Quarter 3 2012 survey results
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The Deloitte CFO Survey Optimism amid reality, striking the balance
Contents
About the survey and key findings 3
Executive summary 7
Survey findings:
Section 1 – Irish capital markets 8Section 2 – Risk, profitability and growth 10Section 3 – Financing, debt and credit facilities 12
Section 4 – Government, EU and audit reform 13
What to expect from next quarter 15
Due to rounding, responses to the questions covered in this report may not aggregate to 100.
3
About the surveyThis is the thirteenth in a series of quarterly surveys of Chief Financial Officers of major Irish based companies. The survey was conducted in September 2012 and CFOs of listed companies, large private companies and Irish subsidiaries of overseas multi-national companies participated.
The Deloitte CFO Survey is the only survey that seeks to establish the views of CFOs in relation to the financial markets, economic outlook and business trends on a quarterly basis.
Key findingsThe following are the key findings of the CFO survey this quarter: External influences•NetoptimismamongstCFOsrisesby31%•CFOswhoexpecttheirturnovertosignificantlyincreaseinthenextsixmonthshasrisenby9%
•50%ofrespondentsareexpectingprofitabilitytoincreaseinthenextsixmonths
•59%ofCFOscitemarketriskasthecategoryofrisk that worries them the most
•35%ofrespondentsstatethatrevenuemaintenance/growth is their top financial challenge this quarter
Internal performance•35%ofCFOsfavourdomesticbanksastheirsourceoffunding–down15%onQuarter42011
•Net29%ofrespondentscitecreditasbeingdifficult to attain
•Net62%ofrespondentsperceivecreditasexpensive
•Net5%ofCFOssurveyednowbelieveGovernment bonds to be undervalued
•Net5%ofrespondentsbelieveIrishcommercialreal estate to be undervalued this quarter
Risk and markets •100%ofCFOssurveyedstatedthattheyexpecttheir
companies’ ability to service debt to either remain thesameorimproveoverthenextthreeyears
•41%ofrespondentsexpecttheirtotaldebttodecreaseoverthenextthreeyears
•10%ofCFOsexpectthattheircompanies’debtwillincreaseoverthenextthreeyears
•52%ofCFOscontinuetofavourtheuseofcashreserves/free cash flow to reduce debt
Government, EU and audit reform•71%ofCFOsindicatethattheybelievethe
Government is having a positive impact on the fiscal stability of the country
•68%ofCFOsbelievetheGovernmenthashadapositive effect on encouraging FDI
•73%ofCFOsnotethattheGovernmenthashadanegativeimpactonlevelsoftaxation
•39%donotbelievethattheGovernmenthashad a positive influence on political reform to date
•76%ofCFOswouldfavourremainingintheIMF/ECB bailout deal rather than return to the bond markets quickly
•76%ofCFOsareconcernedthatthenextbudget will have a negative impact on their business
•85%ofCFOssurveyedbelievebusinesseswillstruggle with any additional PRSI increases
•95%ofCFOsstatedthatPRSIincreaseswouldhave a negative impact on employment creation
•80%ofCFOssurveyedseenovalueinjointaudits
•54%ofCFOsdonotseevalueinthemandatoryrotation of auditors
About the survey and key findings
4
Snapshot of key findings
71 Stability%of CFOs indicate that they believe the Government is having a positive impact on the �scal stability of the country
76 Negativity%of CFOs are concerned that the next budget will have a negative impact on their business
95 Impact%of CFOs stated that PRSI increases would have a negative impact on employment creation
62 Credit%Net 62% of respondents perceive credit as expensive
50 Profitability %of respondents are expecting pro�tability to increase in the next six months
54 Value%of CFOs do not see value in the mandatory rotation of auditors100 Debt%
of CFOs surveyed stated that they expect their companies’ ability to service debt to either remain the same or improve over the next three years
31 Optimism %Net optimism amongst CFOs rises by 31% 71 Stability%
of CFOs indicate that they believe the Government is having a positive impact on the �scal stability of the country
76 Negativity%of CFOs are concerned that the next budget will have a negative impact on their business
95 Impact%of CFOs stated that PRSI increases would have a negative impact on employment creation
62 Credit%Net 62% of respondents perceive credit as expensive
50 Profitability %of respondents are expecting pro�tability to increase in the next six months
54 Value%of CFOs do not see value in the mandatory rotation of auditors100 Debt%
