CFO Survey Europe Q1 2015 Optimism Level Own Company at All-time High Broad Skepticism About ECB s Bond-buying Program Structural Reforms & Investment Programs Believed to Have Positive Impact on European Economy Photograph:" Is central bank stimulus actually good for you?" by Day Donaldson, used under CC BY / Desaturated from original.
As part of the quarterly CFO Global Business Outlook survey, TIAS conducts CFO Survey Europe in collaboration with Duke s Fuqua School of Business, ACCA and CFO Publishing. Netherlands-based TIAS School for Business and Society is the business school of Tilburg University and Eindhoven University of Technology. At TIAS we believe that business and society are interdependent and that today s insights are not tomorrow s solutions. Our mission is to have a positive and lasting impact on organizations, business and society by developing critical and inquisitive managers who are able to demonstrate responsible leadership and exceptional decision-making abilities. For more information, visit www.tias.edu. North Carolina, US-based Duke s Fuqua School of Business was founded in 1970. Fuqua s mission is to educate business leaders worldwide and to promote the advancement of business management through research. For more information, visit www.fuqua.duke.edu. UK-based ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. It aims to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. ACCA supports its 162,000 members providing services through a network of 91 offices and centers. For more information, visit www.accaglobal.com. UK-based CFO Publishing LLC, a portfolio company of Seguin Partners, is a business-to-business media brand focused on the information needs of senior finance executives. The business consists of CFO magazine, CFO.com, CFO Research, and CFO Conferences. CFO has long-standing relationships with more than a half-million financial executives. For more information, visit www.cfo.com. 2 P a g e
Contents Introduction 4 CFO optimism & sentiment 5 Intermezzo: CFO Interview 10 Finance & capital 11 Employment 14 Key results CFO Survey Europe, US, Latin America, Africa and Asia 15 CFO Survey Europe team 16 3 P a g e
Introduction Level of optimism on financial performance own company at all-time high European CFOs skeptical about ECB s bond-buying program but more confidence in reforms and investment Q1 of 2015 exhibits a strong uptick in European sentiment regarding the economic outlook and the financial prospects at company level. Nearly half of the financial directors anticipate a more favorable period ahead of them. The average level of optimism with respect to the economy has increased to 58 on a scale of 100, up from 53 last quarter. The optimism as regards to the own company has increased to 66 on a scale of 100, a level not witnessed before in our survey. Despite the many challenges that still exist in the Eurozone, the economy seems to be on the right path of recovery, albeit modest. Over 40% of the European CFOs do not believe that the European Central Bank s (ECB) plan to buy up government bonds will have the desired effect on the real economy. 11% even thinks that the program will be counterproductive, doing more harm than good. Many believe that only the financial markets will benefit from such program. Others claim that either the scale of the program is still too small or that the design of the program is flawed. Hence, 80% of the CFOs have more confidence in programs aimed at structural reforms and 70% believe in plans that focus on large-scale investments. The effects of recent changes in interest rates, oil prices and currency values have had an impact on European businesses. In some cases, this has compelled companies to adjust their capital spending plans and hiring plans accordingly. Figure 1. Optimism index for CFOs in Asia, Europe, US, Latin America and China 100% 75% 50% 25% 0% -25% -50% -75% -100% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Asia Europe United States Latin America China 4 P a g e
