CFO Survey Europe - Quarterly Report Q3 2013 Number of European Optimists is Encouraging; Uptick in Optimism Level Soon to Follow? ROA and Earnings are Expected to Improve Employment is Down for the 5 th Consecutive Quarter; Indicative of a New Normal?
Contents Introduction 2 CFO optimism & sentiment 4 Finance & capital 7 Employment 11 Key results CFO Survey Europe, US and Asia 14 2 P a g e
Introduction Q3 of 2013 shows a remarkable improvement in the number of optimists among European financial executives. Half of the CFOs are more optimistic and fewer than 16% of the financial directors are less optimistic about the economic outlook for the next twelve months. Number of optimists among European CFOs hits its highest level since years In the rest-of-world CFOs seem to lose their confidence as the number of pessimists grows These numbers are encouraging when we consider that our diffusion index for Europe (figure 1, calculated as % of optimists minus % of pessimists) has reached a point which has only been equaled in Q3 2009 and Q3 2004. We therefore believe that European sentiment is well positioned to continue inch upwards in the next quarters. Currently this level stands at 55.7 on a scale of 100, a level not observed since Q2 2011. Comparing this with other major regions in the world, we see an overall (drastic) decline in the number of financial executives that have a positive outlook on the economy. For the Latin American, African and Asian continent we observe that around 60% of the CFOs are less optimistic. Although the sentiment level remains strongest in Latin America (61 on a scale of 100), the African and Asian regions (except for China) are starting to show some cracks as their optimism level has dropped below that of European CFOs. These now stand at 52.8 and 54.3 respectively. The European outlook has improved but still has some weak spots. Although earnings are expected to rise nearly 8% across all European firms, and the return on assets is expected to jump from about 8% over the past two years to more than 10% by year-end 2014, domestic fulltime employment is expected to continue to fall. High levels of economic uncertainty have resulted in a shift towards temporary and part-time workers at 55% of companies. Figure 1. Optimism index for CFOs in Asia, Europe, US and China The European optimism index is almost at an alltime high since 2002 100% 75% 50% 25% 0% -25% -50% -75% -100% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Asia Europe United States Latin America China 3 P a g e
CFO optimism & sentiment Third Quarter 2013 The number of European CFOs that have an optimistic outlook on the economy continues to rise. During the third quarter of 2013, half of the respondents had a more positive view on the economy, while the number of financial directors with a pessimistic outlook dropped significantly to 16% (figure 2), down from 29% in the previous quarter. Figure 2. European CFO sentiment regarding economy of own country Strong rebound in number of optimists among European CFOs Less optimistic 16% No change 34% More optimistic 50% The improvement in the number of optimists is also coupled with an increase in the average optimism level, which has climbed to 55.7 on a scale of 100 (up from 53 in Q2). Although it still trails sentiment in China, Latin America and the US, European sentiment has witnessed the strongest uptick compared to other major economic regions. Figure 3. Optimism level about own country s economy leading to increased optimism in Europe Africa Latin America US Europe China Asia 0 10 20 30 40 50 60 70 index Last quarter This quarter 4 P a g e
while sentiment in other regions declines Figure 3 shows overall decline in the economic outlook indices for the other major regions: The optimism level on the African continent stands at 53 during the third quarter of 2013 (down from 55 in Q2). Latin American CFOs continue to be the most optimistic. The index stands at 61 on a scale of 100 (down from 66 last quarter) The US optimism level has dropped slightly in Q3, to 58 (down from 61 during the previous quarter) Overall, optimism in Asia has experienced a significant drop as the index declined to 50 during Q3, down from 60 during the previous quarter. China optimism has rebounded from its drop during Q2, and has inched towards 66 on a scale of 100. The macro concerns, including low consumer demand, significant price pressure and global financial instability, continue to top the European CFO s agenda during the third quarter of 2013 (table 1). Table 1. Macro and internal concerns of European CFOs Macro concerns Internal