Q2'18 MIDDLE MARKET INDICATOR | ACG WEBINAR | JULY 25 , 2018 THE MARKET … acg webinar v5.pdf ·...

THE MARKET THAT MOVES AMERICAFINDINGS FROM THE NCMM’S Q2 '18 INDICATOR SURVEY

T h o m a s A . S t e w a r t , E x e c u t i v e D i r e c t o rT h e N a t i o n a l C e n t e r f o r t h e M i d d l e M a r k e t

Q2'18 MIDDLE MARKET INDICATOR | ACG WEBINAR | JULY 25 th, 2018

THE MIGHTY MIDDLE MARKET

2

2

THE NATIONAL CENTER FORTHE MIDDLE MARKET

www.middlemarketcenter.org

The National Center for the Middle Market is a collaboration between The Ohio State University’s Fisher

College of Business, SunTrust Banks Inc., Grant Thornton, and Cisco Systems. It exists for a single

purpose: to ensure that the vitality and robustness of Middle Market companies are fully realized as

fundamental to our nation’s economic outlook and prosperity. The Center is the leading source of

knowledge, leadership, and innovative research on the middle market economy, providing critical data

analysis, insights, and perspectives for companies, policymakers, and other key stakeholders, to help

accelerate growth, increase competitiveness and create jobs in this sector.

MIDDLE MARKET RESEARCH & DATA EXPERTISE & OUTREACH

EDUCATION

Quarterly Middle Market Indicator

Research and Expert Perspectives

Interactive Benchmarking Tools

Executive Programs

Webinars

Share Research & Discuss Trends

3

3

http://www.middlemarketcenter.org/

THE MIDDLE MARKET INDICATOR

4

MIDDLE MARKET INDICATOR

OVERVIEW

5

A Quarterly National Survey Cut by Geography and Industry

Q2'18 MIDDLE MARKET INDICATOR

EXECUTIVE SUMMARY

Source: 3Q’17 Middle Market Indicator Report

6

• THE MIDDLE MARKET CONTINUES TO LEAD THE U.S. ECONOMY IN

JOB CREATION; FOR THE FIRST TIME IN 6 YEARS, S&P REVENUE

GROWTH OUTSTRIPPED THE MIDDLE MARKET

• WHILE REVENUE GROWTH SLOWED FROM THE FAST PACE OF

THE PREVIOUS QUARTERI IT REMAINS STRONG, AHEAD OF LAST

YEAR AND WILL ABOVE HISTORICAL AVERAGES. JOB CREATION IS

ESPECIALLY ROBUST AND TALENT CHALLENGES ARE INTENSE.

• SHORT-TERM ORDER PIPELINES ARE FULL. HOWEVER,

CONFIDENCE HAS DIPPED—ESPECIALLY GOR THE GLOBAL

ECONOMY—AND EXECUTIVES REPORT A JUMP IN CONCERNS

ABOUT TRADE-RELATED POLICIES AND COSTS.

• PRIVATE-EQUITY-OWNED COMPANIES OUTPERFORMED THE

NATIONAL AVERAGES, AND EXPECT TO CONTINUE TO THRIVE

1

2

3

4

Q2'18 U.S. MIDDLE MARKET

EXECUTIVE SUMMARY

CAPITAL INVESTMENT CONFIDENCE

75%GLOBAL ECONOMY

86%NATIONAL ECONOMY

90%LOCAL ECONOMY

REVENUE GROWTH

7.4%PAST 12 MONTHS

5.9%NEXT 12 MONTHS

EMPLOYMENT GROWTH

6.7%PAST 12 MONTHS

4.8%NEXT 12 MONTHS

1.0%SMALLBUSINESS

2.9%LARGEBUSINESS

Source: 1Q’18 Middle Market Indicator Report7

8.25%S&P 500 71%

WILL INVEST


REVENUE GROWTH

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

U.S. MIDDLE MARKET S&P 500 PE-OWNED8


*1Q numbers include only companies who have reported.

