Warmest welcome! 18th Baltic Utilities Seminar

Transcription

1 Warmest welcome! 18th Baltic Utilities Seminar

2 18 th Baltic Utilities Seminar supports development of future engineering The BUS gift fund diverted to the purchase of study technology at Engineering High School of Riga Technical University Page 2

3 11 th Global Capital Confidence Barometer Power and utilities (P&U) Jonas Akelis EY Managing Partner Baltics

4 About the Barometer EY s Capital Confidence Barometer is a regular survey of senior executives from large companies around the world conducted by the Economist Intelligence Unit (EIU). The respondent community is comprised of an independent EIU panel of senior executives and select EY clients and contacts. Our 11 th Barometer provides a snapshot of our findings, gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agenda. Respondent profile EIU panel of more than 1600 executives surveyed in August and September executives from P&U Companies from 62 countries Executives from 18 industry sectors 949 CEO, CFO and other C-level executives More than 800 companies would qualify for the Fortune 1000 based on revenues Page 4

5 Geopolitical instability is seen as the greatest risk factor in the next 12 months What do you believe to be the greatest economic risk to your business over the next 6 12 months? Increased global political instability 3 30% Increased global political instability 2 43% The effects of tapering of quantitative easing 25% 21% Slowing growth in key emerging markets 22% 31% Slowing growth in key emerging markets 15% 26% The effects of tapering of 18% 20% Pace of structural reforms in Eurozone 14% 14% Pace of structural reforms in Eurozone 10% 12% Inflation 6% Inflation 6% Deflation 2% 3% Deflation 1% 3% Geopolitical concerns have increased, especially in the EU, driven mainly by tensions between Ukraine and Russia. The Middle East crisis has also escalated since our last survey. P&U companies, whose operations are highly dependent on the geopolitical and regulatory environments, consider increased geopolitical instability as the greatest risk for their businesses. Page 5

6 Rising geopolitical concerns are influencing outbound investment decisions If you are slowing or stopping your investments into certain markets, to what do you attribute this changing sentiment? Political/regulatory risk in those markets 31% Political/regulatory risk in those markets 39% Lack of infrastructure to support growth in those markets 2 Lack of infrastructure to support growth in those markets 26% Slowing growth 21% Complexity and transparency 12% Complexity and transparency 11% Slowing growth 12% Currency risk 10% Currency risk 11% The prevailing political instability and disturbances primarily in parts of Middle-East and Eastern Europe are forcing utilities to rethink their investment strategies in these markets. The presence of supporting infrastructure for growth is also a key attribute that the utilities are considering while making investment decisions. Page 6

7 Confidence in corporate earnings remains strong Please indicate your level of confidence in the following at the global level: % response positive Corporate earnings 43% 7 65% Corporate earnings 38% 68% 68% Short-term market stability 21% 64% 54% Credit availability 56% 59% 59% Credit availability 58% 54% 48% Short-term market stability 2 45% 60% Equity valuations/stock market outlook 29% 54% 49% Equity valuations/stock market outlook 31% 44% 51% Confidence in corporate earnings continues to be strong among P&U executives. However, the confidence in short-term market stability has fallen over the last six months. The fall in confidence in market stability also translates into lower confidence in equity valuations. Page 7

8 P&U executives express positive hiring intentions With regards to employment, which of the following does your organization expect to do in the next 12 months? 52% 13% 3 50% 1 52% 31% 22% 48% 30% Oct-13 11% 48% Oct-13 53% Reduce workforce numbers Keep current workforce size Create jobs/hire talent A significantly higher number of P&U executives expect to create jobs in the next 12 months as compared to six months ago. The changing P&U business landscape and the aging workforce will require companies to hire talent with newer skills such as energy management, smart technologies and advanced renewable technologies. Page 8

