash flow of their company to go up over the next twelve months, this percentage has dropped again to 4, back at the low level of the end of. CFOs expectations for the free cash flow evolution for their company over the next 12 months 8 7 6 5 4 3 2 1 Increase Unchanged Decline 2009 2009 2009 2009 Deloitte Belgian CFO Survey Corporates are defensive 11
Corporates defensive Risk appetite is back at the very low level of early 2009. CFOs are not planning major investments in the near future. 45% 4 35% 3 25% 2 15% 1 5% % of CFOs who think now is a good time to be taking greater risk onto their balance sheet 5% 17% 17% 21% 23% 28% 31% 35% 41% 35% 19% 2009 2009 2009 2009 13% 19% 8% Expectations for mergers and acquisitions remain low and, are very much correlated to the risk appetite. 10 9 8 7 6 5 4 3 2 1 Net % of CFOs who expect M&A activity to increase over the next 12 months 36% 69% 76% 89% 9 84% 76% 74% 88% 2009 2009 2009 2009 20&& 7 3 5% 48% 12% 12
Appetite to re-invest the surplus cash in the business has decreased compared to previous quarter. Investing it in the business (at home or abroad) Use of "surplus" cash by a net % of CFOs 29% 46% Paying down debt Accumulating cash or non-cash financial assets in Belgium or abroad 15% 13% 16% 21% Distributions to shareholders (via dividends or buy-backs) Paying employees more -9% 9% 12% -1 1 2 3 4 5 Declining optimism and risk appetite have manifested themselves in a shift towards more defensive strategies Reducing costs by CFOs. Reducing costs and increasing cash flow are the top priorities for Belgian CFOs. Increasing cash flow Expansion is less popular than 6 months ago. Introducing new products/services or expanding into new markets Expanding organically Expanding by acquisition Reducing leverage Disposing of assets Increasing capital expenditure Raising dividends or share buy backs Business strategies likely to be a priority for the CFOs businesses over the next 12 months 29% 38% 41% 53% 41% 38% 3 37% 16% 24% 16% 7% 9% 8% 9% 5% 2% 2% 1 2 3 4 5 6 Deloitte Belgian CFO Survey Corporates are defensive 13
Credit conditions weaken Bank borrowings and corporate debt have lost attractiveness compared to the previous quarter, and are again at the level of end of last year. On balance, all forms of financing are now perceived as neither attractive nor unattractive. Attractive Net % of CFOs reporting the following sources of funding as attractive/unattractive 8 6 4 2 Unattractive -2-4 -6 2009 2009 2009 2009 Bank Borrowings Corporate debt Equity Compared to previous quarter, credit is perceived as more costly and slightly less available. Despite the deterioration in the cost of credit, credit conditions on average do not seem to be especially stringent. Credit is costly Credit is cheap 8 6 4 2-2 -4-6 -8 Net % of CFOs reporting credit is costly and net % reporting credit is available 2009 2009 2009 2009 8 6 4 2-2 -4-6 -8 Credit is available Credit is unavailable Available Costly 14
"Going forward, two thirds of CFOs anticipate harder terms for bank borrowing" Deloitte Belgian CFO Survey Corporates are defensive 15
Going forward two thirds of CFOs anticipate harder pricing and/or lending terms for bank borrowing. Though the expectations on the evolution of the price and lending terms vary from quarter to quarter, the dominant view suggests continued financial stress. CFOs expectations about evolutions of price terms and lending terms in the next 6 months 9 8 7 6 85% 64% 57% 5 4 35% 34% 3 2 1 9% 7% 8% 2% On average balance sheets for Belgian corporates are appropriately leveraged. Net % of CFOs who think Belgian corporate balance sheets are overleveraged/underleveraged Overleveraged Underleveraged 4 3 2 1-1 -2 16% 2009 2009 34% 2009 13% 4% 2009 9% 2% -11% -11% -13% -1-1 -3% -9% 16
Equity recovers Compared to the previous quarter the perception of the valuation of equity has improved significantly: on average equity is now perceived as only slightly undervalued. As during the previous quarter, government bonds are perceived adequately priced; commercial real estate is perceived as more overvalued. Overvalued Undervalued Net % of CFOs who think the following assets are overvalued 6 4 2-2 -4-6 -8 2009 2009 2009 2009 Commercial real estate Equity Governments bonds Although the perception of the valuation of equity has improved significantly compared to last quarter, the expectations for the Bel 20 in a year's time have lowered: the percentage of respondents expecting an increase has decreased from over 6 to about 35%. 6 5 CFOs expectations for the Bel 20 in a year's time 56% 4 3 32% 33% 27% 27% 2 1 6% 3% 12% 5% Significantly higher Somewhat higher At current level Somewhat lower Significantly lower Deloitte Belgian CFO Survey Corporates are defensive 17
Eurocrisis deepens The Eurocrisis is not over. Over 4 of the survey respondents assign a high rating to the likelihood of one or more member states leaving the Eurozone in, compared to 1 last quarter. 45% 4 35% CFOs rating on the likelihood of one or more member states leaving the Eurozone in the course of 35% 36% 42% 3 25% 25% 26% 2 15% 1 5% 7% 11% 11% Very high Quite high Neither high nor low Quite low 7% Very low Nevertheless, only one in four CFOs report that their company is at present changing plans to deal with the risk of the euro stress; up from about 13% reported during the previous quarter but still lower than 6 months ago. 10 8 Extent to which companies are changing their plans to deal with the risk of the euro stress 86% 77% 65% 6 4 2 5% 2% 4% Significant change in plans 3 19% 11% Somewhat change in plans No change in plans 18