PAST 12 MONTHS

7.4%U.S. MIDDLE MARKET

9.3%PE-OWNED FIRMS

8.25%S&P 500*

THE RISING TIDE CONTINUES TO LIFT

ALMOST ALL BOATS

Source: 1Q ‘18 Middle Market Indicator Report

9

2Q 2018 2Q 2017

Performance improved

72% 65%

Performance was unchanged

22 30

Performance deteriorated

7 5


INDUSTRY REVENUE GROWTH


10

8.7%

8.8%

4.8%

5.9%

6.7%

4.8%

5.3%

7.2%

5.3%

5.5%

7%

8.9%

7%

8.9%

8.9%

10.3%


REVENUE GROWTH FORECAST

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

3Q

'12

4Q

'12

1Q

'13

2Q

'13

3Q

'13

4Q

'13

1Q

'14

2Q

'14

3Q

'14

4Q

'14

1Q

'15

2Q

'15

3Q

'15

4Q

'15

1Q

'16

2Q

'16

3Q

'16

4Q

'16

1Q

'17

2Q

'17

3Q

'17

4Q

'17

1Q

'18

2Q

'18

U.S. MIDDLE MARKET PE-OWNED


7.6%PE-OWNED FIRMS

NEXT 12 MONTHS


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

U.S. MIDDLE MARKET LARGE

SMALL PE-OWNED FIRMS

PAST 12 MONTHS


9.6%PE-OWNED FIRMS


EMPLOYMENT GROWTH

1.9%SMALLBUSINESS

2.4%LARGEBUSINESS



INDUSTRY EMPLOYMENT GROWTH


5.6%

6.5%

4%

10.4%

4.4%

7.5%

3%

5.3%

3.9%

5.8%

4%

5.8%

4.7%

8.4%

7%

10.5%


EMPLOYMENT GROWTH FORECAST

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

3Q

'12

4Q

'12

1Q

'13

2Q

'13

3Q

'13

4Q

'13

1Q

'14

2Q

'14

3Q

'14

4Q

'14

1Q

'15

2Q

'15

3Q

'15

4Q

'15

1Q

'16

2Q

'16

3Q

'16

4Q

'16

1Q

'17

2Q

'17

3Q

'17

4Q

'17

1Q

'18

2Q

'18

U.S. MIDDLE MARKET PE-OWNED FIRMS


6.1%PE-OWNED FIRMS

NEXT 12 MONTHS


CONFIDENCE, INVESTMENT PLANS,

AND CHALLENGES

15


ECONOMIC CONFIDENCE

16

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q

'13

2Q

'13

3Q

'13

4Q

'13

1Q

'14

2Q

'14

3Q

'14

4Q

'14

1Q

'15

2Q

'15

3Q

'15

4Q

'15

1Q

'16

2Q

'16

3Q

'16

4Q

'16

1Q

'17

2Q

'17

3Q

'17

4Q

'17

1Q

'18

2Q

'18

GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY

U.S. ECONOMY

86%85% PE-OWNED

LOCAL ECONOMY

90%87% PE-OWNED

GLOBAL ECONOMY

75%74% PE-OWNED


_____________________________________

Confidence Dips, but Remains Strong Across the Board


INVESTMENT PLANS


15

14

1596

11

10

173

Save It-Hold as Cash

Save It--for MakingInvestments

CapEx--Plant & Equipment

CapEx--Facilities

Acquisitions

Add to HR--More Personnel

Add to HR--Training &Development

IT

Other

12

17

166

9

8

13

6 2

U.S. MIDDLE MARKET PE-OWNED

WHAT WOULD YOU DO WITH AN EXTRA DOLLAR TO INVEST?

INVESTMENT APPETITES CONTINUE TO

RISE

40%

45%

50%

55%

60%

65%

70%

75%

80%

PE-OWNED U.S. MIDDLE MARKET


INVEST VS HOLD CASH

TALENT CHALLENGES REMAIN INTENSE

Talent retention and recruitment remain challenging at MM firms as the labor market continues to tighten.