CFO optimism & sentiment First Quarter 2015 The first quarter of 2015 starts off promising with almost half of the Improved sentiment may signal economic recovery in the making European CFOs more optimistic about the economy for the next twelve months. Compared to a period of steady decline in the number of optimists and a significant hike in pessimists during 2014, the improved sentiment may indicate that the economy is well on its way to further recovery. In Q1 2015 the share of European CFOs with a positive outlook on the economy has improved to 48%, up from 32% during the previous quarter. During that same time period, the share of pessimists among European CFOs has decreased from 28% to 18% (figure 2). Figure 2. European CFO sentiment regarding economy of own country Less optimistic 18% No change 34% More optimistic 48% but European optimism continues to trail that of the US and Asia Coupled with the increase in number of optimists we also observe that the average level of optimism (measured on a scale of 0 to 100) has improved significantly from 53.5 during the previous quarter to 58 in this first quarter of 2015. Despite the progress in the level of optimism, Europe s still trails that of other major regions such as the US, China and Asia (figure 3). with US optimism back at pre-crisis level CFOs on the African continent are the least positive about the economic prospects. The index has decreased from 53 to 48 on a scale of 100, while the number of optimists has reached an all-time low of 10% (down from 22%), and the number of pessimists a record high of 70% (up from 61%). The deterioration in economic sentiment among Latin American CFOs has resulted in an all-time low. During Q1, the level of optimism has reached 49 on a scale of 100 with only 18% of the CFOs more optimistic and more than two thirds more pessimistic. For the 6th consecutive quarter, the level of optimism has increased in the US and has reached 65 on a scale of 100, a (pre-crisis) level not observed since the first half of 2007. 47% of the CFOs claim to be more optimistic about the economy and just over 16% have a pessimistic view on the economic prospects. 5 P a g e
The strong optimism among Asian CFOs is sustained throughout the first quarter of 2015; the index maintains its previous level of 66 on a scale of 100. Despite the sustained level of optimism, the actual number of optimists in the Asian region has decreased significantly from 63% in the previous quarter to 54% during this first quarter. Financial executives in China maintain their optimism level at 66 on a scale of 100, up from 61 during Q4 2014. The share of optimists among Chinese CFOs has decreased to 14%, down from 20% during Q4 2014. Figure 3. Optimism level about own country s economy Africa Latin America US Europe China Asia 0 10 20 30 40 50 60 70 80 index Last quarter This quarter Global shifts in macroeconomic factors have had a significant impact on European businesses Recent developments in interest rates, oil prices and currency values have had substantial impact on European businesses. 62% of the companies that experienced an effect (directly or indirectly) from recent interest rate policy, say that the effects have been positive. Table 1. Effects of major economic factors on European businesses either directly or indirectly The change has had Changes in Interest rates Oil prices Currency values a direct effect 31% 17% 49% an indirect effect 19% 39% 12% both a direct and indirect effect 8% 8% 13% no effect 43% 36% 26% but not necessarily in a negative way The effect has been positive to very positive 62% 59% 37% negative to very negative 28% 29% 54% 6 P a g e
Another 59% of those companies that have been affected by the recent developments in oil prices, claim the effects to be positive. More than half of the businesses that have experienced an impact from developments in currency values, say that the impact has been negative (table 1). Driven by the effects of these macroeconomic factors (i.e. oil prices, interest rates and currency values), some European businesses have adjusted their plans for capital spending and hiring (figure 4 and 5). Figure 4. How are capital spending plans of your company affected by DOWN UP Dollar appreciation 14% 10% Consequently, European CFOs have adjusted their capital spending plans Oil prices 12% 3% Interest rates 8% 14% For example, 14% of the European CFOs indicate that the recent strengthening of the Dollar has forced them to cut back on capital spending. Another 12% say that developments in oil prices have led them to reduce capital spending. However, recent developments in interest rates have prompted around 14% of the European companies to beef up investments. Figure 5. How are hiring plans of your company affected by DOWN UP Dollar appreciation 10% 7% and hiring plans Oil prices 14% 4% Interest rates 6% 3% 10% of the European CFOs say that the recent dollar-appreciation has had a negative impact on their hiring plans, while another 14% say that recent oil price fluctuations have had an adverse effect on hiring. 7 P a g e
