cfo vision 2014 navigate your world - deloitte united states...elinor hoover capital markets 2015:...

November 19–21 | Washington, D.C.

CFO VISION 2014

Navigate your world

Chairman, Capital Markets Origination

Citi

Elinor Hoover

Capital markets 2015:

Balancing the debt/equity/cash equation

Ajay Khorana Managing Director

Citi

Andrew Luetchford Partner

Deloitte Canada

Chris Ruggeri Partner

Deloitte Financial Advisory Services

LLP

Copyright © 2014 Deloitte Development LLC. All rights reserved.

Recap: What’s changed since the last CFO Vision

conference?

2

Themes 2014

Appetite for yield Yield product continues to be in high demand as investors are looking to deploy capital

into yield; this is fueled by the low interest rate environment

IPO/equity issuance A much healthier market in 2014; however during the last couple of months a rise in

volatility has slowed down appetite for equity

Global coordinated effort to

combat economic slowdown

2014 is seeing a greater number of conflicts involving economic sanctions, particularly

between Russia and some parts of Europe and the United States

CLO outflow We are beginning to observe net outflows; this may be explained by banks de-risking their

balance sheets and winding down their positions

Peak-to-peak debt

The current credit environment can be described as aggressive when compared to

previous periods, with lenders anxious to place debt; the covenant levels and pricing is

below pre-crises levels


Global capital markets timeline Significant events that have impacted capital markets in 2014

3

01

January

April

May

June

June

Octo

ber

Septe

mber

11

17

01

27 02

01

Octo

ber

17

April 10

Marc

h

19

The Federal

Reserve scales

back monetary

stimulus

Cross-border trading

plan to be introduced

for Shanghai and

Hong Kong Stock

exchanges

China market

re-opens

after an abrupt

closure in

March 2014

Chinese

authorities lift a

ban on new

market listings

Greece returns to

the international

markets with bond

sale of US $4.2B

Portugal leaves its

bailout program

with US $293B debt

and lower GDP

The ECB launches

bold measures to

boost Eurozone

trailing economy

China announces a

significant stimulus

package; Federal

Reserve decreases

pace of tapering

Fed begins to

take steps to wind

down the historic

quantitative easing

policies

Markets experience

a flash crash over

concerns of a rate

hike

Let’s first look

at some key

trends from the

North American

CFO Signals

Survey™ …


Key charts: Sentiment CFOs’ sentiment regarding the health of major economic zones and their companies’ prospects

5

Own-company optimism Difference between the percent of CFOs citing higher and lower optimism

regarding their company’s prospects compared to the previous quarter

Economic optimism

Average CFO rating based on five-point scales for current state (“very bad” to “very good”) and expected state one year from now (“much worse” to “much

better”)

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

CurrentStatus

One YearFrom Now

North America

Very

good

Very

bad

Much

better

Much

worse

Neutral Same

CurrentStatus

One YearFrom Now

Europe

Very

good

Very

bad

Much

better

Much

worse

Neutral Same

CurrentStatus

One YearFrom Now

China

Very

good

Very

bad

Much

better

Much

worse

Neutral Same

= Third quarters of calendar years

2Q14 2Q13 3Q13 4Q13 1Q14 3Q14

Risk appetite Percent of CFOs selecting each sentiment

0%

10%

20%

30%

40%

50%

60%

70%

YES

(61%)

This is a

good time

to be taking

greater risks

NO (39%)

This is not

a good time to

be taking

greater risks

North American CFOs have been more optimistic

than pessimistic since the beginning of 2013

Well over half of North American CFOs say

it’s a good time to be taking greater risks

Sentiment about North America’s performance and prospects has been consistently positive for a year and a half — not so for

sentiment about Europe and China. Forty-seven percent of CFOs say external financial and economic risks are higher than normal;

just 14% say they are lower.


To

tal

U.S

.