of CFOs surveyed stated that they expect their companies’ ability to service debt to either remain the same or improve over the next three years
31 Optimism %Net optimism amongst CFOs rises by 31% 71 Stability%
of CFOs indicate that they believe the Government is having a positive impact on the �scal stability of the country
76 Negativity%of CFOs are concerned that the next budget will have a negative impact on their business
95 Impact%of CFOs stated that PRSI increases would have a negative impact on employment creation
62 Credit%Net 62% of respondents perceive credit as expensive
50 Profitability %of respondents are expecting pro�tability to increase in the next six months
54 Value%of CFOs do not see value in the mandatory rotation of auditors100 Debt%
of CFOs surveyed stated that they expect their companies’ ability to service debt to either remain the same or improve over the next three years
31 Optimism %Net optimism amongst CFOs rises by 31%
5
71 Stability%of CFOs indicate that they believe the Government is having a positive impact on the �scal stability of the country
76 Negativity%of CFOs are concerned that the next budget will have a negative impact on their business
95 Impact%of CFOs stated that PRSI increases would have a negative impact on employment creation
62 Credit%Net 62% of respondents perceive credit as expensive
50 Profitability %of respondents are expecting pro�tability to increase in the next six months
54 Value%of CFOs do not see value in the mandatory rotation of auditors100 Debt%
of CFOs surveyed stated that they expect their companies’ ability to service debt to either remain the same or improve over the next three years
31 Optimism %Net optimism amongst CFOs rises by 31%
71 Stability%of CFOs indicate that they believe the Government is having a positive impact on the �scal stability of the country
76 Negativity%of CFOs are concerned that the next budget will have a negative impact on their business
95 Impact%of CFOs stated that PRSI increases would have a negative impact on employment creation
62 Credit%Net 62% of respondents perceive credit as expensive
50 Profitability %of respondents are expecting pro�tability to increase in the next six months
54 Value%of CFOs do not see value in the mandatory rotation of auditors100 Debt%
of CFOs surveyed stated that they expect their companies’ ability to service debt to either remain the same or improve over the next three years
31 Optimism %Net optimism amongst CFOs rises by 31% 71 Stability%
of CFOs indicate that they believe the Government is having a positive impact on the �scal stability of the country
76 Negativity%of CFOs are concerned that the next budget will have a negative impact on their business
95 Impact%of CFOs stated that PRSI increases would have a negative impact on employment creation
62 Credit%Net 62% of respondents perceive credit as expensive
50 Profitability %of respondents are expecting pro�tability to increase in the next six months
54 Value%of CFOs do not see value in the mandatory rotation of auditors100 Debt%
of CFOs surveyed stated that they expect their companies’ ability to service debt to either remain the same or improve over the next three years
31 Optimism %Net optimism amongst CFOs rises by 31%
6
Quarterly roundupKeyeventsinQuarter32012included:
Jul 3 Eurozone unemployment levels reach a high pointof11.1%.Thisriseisdriveninparticularbycompanies in Spain and Italy where budget cuts prompted companies to cut their workforces. Spanishunemploymenthasnowreached24.5%,the highest in the European Union.
Jul5 The European Central Bank (ECB) cuts the interest rate by a quarter of a percentage point, to a newrecordlowof0.75%.Thisisthethirdratereduction in three months. The ECB also cut the interest rate on its deposit facility to zero per cent in an attempt to stimulate the interbank overnight lending market.
Jul17 TheIMFlowersitsglobaleconomicgrowthestimatesby0.1%to3.5%for2012.Estimatesfor2013havebeencutfurtherfrom4.1%to3.9%.ThecontinuingfinancialcrisisinEurope,coupled with sluggish growth in emerging markets, is cited as the main reason for the downgrade in estimates.
Jul19 The Economist Intelligence Unit reports that 151ofthelargestfirmsinIrelandarelookingtocreate13,000jobsoverthenextfiveyears.Italsoreportsthat94%ofcompaniesareplanningtoincreasetheiremploymentby10%inthesameperiod.