40%

45%

35%38%

40% 39% 40% 39% 40%43%

48% 47% 48%50%

43%47%

39%

45%

40% 41%39% 38%

40%

50% 51% 50%54% 54%

14%17%

12%

19%15%

18% 18%16% 17%

19%21% 22%

20%

26%

20151Q

20152Q

20153Q

20154Q

20161Q

20162Q

20163Q

20164Q

20171Q

20172Q

20173Q

20174Q

20181Q

20182Q

Core Business Issues Talent Management Costs

THE TRADE WAR IS CREATING ANXIETY ABOUT COSTS

Source: NCMM Middle Market Indicator 4Q 2017

3%3%

2% 2%

4%

10%

3% 3% 3%

5%4%

6%

2%

3%

3%4%

3%

5%

0%

5%

10%

15%

20%

25%

2017 1Q 2017 2Q 2017 3Q 2017 4Q 2018 1Q 2018 2Q

Imports/exports/transportation costs/tariffsRaw material/commodityavailability/costsCosts/increasing costs(unspecified)

LONG TERM EXTERNAL CHALLENGES: COSTS

WHOLESALERS AND MANUFACTURERS FEAR TARIFFS MOST

Source: NCMM Middle Market Indicator 4Q 2017

3%

12%

33%

6%3%

0%2%

9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

Services Manufacturing WholesaleTrade

Retail Trade Construction FinanacialServices

Healthcare Other

LONG TERM EXTERNAL CHALLENGES: TARIFFS

… AND PROFIT MARGINS MAY BE UNDER

PRESSURE

3.1%

2.4%

2.6%1.9% 2%

2.6%3.1% 3.4%

5.9%

3.2% 3.2%2.6%

3.4% 3.2%

2.3%

1.7%

1.6% 1.2% 1.1%

2.3% 2.1%2.1%

4.3%

2%2.8%

1.5%2.3%

2.9%

0%

5%

10%

15%

20%Profit Margins Cost Structure

Expected Change in

RETENTION AND RECRUITMENT TOP THE TALENT CHALLENGES

54%

19%

15%

9%

8%

Talent management

Employee retention

Talent acquisition/recruitment

Management/leadership

Competition for talent

MIDDLE MARKET

MANUFACTURING

7

24

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

U.S. MIDDLE MARKET MANUFACTURERS

25

2Q'153Q'154Q'151Q'162Q'163Q'164Q'161Q'172Q'173Q'174Q'171Q'18

MIDDLE MARKET MANUFACTURING IS

IMPORTANT—AND PERFORMING WELL

Source: NCMM Middle Market Indicator


*1Q numbers include only companies who have reported.

PAST 12 MONTHS


7.7%MANUFACTURERS

REVENUE GROWTH RATE

MANUFACTURERS FACE FIVE MAJOR,

INTER-RELATED CHALLENGES

Competition

Supply chain relationships

Changing product /service mix

Changing manufacturing technology

Talent

NEW RISKS AND

EXPOSURES_____________________

NEW WAYS

TO WIN

Source: NCMM, Middle Market Manufacturing, 2018

CHALLENGE #1: INTENSIFYING,

INCREASINGLY GLOBAL COMPETITION


20%

17%

15%14%

12%

11%

11% 16%

16%

13%

10%

24%

9%

12%

Globalization Consolidation of customers

Businesses from other industries starting to encroach on your business Consolidation of firms like yours

Businesses like yours expanding into other adjacent industries Consolidation of suppliers