concerns Consumer demand Ability to maintain margins Price pressure from competitors Attracting and retaining qualified employees Global financial instability Ability to forecast results National budget deficit Working capital management Despite of the difficult business environment (as evidenced by CFOs worries concerning their ability to maintain margins, manage WC and the HR challenges that they are facing), financial directors in Europe remain quite positive on the financial outlook of their own companies. During Q3, the number of optimists increased to 47%, while the number of pessimists dropped to 18% (figure 4). The level of confidence in company performance for the next twelve months increased to 64 on a scale of 100 (up from 61 during Q2). Business outlook for European companies remains positive for the next 12 months Figure 4. European CFO sentiment regarding financial prospects of own company Less optimistic 18% No change 35% More optimistic 47% The overall improvement in the business outlook also translates into positive developments in return-on-assets (ROA). During 2011/2012 European companies achieved, on average, an approximate ROA of 5 P a g e
and is likely to translate into improved ROA in 2014 7.8%. While asset performance of European companies has clearly been at the lower end compared to that with peers in the other regions, European CFOs now expect to realize an average ROA of 10.3% during 2013/2014, which is much more in line with the ROA in other regions (table 2). This can partly be explained by the positive outlook on earnings growth which is estimated at a solid 7.6% for the next 12 months. Another indicator is the capacity utilization for manufacturing companies. In Europe, the average planned manufacturing capacity utilization ratio for the remainder of 2013 (79%) is one of the highest among major economic regions and is likely to contribute further to increases in sales and bottom-line performance. Table 2. Return on assets (ROA) and manufacturing capacity utilization driven by earnings growth Return-on-Assets(ROA) Asia Africa Latin America US Europe 2011/2012 8,5% 14,7% 9,2% 9,3% 7,8% 2013/2014 (est.) 10,0% 16,5% 10,7% 10,1% 10,3% Earnings growth for the next 12 months (est.) 5.3% 15.5% 5% 9.4% 7.6% and accelerated by improved capacity utilization Capacity utilization for manufacturing companies Capacity utilized Q1 2013 68% 79% 74% 75% 75% Planned capacity utilization for the remainder of 2013 72% 80% 76% 78% 79% 6 P a g e
Finance & capital Business spending and productivity are likely to pick up again Business spending in Europe is expected to increase during the next twelve months. More than 60% of European CFOs indicate to increase spending on all major categories. Another 81% of the financial directors anticipate improvements in productivity (output per hour) to occur during the next twelve months. Although the actual expected growth rates in business spending remain modest, they clearly show improvement compared to one year ago and continue the upward trend during the first half of 2013(figure 6). Figure 6. CFOs' quarterly expected growth in spending for next 12 months 5,1% 4,5% 3,1% 0,3% Capital investments Technology Research & Development Marketing & Advertising 1 yr ago Q2 2013 Q3 2013 International business contributes to bottom line Capital spending and investments for the next twelve months are expected to increase at an average rate of 3.1% compared to a rate of 3.4% during Q2 Technology spending up from 1.3% in the previous quarter to 5.1% this quarter. Over the last four quarters R&D spending has been very limited with growth rates between 0% and 2.5%. In Q3 2013 R&D spending is expected to grow during the next twelve months at an average rate of 4.5%. Spending on marketing and advertising is expected to remain flat as the anticipated growth rate stands at 0.3%. Figure 7 shows that international business is likely to gain importance over the next twelve months as almost half of the European CFOs indicate that net income in 2013/2014 will be composed of a bigger share that is originated from exports and overseas operations. 11% of the CFOs expect to see the contribution to decrease, while the remaining 41% thinks that the proportion between domestic and foreign operations and activities will stay the same. 7 P a g e
