T h e D e l o i tt e C F O S u r v e y Q 1 2 0 1 4 r e s u l ts 2 Contents Key points from the 2014 Q1 Survey 4 Market conditions and the economy 6 Cash flow and risk 8 M&A10 Special topic 11 A note on methodology 15 Contacts15 The Dutch Deloitte CFO Survey More optimism, less uncertainty and the return of M&A 3 Key points from the 2014 Q1 Survey Sustained optimism among CFOs CFOs of Dutch companies are still optimistic about the financial prospects of their companies. The score of 41% equals last quarter and is considerably higher than the 31% of their UK counterparts. 41% are optimistic about financial prospects for their companies Economic uncertainty fades away The percentage of CFOs who feel uncertain about the economy decreased to 66% from 70% in 2013 Q4. So, one-third considers the current economic situation to be at a normal level, but the majority of CFOs still rate the economy as uncertain. 34% rate the external financial and economic uncertainty facing their business as normal, or even below normal Risk attitude increases again Some 34% of CFOs believe that now is the time to be taking greater balance-sheetrelated risk, the highest score since 2010 Q4. 34% are willing to take greater balance sheet-related risks Cash flows expected to increase further 53% expect cash flows to increase by more than 10% 4 More than half (53%) of CFOs expect their operating or free cash flow to increase by more than 10% over the next 12 months, the highest score since the launch of this survey in 2009 Q1. Some 78% of CFOs expect an increase and, only 4% expect a decline. The good news continues. The Dutch economy is emerging from recession. The budget deficit has already fallen below the 3% EU threshold and is expected to remain so in 2014 and 2015. There seems to be no need for additional austerity measures in the coming years. In its Fiscal Monitor, the International Monetary Fund (IMF) is more positive about the Dutch economy than three months ago, forecasting growth of 0.8% for this year and 1.6% for 2015. Forecasts by the Economist Intelligence Unit (EIU) are 1.0% and 1.5% for 2014 and 2015 respectively. The Bureau for Economic Policy Analysis (CPB) is also expecting a pick-up of the economy over the next couple of years. The economy should grow 0.75% this year and 1.25% next year. CPB said that budget deficit is expected to fall to 2.9% of GDP this year and to 2.1% in 2015. It also expects domestic spending, particularly investments, to increase, and for 2015 consumption is projected to increase for the first time in years, in line with a growth in wage income and benefits. Since the Dutch economy is one of the world’s most sensitive to global trade flows, it is also very vulnerable to any escalation of the crisis in Ukraine. The CPB stated that if the crisis led to a 10% increase in energy prices over two years, inflation would rise worldwide and a fall in spending would hit world trade. In early March, Moody’s raised the outlook for the Netherlands’ Aaa rating from negative to stable. The lift was driven by declining risks from the euro area debt crisis, stabilization of fiscal strength and the belief that domestic vulnerabilities, such as domestic demand and the housing market, have peaked. The Dutch housing market shows early signs of recovery. In fact, the decline in home prices in many parts of the Netherlands has stopped and home prices were 1.2% higher in 2014 Q1 compared to a year ago. The gap between initial asking price and closing price decreased from 10.7% to 7.1% year-on-year, and the number of home sales increased for the third consecutive quarter. The NEVI/Markit’s Purchasing Managers’ Index (PMI) for the Dutch manufacturing sector fell to the lowest level in nine months due to decreased growth in output and new orders. The index stood at 53.4 in April, compared to 53.7 in March. But still, the index was above the crucial 50.0 cut-off point for industrial growth for the eighth month in a row. According to Statistics Netherlands (CBS), March’s inflation rate eased further to 0.8%, the lowest level since June 2010. In February, consumer prices were on average 1.1% higher than one year ago. Calculated according to the ILO definition, the Dutch unemployment rate declined from 7.3% in February to 7.2% in March. The decline was largely due to the fact that many people withdrew from the labour market, not because more people managed to find paid jobs. Special topic: The impact of new business models on the finance function Many organizations are transforming their business model - apparently for different reasons. Some are positioning themselves for new growth opportunities or trying to stay ahead of shifting consumer preferences. Others are restructuring in order to improve efficiency and reduce costs, or they are seeking to capitalize on lower labour rates offshore. Many others are playing catch up on changes that were put on