how fp&a and treasury can help beat the street - …

HOW FP&A AND TREASURY CAN HELP

BEAT THE STREET

October 2019BostonVlad Antikarov

About the Author

Mr. Antikarov is a CFO of Epione Pharmaceuticals.

A Fulbright Scholar, Mr. Antikarov has held leadership roles in sophisticated financial transactions, corporate

finance, strategy development and enterprise risk management, driving gains in revenue, profitability, and

shareholder value.

His experience includes work with Fortune 500 companies, as well as international front runners such as

AT&T, Merck, Lockheed Martin, Alcatel-Lucent, Thomson Reuters, Philips, OSG, Roche, Valle, Votorantim,

Telefonica and Axel Johnson.

He is co-author of a best-selling book, Real Options, A Practitioner’s Guide, which is used by MIT, Harvard

and The Wharton School and by corporate finance practitioners. Antikarov is cited as a thought partner in

McKinsey & Company’s book Valuation: Measuring and Managing the Value of Companies.

Proposed Agenda

⚫ The Challenge of Managing for Shareholder Value

⚫ Measuring Shareholder Value

⚫ Planning for Shareholder Value

⚫ Conclusions

Shareholder Value – Talk is not Cheap

“Study, recently published in the Journal of Management Studies, examined 2,373 letters to shareholders

from 590 CEOs of S&P 500 companies between 1998 and 2005. Authors …determined that corporate

leaders who explicitly communicated their interest in maximizing shareholder value received higher annual

compensation increases. …

After controlling for company size, stock performance, the chief executive’s tenure and

other factors, CEOs could count on an additional $116,000 for every mention per 1,000 words of

boosting the company’s share value….

in 2005, there were just 616 mentions of “shareholder value” on corporate earnings calls with analysts and

investors; by 2015, that number rose to 3,756 mentions…”

The Two Words That Earn CEOs a Pay Raise, The Wall Street Journal 10/21/2017

How to achieve consistently the creation of shareholder value?

Management is Responsible for Relationships with Key Constituencies or

Company’s Relationships with Key Constituencies

Only a long-term financially viable company can successfully maintain its

relationships with key constituencies meeting and exceeding their expectations

Customers

Investors

Society

Government

Employees Management

Company

Products and Services

Revenues, Feedback

Return on Investment, Information

Investment, Oversight

Fairness, Compensation, Careers

Skills, Efforts, Loyalty

Taxes, Compliance, Petitioning

Regulation, Government Services

Corporate Citizenship

Social License to Operate

Creation of Shareholder Value – The Role of Strategy in the

Creation of Shareholder Value

Operations

New

Initiatives

Product

Development Compensation

Financial

ManagementMarketing &

Sales

Shareholder

Value

?

M&A Activity

For the last 40 years, the formulation of corporate strategy and its implementation

through different plants is supposed to be the process for planning and achieving the

creation of shareholder value

Strategy

Formulation &

Implementation

Planning

Unrealistic Goals and Later Revisions

Kohl’s (KSS) In 2015, it adopted (and later abandoned) a 2017 sales target of $21

billion. The Street now expects closer to $18.6 billion.

Under Armour (UAA) dropped a 2018 goal of $7.5 billion (analysts expect $6

billion) in favor of a $10 billion target—but gave no time frame.

Target (TGT) In 2015 it promised annual digital-sales growth of 40%; it delivered

31% in 2015 (off a small base), and 27% in 2016.

Nike (NKE) made a bold promise in 2015 to hit annual sales of $50 billion

by 2020—a 67% jump. Wall Street analysts expect Nike sales to hit only

$42.5 billion in 2020

Source: Nike, Under Armour, and More Companies That Missed Their Revenue Goals, Fortune, July 2017

http://fortune.com/company/kss

http://fortune.com/company/uaa

http://fortune.com/company/tgt

http://fortune.com/company/nke

Unrealistic Goals and Share Price Performance Share Price

Performance

S&P

%

Failure to achieve the unrealistic goals and the inevitable fall back has significantly

damaged companies’ reputation and forced investors to downward adjust their

performance expectations

-80

-60

-40

-20

0

20

40

60

80

100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Relative Monthly Share Price Growth over Three Year Period

Under Armour Inc A Nike Inc B Lululemon Athletica Inc Target Corp Kohl's Corp S&P Global Inc

Setting Targets – Current Challenge Right

Performance Targets – Current

Challenges

Lack of Clear Rationale

⚫ Incremental targets derived

from past performance (driving

while looking in the rear-view

mirror)

⚫ Striving to always hit analysts’

set earnings expectations

⚫ Aspirational target-setting ( e.g.

keep a double-digit earnings

growth)

Lack of clarity around the creation of shareholder value creates formidable

challenges in successfully formulating and achieving performance objectives.