Figure 7. Relative to 2011/2012, do you expect the contribution to profit margins from exports and overseas operations to increase or decrease in 2013/2014? (Europe vs. R-o-W) Exports and overseas operations are expected to contribute to profit margins possibly stimulating demand for international long term credit As the contribution of foreign operations to bottom-line performance may become even more substantial during the next twelve months, it is likely that long-term credit, acquired in overseas (capital) markets, will also gain ground. Table 3. Origination of long-term credit (% of companies that have acquired credit) Asia Africa Latin America US Europe Domestic 70% 75% 77% 89% 73% International 33% 21% 23% 11% 32% At the moment European companies, together with their Asian peers, are the most active in acquiring credit in the international capital markets (table 3). Figure 8. Comparison of long-term credit mix Loan from multilateral organization ASIA AFRICA LATAM US EUROPE 5% 4% 3% 1% 7% Loan from state bank 9% 4% 11% 2% 7% Private loan 9% 8% 18% 14% 18% Bond 19% 25% 19% 16% 20% Bank loan 72% 71% 65% 73% 73% 8 P a g e
A closer look at the actual credit mix in figure 8 (use of bank and private loans, bonds, multilateral loans from organizations, etc.) reveals that European companies are quite diversified in terms of credit type. Whereas bank loans are the preferred type of credit, a significant group of companies in Europe finance their operations by means of bonds (20%), private loans (18%), and loans from multilateral organizations (7%). But what will be the effect of expected increases in long term interest rates Across all regions most CFOs expect benchmark long-term interest rates in their country to increase by the end of 2013 (figure 9). The (long-term) credit mix is therefore likely to change due to anticipated adjustments and fluctuations in long-term rates, making one credit instrument more attractive than the other. Figure 9. Do you expect benchmark long-term interest rates in your country to change by the end of the year 2013? Expect decrease of benchmark long-term interest rates Expect increase of benchmark long-term interest rates 80% 64% 47% 52% 52% 27% 18% 9% 6% 7% ASIA AFRICA LATAM US EUROPE when they increase (on average) by 40 basis points? On average, European financial directors expect their benchmark longterm interest rate to increase with 40 basis points (figure 10). Figure 10. How much do European CFOs expect benchmark long-term interest rates to change by the end of the year 2013? 41% 35% 12% 0% 0% 0% 2% 5% 1% 1% 2% < -2.0% -2.0% -1.5% -1.0% -0.5% No chng 0.5% 1.0% 1.5% 2.0% > 2.0% 9 P a g e
Moreover, these financial executives indicate that if rates were to climb with 100 basis points: 9% of the European companies would reduce capital spending 6.1% of the companies would reduce corporate hiring 8.7% of the European companies would decrease corporate financing A rate hike of 200 basis points would have a much bigger effect as: 20% of the European companies would reduce capital spending 11% of the companies would reduce corporate hiring 24% of would reduce corporate financing 10 P a g e
Employment Employment is expected to continue to fall during the next 12 months Domestic employment is expected to continue to fall in Europe. For the coming year the European CFOs expect a decrease in permanent and temporary contracts (down 1.8% and 2.4% respectively). These workers seem to be partly replaced by outsourced employees. However, outsourced employment is expected to grow at a rate of only 3.4% in the next twelve months (figure 11). Figure 11. European CFOs expected growth for next 12 months in employee mix 3,4% -1,8% -2,4% Employment full-time Employment temporary Outsourced Employment 1 yr ago 6 months ago Q2 2013 Q3 2013 possibly indicating that we have reached a new normal The five-quarter trend indicates that the declining demand for labor is not temporary, but could very well be a new reality. Companies go back to their core business and outsource their other activities. Capital investment and spending on technology (automation) is likely to further reduce demand for employment. Figure 12. Relative to full-time permanent workers, has the proportion of work performed for your firm by other types of workers increased over the past few years? The shift from fulltime towards part time and temporary employment % of companies that have witnessed a shift in the proportion of work from fulltime worker 71% 50% 59% 55% Temporary or contract employees Outside advisors and consultants ASIA LATAM US EUROPE 45% 31% 32% 31% 19% 13% 20% 18% Part-time employees 12% 9% 19% 13% 11 P a g e