Disruptive entrants into the marketplace

ALL MANUFACTURERS FASTEST GROWING

of middle market manufacturers say the business environment has

grown much more competitive in the last five years (top 2 of 5 boxes)86%

CHALLENGE #2: MORE DEMANDING

SUPPLY-CHAIN RELATIONSHIPS


Role of Company in Supply Chain Over Past 5 Years

• Speed, inventory

policies, and

transparency have

driven increased

collaboration – upstream

and downstream

• Increased integration

brings about additional

requirements, services,

and responsibility

CHALLENGE #2: MORE DEMANDING

SUPPLY-CHAIN RELATIONSHIPS


36%

28%

20%

14%

23%

12%

81%

79%

69%

65%

60%

58%

Our customers expect faster cycle times than they have in the past

We expect faster cycle times from our suppliers than we have in the past

Regulations make supply chain management more complicated

Digitization has made supply chain management simpler

Import tariffs would likely have a major negative impact on my supply chain

Digitization of the supply chain has resulted in shorter timelines

47%

36%

18%

22%

30%

12%

90%

90%

76%

76%

63%

66%

Top 2 BoxAgree completely Agree somewhat

ALL MIDDLE MARKET

MANUFACTURERSMM MANUFACTURERS

GROWING 10% +

CHALLENGE #3: CHANGES IN WHAT

MANUFACTURERS SELL


68%

64%

71%

79%%

Total

CPM

OEM

Growing 10%+

8%

8%

8%

12%

VALUE-ADDED SERVICES

HAVE BEGUN OR INCREASED AVE. REVENUE GAIN

CHALLENGE #3: CHANGES IN WHAT

MANUFACTURERS SELL


41% 42%

37% 32%

18% 23%

4% 3%More than 50%

25% - 50%

Less than 25%

None

PROPORTION OF PRODUCTS MADE THAT

ARE ”SMART PRODUCTS” (IOT)

ALL MIDDLE MARKET

MANUFACTURERSMM MANUFACTURERS

GROWING 10% +

CHALLENGE #4: RAPID TECHNOLOGICAL

CHANGE ON THE FACTORY FLOOR


TECHNOLOGY SPENDING LAST YEAR

18%

19%

18%

19%

13%

10%

3%

Total

Cybersecurity

New Materials or Composites

Advanced Process Control

Robotics and Other Advanced Automation

Additive Manufacturing and Rapid Prototyping

Embedded Sensor Technology (The Internet of Things)

Other Technology Not Mentioned

CHALLENGE #4: RAPID TECHNOLOGICAL

CHANGE ON THE FACTORY FLOOR


IMPORTANCE OF TECHNOLOGY ISSUES: NEXT YEAR

30%

21%

19%

13%

17%

13%

66%

61%

52%

48%

45%

37%

Cybersecurity

Advanced process control

New materials or composites

Additive manufacturing /

rapid prototyping

Robotics and other

advanced automation

Embedded sensor technology

(the internet of things)

31%

21%

21%

14%

20%

18%

70%

72%

59%

54%

43%

37%

Extremely Important Very Important Top 2 Box

ALL 10%+ GROWTH

CHALLENGE #5: TALENT, TALENT,

TALENT


20%

13%

7%

11%

12%

6%

4%

64%

46%

40%

39%

37%

37%

22%

Finding workers with the technical

skills needed

Selecting and implementing health

coverage for workers

Implementing automation in the

manufacturing process

Finding workers with basic vocational skills

Finding workers who meet basic requirements

(e.g. drug free, physically able to do the job)

Dealing with an aging workforce

Fostering a safe work environment

23%

13%

9%

12%

22%

7%

6%

76%

51%

42%

45%

52%

44%

23%

ALL 10%+ GROWTH

IMPACT OF TECHNOLOGY IS

OVERWHELMINGLY POSITIVE


Lower Productivity Higher Productivity

Less Customization More Customization

Less Need for Capital Greater Need for Capital

Less Security Risks Higher Security Risks

Manufacture Smaller Batches Manufacture Larger Batches

Smaller Factories Larger Factories

Smaller Workforce Larger Workforce

4%

10%

12%

22%

22%

14%

27%

76%

55%

50%

46%

42%

32%

28%

MANUFACTURERS ARE EXPOSED TO A

WIDER VARIETY OF RISKS

• Playing a more important role in the supply chain leads to

greater responsibility

• The geopolitical climate is increasingly important

• Digitization opens new doors—and new cracks

• Adding new services leads to continuing responsibility

• IT and operations systems must become more integrated

WHAT HIGH-GROWTH MANUFACTURERS

ARE DOING

• Achieving an ideal mix of international vs. domestic sales (less than 25% of

revenue international)

• Incorporating strong relationship management mindsets and tools across the

organization

• Offering higher levels of value-added services; these companies experience

9.7% average revenue growth vs. 7.7% for the entire sample – services

component of these businesses growing at 17% of annual sales

• Implementing a variety of technology and advanced manufacturing –

cybersecurity, APC, robotics, additive manufacturing, and IOT devices/wearables

• Tackling the workforce challenges with stronger employer brands and value

propositions, stronger HR and recruiting capabilities, and leveraging public-

private systems

MIDDLEMARKETCENTER.ORG38

Q2'18 MIDDLE MARKET INDICATOR | ACG WEBINAR | JULY 25 , 2018 THE MARKET … acg webinar v5.pdf ·...

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