hold during the downturn and are now long overdue. However, one thing they have in common is the desire to dramatically improve business performance. CFOs were asked about the impact of the changing business landscape on finance in terms of the roles to play and the enablers to change. Changing one enabler will almost certainly require changes to one or more of the others. Key findings of the survey include: • A majority of 56% of CFOs indicates that the impact of a changing business model on their finance function has been (very) high; • All key enablers had to be adapted to the new business model; • After the transformation, focus on the business decision support and reporting and analysis functions of finance increased; • The role of finance changed also, with finance now being more a business partner (catalyst, strategist) than a steward and/or operator. The Dutch Deloitte CFO Survey Sustained optimism 5 Market conditions and the economy The increased optimism about the general economic situation is reflected in CFOs’ perceptions of uncertainty. Now, 66% of CFOs rate the current financial and economic conditions at a higher than normal level of uncertainty, down from a peak of 95% in 2011 Q3. Chart 1. Uncertainty Percentage of CFOs who rate the external financial and economic uncertainty facing their business as above normal, high, or very high 95% 90% The percentage of CFOs who consider the current situation as normal, or even below normal, increased further from 30% in 2013 Q4 to 34% now. 85% 80% 75% 70% 65% 60% 55% 50% The net percentage of CFOs who are more optimistic continued its steady upward trend and came in at 41%. Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Chart 2. Business confidence Net percentage of CFOs who are more optimistic about the financial prospects for their companies now versus three months ago This is the first time since 2012 Q4 that Dutch CFOs are more optimistic than their UK counterparts (31%). More optimistic 50% 40% 30% 20% 10% Less optimistic 0% -10% -20% -30% -40% Q1 12 Q2 12 Q3 12 Q4 12 NL 6 Q1 13 UK Q2 13 Q3 13 Q4 13 Q1 14 Financing conditions improved further. Credit is seen as being cheaper. Chart 3. Cost and availability of credit Net percentage of CFOs reporting that funding for corporates is cheap or expensive, and funding is easily available or hard to get Credit is cheap 70% 50% 50% 30% 30% 10% 10% -10% -10% -30% -30% -50% Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Cost of credit Q4 13 Q1 14 -50% Availability of credit 50% 40% Attractive Although less preferred, equity has gained favour and is now seen as attractive. Please note that this is a net view. Q3 13 Chart 4. Favoured source of corporate funding Net percentage of CFOs reporting the following sources of funding as (un)attractive 30% 20% 10% 0% Unattractive The good availability of credit is reflected in sources of funding. Corporate debt is still seen as the most attractive source of funding, but bank borrowing has risen very sharply this quarter (from 13% to 31%). Q2 13 Credit is hard to get 70% Credit is available Credit is costly Credit is also more easily available than at any time since the beginning of this CFO Survey in 2009 Q1. -10% -20% -30% Q1 12 Q2 12 Q3 12 Q4 12 Bank borrowing Q1 13 Q2 13 Corporate debt Q3 13 Q4 13 Q1 14 Equity The Dutch Deloitte CFO Survey Sustained optimism 7 Cash flow and risk As a result of increased optimism and less uncertainty, risk appetite among CFOs increased again and is inching closer to 2010 Q4’s high of 39%. Risk appetite is much stronger than one year ago. Chart 5. Risk appetite Percentage of CFOs reporting that now is a good time to be taking greater balancesheet-related risks 60 Still, the vast majority of CFOs (66%) believe that now is not yet the right time to take greater balance-sheetrelated risk. 40 20 19 0 % 8 16 12 8 -92 -84 -88 -92 Q2 12 Q3 12 Q4 12 31 32 32 34 -69 -68 -68 -66 Q2 13 Q3 13 Q4 13 Q1 14 -20 -40 -81 -60 -80 -100 Q1 12 Q1 13 Yes No The percentage of CFOs who expect their cash flow to increase by more than 10% increased from 29% last quarter to no less than 53% now. This is the highest score since the beginning of this survey in 2009 Q1. Chart 6. Change in cash flows over the next 12 months Percentage of CFOs who expect their companies’ operating or free cash flows to increase/decrease over the next 12 months Some 78% of CFOs expect an increase in operating or free cash flows. 100% Only 3% of CFOs expect their cash flow to decline. 9 90% 80% 16 3 18 0 6 16 13 0 4 14 19 25 11 36 10 70% 34 60% 50% 34 47 42 42 44 44 38 28 40% 30% 25 6 32 20% 10% 13 Q1 12 Q2 12 16 10 Q3 12 10 22 29 25 0% 8 19 Q4 12 25 19 24 8 11 8 24 Q1 13 Q2 13 Q3 13 Decline Remain unchanged Increase by 1%-10% Increase by 11%-20% Increase by more than 20% Any increase 19 3 Q4 13 Q1 14 CFOs were asked for the internal measures driving their opinion about changes in cash flow. Chart 7. Internal drivers of change in cash flows CFOs’ assessment of internal measures driving a change in cash flows (net percentages) Changes in cash flows are primarily driven by further increased offering of products/services and improved gross margin. 