CFO Studio Magazine with Dominic Caruso, CFO, Johnson & Johnson

12 WWW.CFOSTUDIO.COM Q4 2016 •Cash flow contribution: working capital, other capital expenditures, dividends, share repurchases, debt, and cash The second of these, P/E multiple change, offers a lot of opportunity for control by management by “reshaping their financial strategy, reshaping their business portfolio, driving much stronger margin, perhaps at the expense of growth,” among other choices, says Kotzen. He notes that in conversation with clients, there’s sometimes an obsession with growth, “trying to get 6 percent growth whereas in actuality what their shareholders need is 4.5 percent or 5 percent organic growth.” Other management levers for P/E multiple change include performance consistency, meeting expectations, confidence in management, portfolio changes, and targeting optimal investors. Kotzen says that private companies, too, can implement the TSR discipline. “We develop a TSR model for them. We use regression analysis, look at a peer group of publicly traded companies, develop a synthetic P/E or EBITDA multiple, and we create a synthetic share price.” At D&B in 2013, in a period of historically low interest rates, Veldran said he felt the time was right to buy back some shares. “We bought back $1 billion worth of shares at an average price of around $83,” he said at the conference. “But we wouldn’t have done that unless the key elements of TSR were in play: if we weren’t on a strategy that was geared towards driving growth, if we weren’t able to expand margin, and if we weren’t able to drive strong, free cash flow as a result of those. So everything is situational. You have to look at the TSR equation on an ongoing basis and adjust at the right time.” Today, the business strategy at D&B, launched a couple of years ago, is geared toward driving sustainable mid-single-digit growth with ongoing margin expansion, and “making sure that we use our cash extremely effectively,” says Veldran. “It’s a very disciplined approach,” he says, but “it’s just the way we live and breathe as a company: a healthy balance of great innovation to drive growth, but leveraging your core so that you can expand your margin, and then making sure that once you generate cash as a result of that, you’re using that cash very wisely.” The relationship between Rich Veldran and Jeff Kotzen, forged in the financial offices of large global companies, is longstanding. Both men respect what the TSR lens can suggest about the way forward. Neither of them, however, fears making a contraindicated decision, as long as it rests on facts and data. They have even joined forces to go against large investors clamoring for a leveraged recap or an ASR. In that case, the intent was to bring to D&B a different type of investor, one who looks for longer-term, growth- oriented stocks. The decision paid off. As Kotzen puts it, those investors became D&B’s partners on its journey. C The Implementation of TSR T otal Shareholder Return is, as Jeffrey Kotzen, Senior Partner & Managing Director of Boston Consulting Group, says, a way to think about the future of a company and of its strategy. Taking an investor’s point of view, Kotzen helps clients analyze their plans for the next three, five, or 10 years, in terms of the share price, price-to-earnings multiple, and market cap potential. Then, he says, “let’s peel the onion: Let’s look at the underlying business units or divi- sions or lines of business, and let’s understand, if they were standalone publicly traded companies, what the total shareholder return contribution of each of them would be.” Richard Veldran, CFO of Dun & Bradstreet, says that D&B undertook a comprehensive review of its portfolio 12 years ago. “We were collecting data everywhere, and present in every market, but all of these businesses aren’t created equal.” D&B used that insight to make certain decisions: If they were the No. 1 player and there was growth potential and the business was profitable, then D&B would own and operate it. In other mar- kets, D&B sold their business to a local partner, combined the databases, had the partner brand the data D&B, and monetized any information that crossed the border. “If you do this right,” says Veldran, “any business that you invest in, as long as it is optimized around your core [product], will create sharehold- er value. It all comes back to the TSR model.” Jeffrey Kotzen, Senior Partner & Managing Director, The Boston Consulting Group STUDIES IN SUCCESS Every quarter, the CFO Breakfast Learning Series, with CPE credits. Reserve your seat at www.cfostudio.com +