9 Transformation in the business landscape is driving utilities to innovate Which of the following will impact a) your core business and b) your acquisition strategy most in the next 12 months? Select up to two. Future of work Rethinking government Digital transformation Global rebalancing Resourceful planet Reconfiguring the financial system Cyber security 4% 4% 44% 38% 34% 2 33% 3 33% 32% 2 26% 18% 21% Resourceful planet Future of work Rethinking government Digital transformation Global rebalancing Reconfiguring the financial system Cyber security 4 46% 31% 34% 19% 26% 3 26% 2 13% 15% 3% 2% Business Acquisition 4 of the surveyed believe that Resourceful planet the idea of optimizing the use of the limited resources and use of renewable and less emitting resources will most significantly impact their core business. The P&U M&A market reinforces this sentiment with more than $20b worth of deals already completed in the renewable power segment in the first nine months of 2014, outpacing the renewable power deal value in the completed year Page 9

10 Focus is on reducing costs and increasing efficiency Which statement best describes your organization s focus over the next 12 months? 1% 15% 35% 49% 80% % focused on growth Power and utilities respondents Oct-13 Oct-13 6% 1 2% 8% 32% 13% 5% 16% 1% 10% 39% 49% 3 38% Survival 58% 38% 50% 58% 60% 52% 49% 50% 50% 38% 20% 0% Oct-12 Apr-13 Oct-13 Falling electricity demand, increased pressure on tariffs and the prevailing depressed wholesale prices have forced utilities to focus on cost reduction and efficiency improvement in order to protect their bottom lines. As growth opportunities dry up in mature economies, utilities are looking at emerging markets such as Latin America and Africa for growth. Page 10

11 Optimizing business portfolio and investment in R&D are the primary focus areas What is the primary focus of your company s organic growth over the next 12 months? Changing mix of existing products & services Increase R&D/product introductions Exploiting technology to develop new markets/products Investing in new geographies/markets Higher risk 30% 21% 9% 22% 1 6% 8% 15% 16% 3% 12% 12% Lower risk Changing mix of existing products & services Increase R&D/product introductions Investing in new geographies/markets Exploiting technology to develop new markets/products Higher risk 25% 19% 10% 20% 12% 3% 10% 1 10% 10% 1 20% Lower risk More rigorous focus on core products/existing markets 23% 24% More rigorous focus on core products/existing markets 20% 28% 43% New sales channels 14% 11% 1 New sales channels 15% 14% Oct-13 P&U companies are focusing more and more on optimizing their business portfolios to operate in the changing business landscape. As research continues on clean generation and emission reduction, higher numbers of utilities are investing in research on smart and storage technologies. 20% of the respondents from the P&U sector say increasing R&D is the primary focus in the next 12 months, significantly up from 3% 12 months ago. Page 11

12 Capital allocation to M&A remains measured and disciplined What percentage of your planned growth for the current fiscal year is explicitly assigned to acquisitions? Less than 25% 55% 69% Less than 25% 72% 25% 49.9% 2 39% 25% 49.9% 26% 48% Greater than 50% 4% 6% Greater than 50% 2% 11% Companies are not planning acquisitions at the expense of organic growth but they expect to do deals that are aligned to their strategy. Page 12

13 Divestments and cost reduction measures help in lowering debt levels What is your company s current debt-to-capital ratio? 68% 58% Less than 25% 39% Less than 25% 36% 44% 28% 24% 31% 25% 49.9% 33% 25% 49.9% 29% 32% 36% 5% 4% 50% 74.9% 19% 50% 74.9% 28% 16% 30% 3% 75% 100% 9% 8% 75% 100% 6% Oct-13 Divestment of non-core businesses and proactive cost reduction and efficiency measures appear to have been successful. Our survey results show a decrease in leverage among utilities. 58% of the P&U companies surveyed have a debt-capital ratio of 25% or less. While only 11% have a debt-capital ratio of over 50%. Page 13