European CFOs have indicated that economic uncertainty, regulatory requirements, weak demand, government policy, and currency risk remain the biggest factors of concern (table 2). Table 2. Top concerns on the agenda of European CFOs Top 10 major concerns affecting the corporate agenda 1. Economic Uncertainty 2. Regulatory requirements 3. Weak demand for your product/services 4. Government policy 5. Currency risk 6. Attracting and retaining qualified employees 7. Geopolitical/Health Crises 8. Employee productivity 9. Access to capital 10. Employee morale During the first quarter of 2015, the ECB launched its program to purchase government bonds from banks in order to stimulate the economy and counter inflation in the Eurozone. At an estimated cost of as much as EUR 1.14 trillion in total, the program has also caused controversy throughout Europe. Only few CFOs are confident about success of ECB s program When asked about its effectiveness, a mere 23% of the European CFOs believes that the ECB program will indeed succeed in staving off the risk of deflation in the Eurozone (table 3). However, Almost 40% of the financial directors are of the opinion that the ECB program will ultimately only benefit the financial markets without contributing to the real economy. Table 3. In your opinion, will the ECB s trillion-euro bond purchase program succeed in boosting inflation? Response % of CFO s Yes 23% No, QE may benefit financial markets (e.g., bank liquidity or stock markets) but will not increase access to funds to the real economy (e.g., bank lending, equity issuances) enough to increase inflation No, QE will not have enough direct effect on the demand side (e.g., direct effect on business and consumer spending) to increase inflation 38% 20% No, the scale of the QE program is too small 10% No, the design of the program is flawed 7% Many believe that the program will have no real impact on own company When asked about the potential benefit to their own businesses, more than 60% of the financial directors CFOs responded that they do not expect to see any meaningful and measurable effect coming from the ECB program. 30% of the CFOs do expect the ECB program to have a direct and positive impact on their company. 8 P a g e
Structural reforms and large investment programs are believed to have more chance in boosting the European economy European CFOs have much more confidence in structural reforms (over 80%) or in investment programs, such as the European Fund for Strategic Investments (EFSI), as suggested by Jean-Claude Juncker (figure 6). The latter should be able to attract 315 billion euro of external investments for large projects. More than 70% of the CFOs surveyed think that this plan will have a positive impact on the European economy. Figure 6. Considering the current state of the European economy, how effective do you think the following programs will/would be? 60% 50% 45% 52% 40% 37% 30% 20% 19% 10% 0% counterproductive neutral productive Structural reforms (e.g., labor marketreform, public sector reform, tax reform, etc.) Investment programs (e.g., Juncker's EU strategic investment plan) Recently announced ECB bond buying program Quantitative easing Austerity Optimism level about own company has reached all-time high Compared to economic sentiment, European CFOs are much more confident about the (financial) prospects of their own company. Although just under half of the financial directors have a more optimistic outlook (figure 7), the average level of optimism has increased to 66 on a scale of 100 during Q1 (up from 62 in the previous quarter). This is the highest level observed since the start of this survey. Figure 7. European CFO sentiment regarding financial prospects of own company Less optimistic 20% No change 31% More optimistic 49% 9 P a g e
Intermezzo: CFO Interview First Quarter 2015 Mr. Karl Durocher (MSc, MBA) COMPANY: MERCEDES-BENZ HUNGARY ROLE: MANAGING DIRECTOR & CHIEF FINANCIAL OFFICER Key Facts: PRIVATE COMPANY GREECE INDUSTRY: AUTOMOTIVE EMPLOYEES: 70 Karl Durocher is CFO of Mercedes-Benz Hungary. This company is a subsidiary of Daimler, responsible for the wholesale and import of Daimler vehicles and aftersales parts. Mercedes-Benz Hungary employs 70 people in total, with 7 persons working in the Finance department. Karl Durocher has been its CFO since 2014. Has the CFO role changed in the time you've been in the position? I ve been a CFO at various Daimler subsidiaries for over 5 years now. My role has been more or less the same. But the challenges are different of course. I started in this position during the height of the crisis but the economic climate is getting better since. That s something which is changing. But there are also new developments in the car market, like Tesla or Uber. Such developments imply that our company also has to look for new opportunities, like developing new financial services. What do you think is the most challenging in being a