E&Y - CFO need to know: Hidden trends from the earnings season - May 2013


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E&Y - CFO need to know: Hidden trends from the earnings season - May 2013

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E&Y - CFO need to know: Hidden trends from the earnings season - May 2013

  1. 1. Hidden trends from the earnings season Although many US corporations reported strong earnings in the second quarter and US equities markets surged to record highs, CFOs remain guardedly optimistic about economic conditions and business prospects. In fact, CFOs seem to be focused more on stability than aggressive growth, even while a small majority of them admit that the overall economy is “modestly improving.” These executives and their organizations are moving cautiously into the future, as a large percentage do not expect any upside earnings surprises over the second half of 2013. When it comes to key strategic moves such as M&A, hiring and overall capital expenditures, the key theme seems to be advance, but tread carefully. Indeed, CFOs see serious risks and much uncertainty over pivotal macro-issues. Government policy ranks high on their list of concerns. From negotiations over the national debt and the Affordable Care Act to corporate tax policy, executives are wondering what impact Washington’s decisions will have on their plans. Interestingly, however, a large plurality of CFOs seems to support the Fed’s current easy-money policies. Given these two factors confronting CFOs — careful steps forward combined with uncertainty about the future — it is vital that the discussion at the executive level also includes another key component: growth. 9k l`] jgd] g^ eYfq ;>Gk jgd] `Yk ]phYf] kaf[] l`] _dgZYd ÕfYf[aYd [jakak ^jge l`Yl g^ Y ÕfYf[aYd _mYjaYf to a more comprehensive enabler of an organization’s strategic goals and objectives, CFOs must keep growth top of mind — in any and all economic and geopolitical conditions. C]q Õfaf_k  Just over half of CFOs see the overall economy as modestly improving. More than four in 10 see the economy as stable.  CFOs expect to increase their level of capital expenditures by just 7% in the second half of 2013 versus the same period in 2012.  CFOs rank information technology as their top spending priority, followed by new equipment and upgrading existing assets.  Gfdq )* g^ ;Gk `gd Y hgkalan] na]o lgoYj E9 ]Yd Ögo Tom McGrath, EY Americas Senior Vice Chair — Markets Premiere Issue Q1 earnings — April – May 2013 CFO: need to know Insights for CFOs About this paper CFO: need to know is a regular EY paper featuring highlights of polls conducted by CNBC of the CNBC Global CFO Council. The CNBC Global CFO Council represents an elite group of Chief afYf[aYd G^Õ[]jk l`Yl will share their views on key issues and challenges for today’s CFOs. Views expressed in this paper are solely those of EY and do not represent the views of CNBC, the CNBC Global CFO Council members or their employers. More EY insights Visit ey.com/cfo
  2. 2. Views expressed in this paper are solely those of EY and do not represent the views of CNBC, the CNBC Global CFO Council members or their employers. 2 Oadd [gfÕ]f[] jan] _jgol`7 Similarly, CFOs see stasis in some very important business trends, egkl fglYZdq ]ehdgqe]fl _jgol`$ gn]jYdd ÕfYf[aYd eYjc]l klYZadalq Yf E9 ]Yd Ögo É;Gk l]dd mk l`]q kladd ^Y[] Y lj]e]fgmk amount of uncertainty, which makes them hesitant when it comes to deal-making,” says Richard Jeanneret, Americas Vice Chair of Transaction Advisory Services at EY. “But CFOs must constantly assess their businesses and look for ways to align their portfolios with business objectives — including the use of strategic exits.” See the accompanying “Viewpoint: Divesting to grow” for more insights. Optimism, but clearly tempered Despite the surge in US equities markets, rising consumer sentiment and falling employment rates, many CFOs (41.7%) describe the overall economy today as simply stable. A small majority (54.2%) feel that the economy is modestly improving, while none consider it strongly improving. Interestingly, these Õfaf_k Yda_f [dgk]dq oal` l`] YlY ^jge l`] dYl]kl =Q Global Capital ;gfÕ]f[] :Yjge]l]j$ o`a[` Õfk l`Yl ,, g^ MK k]fagj executives believe that the global economy is improving. * The EY ?dgZYd ;YhalYd ;gfÕ]f[] :Yjge]l]j is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit. 30% of CFOs see positive employment growth in the US.