60% Increased geographical presence, and working capital are also driving increased cash flows. Increase 50% CFOs also indicated to increase investments, especially compared to lower capital expenditures six months ago. 40% 30% 20% 10% Decrease 0% -10% -20% -30% -40% 2013 Q2 2013 Q3 2013 Q4 2014 Q1 Products/serv. Geogr. presence Gross margin Headcount Capex Working capital The Dutch Deloitte CFO Survey Sustained optimism 9 M&A Coming from a record-breaking high last quarter, CFOs’ outlook on M&A activity decreased somewhat. Now, 75% of CFOs expect corporate M&A to increase over the next 12 months – versus 91% in 2013 Q4. The outlook on private equity transactions was also down, from 86% to 78%. Chart 8. M&A outlook Percentage of CFOs who expect M&A activity to increase/decrease in the next 12 months 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Strategic M&A Asked whether their companies will be involved in any M&A transactions over the next 12 months, half of CFOs (50%) expect their companies to enter a strategic partnership in the next 12 months. Compared to last quarter, the percentage of CFOs who expect their companies to make an acquisition increased from 41% to 44%. Some 25% of CFOs indicated a divestment of a subsidiary and/or assets, down from 48% in the previous edition of this report. Q2 13 Q4 13 Q1 14 Private equity Chart 9. Likeliness of M&A activity at a CFO’s company Percentage of CFOs who expect their company to be involved in a M&A transaction over the next 12 months Partnership 50% Divest 25% Acquire 44% 0% 10 Q3 13 10% 20% 30% 40% 50% 60% Special topic The impact of new business models on the finance function Many organizations are transforming their business model, apparently for different reasons. Some are positioning themselves for new growth opportunities or trying to stay ahead of shifting consumer preferences. Others are restructuring in order to improve efficiency and reduce costs, or they are seeking to capitalize on lower labor rates offshore. Many others are playing catch up on changes that were put on hold during the downturn and are now long overdue. However, one thing they have in common is the desire to dramatically improve business performance. To more fully complement a changing business model, finance will also have to change one or more elements of its Target Operating Model (TOM). The four key elements that shape and enable the Finance TOM are: • Financial systems and information; • Finance organization; • Policies & financial processes; • Finance talent and people. Most transformations will have a fundamental and far-reaching impact on the operating model in general and on the finance function specifically. In fact, along with a changing business model, CFOs can expect increasing demand on the finance function to add value to the business. Not only has the recent shift in external pressures resulted in the need for leaner and more responsive back-office functions, but there is also a growing demand from the business for finance to drive and monitor performance. This pressure forces CFOs to increasingly focus on business partnering. Some 72% indicated that their organization has undergone significant changes in their business model in the past five years. CFOs were asked to answer questions that address the impact of the changing business landscape on finance in terms of the roles to play and the enablers to change. Changing one enabler will almost certainly require changes to one or more of the others. That need for partnering will also require CFOs to change their own focus. Traditionally, their focus has been on the steward role (preserving the assets of the organization by minimizing risk and getting the books right), and the operator role (running a tight finance operation that is efficient and effective). In line with changing business models, however, CFOs have to broaden their roles in two directions: the role of strategist (helping to shape overall strategy and direction), and the role of catalyst (instilling a financial approach and mind-set throughout the organization to help other parts of the business perform better). These various roles increase complexity of the CFO’s job more than ever. The Dutch Deloitte CFO Survey Sustained optimism 11 The impact of a changing business model on the finance function has been (very) high, according to 56% of CFOs. Almost one third indicated that the impact was neither high nor low, and only a small minority of 13% said that the impact had been low. Chart 10. Influence on finance function Impact of a changing business model on the finance function 60% 56% 50% 40% 31% 30% 20% 13% 10% 0% High Actually, all enablers of the finance function had to be adapted to the changed business model of the organization. High nor low Low Chart 11. Alignment of finance with the new business model The extent to which the finance function enablers required changes in order to get more aligned with the new business model Financial systems and information appears to be the most important enabler to align the finance function with the new business model. Policies and financial processes was referred to least. 