Internal Friction

⚫ Lack of clear logic for deriving

the targets creates top vs.

bottom friction at all levels of

management

⚫ Targets are not tested for

feasibility and frequently fail to

materialize

⚫ Negative effect on morale and

constant push-back to lower

targets

Uncertainty of Results

⚫ As the relation between

performance results and

shareholder value is not well

understood:

– Achieving targets does not

guarantee the creation of

shareholder value

– Long-term strategy can be

sub-optimal

To achieve a particular outcome, a company goes through a standard goal setting, planning, and implementation cycle:

• Select an appropriate metric that can be directly impacted by the company’s activities and measures success.

• Develop a set of measurable goals over a certain planning period.

• Develop a cascade of strategic and implementation plans to achieve or exceed those goals.

• Provide the necessary resources required for successful implementation.

• Create proper incentives for employees around specific sub-goals.

• Test the plans for implementation feasibility.

• Lead implementation

• Communicate with key constituencies planned and achieved results

Goal Setting, Planning, and Implementation for Shareholder Value

Management of

Operations

New Initiatives

Product Development Compensation

Financial ManagementMarketing & Sales

Shareholder

Value

M&A Activity

Shareholder

Value

Goal Setting

and Planning

Strategy

Formulation &

Implementation

Planning

Proposed Agenda




⚫ Conclusions

Shareholder Value Creation - Investor Perspective

Investors acquire the shares of a company at a particular price

expecting returns equal or superior to comparable investment alternatives.

The company’s strategy and its implementation have to meet and

exceed those expectations.

Does the company understand current investor expectations?

How does the company plan to meet and exceed those expectations?

Shareholder Value Measurement Framework

Shareholder Value Measurement Framework

Area of Impact

CapabilitiesGoals Implementation Results

Assess Alternatives strategic goals Implementation feasibility Likely shareholder value

results

Influence

Selection of optimal strategic

goals

Design of feasible

implementation

Achievement of targeted value

creation results

Communicate

Economic rationale of the

strategy and its objectives

State of implementation and

managing through occurring

challenges

Scope and certainty of

targeted shareholder value

results

The Shareholder Value Measurement Framework (SVMF) allows management to use

consistent and detailed framework for:

Area of Impact



results

Influence

Selection of optimal strategic

goals

Design of feasible

implementation

Achievement of targeted value

creation results

Area of Impact



results

Area of Impact


AT&T Recent Quarterly Results

40.03

36.78

39.4 38.88

35.65

32.1133.58

28.54

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10

15

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25

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35

40

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Quarterly Share Price - AT&T

0.2%

-25%

38%

0%

-25%-30%

27%

-44%

Annualized Quarterly Total Shareholder Returns

Total Shareholder Return per Share

AT&T 2017 and 2018 – Investor Expectations vs. Total Shareholder Returns017

– Illustrative ExampleThe low market related risk of AT&T determines its low annual Required Rate of Return on

Equity of 4.6% (Quarterly RRE = 1.13%)

( )fMtft RRRRRE −+= *

0.642.3% 3.6%4.6%

0.9%

-21%

4.8% 5.0%

2017 2018

Total Return per Share - AT&T

Total Shareholder Return Ann Required Return Ann

Change in MarketCapitalization

Dividends Share Buybacks Total ShareholderValue Added

Expected TotalShareholder Value

Total ShareholderValue Created

Measuring Total Shareholder Value Created

*

Total Shareholder Value Created – Measurement Methodology

The Total Shareholder Value Created measures the net new total wealth the company has created

for its shareholders over a given period in excess of the return they could have expected to achieve

by investing in businesses with a similar market risk.