Jul 24 Hireland, a not-for-profit initiative aimed at encouraging employers to hire unemployed skilledworkers,hasledto5,000jobsbeingpledgedand2,000positionsfilledinthesixmonths since its launch. The jobs have come from hundreds of companies across a wide range of sectors.
Aug 2 GE Healthcare announces it is to invest $10 million in its Carrigtwohill plant in Co. Cork. Thiswillincludethehiringof50newstaffasthe company aims to increase manufacturing capacityby50%.
Aug 24 TheNTMAraisesover€1.02billionthroughitsfirst issue of amortising bonds. The maturity on thesebondsrangesfrom15to35yearsandtheaverageyieldwas5.91%.
Aug29 Catalonia becomes the latest Spanish region to announcethatitrequiresa€5billionbailoutfromthe Spanish state.
Sep19 NorthernTrustannouncesthelaunchof400newjobsinLimerickoverthenextfiveyears.The financial services institution plans to source a number of these jobs from local third level institutions.
Key events and economic trends
Sep 21 The Central Statistics Office releases latest figures ontheIrisheconomyforQuarter22012.GDPgrowth was flat on the previous quarter following anegativegrowthof-0.7%inQuarter12012.GNPgrewby4.3%mainlyduetodecliningfactoroutflows as multinationals repatriated profits to Ireland.
Sep28 Googleunveilstheir€75millionaircooleddatacentre in Dublin. The data centre is ranked amongst the most energy efficient in the world and houses computers which run cloud computing services such as Google Search, Gmail andGoogleMaps.
Sep27 US marketing software provider, HubSpot, announces they are opening their European headquartersinDublincreating150jobsbytheendof2015.
If you would like further information on the Deloitte CFO Survey or wish to participate in the future, please contact:
Shane MohanPartnerT:+35314172543E: [email protected]
David CassSeniorManagerT:+35314172629E: [email protected]
Key economic trends over this quarter included:
June 30 2012
September 30 2012
%Change
ISEQ 3,148.60 3,278.28 4.12%
FTSE-100 5,571.10 5,742.10 3.07%
NASDAQ(IXIC)
2,935.05 3,116.23 6.17%
$/€ 1.26 1.29 2.38%
£/€ 0.81 0.80 -1.23%
ECB Int. Rate
1% 0.75% -25%
LIBOR 1mth 0.245% 0.221% -9.80%
Irish Government Bonds
6.39% 5.32% -16.74%
7
ShaneMohanPartner, Deloitte
While the third quarter of any year can typically be a quiet period before the nextbudgetcyclekicksin,theLondon2012Olympicsensuredthatthisquarterstarted with a bang. Widely regarded as one of the most successful of the modern Olympics, the UK proved what impact focused investment can have in the sporting world.
In the EU however the crisis is still bubbling on, but markets have more or less stabilisedwiththeexpectationthatnowtheyunderstandthefullextentandscope of the economic issues. The crisis in Spain is deepening with nearly one in four now registered as unemployed while the EU unemployment average istopping11%.Intermsofeconomicgrowth,theIMFhaslowereditsglobalestimatesby0.1%to3.5%for2012andestimatesfor2013havebeencutfurtherfrom4.1%to3.9%purportingtoagloomymediumtermeconomicoutlook, with Ireland’s recovery potentially caught again in a global slump.
However, our results this quarter show a dramatic increase in optimism amongstCFOrespondentsfromanet0%lastquarterto31%thisquarter.Thisincrease can be largely attributed to the agreement in July to decouple bank and sovereign debt, and while the nature and structure of this deal is yet to be determined, the feeling is that Ireland will be able to reduce the burden of the bank debt on the State. Once the finer details of this deal are ironed out, and Budget 2013 has been announced in December it will be interesting to see if CFO optimism remains.
NextquarterwillrevealthisGovernment’ssecondbudgetwithsignificantandtough decisions to be made to close the deficit and meet Troika targets. This quarter we asked a number of questions around the impact of PRSI changes on employment and our results show that further pressure on employment costs willnotbewarmlyreceivedbyCFOswhoregardfurthertaxationofemploymentas counterproductive to meeting growth targets set for the economy.