  3. 3. Views expressed in this paper are solely those of EY and do not represent the views of CNBC, the CNBC Global CFO Council members or their employers. 3 Where is the growth? When asked to name their boards’ priorities, CFOs list increasing shareholder dividend, strengthening corporate governance and cuttings costs as their top priorities. Curiously, they do not rank growing the business among the top six concerns. According to the EY ?dgZYd ;YhalYd ;gfÕ]f[] :Yjge]l]j, 52% of organizations are focused on growth — an increase of 11% over last fall. “An increasing number of executives are optimistic, but many are still very cautious about putting their capital to work,” says Tom McGrath. “We call this the [gfÕ]f[] [gfmfjmeÊ This paradox presents opportunities for savvy CFOs. “Clearly, companies cannot continue to cost-cut their way to growth. They have to look to grow on a long-term basis,” says McGrath. “With so many executives cautious, it does offer a chance for some to gain early-mover advantage on strategic activities.” ?]g_jYh`a[Yddq$ ;Gk ^]]d n]jq [gfÕ]fl YZgml l`]aj hjgkh][lk in the US. They are also optimistic about Asia (outside of China) and, perhaps surprisingly, Latin America. Viewpoint Divesting to grow Many CFOs seem content to remain on the sidelines when it comes to deal-making. Only 12%, when polled by CNBC, have Y hgkalan] na]o lgoYj ]Yd Ögo Egj]gn]j$ gfdq *1 g^ k]fagj executives in the US expect their company to pursue acquisitions in the next 12 months, according to the EY Global Capital ;gfÕ]f[] :Yjge]l]j However, organizations have ample opportunity to grow via divestments. CFOs are championing divestments as a tool to support growth and align corporate portfolios with their business objectives. “With divestments on the rise, CFOs need to act as strategic partners to CEOs in driving the company’s capital strategy,” says Richard Jeanneret. “CFOs have to carefully consider the performance of each portfolio component and determine whether it is aligned with broader strategic goals. CFOs also have to carefully prepare the business unit for sale in order to maximize its value, complete the deal quickly and then continue to focus on growing their core business.” B]Yff]j]l Ynak]k ;Gk lg ^g[mk gf Õn] hjY[la[]k lg `]dh e]]l stakeholder expectations and maximize divestment success: 1. Conduct structured and regular portfolio management 2. ;gfka]j Ydd hgl]flaYd kljYl]_a[ Yf ÕfYf[aYd Zmq]jk 3. Articulate a compelling value and growth story tailored to each buyer, including synergy and cost analyses 4. Prepare rigorously for the divestment process, including performance improvements 5. Master preparation planning, including a road map for business functions, tax planning, reporting, transaction service agreements and stranded cost management No upside surprises? Nearly two-thirds of CFOs polled by CNBC anticipate US corporate earnings per share to come in as expected or slightly o]Yc]j l`Yf ]ph][l] af l`] k][gf `Yd^ g^ Õk[Yd q]Yj *()+
  4. 4. Views expressed in this paper are solely those of EY and do not represent the views of CNBC, the CNBC Global CFO Council members or their employers. 4 Daunting risk and uncertainty The negative impact of uncertainty in Washington Across the board, CFOs are concerned about indecision in Washington. A range of government policy issues seem to be having a detrimental effect on business. Clearly the most contentious topic is health care policy, with 80% of CFOs citing its negative consequences. These executives expect to increase their health care kh]f ka_faÕ[Yfldq È / af l`] [geaf_ q]Yj É;gehYfa]k k`gmd Z] planning now for the Affordable Care Act (ACA) because major provisions of it take affect January 1, 2014,” says Kate Barton, Americas Vice Chair, Tax Services, at EY. “This is an enterprisewide change. Companies should be pulling together a team from HR, tax, internal audit, legal and other functions to analyze the consequences of this legislation and develop a plan to address all of its effects.” :Yjlgf [gmfk]dk l`Yl eYfq gj_YfarYlagfk oadd k]] ka_faÕ[Yfl 9;9 implementation costs in the short term — and, moreover, spend the next several years creating and mastering their processes around ACA compliance. Few expect future earnings to surpass expectations The cautious optimism held by CFOs can be seen in their views on future earnings. Only one-third expect earnings per share (EPS) to exceed expectations. In fact, one-quarter of CFOs expect earnings per share to come in weaker than anticipated. What best describes your anticipated view of US corporate EPS growth in the second half of FY13? Stronger than expected 4.2% Slightly stronger than expected 29.2% As expected 41.7% Slightly weaker than expected 25.0% Weaker than expected 0.0%