CFO? With new business ideas you have to balance between risks and safety. New sales ideas may have risks in terms of new tax regimes or expanding inventory for example. Of course you can make an analysis, but that doesn t necessarily mean it s going to work. In cases like these it is difficult to make the right decision. Sometimes you have to say no, and sometimes you have to go for it. It helps to have a little bit of experience; not only to feel if something is going to work or not but also by communicating that an idea cannot go through. Since becoming CFO, what achievements are you most proud of to date? One of the companies I have worked for previously had a liquidity gap of over 34 million euros. When I started to work there, the company was very close to bankruptcy. It took us up to three years to turn it around. One of the biggest problems was the customer payment morale. So we took drastic measures at the collection side. What are the priorities for your company next year? We are planning to grow from a low level, 20 percent of turnover. We only do business in Hungary, because we are part of a global network of Daimler. We think we can grow to take better advantage of our existing customers by improving our communication. We are starting with a project for a new customer relationship management system in 4 to 6 months. This will support us in our efforts for smarter marketing. What do you think of the ECB s plan to buy up government bonds? I don t think this is a good idea. I believe more in local measures to change the market structurally. This is just postponing the real problem. 10 P a g e
Finance & capital Growth in business spending for the next twelve month is likely to stay on track During the next twelve months, European financial directors expect to increase business spending. Approximately two thirds of the CFOs say they will beef up capital investments and spending on technology. More than half of the CFOs indicate that they expect to increase spending on R&D and marketing & advertising. Except for the latter category, the average growth rates in spending remain robust and slightly higher compared to one year ago (figure 8). This underscores the improved sentiment among CFOs and may signal moderate but sustained recovery. Figure 8. CFOs' expected growth in business spending for next 12 months 6,2% 5,1% 4,3% 0,5% Capital investments Technology Research & Development Marketing & Advertising 1 yr ago previous quarter Q1 2015 The expected growth in capital spending on investments for the next twelve months has climbed to 6.2%, up from 4.2% during the previous quarter. Tech spending is expected to grow at an average rate of 5.1%, down from 6.4% in Q4 2014 but still at a rate comparable to that of one year ago. R&D expenditures are expected to grow at 4.3% on average, up from 1.5% during the last quarter. Spending on marketing and advertising is projected at 0.5%, down from 2.6% during Q4 2014. but will hardly have any effect on product prices Almost half of the financial executives expect an increase in the price of their products during the next twelve months. On average, however, the increase is less than 0.5%, emphasizing once more that concerns about deflation in the Eurozone are well grounded. More than 80% of the companies are expected to see their revenues increase over the next twelve months, and another 68% expect to realize growth in earnings. The expected average growth rates remain moderate however, both at 4.2% (figure 9). 11 P a g e
Figure 9. Anticipated balance sheet and P&L developments (public firms) 5,4% 4,2% 4,2% 1,5% 2,5% Dividends* Share Repurchases* Cash on balance sheet* previous quarter Q1 2015 Revenues Earnings growth* During the next twelve months we expect modest acquisition activity by European companies Europe nevertheless remains favorite region for acquisition targets Anticipated acquisition activity during the next twelve months remains modest in Europe, with just one third of the CFOs saying they will acquire one or more companies or part(s) thereof. 40% of those companies that are indeed looking for acquisitions say that more than half of their acquisition targets will constitute foreign companies. According to European CFOs, the most attractive regions to look at for acquisitions remain Europe and the US. The attractiveness of Europe as a location for takeover targets is also shared by many other CFOs from other parts of the world. Figure 10. Share of CFO s who expect to acquire (entire or part of) another company or companies during the next 12 months 12 P a g e