Canada

Mexic

o

Manufa

ctu

rin

g

Reta

il / W

hole

sale

Te

chnolo

gy

Energ

y /

Resourc

es

Fin

ancia

l S

erv

ices

Healthcare

/ P

harm

a

T/M

/E

Serv

ices

(n=98*)

(n=73) (n=17) (n=6)

(n=20) (n=13) (n=10) (n=11) (n=13) (n=9) (n=7) (n=9)

Revenues 6.8%

6.2% 9.3% 8.8%

5.2% 4.8% 11.3% 7.3% 4.8% 12.9% 5.1% 6.9%

Earnings growth 10.9%

11.6% 10.2% 7.2%

10.9% 7.1% 10.3% 10.3% 8.9% 17.6% 21.4% 8.0%

Capital spending growth 5.0%

3.5% 9.7% 9.9%

3.4% 1.3% 6.5% 10.5% 5.7% 3.7% 2.1% 6.9%

Domestic personnel growth 2.3% 1.7% 3.5% 6.5%

2.3% 1.5% 4.3% 3.9% 1.8% 2.0% -0.4% 2.6%

Key charts: Expectations CFOs’ expected year-over-year increases in key metrics

6

Breakdown by country and industry

0

500

1,000

1,500

2,000

2,500

0%

5%

10%

15%

20%

25%

Sales growth

Earnings growth

Capital spendinggrowth

Domestic personnelgrowth

S&P 500 price atsurvey periodmidpoint

* Sample sizes may not sum to total due to responses from “other” categories.

Expectations for sales,

earnings, and domestic

hiring are all improving

— but not for capital

spending. Equity

markets have followed

suit, but 63% say U.S.

equity markets are

overvalued (and only 7%

say they are

undervalued.)

Consolidated expectations

CFOs’ expected year-over-year growth in key metrics (compared to the value of the S&P 500 index at the survey midpoint)


Company expectations and priorities

7

What is your company’s business focus for the next year?

CFOs’ assessments based on 5-point semantic differential scale with opposing choices as noted (n=103)

1

2

3

4

5

1 2 3 4 5

Grow revenue

Reduce costs

Invest

cash

Return

cash New

geographies

Current

geographies

New offerings

Current offerings

1

2

3

4

5

1 2 3 4 5

Offense vs. Defense New business vs. current

Heavy focus on

growth/investment over cost

reduction and returning cash

Focused on current (mostly North American)

geographies; evenly split between new and

current offerings

1 2 3 4 5

.

2Q14 1Q14 4Q13 3Q13 3Q14

Organic Inorganic

Inorganic vs. organic

More focused on organic growth

than inorganic



8

• Execution of plans/initiatives (6) up

• Complacency

• Deals collapse before completion

• Executive management focus

• Ability to scale and control spending

• Allocation of cash to growth vs. buybacks

• Managing changes in business portfolio

• Spend on M&A vs. earnings growth

• R&D execution risk

• Meeting rising investor expectations

• Investor activism

Overall, what external or internal risk worries you the most?

Consolidation and paraphrasing of CFOs’ free-form comments* (n=103)

Competition

Demand

• Lack of job growth in U.S. (2)

Internal Execution

• Cybersecurity (3)

Economy

• European economy (6)

• Direction of world

economies (4)

• U.S. economy (3)

• Market

bubbles/corrections (3)

• Conditions in Latin

America (2)

• Housing recovery

• China economy

Capital / Currency

• Interest rate increases/decreases (4)

• Exchange rate volatility

• Inflation

Macro / Economy

* Arrows indicate notable movements since last quarter’s survey. Category

movements are indicated by block bullets. Strong movements are indicated by

multiple arrows.

This chart presents a summary of CFOs’ free-form responses. CFO comments

have been consolidated and paraphrased, and parentheses denote counts for

particular response themes. For a more detailed summary of comments by industry,

please see the Appendix.

Industry / Company

• Federal regulation – new/burdensome (14)

• State-level regulation (2)

• Regulatory onslaught for banks

• Lack of clarity around regulations

• Government interference with market forces

• Mexican energy reform

• Government regulation of health care

• Uninformed regulatory intervention

Regulation

Security

Talent

• Availability of qualified workers (2)

• Retention of top talent (2)

• Finding leaders who can grow business

• Federal taxes / tax policy (4)

• Inability of U.S.

government to reform

tax system

• Overshooting tax regulations

around inversions

• Pace of political decision-

making/gridlock (3)

• Government spending/fiscal

policy (2)

• U.S. political environment

• Anti-business sentiment

• Trade risk

• U.S. Federal Reserve policy

Policy

Government

• Price competition at retail

• Tech obsolescence cycles

• Continuous competitive changes/consolidation

• Technological shifts

• Irrational competitor behavior

Margins

• Input prices (4)

• Industry demand (3)

• Recovery of industry pricing/margins

Geopolitics

• Geopolitical risk (9)

• Wars in Ukraine (5)

• Wars in Middle East (5)

• Latin American conflict

Economic and

competitive worries

declined a bit

recently, but

geopolitical and

government policy

concerns have

ramped up

Execution concerns,

which hit a high last

quarter, remain a

recent fixture


Perception of markets

How do CFOs perceive pricing and risk within the financial

markets?