  5. 5. Views expressed in this paper are solely those of EY and do not represent the views of CNBC, the CNBC Global CFO Council members or their employers. 5 Fiscal policy questions lead list of risks 9eZa_malq gn]j ][akagfk af OYk`af_lgf ak kg hj]nYd]fl l`Yl Õk[Yd policy heads the list of risks faced by CFOs. Weakening consumer demand and the continuing Euro crisis rank second and third. Cyber attacks rank fourth, even ahead of terrorism. “The threat of highly organized cyber attacks is now a boardroom issue for many,” says McGrath, “especially as enterprises rely more and more on cloud and mobile computing solutions.” Given the high level of economic and geopolitical uncertainty for today’s CFOs, they are also highly concerned about their supply chains. However, if CFOs are able to successfully mitigate their supply chain risks, they have the opportunity to leverage their supply chain to drive growth. For more, see the accompanying “Viewpoint: Optimizing the supply chain to grow.” CFOs of multinationals are also anxious about US corporate tax hgda[a]k$ Yk ]na]f[] Zq j][]fl `a_`%hjgÕd] ]p[`Yf_]k Z]lo]]f executives and lawmakers. 80% of CFOs see US Government health care policy as having a negative impact on business.
  6. 6. Views expressed in this paper are solely those of EY and do not represent the views of CNBC, the CNBC Global CFO Council members or their employers. 6 Hiring under the microscope Despite a long-term decline in the number of unemployed in the US, few CFOs are planning to add jobs in the US. Only 33% of executives foresee a head-count increase in the next quarter, compared to 66% who plan to do no hiring or decrease headcount. (Interestingly, the most recent EY Global ;YhalYd ;gfÕ]f[] :Yjge]l]j reveals that 47% of US companies plan to create jobs, up from 32% last fall.) On the other hand, when it comes to their overseas operations, nearly 60% of CFOs plan to increase hiring — a large majority considering that 12.5% of those surveyed do not operate outside the US. Hiring and tech challenges Viewpoint Optimizing the supply chain One of the most challenging issues facing CFOs today is supply chain optimization. Fortunately, a savvy CFO’s impact on the supply chain can have an immediate and lasting effect on growth. Optimizing a supply chain, and maximizing the information derived from one, can help companies improve [mklge]j k]jna[]$ hjgdgf_ Yf af[j]Yk] l`] hjgÕlYZadalq g^ product life cycles and achieve optimal operational launch methods into new markets. É9l l`] `]Yjl g^ l`] egkl ]^Õ[a]fl Yf [gkl%]^^][lan] _dgZYd supply chains is an alliance between the CFO and his or her supply chain colleagues,” says Bob Patton, Americas Vice Chair of Advisory Services at EY. “All share the need to gain an edge on industry rivals that will ultimately lead to increased eYjc]l k`Yj] Yf aehjgn] hjgÕlYZadalqÊ L`ak ogjcaf_ relationship should be grounded in data and the deployment of technology to aggregate and mine information to better forecast demand, manage inventory levels, stay ahead of buyer trends and identify and mitigate risks — from commodity price spikes to hurricanes. The truly strategic CFO will be a proponent and enabler of technology, and understand the valuable role technology has in enhancing the supply chain. “Deriving valuable insights from aggregated data will prove to be an important tool for CFOs to both understand their company’s key performance indicators, and also to identify risks that can impact the supply chain and gn]jYdd [gehYfq ÕfYf[]k$Ê HYllgf kYqk