AT&T Recent Results – Total Shareholder Value Created

128,857,888

(16,956,977,974)

19,093,036,282

(124,518,395)

(16,762,228,179)(18,692,498,089)

14,299,439,287

2,957,463,085 2,965,891,962 2,637,759,090 2,754,871,725 2,635,101,985 2,772,991,257 3,000,787,057

Total Shareholder Value

Total Shareholder Value Created Required Total Return

Proposed Agenda




⚫ Conclusions

Value Planning Tool Set – Sequential Implementation

Shareholder Value Creation Plan

Set the total and per share value

creation targets for the planning

period and the levers the company

will use to achieve them

Implementation Plans

Develop a full set of

implementation plans including

sales, operations, capital

budgeting, corporate

development to support the

Financial plans

Capital Deployment Plan

Set the key investment and

return on investment targets the

company will achieve to support

its Shareholder Value Creation

Plan

The modules are implemented sequentially and are connected through their respective

inputs and outputs

Formulation and

Implementation

Full Financial Plan

Develop a full set of financial

plans, including income

statements, balance sheets and

cash flow statements to support

the Capital Deployment Plan


• The Shareholder Value Creation Plan is a document that captures at the highest level the

shareholder value creation objectives of the company over the planning period

• Senior management can set total return per share targets for each of the planning periods

and the specific combination of dividends and capital appreciation to be achieved

• The Plan also establishes Total Shareholder Value Created, Free Cash Flow, Enterprise

Value and Market Capitalization targets for the planning period.

• The Shareholder Value Creation Plan module is an iterative platform that allows

management to test different alternatives and ultimately develop a plan tightly aligned with

current situation, resources, capabilities and corporate strategy



Steady Trend Inputs – Illustration I

Total Shares 7,281,628,525

Share Price 32

Dividend/Share 2.04

Div. Ann. % Change 2%

Net Shares Bought Back 20,000,000

SBB Ann. % Change 1%

Targeted TSR 7.0%

TSR Ann. % Change 2%

Capital Str. (% Debt) 46%

Ann. % Change -1.0%

Cost of Debt 4.0%

Ann. % Change 1.0%

Current Cash Reserves 3,000,000,000

Ann. Cash Reserv as % 1%

Inputs

20.00 20.20 20.40 20.61 20.81 21.02 21.23 21.44 21.66 21.87

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Share Bought/Issued (M)

7,282 7,262 7,241 7,221 7,200 7,180 7,159 7,137 7,116 7,094

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Total Shares Outstanding (M)

7.0% 7.1% 7.3% 7.4% 7.6% 7.7% 7.9% 8.1% 8.2% 8.4%

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

TSR per Share

2.24 2.30 2.36 2.43 2.50 2.57 2.65 2.73 2.82 2.91

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Shareholder Value per Share

2.04 2.08 2.12 2.16 2.21 2.25 2.30 2.34 2.39 2.44

0.20 0.22 0.24 0.27 0.29 0.32 0.35 0.39 0.43 0.47

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Shareholder Value per Share Components

Dividends per Share Capital App. Per Share

• Outputs describes planned shares outstanding and TSR per share



Steady Trend Inputs – Illustration II

835 955 1,088 1,237 1,402 1,586 1,791 2,020 2,276 2,563

14,834 15,089 15,348 15,610 15,877 16,147 16,422 16,700 16,982 17,269

642 651 662 673 685 698 712 727 742 759

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Total Shareholder Value Components

Capital Appreciation M Dividends Total M Share Buybacks Value M

233,012 233,847 234,802 235,890 237,127 238,529 240,115 241,906 243,927 246,203

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Market Cap

16,311 16,694 17,098 17,520 17,964 18,432 18,925 19,447 20,001 20,591

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Total Shareholder Value

32.0 32.2 32.4 32.7 32.9 33.2 33.5 33.9 34.3 34.7

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Share Price Forecast

• Outputs describes planned Shareholder Value Created, Share price and Market Capitalization



Steady Trend Inputs – Illustration III

54% 54% 55% 55% 56% 56% 57% 57% 58% 58%

46% 46% 45% 45% 44% 44% 43% 43% 42% 42%

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Capital Structure

Market Cap Value of Debt 3,037 2,859

2,682 2,501

2,315 2,124

1,925 1,719

1,502 1,274

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Funds to/from Change of Debt (M)

199,203 196,344 193,662 191,161 188,846 186,722 184,797 183,079 181,576 180,302

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Total Value of Debt (M)

433,050 431,145 429,552 428,288 427,375 426,838 426,704 427,005 427,780 429,069

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Enterprise Value (M)

199,203 196,344 193,662 191,161 188,846 186,722 184,797 183,079 181,576 180,302

233,721 235,355 237,864 242,910 247,642 252,759 257,576 262,789 267,721 273,447

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Enterprise Value Components (M)