Risk is high, but financing availability is mostly good:

• Risk is higher than normal: Forty-seven percent of CFOs say external

financial and economic risks are higher than normal;14% say they are

lower. Financial services CFOs are most likely to see higher risk (69%),

and services CFOs are lowest (33%). More than 60% of Canadian CFOs

see higher risk, while the U.S. and Mexico are at 46% and 14%,

respectively

• U.S. markets are overvalued: Only 7% say U.S. equity markets are

undervalued, and 63% say they are overvalued. More than 75% of CFOs

from financial services, technology, and services say markets are

overvalued, while energy/resources is lowest at 50%

• Debt financing is very attractive: An overwhelming 86% say debt is

currently an attractive financing option, and nearly two-thirds of all CFOs

say it is a very attractive option. Services is the industry outlier at just

22%, and Mexico is lowest of the countries at 43%

• Equity financing’s attractiveness is mixed: About 30% of public

company CFOs say equity is attractive, but 36% say it isn’t. About 20%

of private companies say it is attractive, but 44% say it isn’t.

Healthcare/pharma and technology are most likely to say equity is

attractive (67% and 50%, respectively), and retail/wholesale is lowest at

20%


9

What is your perception of the financial markets?

CFOs’ assessments based on 5-point semantic differential scale

with opposing choices as noted (n=103)

Please see Appendix for industry-specific findings.

Markets

and Risk

1

2

3

4

5

1 2 3 4 5

U.S. equity

markets are

undervalued

U.S. equity

markets are

overvalued

External financial/economic risk is

lower than normal

External financial/economic risk is

higher than normal

1

2

3

4

5

1 2 3 4 5

Debt financing

is unattractive

Debt financing

is attractive

Equity financing is

unattractive

Equity financing is attractive

Debt

and Equity

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

US UK Japan Eurozone Mexico China

10-Y

ear

Yie

lds (

%)

High YE 2015F

Low YE 2015F

Current

Significant Variance in GDP Growth across Countries

Dispersion in Global Estimates for Rates

Source: Citi GEOS and Bloomberg. Source: Bloomberg.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

US UK Japan Eurozone Mexico China

GD

P G

row

th (

%)

High FY 2015F

Low FY 2015F

FY 2015F (Citi Est.)

FY 2015F

vs. Current +1.0% +0.2% +0.1% +0.3% +1.5% -0.4%

Global Macro Uncertainty Affecting Dispersion in Rate Outlook

9

Rising Growth Expectations Driving Corporate Valuations

Multiple Expansion is Driven by Expectation for Growth Median Price / NTM EPS for the S&P 500 Non-Financials

Analysts Expect Strong EPS and Topline Growth Median Sales and EPS Growth for North America

11.6 11.0 10.3

10.9

1.5 3.1

6.6 6.2 13.1

14.1

16.9 17.1

0.0

500

1,000

1,500

2,000

2,500

2011 2012 2013 LTM 2014

S&

P 5

00 I

ndex L

evel

Price / N

TM

EP

S (

x)

Growth P/E

Base P/E

S&P 500 Index Level

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2012 2013 2014F 2015F

Gro

wth

(%

)

EPS Growth

Sales Growth

US 2015F GDP Growth

Source: FactSet. Source: Citi GEOS and FactSet.

10

The Need to Deliver on Growth Is Fueling M&A Activity

M&A Volume Has Been on the Rise Global M&A Volumes ($ in bn) and % Transformational Deals of Total M&A Count

as of October 2014

Recent US Domestic and Cross Border M&A Outperform Excess Returns around Deal Announcement, [-1, +1] Day Window

$2,690 $2,763

$2,654

$2,870 $2,946

$3,535

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2010 2011 2012 2013 YTD 2014

% T

ransfo

rmatio

nal

Deals

as a

Fra

ctio

n o

f T

ota

l

Volu

me (

$ in

bn)

Annualized

All M&A

Transformational M&A

0.2%

(0.0%)

2.5% 2.4%

US to RoW US to US

Excess R

etu

rns [

-1, +

1],

(%

)

Deals Announced in 2010

Deals Announced in 2013 and YTD 2014

Source: Citi and Dealogic. Source: Citi, Dealogic and FactSet.