14 Stronger balance sheets will fuel debt funding for growth strategies How do you expect your company s debt-to-capital ratio to change over the next 12 months? 18% 36% 46% 15% 45% 33% % 2 Oct-13 34% 46% 20% Oct-13 36% 23% Decrease Remain constant Increase 45% of the companies expect their debt-capital ratio to increase in the next one year, showing a willingness to take on more debt to fund growth. The proportion of executives expecting the debt-capital ratio to decrease has reduced from 3 in April to 15% in October Page 14

15 Companies desire to acquire, but face dealmaking challenges Do you expect your company to pursue acquisitions in the next 12 months? 60% Expectations to pursue an acquisition Power and utilities respondents Level of confidence at the global level: Likelihood of closing acquisitions 44% 32% 42% Likelihood of closing acquisitions 34% 28% 35% 33% 25% 29% 20% 31% 28% 22% 23% 0% Oct-12 Apr-13 Oct-13 Quality of acquisition opportunities Number of acquisition opportunities 51% 43% 58% 51% 61% Quality of acquisition opportunities Number of acquisition opportunities 34% 35% 39% 50% 45% 53% Oct-13 P&U companies appetite to pursue acquisitions hits a two year high, with of the P&U executives surveyed expecting to pursue acquisitions in the next 12 months. The total deal value in the first nine months of 2014 has already reached $125b, compared to a full year deal value of $125.4b in Some deal making challenges persist. Whilst improving from 28% six months ago, only 34% of the P&U executives are confident of closing acquisitions. Page 15

16 Estimation of right strategic value remains a key challenge among the P&U companies For acquisitions completed recently, what was the most significant issue that contributed to deals not meeting expectations? Strategic value overestimated/purchase price multiple too high 32% 51% Unforeseen liabilities (tax, HR, pension etc) 9% 1 Product/Sales price and margin deterioration Poor execution of integration Sales volume declines/loss of customers Poor operating cost assumptions 1 11% 1 18% 11% 6% 4% Power and utilities respondents 32% of the respondents in the previous Capital Confidence Barometer survey in April 2014 believed that overestimation of strategic value was the most significant reason for deals not meeting expectations. The latest survey reveals that the P&U companies continue to face valuation challenges with 51% of the respondents stating that deals are not meeting expectations primarily due to overestimation of the strategic value of the asset. Page 16

17 Companies are looking to achieve growth within core businesses What are the main drivers impacting your M&A strategy over the next 12 months? Select up to three. Reduce costs, improve margins Move into new geographical markets Access new technology/intellectual property Improvements to supply chain Move into new product/services areas Gain market share in existing geographical markets Acquire talent Acquire assets at a discount opportunistic M&A Optimize tax efficiencies Navigate regulatory issues Leverage regulatory/legislative opportunities 3% 5% 11% 16% 19% 19% 30% 31% 2 24% 23% 35% 35% 34% 34% 32% 45% 44% Power and utilities respondents 44% of P&U executives say that their M&A strategy is primarily driven by the need to move into new geographical markets, while say that moving into new products/services will drive their strategy. As growth in traditional utility businesses dries up in mature markets, a greater number of utilities are looking to expand their geographical footprint in search of growth. Utilities are also taking steps to expand their business scope to include allied services such as energy management and other energy services. Page 17

18 P&U companies strategic agendas are increasingly influenced by growing shareholder activism Which of the following has been elevated on your boardroom agenda as a result of shareholder activism? Select up to two. Cost reduction 48% Cost reduction 55% Share buy-back 30% Share buy-back 26% Cash dividend payments 28% Strategic divestment 26% Strategic divestment 25% Cash dividend payments 24% Portfolio analysis 20% Portfolio analysis 19% Spin-off/IPO 14% Acquisition 14% Acquisition 11% Spin-off/IPO 12% Our shareholders have not raised these issues 5% Our shareholders have not We do not have shareholders 1% We do not have shareholders 0% As the utilities business environment continues to be difficult with lower demand and lower profits, investors are increasingly focusing on the need for higher cost control and efficiency improvement measures. Divestment of non-strategic assets has also risen in the boardroom agenda as a result of increased shareholder activism. Page 18

19 Thank you!