TheNTMAraisedover€1.02billionthroughitsfirstissueofamortisingbondsthisquarterwiththematurityonthesebondsrangingfrom15to35yearsandtheaverageyieldwas5.91%.Whilethisisawelcomereturntothebondmarkets, a boon to the Government, and a glimmer of hope for a return to sovereignty,itisinterestingtonotethat76%ofCFOswouldelecttoremainintheEU/IMFdealratherthanhaveaquickreturntothebondmarket.Perhapsthiscanbeattributedtothelevelofcertaintythiscouldbringoverthenextyearor so while our domestic economy is struggling to return to growth.
What to expect from next quarterTheQuarter4CFOSurveywillexamineindetailthereactiontoBudget2013andlookathowCFOsviewtheimpactofkeytaxationandspendingchangesontheir business.
Executive summary
8
Survey findings
Section 1 – Irish capital marketsWhile domestic banks continue to be the preferred source offundingforIrishcorporatesat35%,theirpopularityhasdeclinedsignificantlyfrom50%inQuarter42011.Thedeclining preference for domestic funding has been offset by a consistent increase in the preference for overseas banks and, toalesserdegree,corporatebondsassourcesoffunding.30%of respondents cite overseas banks as their preferred funding source. This closes the gap between the preference for overseas versusdomesticfundingtojust5%fromahighof29%inthefinal quarter of last year.
This shift from domestic to overseas funding is unsurprising considering a report published last quarter by the Central Bank. The report showed that Ireland is the second most difficult country in the Eurozone for securing business loans. It found that Ireland had not only the second lowest approval level for small business loan applications but also that the country has the Eurozone’s second highest rate of discouraged business borrowers.
Figure 1: What is your company, or your parent company’s preferred method of funding?
0%
10%
20%
30%
40%
50%
Figure 1. What is your company, or your parent company’s, preferred method of funding?
Q4 2011
Q1 2011
Q2 2012
Q3 2012
Bank (domestic)
Leasing Bank(overseas)
Equity Corporatebonds
50%
43%
40%
35%
21%
23%
26%
30%
14%
20%
13%
16%
7%
11%13%
16%
4%3%
4% 4%
0%
4%3%
0%
Reduced dividendpayments
CFOsarestillcitingcreditasdifficulttoattain,atnet29%,down21%fromlastquarter.TherehasalsobeenareductioninthenumberofCFOsreportingcreditascostly;anet62%ofrespondentsperceivecreditasexpensivethisquarter,comparedto81%inQuarter22012.Althoughthispercentageremainshigh, it puts the net perception of the cost of credit at its lowest level in over two years.
Figure 2: Perception of overall cost and availability of credit to Irish corporates?Figure 2. Perception of overall cost and availability of credit to Irish corporates?
Costly
CheapHard to get
-80
-60
-40
-20
0
20
40
60
80
100
Q4 2010 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012
68% 69%62%
68% 62%
81%76%
62%
-48%
-31%-40%
-44%-38%
-68%
-50%
-29%Availability
Cost
Easily available
Q1 2011
CFO opinion is more optimistic this quarter in relation to the overall availability of new credit for Irish corporates compared tosixmonthsagoacrossallfoursourcesoffundingsurveyed.In keeping with overseas funding as an increasingly popular optionforIrishcompanies,anet6%ofrespondentsthisquarter believe funding from this source is somewhat or easily available.
Accordingto29%ofrespondentsdomesticbanksarethemostdifficult source of funding this quarter. The availability of credit fromoverseasbankshasgreatlyimprovedoverthelastsixmonthswithanet6%ofCFOsratingthisaseasilyavailable.Itremains to be seen if there will be a change in this sentiment in relationtofundingfromdomesticbanksnextquartergiventhattheIrishGovernmentareduetosignoffa€450millioncreditguarantee scheme which will involve the State guaranteeing portions of loans to businesses.
CFOs are still citing credit as difficult to attain, at net 29%, down 21% from last quarter.
9
Figure 3: How would you rate the overall availability of new credit for Irish corporates compared to six months ago from the following sources?
Figure 3. How would you rate the overall availability of new credit for Irish corporates compared to six months ago from the following sources?