Table 4. Manufacturing capacity utilization and Return on assets (ROA) Asia China Latin America US Europe Capacity utilization for manufacturing companies Capacity utilized H2 2014 89,5% 84% 90% 77% 86% Planned capacity utilization for H1 2015 93,2% 84% 93% 79% 86% Return-on-Assets(ROA) Approximate ROA in 2014 8,3% 13,5% 8,4% 9,2% 9,2% Expected ROA in 2015 10,2% 14,0% 10,0% 11,4% 11,4% 13 P a g e
Employment The bleak outlook on employment is likely to linger on during the next twelve months. With slightly negative (expected) growth rates for both fulltime and part-time contracts and a negligible growth in outsourcing, employment remains a major source of concern (figure 11). Figure 11. European CFOs expected growth for next 12 months in employee mix Growth in employment is expected to remain absent in the next twelve months 0,9% -0,4% -1,4% Employment full-time Employment temporary Outsourced Employment 1 yr ago 6 months ago previous quarter Q1 2015 Along with the disquieting growth rates in employment, companies have not only expressed concerns about attracting and retaining qualified employees but they also worry about employee morale. In an attempt to counterbalance both concerns, companies may therefore seek to increase productivity and raise wages and salaries (figure 12). Figure 12. Relative to the previous twelve months, do you expect a positive (increase) or negative (decrease) change in the next twelve months for? Domestic temporary employees 39% 39% 23% Domestic full-time employees 51% 18% 32% but companies expect to see increases in wages & salaries Outsourced employees Wages & Salaries 32% 79% 59% 11% 9% 10% and the realization of productivity gains Productivity (output per hr) 73% 21% 6% Health care costs 49% 49% 3% Positive No change Negative 14 P a g e
Key results CFO Survey Europe, US, Latin America, Africa and Asia Key Indicator Europe US Latin America Africa Asia Economic sentiment About economy of own country More optimistic 47.8% 46.5% 18.5% 10.6% 53.6% Less optimistic 18.4% 16.5% 67.7% 70.2% 26.1% No change 33.8% 36.9% 13.8% 19.1% 20.3% Own country optimism level 57.9 64.7 49.4 48 66.5 About own company More optimistic 48.9% 48.4% 35.4% 41.7% 51.4% Less optimistic 20.0% 21.3% 36.9% 27.1% 24.3% No change 31.1% 30.3% 27.7% 31.3% 24.3% Own company optimism level 65.6 67.5 63.0 68.3 64.2 Business spending Capital spending 6.2% 5.2% -1.5% 5% 13.5% Technology spending 5.1% 3.8% 4.6% 15.4% 6.7% R&D spending 4.3% 3.6% -0.0% 5.9% 4.1% Advertising and marketing spending 0.5% 3.2% 1.6% 9.0% 10.5% Employment Employment full-time -0.4% 2.4% -0.3% 8.7% 1.9% Employment temporary -1.4% -0.3% 2.3% -7.5% 0.1% Outsourced Employment 0.9% 3.2% -1.5% 0.1% 3.6% Wages and Salaries 1.8% 2.7% 5.1% 9.4% 7.6% Health Care Costs 1.2% 0.8% 6.3% 9.5% 6.0% Balance Sheet & P&L Productivity 3.1% 2.3% 1.5% 4.6% 1.7% Inflation (own-firm products) 0.4% 0.8% 1.1% 3.9% -4.4% Revenue growth 4.2% 4.2% 4.2% 7.3% 6.3% Earnings growth* 4.2% 8.2% 6.2% 15% 5% Dividends* 5.4% 10.3% 3.4% 0% -3.2% Share Repurchases* 1.5% 1.9% 2.3% 0% 0.4% Cash on balance sheet* 2.5% -3.3% -3.6% -4.7% 2.0% Mergers and Acquisitions 32.6% plan to acquire; Foreign targets in 54.9% of acquisitions; 21.7% plan to sell part or all of firm 26.5% plan to acquire; Foreign targets in 17.6% of acquisitions; Percentages indicate this quarter s expected growth rates for the next twelve months * Indicates public firms only 13.3% plan to acquire; Foreign targets in 27.1% of acquisitions; 13.5% plan to sell part or all of firm 31.8% plan to acquire; Foreign targets in 18.6% of acquisitions; 15.8% plan to sell part or all of firm 28.8% plan to acquire; Foreign targets in 26.9% of acquisitions; 14.6% plan to sell part or all of firm 15 P a g e
About CFO Survey The figures quoted above are taken from the Global CFO Survey for the first quarter of 2015. The survey concluded March 5, 2015. Every quarter, CFOs in Europe, the US, Latin America, Asia (and China), and Africa are questioned about their economic expectations. Current records go back 76 quarters. The CFO Survey is conducted jointly by TIAS School for Business and Society (Tilburg, Netherlands), Duke University (Durham, North Carolina), ACCA Global and CFO Magazine. Note for the press Previous editions of the CFO Survey can be found at FinanceLab under the CFO Survey tab. For further information, please contact Mrs. Rian van Heur, TIAS School for Business and Society, tel.+31-(0)-134668637 or e-mail m.j.vanheur@tias.edu CFO Survey Europe team Kees Koedijk Professor Financial Management Dean & Director TIAS School for Business & Society Christian Staupe Policy Advisor Dean s Office Coordinator CFO Survey Europe Rian van Heur (contactperson) Corporate Marketing & External Relations m.j.vanheur@tias.edu +31-(0)-13 466 8637 16 P a g e