indicates that companies are looking for new and flexible employment models Figure 12 indicates that companies in all regions (55% of European companies) have witnessed a shift towards temporary and part-time workers at the expense of fulltime employees. When asked what the primary reasons are for this shift, European CFOs predominantly point towards economic uncertainty and weak customer demand. Also, the hourly wages for fulltime employees are generally higher (figure 13). These indicators support our view that (possibly with the crisis in mind) companies are thinking about new and more flexible employer models. Figure 13. What best describes the reasons for your shift to resources other than full-time, permanent workers? (choose top 3) to deal with new realities Asia Latin America US Europe Economic uncertainty 48% 35% 44% 60% Hourly wages are higher for permanent employees 33% 29% 24% 29% Weak customer demand 29% 19% 12% 29% Government regulations, other than health care regulations Many of our employees prefer not to work full-time 16% 15% 14% 12% 4% 6% 8% 9% Cost of non-health care benefits 18% 18% 11% 7% Health care cost and/or regulations 19% 22% 38% 4% Another factor of major influence to employment growth in the home country is the share of company employees outside of the headquartered or home country. Among all regions, European companies have by far the highest share of non-domestic employees (figure 12). Figure 12. Does your company have employees outside of its home country (not counting contracted or outsourced labor/services)? Europe Latin America Asia US Non-domestic employees may further inhibit employment growth 51% 23% 46% 28% When asked further about hiring plans for the next twelve months, an overwhelming two thirds of European CFOs indicated that nondomestic hiring will continue, and even 48% say that hiring in foreign regions will be accelerated (figure 13). Clearly, this further inhibits growth of employment in the home markets. 12 P a g e
Figure 14. Over the next year, how do you expect your company's hiring outside of its home country will change, relative to domestic hiring? as non-domestic hiring will be accelerated in the next 12 months 100% 75% 48% 50% 15% 25% 0% ASIA LATAM US EUROPE Non-domestic hires will grow at a faster rate than domestic hires, Non-domestic hires will grow at about the same rate as domestic hires, Non-domestic hires will grow at a slower rate than domestic hires, I don't expect my company to make any non-domestic hires within the next year, 13 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 50.0% 32.8% 14.2% 27.8% 22.9% Less optimistic 15.5% 25.8% 59.8% 59.3% 60.5% No change 34.5% 41.5% 26.0% 13.0% 16.6% Own country optimism level 55.7 58.2 61 52.8 54.3 About own company More optimistic 47.1% 42.2% 37.7% 43.4% 36.1% Less optimistic 18.4% 25.6% 32.0% 41.5% 38.7% No change 34.5% 32.2% 30.3% 15.1% 25.2% Own company optimism level 64.2 65 69.2 62.6 62.2 Business spending Capital spending 3.1% 4.8% 6.0% 5% 3.3% Technology spending 5.1% 4.2% 7.8% 6.8% 3.2% R&D spending 4.5% 1.8% 3.7% -4.9% 2.8% Advertising and marketing spending 0.3% 3.7% 3.8% 8.0% 3.1% Employment Employment full-time -1.8% 1.8% 6.6% -1.5% -1.1% Employment temporary -2.4% 0.1% 6.1% 3.8% -7.3% Outsourced Employment 3.4% 3.0% 2.2% -3.5% 1.6% Wages and Salaries 1.6% 2.3% 7.0% 8.0% 4.3% Health Care Costs 1.2% 8.9% 7.6% -0.4% 2.6% Balance Sheet & P&L Productivity 2.6% 2.7% 4.2% 0.3% 1.6% Inflation (own-firm products) 0.2% 2.2% 3.1% 1.8% -1.3% Revenue growth 3.6% 5.7% 7.8% 10% 8.3% Earnings growth* 2.9% 13.4% 9.3% 8% -0.9% Dividends* 2.4% 4.1% 2.4% 0% -0.3% Share Repurchases* 0% 8.7% 0.1% 0% 1.4% Cash on balance sheet* 4.3% 2.5% 3.5% 5% -5.8% Mergers and Acquisitions Not asked in Q3 Not asked in Q3 Not asked in Q3 Not asked in Q3 Not asked in Q3 Percentages indicate this quarter s expected growth rates for the next twelve months * Indicates public firms only 14 P a g e
About CFO Survey Note for the press All The figures quoted above are taken from the Global CFO Survey for the third quarter of 2013. The survey concluded September 6, 2013. Every quarter, CFOs in Europe, the US, Asia and China are questioned about their economic expectations. Current records go back 70 quarters. The CFO Survey is conducted jointly by TiasNimbas Business School (Tilburg, Netherlands), Duke University (Durham, North Carolina) and CFO Magazine. 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, TiasNimbas Business School, tel.+31-(0)-134668637 or e- mail m.j.vanheur@tiasnimbas.edu CFO Survey Europe team Kees Koedijk Professor Financial Management Dean & Director TiasNimbas Business School Christian Staupe Policy Advisor Dean s Office Coordinator CFO Survey Europe Rian van Heur (contactperson) Corporate Marketing & External Relations m.j.vanheur@tiasnimbas.edu +31-(0)-13 466 8637 15 P a g e