Q4 2011 Q1 2012 Q2 2012 Q3 2012
Easily Available
Hard to get-80
-70
-60
-50
-40
-30
-20
-10
0
10Domestic banks
Overseas banks
Corporate bonds
Equity
-17%-22%
-22%
-38%
-68%
-33%
-43%
-51%
-50%
-29%
-23%
-16%
6%
-38%
-38%
-43%
Ireland continues to rank at the bottom of the league table when it comes to the cost of credit in comparison with selected EU countries. Irish based CFOs perceive the cost of credit to begreatestatnet62%.Thisrepresentsa19%improvementon last quarter suggesting that CFOs believe that the cost of credithasdeclinedsomewhat.ThisquartertheNetherlandscomeslastintermsofavailabilityofcreditatnet37%findingcredit difficult to attain while Ireland rests just one place above atnet29%.ManyEuropeanCFOsareclearlystrugglingtoavailof credit with banks cautious to lend. It remains the case that Irish companies still face difficulties competing internationally despite the increase in funding from overseas banks.
Figure 4: International comparison of cost and availability of credit
The perception of Government bond valuations shifted considerablythisquarter.Lastquarterwereportedthatanet9%of respondents believed bonds to be overvalued. This quarter anet5%ofCFOsnowbelieveIrishbondstobeundervalued.This is against a backdrop of a continued decrease in the yield of Irishbondswithover1%deductedfromtheinterestrateinthelast three months.
IntermsofIrishcommercialrealestateanet5%ofCFOsbelievethis to be undervalued this quarter. A recent survey found that 11%ofcommercialbuildingsinIrelandarevacant,combinedwiththeevidenceinfigure5belowitappearsthatthelawsofsupply and demand are finally readjusting commercial real estate to more realistic values.
Figure 5: Net perception of overall rate of Irish Government Bond valuations and Irish commercial real estate valuations
Figure 5: Net perception of overall rate of Irish Government Bond valuations and Irish commercial real estate valuations
43%
-14%
31%
-4%
2%4%
46%
17%
44%
18%
9%
-5%-2%
23%
Government bond valuations
Real estate asset valuations
High
Low
-20
-10
0
10
20
30
40
50
Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012
16%
Many European CFOs are clearly struggling to avail of credit with banks cautious to lend. It remains the case that Irish companies still face difficulties competing internationally despite the increase in funding from overseas banks.
10
Section 2 – Risk, profitability and growthQuarter32012showsasharppositiveincreaseinCFOoptimism.Lastquarteranet0%ofCFOswereoptimisticabout their companies’ financial prospects; this has increased significantlytonet31%thisquarter.Quarter22012showedCFO optimism at an all-time low since our survey record began inQuarter12011,howevertheresultswerecollectedduringaperiod of high uncertainty before the agreement on decoupling bankandsovereigndebt.Whiletheexactdetailsofthisagreement have yet to be finalised, Irish CFOs’ optimism has been buoyed in the short term.
Figure 6: Compared with three months ago how do you feel about the financial prospects for your company?
Figure 6. Compared with three months ago how do you feel about the financial prospects for your company?
Q4 2011 Q1 2012 Q2 2012 Q3 2012
Optimistic
Sentiments on your company’s �nancial prospects
Pessimistic0
5
10
15
20
25
30
35
0%
31%
7%
17%
The increase in overall optimism is reflected further in expectationsofturnoverandprofitability.57%ofCFOsareexpectingtheirturnovertoincreaseinthenextsixmonths.Ofthis,11%ofCFOsexpecttheirturnovertosignificantlyincreasecomparedtojust2%lastquarter.Thispositiveoutlookwasparticularly evident amongst multinational companies which mayaccountforthe9%increaseonQuarter22012.Only19%ofCFOsexpecttheirturnovertodecreaseoverthenextsixmonths.
Figure 7: How do you feel your company's turnover will compare in six months time?
0%
10%
20%
30%
40%
50%
Figure 7. Compared with six months ago how has your company’s turnover changed and how do you feel it will compare in six months time?