Although one out of three CFOs expect a significant effect on their business in the event of one or more member states leaving the euro, only 6% of the respondents expecting at least some effect from this event, consider themselves well prepared. 27% of those respondents, mainly representing large organisations, have made some preparations. CFOs expectations on the effect on their company's business in the event of one or more member states' departure from the Euro 5% 34% 27% Severe effect 34% Significant effect Some effect Little or no effect * CFOs rating on their business preparedness for a full or partial breakup of the Euro 3% 3% 8% 27% Most or all preparations mad 59% Preparations well advanced Some preparations made Few or no preparations Few ways of mitigating risk * Of those CFOs who foresee 'some', a 'significant' or a 'severe' effect on their business from a breakup of the euro (see previous chart) Deloitte Belgian CFO Survey Corporates are defensive 19
At the end of May, the European Commission formulated a new set of recommendations for Belgium. On average, CFOs rating on the importance of these seems to be spread rather equally between implementation of the budget, reforming the system of wage indexation, shifting of taxes and improving long-term sustainability of public finances. Although further increasing capital of the weakest banks was suggested to ensure granting of credits and liquidity, this recommendation is not considered a priority for CFOs. CFOs rating on the importance of the recommendations expressed by European Commission 2% 27% 25% 16% 3 2% Implement the budget for the year to make sure the excessive deficit is corrected by. Continue to improve the long-term sustainability of public finances by curbing age-related expenditure, including health expenditure. Further increase capital of the weakest banks. Reform the system of wage bargaining and wage indexation. Shift taxes from labour to less growth-distortive taxes Progress towards reaching the targets for reducing greenhouse gas emissions Strengthen competition in the retail sector an introduce measures to strengthen competition in the network industries (electricity and gas, telecom, postal services and transport). 20
Implications for the CFO Companies are currently faced with specific challenges, questions and concerns that are caused by today's uncertain economic environment. A critical priority for most CFOs is to assure sufficient cash for their company to operate without interruption. CFOs can focus on improving disciplines around cash management, analyse and understand drivers of cash flow. CFOs can focus on the completeness of the current top line. It is easy money, waiting to be processed, invoiced and collected. CFOs must secure financing not only short term but for the coming three to five years and identify opportunities to improve access, cost and flexibility of (debt) financing. But CFOs can also create value through identifying enterprise-wide cost reduction opportunities, and through taking advantage of tax planning opportunities that help business weather difficult times. Most recessions since World War II have lasted less than a year, but the current slowdown might continue through 2013 or longer. What can CFOs do in this environment? The first thing is to track indicators that provide a likely trajectory for recovery. The challenge for CFOs will be to read the signals and discern the shape and structure of the recovery. We hope the CFO survey can contribute to this. CFOs need to develop playbooks to navigate the current downturn, renew growth under varied economicrecovery scenarios, and manage risk. Forecasting near-term revenues and providing earnings guidance is a key challenge for CFOs. Strong revenue-forecasting tools are essential to successfully managing finances and cash flow. The CFO can also act as the voice of reason of the company. In good times this means keeping everyone s feet on the ground, and safeguarding the organisation from overly ambitious or risky ventures. But in difficult times, the CFO is often well positioned to see investment opportunities, when the rest of the organisation is still focusing on day-to-day survival. Deloitte Belgian CFO Survey Corporates are defensive 21
The Deloitte Belgian CFO Survey is produced by Thierry Van Schoubroeck, Partner and Ann Moerman, Senior Consultant. A note on methodology Not all survey questions are reported in each quarterly survey. In response to the current financial economic situation survey questions will be selected. In case you participated to the survey and would like to receive information about non-reported questions do not hesitate to contact us. Delivering the voice of the CFO community Some of the charts in the Deloitte CFO survey show the result 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. The second quarter survey took place between 31 May and 27 June,. A total of 60 CFOs completed our survey. The participating CFOs are active in a variety of industries. 23% of the participating companies have a turnover of over 1 billion, 53% of between 100 million and 1 billion, and 25% of less than 100 million. We would like to thank all participating CFOs for their efforts in completing our survey. We hope the report makes an interesting read, clearly highlighting the challenges facing CFOs, and providing an important benchmark to understand how your organisation rates among peers. 22
Deloitte Belgian CFO Survey Corporates are defensive 23
Contact Thierry Van Schoubroeck Deloitte CFO Services Partner tvanschoubroeck@deloitte.com + 32 2 749 56 04 www.deloitte.com/be/cfo-survey Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte's more than 195,000 professionals are committed to becoming the standard of excellence. July Deloitte Consulting Designed and produced by the Creative Studio at Deloitte, Belgium.