11

Increased Focus on Business Restructurings

Favorable Market Response to Spinoffs amidst a Rise

in the Conglomerate Discount Excess Returns, [-1, +1] Day Window

YieldCos Illuminate Value of Dividend plus Growth Median Parent Price / NTM EPS

13.6 13.3

14.8 13.4

12.3 10.9

13.0 12.0

1.3

4.3

2.1 3.6 6.9

5.0 8.3

15.0

17.6

14.8 15.5

15.9

17.8 18.1

20.4

NoYieldCo

WithYieldCo

NoYieldCo

WithYieldCo

NoYieldCo

WithYieldCo

NoYieldCo

WithYieldCo

Price / N

TM

EP

S (

x)

Growth P/E Base P/E

2011

1.2

0.9

1.5 1.5

2.6

4

5

6

7

8

9

10

11

12

2010 2011 2012 2013 2014

Excess R

etu

rns [-1

, +

1],

(%

)

Conglo

mera

te D

iscount (%

)

Excess Returns [-1, +1]

Conglomerate Discount

2012 2013 YTD 2014

Source: SDC, Worldscope and FactSet. Source: FactSet.

12

Activist Focus Remains More Strategic

Global Shareholder Activism Continues Its Rise Number of Campaigns Initiated Worldwide

Strategic Focus Remains Important to Activist Agendas Number of S&P 1500 Campaigns where Activist Made Explicit Demand for M&A or

Distributions

15

23

27

30

32

6 7

10

29

14

2010 2011 2012 2013 2014 YTD

Num

ber

of C

am

paig

ns

M&A

Distributions

147

176 174

245

217

22

28 30

34

23

320

169

204 204

279

2010 2011 2012 2013 2014 YTD

Num

ber

of C

am

paig

ns

Annualized

Rest of World

North America

Board Seats

2 or More => 80%

4 or More => 14%

Source: FactSet. Source: FactSet.

13

Robust Capital Markets Fuel Strategic Initiatives

($13)

($39)

$98

$50

2011 2012 2013 YTD Q2 2014

Equitie

s F

unds F

low

($ in

bn)

3.0 4.0 5.0 6.0 7.0 8.0 9.0

Current BBB

Rate

120

130

140

150

160

170

180

190

200

Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14

Spre

ad (

bp)

USBIG BBB-Rated

Mean

Mean:

T+152 bp

Strong Fund Flows Help Support Equity Markets… Equity Fund Flow ($ in bn)

…And Debt Markets Fixed Income Fund Flow ($ in bn)

Credit Spreads Have Fallen… 10-Year BBB-Rated Spreads (LTM)

…Keeping All-In Borrowing Costs Near Historic Lows Distribution of 10-Year BBB-Rated Borrowing Rates 1992 - Present

Source: AMG Fund Flows (Equities excludes ETFs), Bloomberg. Source: Yieldbook. 10-year BBB-rated all-in cost of funds since 1992.

$32

$65$54

$43

$11

$21

$2

$11

2011 2012 2013 YTD Q2 2014

Fix

ed I

ncom

e F

unds F

low

($ in

bn)

IG Total Flows HY Total Flows

14

Innovative Capital Markets Fueling Growth

Persistent Currency Swap Advantage Fuels Arbitrage on Global Basis

Funding Emerging Markets Growth and Need to Incorporate Structured Solutions

Shadow Banking Growing in Importance in Certain Regions

Expanding Leverage Capacity through Pension Risk Transfer

1

2

3

4

15

$1,581

$75

$453

$1,054

$1,024

$2,078

Current CashBalance

Net LiquidityNeeds

2σ OCF Shock

ExcessLiquidity

UndrawnRevolvers

TotalLiquidity

Implications of Evolving Banking Regulations

Key US Bank Regulations Impact Corporates

Corporates Need to Reevaluate Liquidity Buffers 2σ Stressed Liquidity for S&P 1500 Non-Financials ($ in bn)

Higher Cost of Liquidity Revolvers and Non-Operating Deposits

Liquidity Coverage Ratio

Discourages Banks From Holding Low Return Assets

Supplementary Leverage Ratio

Limits Amount of Bank Loans to Highly Levered Firms

Leveraged Lending Guidelines

Higher Cost of CLO Issuances by Banks

Risk Retention

Discourages Banks From Holding High Risk Assets

Stress Testing

Source: FactSet.