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Signi�cantlyincreased
Somewhatincreased
Broadly unchanged
Somewhatdecreased
Signi�cantlydecreased
50%
46%
41%
49%
3%
11%
7%
2%
33%
24%
37%
22%
11%14%15%
25%
3%5%
0%2%
CFOs’expectationsofimprovedbusinessperformancearealsoreflected in their profitability outlook. Half of respondents are expectingprofitabilitytoincreaseinthenextsixmonthswhile39%areexpectingprofitabilitytoremainbroadlyunchanged.11%ofthisquarter’srespondentsexpecttheprofitabilityoftheircompanytodecreaseinthenextsixmonths,avastcontrasttolastquarter’sresultswhichshowedthat20%ofCFOsexpectedtheprofitabilityoftheircompanytodecrease.
Figure 8: Compared with six months ago how has your company’s profitability changed and how do you feel it will compare in six months’ time?
0%
10%
20%
30%
40%
50%
Figure 8. Compared with six months ago how has your company’s profitability changed and how do you feel it will compare in six months time?
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Signi�cantlyincreased
Somewhatincreased
Broadly unchanged
Somewhatdecreased
Signi�cantlydecreased
3% 2%
6%4%
50%
44% 44%44%
30%
34%
39%
30%
14%16%
11%
22%
3% 4%
0%0%
11
MarketriskcontinuestoremainthemostdominantformofriskfortheIrishCFOhoweverthishasdecreasedby8%thisquarter. Interestingly, there has been a significant increase in operationalrisk,havingrisenfrom4%inQuarter22012to23%.Whilemarketriskcontinuestobeakeyconcern,CFOsare beginning to refocus their attention on operational risk. Strategic and financial risks continue to decrease slightly on last quarter’s results.
Figure 9: Which one of the following categories of risk worries you the most?
0%
10%
20%
30%
40%
50%
60%
70%
80%
Figure 9. Which one of the following categories of risk worries you the most?
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Strategic Operational Market Financial
19%22%
19%
13%
8% 8%4%
23%
61%
53%
67%
59%
12%
17%
10%
5%
According to CFOs, revenue maintenance/growth, maintaining profit margins and cost management are the top three financial challenges facing businesses today. It appears to be becoming more and more difficult to increase revenue growth, therefore keeping the cost of sales as low as possible is critical in terms of realising profit from revenue.
Figure 10: What are the top three financial challenges currently facing your business today?
Figure 10. What are the top three financial chal-lenges currently facing your business today?
Working capital management
Maintaining profit margins
Revenue maintenance/growth
Raising finance/credit facilities
Pension costs/deficit
Forecasting
Cost management
Other - please specify below 1%
0% 5% 10% 15% 20% 25% 30% 35%
5%
5%
9%
13%
15%
18%
35%
Whileoptimismisincreasing,only29%ofCFOrespondentsindicated that their companies have already returned to growth.ThisisthelowestlevelsinceQuarter22011followingatroughofnet26%lastquarter.Costmanagementandoperational efficiency will be key areas of focus in returning to growth.
Only8%ofCFOssharetheperceptionthattheIrisheconomyhasreturnedtogrowthinthelastquarter.Thisisa4%increase on last quarter’s results. Overall, CFOs find that their owncompanies’growthcontinuestoexceedthatoftheIrisheconomy.
Figure 11: Perception that one’s company/the Irish economy has already returned to growth in the given quarter
0%
10%
20%
30%
40%
50%
Figure 11. In your view when will the Irish economy return to growth & your company return to growth?
Q3 2011Q2 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012
33%
37%
43% 44%
26%
29%
2%
10%
4%6%
4%
8%The Irish economy
Your company
Perception that one’s company/the Irish economy has already returned to growth in the given quarter
Only 8% of CFOs share the perception that the Irish economy has returned to growth in the last quarter.
12
Figure 14: Rank in order of preference your company’s debt reduction strategies (if any) over the next three years:Figure 14. Rank in order of preference your company’s debt
reduction strategies (if any) over the next three years:
28%
52%
17%
3%Asset sales
Cash reserves / free cash �ow
Equity o�ering
Other (please specify below)
Theperceptionofriskassociatedwithexchangeratesensitivityand the valuation of assets continues to diverge. Perception ofexchangeratesensitivityriskhasdeclinedbynet71%overthelastthreequarters,fromanall-timehighof58%inQuarter4 2011. This downward trend indicates that CFOs no longer perceiveexchangeratesensitivitytobeasignificantbusinessrisk. This could reflect CFO confidence that the EU’s efforts to reform the sovereign debt crisis will result in increased market stability.
