The Dutch Deloitte CFO Survey Ready for growth 2013 Q4 results January 2014 Contents Ready for growth 4 Market conditions and the economy 6 Cash flow and risk 9 M&A11 A note on methodology 12 Contacts12 The Dutch Deloitte CFO Survey More optimism, less uncertainty and the return of M&A 3 Ready for growth We are proud to present our 20th quarterly Chief Financial Officers Survey in the Netherlands, an initiative of the Deloitte CFO Program. The survey gauges attitudes to risk, financing and M&A, and reports trends and turning points for you and your business. Key points from the 2013 Q4 Survey • Dutch CFOs entered 2014 in a good mood: Optimism about financial prospects for their companies increased to 35%, equalling UK CFO’s optimism; • There is also less uncertainty about the economy with now 30% of CFOs who rate the current financial and economic conditions at a normal level of uncertainty, a sharp rise since 2013 Q2’s 11%; • The level of risk appetite has proven to be sustainable with 32% of CFOs in 2013 Q4 willing to take more balance sheet related risk; • The percentage of CFOs expecting their cash flow to increase by more than 20% came in at 19%, the highest score since 2011 Q1; • The main drivers of changes in cash flow are increases in products and services, better gross margin and reduction of other operating expenses; • CFOs outlook on the M&A market remains very good; • Overall, CFOs seem to be ready to walk the path to growth again. 4 General economic environment The worst seems to be really over. In fact, the Netherlands officially got out of recession in the third quarter of 2013 and there has been a lot of optimism since then among consumers, corporate officers, economists and researchers. Moreover, world indicators reflect similar positive sentiments. For the first time in three years, the World Bank raised its forecast for global economic growth, suggesting that the world is finally breaking free from the long and sluggish recovery after the financial crisis. Global GDP growth is projected to rise from 2.4% in 2013 to 3.2% this year, and stabilize at 3.4% and 3.5% in 2015 and 2016 respectively. The acceleration in growth in 2014 is the fastest pace in four years, mainly because developed countries are joining emerging countries as engines of growth. The Eurozone is expected to grow by 1.1% this year, compared to a contraction of 0.4% last year. The United States will show a stronger recovery, expanding at a 2.8% growth rate in 2014. However, there could be some downside risks that threaten economic recovery. The most important one is the Federal Reserve’s decision to withdraw its massive monetary stimulus to the US economy, which could result in a too sharp rise of interest rates, leading to a significant reduction in capital inflows to developing countries by between 50% and 80% for many months. In 2013, the euro appeared to be resilient to political crises in Italy, Portugal and Greece, and to very high unemployment in Southern Europe. In fact, the so-called PIIGS countries returned to growth, or at least were able to stop contraction. Moreover, in November 2013, Eurozone industrial production rose at the fastest pace in 3.5 years (3.0% higher year-on-year and 1.8% higher than in October) – removing doubts about the sustainability of the economic recovery. In the Netherlands, NEVI/Markit’s Purchasing Managers’ Index (PMI) for the Dutch manufacturing sector increased from 56.8 in November to 57.0 in December, a 32-month high and well above the 50 mark that separates expansion from contraction. The increase was driven by the strongest rise in new orders during the past 32 months, and also resulted in an increase in backlogs of work. In contrast to these global bright prospects, the Dutch economy is expected to grow by a marginal 0.5% according to the Netherlands Bureau for Economic Policy Analysis (CPB). This is mainly driven by exports. Dynamics on the domestic market will remain limited. The unemployment rate is expected to remain high (and even increase to 7.5% this year), and very few new jobs will be created. Contrary to Standard & Poor’s, Fitch affirmed its AAA rating for the Netherlands, but outlook is still negative due to weak economic growth prospects. Fitch noted that there had been some signs of recovery in recent months, but said this is likely to be slow because of household deleveraging, declining house prices, and fiscal consolidation. The rating agency forecasts the Dutch economy to stagnate in 2014 and to grow by 1% in 2015. There are worries about the pace of