  7. 7. Views expressed in this paper are solely those of EY and do not represent the views of CNBC, the CNBC Global CFO Council members or their employers. 7 Fears of cyberattack The risk of cyberattack is rising on the long list of agenda items for CFOs. As shows in the graph on page 5, CFOs now rank a cyberattack on their corporate infrastructure as their fourth-most prominent risk, ahead of terrorism and US immigration policy. Moreover, some 55% of CFOs admit that cybersecurity is now having a negative impact on their business, even greater than ]^^gjlk lg j]m[] l`] ^]]jYd ]Õ[al “Every company in the Fortune 1000 has been or will be a target of a cyberattack, whether they know it or not,” says Jose Granado, Americas Security Practice Leader, at EY. “Everyone agrees that CFOs need to play a role in making cybersecurity a high priority. L`ak ak Y c]q Õjkl egn] lgoYj aehjgnaf_ Yf gj_YfarYlagfÌk k`a]d against cyberattacks. CFOs and other leaders need to work with the board to rally their systems, controls, people and processes for cyberdefense.” There is much work to be done. Only 16% percent of executives feel that their information security fully meets the needs of their organization, according to the most recent EY Global Information Security Survey. These are steps organizations should be taking now to enhance their cyberattack risk management strategy:  Clarify cybersecurity roles and responsibilities within the executive team.  Establish metrics to adequately assess cybersecurity.  Make sure the organization has the appropriate skills to assess cyberdefense.  ;gfÕje l`Yl m] ada_]f[] hjg[]kk]k af[gjhgjYl] [qZ]j risk assessments.  Engage “ethical hackers” to test a company’s defenses. Viewpoint Leveraging big data and analytics CFOs plan to increase spending by just 7%. However, their largest expenditure will go toward IT. In many organizations, the CFO is charged with maximizing the j]lmjf gf afn]kle]fl af nYjagmk ZY[c g^Õ[] Yf YlY aggregation systems. “This means they should continue to invest in and master big data,” says Tom McGrath. “There is a growth opportunity for those who are best able to collect, YfYdqr] Yf Y[l mhgf l`] YlY Ögoaf_ l`jgm_` l`] ]fl]jhjak]Ê EY research shows that CFOs that best leverage big data are outperforming their peers by 20%. Big data enables the CFO to change the decision-making DNA of the enterprise. “For instance, the CFO can now understand the correlation between mining rights in an emerging economy and the RD investment they could be making into developing certain types of alloys,” says McGrath. Two things that CFOs must consider in regard to big data are: 1. Making big data’s power easy for the organization to use. A simple concept like creating a decision-making center oal`af l`] ÕfYf[] ^mf[lagf l`Yl jmfk l`] YfYdqla[k Yjgmf big data makes decision-making easier for the organization. 2. Bringing in the skills necessary to harness big data. Hiring economists and statisticians, for example, to complement Y[[gmflaf_$ lYp Yf ÕfYf[aYd hdYffaf_ kcadd k]lk Yj] c]q lg Zmadaf_ l`ak f]o ÕfYf[] ]hYjle]fl
  8. 8. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and/or one or more of the member firms of Ernst Young Global Limited, each of which is a separate legal entity. Ernst Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst Young LLP is a client-serving member firm of Ernst Young Global Limited operating in the US © 2013 Ernst Young LLP. All Rights Reserved. SCORE No. BE0231 ED None. EY is committed to minimizing its impact on the environment. This document has been printed using recycled paper. www.ey.com Contacts If you would like to discuss the insights in this paper, please contact your EY advisor or any of the contacts below. EY is the exclusive sponsor of the CNBC Global CFO Council. Views expressed in this paper are solely those of EY and do not represent the views of CNBC, the CNBC Global CFO Council members or their employers. More EY insights Visit ey.com/cfo Tom McGrath Americas Senior Vice Chair — Markets +1 212 773 9550 tom.mcgrath@ey.com Kate Barton Americas Vice Chair — Tax Services +1 617 585 6820 kate.barton@ey.com Jose Granado Americas Security Practice Leader +1 713 750 8671 jose.granado@ey.com Richard M. Jeanneret Americas Vice Chair — Transaction Advisory Services +1 212 773 2922 richard.jeanneret@ey.com Mark Manoff Americas Vice Chair — Accounts +1 212 773 1954 mark.manoff@ey.com Bob Patton Americas Vice Chair — Advisory Serivces +1 404 817 5579 robert.patton@ey.com