CFO perception of risk surrounding valuation of assets has increasedbynet7%tonet13%fromlastquarter,thehighestfigurerecordedsinceQuarter42011.CFOsmayperceivean increased risk in this area due to uncertainty surrounding propertytaxesandtheimpactofBudget2013.
Figure 15: How has the level of risk of the following items on your company’s profit and loss and/or balance sheet changed over the last twelve months?
Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Figure 15. How has the level of risk of the following items on your company’s P&L and or balance sheet changed over the last twelve months?
41% 39%
58%
39%
6%
13%
-13%
-2%
8%
19%
10%9%
Exchange rate sensitivity
Valuation of assets
Decreased perception of risk
Increased perception of risk
Section 3 – Financing, debt and credit facilitiesThe ability to service debt has ceased to be the key concern forCFOs;100%ofCFOssurveyedstatedthattheyexpecttheircompanies’ ability to service debt to either remain the same orimproveoverthenextthreeyears.TheseresultsshowthatCFOs continue to believe they are in control of debt financing and repayment structures.
Figure 12: Over the next three years, do you expect your company’s ability to service its debt to:
Figure 12. Over the next three years, do you expect your company’s ability to service its debt to:
12%
61%
27%
Improve signi�cantly
Improve somewhat
Remain the same
Decrease somewhat
Decrease signi�cantly
0%
CFOs are also reducing their reliance on debt financing by deleveragingtheirbalancesheets.41%ofrespondentsexpecttheirtotaldebttodecreaseoverthenextthreeyears,while49%expecttotaldebttoremainthesame.Only10%ofCFOsexpectthatdebtwillincrease,adecreaseof14%fromlastquarter.
Figure 13: Over the next three years, do you expect the total debt on your company's balance sheet to:
0%
10%
20%
30%
40%
50%
Figure 13. Over the next three years, do you expect the total debt on your company's balance sheet to:
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Increase significantly
Decrease significantly
No changeIncrease a little Decrease a little
15%
21%18%
10%
4%
0%
6%
0%
31%
26%
33%
49%
31%32%31%
24%
19%21%
12%
17%
52%ofCFOscontinuetofavourtheuseofcashreserves/freecashflowtoreducedebt.28%ofCFOschoseassetsalesasthe second most popular method of debt reduction in order to balancethebooks,whileequityofferingranksthirdwith17%of CFOs favouring this method.
13
Section 4 – Government, EU and audit reform71%ofCFOsindicatethattheybelievetheGovernmentishaving a positive impact on the fiscal stability of the country. Positive domestic and international media attention on achievingEU/IMFtargets,aswellassurpassingtaxationincometargets, have been well received by CFOs. In other positive resultsfortheGovernment,68%ofCFOsbelievetheyhavehadapositiveeffectonencouragingFDI.However,73%ofCFOsarediscouragedbythelevelsoftaxationbeingimposedontheeconomyand39%don’tbelievetherehasbeenpositiveactionon political reform to date.
Figure 16: What impact do you think the Government has had on the following:
Figure 16. What impact do you think the Government has had on the following:
Cost of credit
Credit availability to small business
Renegotiation of the EU/IMF rescue package
Restoring �scal stability
Encouraging further FDI
Political reform
Levels of taxation
Employment and job creation
No changePositive Negative
0% 20% 40% 60% 80% 100%
2% 68% 29%
6% 51% 44%
43% 43% 15%
71% 17% 12%
68% 23% 10%
15% 46% 39%
7% 20% 73%
24% 49% 27%
Although Ireland recently returned to the bond markets in a limitedcapacityitisinterestingtonotethat76%ofCFOswouldratherthatweremainintheIMF/ECBbailoutdealratherthanreturn to the bond markets quickly. This bailout framework provides increased certainty to CFOs while keeping the country tightly integrated with the EU programme. Any premature deviation from the framework could damage international and consumer confidence, and increase risk levels at a delicate period in our recovery.
Figure 17: Irish Government Bond rates are starting to return to a level where we may be able to return to international markets for significant levels of funding in the near future. Should the Government push for a quick return to the bond markets or should they remain within the IMF/ECB framework and avail of lower rates and guaranteed funding?