inflation, not only for the Netherlands but for the Eurozone as a whole. Surprisingly, Eurozone inflation fell to almost the lowest point in four years: 0.8%. An inflation rate that is well below the European Central Bank’s (ECB) target of close-to-but-below 2% carries risks in the longer term because it can deflate wages and demand, depressing the economy. Still, ECB is confident that there are no signs of deflation or an urgent need for an interest rate cut. However, ECB’s president Mario Draghi emphasized recently that it is vital to avoid a scenario where inflation gets stuck permanently below 1% and slips into a danger zone for the economy. Figures from Statistics Netherlands show that the inflation rate in December was 1.7%. In November, consumer prices were 1.5% higher than one year previously. CFO Survey In this mixed bag of international optimism, Dutch modest recovery and warning signals, Dutch CFOs seem to be in a good mood, given the rise in business confidence to 35% versus 24% last quarter. This is the highest score since 2011 Q1. Some 30% of respondents believe that the general level of external financial and economic uncertainty facing their business is normal – the highest score since 2010 Q4. Credit is seen as cheap and somewhat available. A net percentage of 23% of CFO see credit as cheap. The net percentage who see credit as available, however, is much lower at only 5%. Bank borrowing has gained favour again as the most favoured source of corporate funding, while equity issuance is still seen as neither attractive nor unattractive. It is very unlikely that CFOs will issue equity over the next 12 months. Compared to the previous quarter, it has also become less likely that CFOs will attract new or renew current credit. The level of risk appetite has proven to be sustainable since 2013 Q2 and now stands at 32%. The percentage of CFOs expecting their cash flow to increase by more than 20% came in at 19%, the highest score since 2011 Q1. Some 67% of CFOs expect their free or operating cash flow to increase anyway. The main drivers of CFOs’ opinion about changes in cash flow are an increase in products and services, an increase of gross margin as well as a decrease of other operating expenses. Some 38% of CFOs expect to hire new personnel. CFOs outlook on the M&A market remains very good. The outlook on the private equity market equalled the highest score since 2011 Q1: 86%. Some 92% of CFO expect the corporate M&A market to increase over the next 12 months. The Dutch Deloitte CFO Survey Ready for growth 5 Market conditions and the economy CFOs’ perception of economic uncertainty has fallen sharply since 2013 Q2. Now, 70% 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. The percentage of CFOs who consider the current situation as normal increased again from 24% in 2013 Q3 to 30% now. 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% 85% 80% 75% 70% 65% 60% Dutch CFOs are now more optimistic about the financial prospects for their companies than at any time since 2010 Q4. They have entered 2014 in a good mood! Chart 2. Business confidence Net percentage of CFOs who are more optimistic about the financial prospects for their companies now versus three months ago. 40% More optimistic The net percentage of CFOs who are more optimistic continued its upward trend and came in at 35%, equal to their UK counterparts’ optimism. Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 30% 20% 10% 0% Lsse optimistic -10% -20% -30% -40% -50% Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 NL 6 UK The cost and availability of credit stabilized compared to the previous quarter. 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. Year-on-year, the availability of credit improved, but the cost of credit fell back. Still, a net percentage of 23% of CFOs believe that credit is rather cheap. Cheap/available 80% 60% 40% 20% Costly/hard to get 0% -20% -40% -60% Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Cost of credit Corporate debt (i.e. bond issuance) has gained favour again as the most attractive source of funding. Bank borrowing is seen as the second-favoured source of funding. Availability of credit Chart 4. Favoured source of corporate funding Net percentage of CFOs reporting the following sources of funding as (un)attractive. Equity issuance is still not seen as a favourite source of funding for corporates. CFOs see equity as neither attractive, nor unattractive 60% Attractive 40% 20% 0% Unattractive -20% -40% -60% Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Bank borrowing Corporate debt Equity The Dutch Deloitte CFO Survey Ready for growth 7 Compared to 2013 Q3, fewer CFOs are likely to attract or renew (current) credit over the next 12 months. Last quarter’s 11% was largely driven by renewing current credit, but hardly any CFOs plan to renew credit now. Chart 5. Likely to issue debt/equity? Percentage of CFOs who are (very) likely to issue debt/equity over the next 12 months. 