Value of Debt Market Cap end

• Outputs describes planned Enterprise Value and Capital Structure



Steady Trend Inputs – Illustration IV

29,746

26,796 26,859 26,929 27,005 27,087 27,175 27,267 27,363 27,462

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Cashflow to Investors (M)

3,037 2,859 2,682 2,501 2,315 2,124 1,925 1,719 1,502 1,274

7,968 7,932 7,902 7,878 7,861 7,850 7,847 7,851 7,865 7,888

14,834 15,089 15,348 15,610 15,877 16,147 16,422 16,700 16,982 17,269

642 651 662 673 685 698 712 727 742 759

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Cashflow to Investors Components (M)Change in Debt Ann Interest Payment Dividends Total Share Buybacks Value

4.0% 4.0% 4.1% 4.1% 4.2% 4.2% 4.2% 4.3% 4.3% 4.4%

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Annual Cost of Debt

7,968 7,932 7,902 7,878 7,861 7,850 7,847 7,851 7,865 7,888

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Annual Interest Payments (M)11,005 10,792 10,584 10,379 10,176 9,974 9,772 9,570 9,367 9,162

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Total Cash Flows to/from Debtholders (M)

• Outputs describes planned Free Cash Flow


Free Cash

Flow from

Invested

Capital

Reinvested % of NOPLAT

Reinvested Depreciation

Reinvested % of Depreciation

Invested Capital


Gross Cash

Flow

Return on

Invested

Capital

New InvestmentsGross Cash

Flow

Return on

New

Investments

Free Cash

Flow from

New

Investments

Free Cash

Flow from

Invested

Capital

Reinvested % of Depreciation

Current Invested

Capital

Gross Cash

Flow

Return on

Invested

Capital

Reinvested % of Depreciation and NOPLAT

in New Investments

External

Financing for New

Investments

• When, where and how much capital is to be deployed? What returns are to be

achieved and when?

• Will the amounts of capital deployed, and the returns achieved within the company be

sufficient to meet and exceed the returns expectations of investors outside the firm?



Key Outputs III- Illustrative

• The output compares the targeted Free Cash Flows from the Shareholder Value Creation

Plan with the Free Cash Flow generated by the version of inputs in the Capital

Deployment Plan


Full Set of Financial and Implementation Plans Plan

• Based on the Capital Deployment Plan management develops a full set of financial

plans, including Income Statements, Balance Sheets, and Cash Flow Statements.

This is a way to flesh out all financial details and test the feasibility of the strategy

and its implementation.

• Finally, management develops a full set of implementation plans including sales,

operations, capital budgeting, corporate development, and liquidity management.

Each of these plans containing objectives and required resources assuring the

achievement of the financial targets set in the previous documents.

Full Financial Plan Implementation Plans

Proposed Agenda




⚫ Conclusions

Key Benefits

Executive Summary

29

• The adoption of the Shareholder Value Measurement Framework and Value

Planning Tool Set enables the CFO function and senior management to

deliberately and effectively drive the creation of shareholder value despite

the concurrent impact of multiple factors.

• The capabilities reduce the likelihood of costly errors in the goal setting and

strategy formulation process as well as facilitate the prioritization and

implementation of corrective actions when implementation challenges occur.

• The strategic capabilities are integrated with all other management systems

and can drive optimization and continuous improvement efforts across the

enterprise

• The capabilities form a powerful communication platform to fully inform

investors regarding the shareholder value potential and credibility of the

company's strategy and implementation plans.

• In times of ever-growing investor activism, the platform can provide powerful

counterarguments to potential hostile narratives.

Back in the Office

Executive Summary

30

• Identify a data source for forward-looking Betas (ꞵ) for the company and calculate the

quarterly and annual Required Return on Equity (RRE) for the last few years to

understand minimum investor expectations

• Compare the historical RREs with the corresponding Total Shareholder Return (TSR)

per share for the same periods and check whether your company has met, exceeded all

failed investor expectations

• Multiply the annual RRE with the current market capitalization of the firm to find the

minimum Total Shareholder Value investors expect over the next year.

• Identify what portions of these total shareholder value added the company plans to

deliver through dividends, share price appreciation and share buybacks

• Start a conversation about adopting a Value Planning Tool Set for your company and

the creation of Value Creation Plan as a first step

Thank You

Vlad Antikarov

[email protected]

617 256 4868

mailto:[email protected]

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