Figure 17. Irish Government Bond rates are starting to return to a level where we may be able to return to international markets for significant levels of funding in the near future. Should the Government push for a quick return to the bond markets or should they remain within the IMF/ECB Framework and avail of lower rates and guaranteed funding?
24%
76%
Remain in IMF/ECB dealwhile available
Return to bond markets quickly
76%ofCFOsareconcernedthatthenextbudgetwillhaveanegative impact on their business. As the Government seeks to furtherreducethenationaldeficit,CFOsfearthattaxincreasesandspending cuts will put further pressure on the struggling domestic market, and increase the costs of doing business in Ireland.
Figure 18: How do you think the upcoming budget will impact your business?
Figure 18. How do you think the upcoming budget will impact your business?
2%
0% 0%
5%
71%
22%
Some negative impact
Very positive impact
Some positive impact
Minimal impact
Very negative impact
Too early to judge
CFOs have responded with some negativity this quarter towards the Government’s impact on employment and job creation. Although the Programme for Government commits to not increasingincometaxrates,PRSIcouldbesettoriseinBudget2013.85%ofCFOssurveyedindicatedthattheybelievebusinesses will struggle with any additional PRSI increases, while95%ofCFOsstatedthatanysuchincreaseswouldhave
14
Figure 21: Would you see value in joint audits?Figure 21. Would you see value in joint audits?
80%
20%
Yes
No
CFOs came out against the mandatory rotation of auditors with54%againsttheintroductionofsucharequirement.CFOsthat were against the mandatory rotation of auditors cited an erosion of business confidentiality over time as auditors acquire deep insight into the business affairs of companies they no longer audit. Increased costs arising from compliance would also be incurred by businesses and may result in increased auditing fees. Those in favour of the policy argued that audits have become routine and that businesses and auditors alike wouldbenefitfromachangeinthecurrentprocess.ManyCFOssuggested that the rotation period would need to be sufficiently long to allow for the costs of switching auditors.
Figure 22: Would you see value in the mandatory rotation of auditors?
Figure 22. Would you see value in the mandatory rotation of auditors?
54%
46%
Yes
No
a negative impact on employment creation. Considering that many companies have spent the past number of years cutting costs and reducing pay to protect jobs and enhance competitiveness, any increases in the cost of employment may negatively affect economic recovery. Figure 19: Do you believe that any increase in PRSI in the Budget will be able to be absorbed by business?
Figure 19. Do you believe that any increase in PRSI in the Budget will be able to be absorbed by business?
85%
15%
Yes
No
Figure 20: What impact will an increase in PRSI have on employment creation?Figure 20. What impact will an increase in PRSI have on
employment creation?
0%
95%
5%
Positive
No impact
Negative
This quarter we sought CFO opinion on two key elements of the European Commission’s legislative proposals to reform the audit market, joint audits and the mandatory rotation of auditors.80%ofCFOssurveyedseenovalueinjointaudits.When asked to comment many CFOs stated that they prefer to have a relationship with just one auditor and that the extracostinvolvedinajointauditwouldoutweighanyextravalue incurred. Additional concerns included the increased complexityoftheauditprocessandthelengthoftimeitwouldrequire which would impact business performance.
15
Quarter 4 2012 will examine in detail the reaction to Budget 2013 and look at how CFOs view the impact of key taxation and spending changes on their business.
What to expect from next quarter
For more information on the Deloitte CFO Survey please contact:
Shane MohanPartner,ManagementConsultingT:+35314172543E: [email protected]
Alan FlanaganPartner,ManagementConsultingT:+35314172873E: [email protected]
Tom CassinPartner, AuditT:+35314172210E: [email protected]
Pádraic WhelanPartner,TaxationT:+35314172848E: [email protected]
Michael FlynnPartner, Corporate FinanceT:+35314172515E: [email protected]
Cathal TreacyPartner, AuditT:+35361435511E: [email protected]
ContactsDublinDeloitte & ToucheDeloitte & Touche HouseEarlsfort Terrace Dublin 2 T:+35314172200F:+35314172300
CorkDeloitte & ToucheNo.6Lapp’sQuayCorkT:+353214907000F:+353214907001
LimerickDeloitte & ToucheDeloitte & Touche HouseCharlotteQuay Limerick T:+35361435500F:+35361418310
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