40% Likely It is still unlikely that CFOs will issue equity over the next 12 months. In fact, the trend is down again. 20% 0% -20% -40% Unlikely -60% -80% -100% Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Issue equity 8 Attract credit Cash flow and risk The level of risk appetite equalled last quarter and appears to be stabilized for the third consecutive quarter. Chart 6. Risk appetite Percentage of CFOs reporting that now is a good time to be taking greater balance sheet related risks. Some 32% of CFOs say now is a good time to take balance sheet related risks. 40 20 18 19 -82 -81 12 8 -84 -88 -92 8 0 % 16 31 32 32 -69 -68 -68 -20 -40 -92 -60 -80 -100 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Yes The percentage of CFOs expecting their cash flow to increase by more than 20% came in at 19%, the highest score since 2011 Q1. But on the other hand, the percentage of CFOs expecting a decline in cash flow tripled from 8% in 2013 Q3 to 24% now. Still, the percentage of CFOs expecting any increase in operating or free cash flow remained essentially the same (67%). No Chart 7. 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. 100% 90% 8 10 80% 3 6 9 16 18 13 16 25 14 11 4 19 36 70% 60% 38 34 42 47 42 44 50% 44 28 40% 30% 21 6 32 29 20% 10% 0% 23 25 13 10 10 22 16 38 10 25 19 24 8 11 8 24 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Decline Remain unchanged Increase by 1%-10% Increase by 11%-20% Increase by more than 20% Any increase The Dutch Deloitte CFO Survey Ready for growth 9 CFOs were asked for the internal measures driving their opinion about changes in cash flow. Chart 8. Internal drivers of change in cash flows CFOs’ assessment of internal measures driving a change in cash flows. Some 55% of CFOs said that an increase in products of services offered will drive changes in cash flow. 60 50 40 Increase Another driver is hiring: 38% of CFOs mentioned a decrease in workforce as a driver of a change in cash flow. But 33% intend to cut headcount. A change in geographical presence, either entering a new market or withdrawing from it, is still the least mentioned driver. 30 20 10 0 Decrease -10 -20 -30 -40 Products/serv. 10 Geogr. presence Gross margin Headcount Other opex M&A CFOs’ outlook on the M&A market maintained its high levels. No less than 86% of CFOs see an increase in private equity activity in the next 12 months, equaling 2011 Q1’s highest score. Although a little bit down compared to 2013 Q3, 92% of CFOs expect corporate M&A to increase in the next 12 months. Chart 9. M&A outlook Percentage of CFOs who expect M&A activity to increase/decrease in the next 12 months. 100% 80% 60% 40% 20% 0% -20% -40% Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Strategic M&A Asked whether their companies will be involved in any M&A transactions over the next 12 months, more than half of CFOs (55%) expect their companies to enter a strategic partnership in the next 12 months. Private equity Chart 10. 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. Compared to last quarter, the percentage of CFOs that expect their companies to make an acquisition declined from 52% to 41%. Some 48% of CFOs indicate a divestment of a subsidiary and/or assets. Partnership 55% Divest 48% Acquire 41% 0% 10% 20% 30% 40% 50% The Dutch Deloitte CFO Survey Ready for growth 60% 11 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 2013 Q4 survey took place between 14 December 2013 and 16 January 2014. A total of 23 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 (22%), 100-499 million (17%), 500-999 million (9%), 1-4.9 billion (39%), more than 5 billion (8%), and unknown (4%). The participating CFOs are active in a variety of industries: Retail/Wholesale, Manufacturing, Agribusiness, Construction, Services/Consulting, Leisure/Entertainment, Transportation, 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. 12 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 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 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.nl/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. 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