90 80 70 60 High 50 40 30 20 10 Low 0 -10 -20 Financial systems & information 12 Finance organization Policies & financial processes Finance talent & people Before the change in business model, finance was focused on transaction processing and to a lesser extent on reporting and analysis and business decision support. Chart 12. Changing focus of finance in new business model Focus on the finance function before and after the change in business model The change in business model apparently caused a shift from transaction processing to reporting and analysis (slightly), and business decision support (strongly). 60% 50% 50% 40% 38% 29% 30% 32% 31% 21% 20% 10% 0% Transaction processing Reporting & analysis Before CFOs were asked about the impact of organizational changes on the finance function through five statements. Business decision support After Chart 13. Five statements: agree or disagree CFOs’ response to statements about the impact of changes in the business model on the finance function Most CFOs did not agree with the statement that the finance function now operates more decentralized. Finance more decentralized There was more agreement upon: • improved communication with headquarters; • accelerated introduction of shared services; • increased focus on risk and compliance. Better communication with HQ Accelerated shared services Focus on risk increased Focus on compliance increased Disagree Neutral The Dutch Deloitte CFO Survey Sustained optimism Agree 13 Before the change in business model, most finance departments’ service delivery model was based on roles as steward and operator (84% in these roles). Once the business model was adapted, the service delivery model for finance completely shifted towards strong roles as catalyst and strategist. This reflects the trend that CFOs increasingly focus on being a business partner. Chart 14. Role of the finance function The role of the finance function before and after the change in business model 45% 42% 40% 36% 42% 33% 35% 30% 25% 20% 20% 15% 10% 11% 9% 6% 5% 0% Catalyst Strategist Before 14 Steward After Operator A note on methodology To enhance readability not all survey questions will be reported in each quarterly survey. Survey questions will be selected in response to the current financial economic situation. If you wish to receive information about non-reported questions, please contact us. The Deloitte CFO Survey is also executed by other Deloitte countries, for instance the UK. Comparisons will be 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 stating that bank credit is unattractive. This is a standard way of presenting survey data. Due to rounding answers may not total 100%. The 2014 Q1 survey took place between 28 March 2014 and 16 April 2014. A total of 32 corporate CFOs completed our survey, representing a net turnover per company of approximately EUR 2.1 billion. The responding companies can be categorized as follows: less than 100 million (16%), 100-499 million (28%), 500-999 million (19%), 1-4.9 billion (22%), more than 5 billion (12%), and unknown (3%). The participating CFOs are active in a variety of industries: Retail/Wholesale, Manufacturing, Energy/ Utilities, Agribusiness, Construction, Real Estate, Services/Consulting, Communication/Media, Leisure/Entertainment, Transportation, Healthcare/ Pharmaceuticals, Software, Technology, and Banking/ Finance/Insurance. We would like to thank all participating CFOs for completing our survey. We trust the report will make an interesting read and highlights the challenges facing CFOs. We also hope it provides you with an important benchmark to understand how your organization compares to your peers. Author: Harm Drent, Deloitte Research & Market Intelligence Contacts Jan de Rooij Partner Deloitte Core Audit [email protected] +31 (0)6 5336 6208 Wilten Smit Managing Partner Deloitte Financial Advisory Services [email protected] +31 (0)6 5389 7407 Frank Geelen Partner Deloitte Consulting – CFO Services [email protected] +31 (0)6 2239 7053 Peter Meijer Lead Finance Transformation [email protected] +31 (0)6 2708 9815 Harm Drent Manager Research & Market Intelligence [email protected] +31 (0)6 1201 1716 Wilma Bontes Deloitte Press Officer [email protected] +31 (0)6 2127 2102 The Dutch Deloitte CFO Survey Sustained optimism 15 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. 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