16

Markets Reward Proactive Risk Management

Decreasing Correlations for Commodities and Rates Weekly Correlations over Two Years

Valuation Benefit Linked to Hedging Valuation Uplift from 10% Decrease in Earnings Volatility

5.0

3.5

3.0

EM Global DM

Multip

le Im

pro

vem

ent (%

)

0.08

0.46

0.40

0.47

(0.05)

0.04

USD 10-Yr SWAP Rate vs. EUR/USD Commodity Index vs. EUR/USD

Corr

ela

tions

2008 - 2010

2011 - 2012

2013 - 2014

Source: Bloomberg. Source: Bloomberg.

17

Citi’s multivariate statistical model suggests that a Large-Cap company could achieve a potential valuation uplift by

reducing segment diversification, improving growth prospects and margins, and more efficient deployment of capital.

Large-Cap Company’s Current Metrics Relative to Industry Peer Median

Path to Improving Valuation: Large-Cap Company Case Study

5.02x

0.88x

0.71x

0.62x

0.24x

0.21x 0.16x

0.16x 0.12x 0.10x

0.07x 0.00x 0.02x 8.29x

4.0

5.0

6.0

7.0

8.0

9.0

HPQ Current LT EPSGrowth

Cash /Market Cap

Net IncomeMargin

Number ofBusiness

Segments *

Capex /Assets

ROAVolatility

Effect ofTrappedCash onLiquidity

CapexGrowth

IndicatedDividendPayout

Stock ReturnVolatility

ST NetIncomeGrowth

SalesAbroad

ImprovedValuation

FV

/ N

TM

EB

ITD

A (

x)

<0.01x

Large-Cap

Company

Current

Multiple

Source: FactSet.

+ - + - - - + + - + + Sign of

Coefficient -

18


The relationship between public companies and their

owners continues to evolve

0

10

20

30

40

50

60

70

80

90

100

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Year

U.S. public company equity ownership

Source: U.S. Census Bureau

Household

Gov & Int’l

Institutional

• Household sector

• Brokers & dealers

Retail investors

• Banks & trusts

• Insurance

• Private pensions

• Mutual funds

• ETFs

• Close-end funds

Institutional investors

• State & local

• Federal

• Rest of the world

Gov & int’l

19


Factors influencing analyst investment decisions

A differentiated strategy and efficient operations are

only part of the story

93% 92%

84% 84% 79%

Execution TrackRecord

Strategic Vision ManagementQuality

SustainableCompetitiveAdvantages

Effective CapitalAllocation

Market value realization also depends on investors having confidence

that there is a high probability management will deliver the business

plan and expected results

Source: Corbin Perception Group, Inside The Buy-Side 2014.

Survey of 68 financial professionals: Buy-side (59%) and sell-side (41%)

20


Lessons learned from leading IR organizations

Emboldened investor base

Highly engaged and demanding investor base

Demand for transparency

Increasing requests for visibility and pressure to

provide reporting beyond historical requirements

Timeliness of information

Balancing the desire for timely information with

accuracy given the context / situation, including crisis

management

Increasingly diverse shareholders

Complexity of managing diverse expectations

Challenges with delivering cohesive messaging across all

technology platforms and shareholder interactions

Inconsistent messaging

Highly competitive landscape

Concerns that detailed disclosure may reveal information

leading to a loss of competitive advantage

IR challenges?

Companies interviewed

What are some leading practices?

1

2

3

Organization / role

An extension of C-Suite

Proactive, not reactive

Establish internally to be recognized externally

Shareholder engagement

A two-way street that serves as a conduit for investor

feedback that can be acted on

Embrace shareholder feedback to deliver increasingly

valuable insights

Provide access to multiple layers of executives

Storytelling

Push the boundaries of transparency

Develop an effective qualitative story to support

financial results

Explore growing communication mediums

(e.g. social media)

IR of the future

Organizationally integrated and aligned

Credible in strategy, finance and operations

4 Globalization

Diverse sources of capital with varying needs

21


• IR is a team sport with C-suite, line management all actively involved

• Two-way feedback loop to help manage expectations

• Financial filters influenced by shareholder preferences

• Proactive shareholder engagement

• Continuous improvement mindset is “shareholder friendly”

The CFO’s role in driving market value through IR

PerceivedValue

ActualValue

Sell-side

Buy-side IR MGMT •Division A

•Division B

•Division C

Strategy, results, outlook

Expectations, perceptions, industry expertise

22

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