Q1'18 MIDDLE MARKET INDICATOR | ACG WEBINAR - ACG Global · q1'18 middle market indicator....

THE MARKET THAT MOVES AMERICAFINDINGS FROM THE NCMM’S Q1 '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

Q1'18 MIDDLE MARKET INDICATOR | ACG WEBINAR | MAY 8th, 2018

THE MIGHTY MIDDLE MARKET2

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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

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http://www.middlemarketcenter.org/

THE MIDDLE MARKET INDICATOR

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MIDDLE MARKET INDICATOROVERVIEW

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A Quarterly National Survey Cut by Geography and Industry

Q1'18 MIDDLE MARKET INDICATOREXECUTIVE SUMMARY

Source: 3Q’17 Middle Market Indicator Report6

• BY A SOLID MARGIN, THE MIDDLE MARKET CONTINUES TO LEAD THE U.S. ECONOMY IN REVENUE GROWTH AND JOB CREATION

• THE MIDDLE MARKET KICKED OFF 2018 WITH NEAR-RECORD HIGH JOB CREATION AND REVENUE GROWTH; NEARLY ALL COMPANIES HAVE PARTICIPATED IN THE GOOD RESULTS

• EXPECTATIONS FOR GROWTH AND JOB CREATION IN THE COMING YEAR ARE STRONG. CONFIDENCE IN THE GLOBAL AND LOCAL ECONOMIES HIT RECORD HIGHS; U.S. CONFIDENCE IS NEAR ITS RECORD; TALENT AND COST CHALLENGES ARE INTENSIFYING

• PRIVATE-EQUITY-OWNED COMPANIES OUTPERFORMED THE NATIONAL AVERAGES, AND EXPECT TO CONTINUE TO THRIVE

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Q1'18 U.S. MIDDLE MARKETEXECUTIVE SUMMARY

CAPITAL INVESTMENT CONFIDENCE

82%GLOBAL ECONOMY

87%NATIONAL ECONOMY

94%LOCAL ECONOMY

REVENUE GROWTH

8.4%PAST 12 MONTHS

5.9%NEXT 12 MONTHS

EMPLOYMENT GROWTH

6.3%PAST 12 MONTHS

4.6%NEXT 12 MONTHS

1.9%SMALLBUSINESS

2.4%LARGEBUSINESS


7.42%S&P 500 70%

WILL INVEST

Q1'18 MIDDLE MARKET INDICATORREVENUE 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

Source: 1Q’18 Middle Market Indicator Report*1Q numbers include only companies who have reported.

PAST 12 MONTHS

8.4%U.S. MIDDLE MARKET

10.5%PE-OWNED FIRMS

7.42%S&P 500*

THE RISING TIDE CONTINUES TO LIFT ALMOST ALL BOATS

Source: 1Q ‘18 Middle Market Indicator Report9

1Q 2018 1Q 2017

Performance improved 72% 70%

Performance was unchanged 26 25

Performance deteriorated 3 5

24-1 14-1

Q1'18 MIDDLE MARKET INDICATORINDUSTRY REVENUE GROWTH


8.2%

7.7%

8.7%

8.3%

7.3%

5.3%

4.5%

7.2%

5.2%

5.9%

8.2%

6.9%

7.9%

8.2%

9.6%

10.2%

Q1'18 MIDDLE MARKET INDICATORREVENUE GROWTH FORECAST

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

3Q '1

24Q

'12

1Q '1

32Q

'13

3Q '1

34Q

'13

1Q '1

42Q

'14

3Q '1

44Q

'14

1Q '1

52Q

'15

3Q '1

54Q

'15

1Q'1

62Q

'16

3Q'1

64Q

'16

1Q'1

72Q

'17

3Q'1

74Q

'17

1Q'1

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U.S. MIDDLE MARKET PE-OWNED


6.0%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 LARGESMALL PE-OWNED FIRMS

PAST 12 MONTHS


8.5%PE-OWNED FIRMS

Q1'18 MIDDLE MARKET INDICATOREMPLOYMENT GROWTH

1.9%SMALLBUSINESS

2.4%LARGEBUSINESS


Q1'18 MIDDLE MARKET INDICATORINDUSTRY EMPLOYMENT GROWTH


5.4%

5.9%

4.1%

8.7%

3.8%

5.7%

2.7%

4.7%

4.2%

6.3%

5.1%

5.9%

5.0%

8.7%

6.2%

8.1%

Q1'18 MIDDLE MARKET INDICATOREMPLOYMENT GROWTH FORECAST

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

U.S. MIDDLE MARKET PE-OWNED FIRMS


5.5%PE-OWNED FIRMS

NEXT 12 MONTHS


CONFIDENCE, INVESTMENT PLANS, AND CHALLENGES

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Q1'18 MIDDLE MARKET INDICATORECONOMIC CONFIDENCE

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20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q '1

32Q

'13

3Q '1

34Q

'13

1Q '1

42Q

'14

3Q '1

44Q

'14

1Q '1

52Q

'15

3Q '1

54Q

'15

1Q '1

62Q

'16

3Q'1

64Q

'16

1Q'1

72Q

'17

3Q'1

74Q

'17

1Q'1

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GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY

U.S. ECONOMY

87%87% PE-OWNED

LOCAL ECONOMY

94%92% PE-OWNED

GLOBAL ECONOMY

82%85% PE-OWNED

Source: 1Q’18 Middle Market Indicator Report

_____________________________________Confidence Remains Strong Across the Board

Q1'18 MIDDLE MARKET INDICATORCAPITAL INVESTMENT PLANS

40%

45%

50%

55%

60%

65%

70%

75%

80%

1Q '1

32Q

'13

3Q '1

34Q

'13

1Q '1

42Q

'14

3Q '1

44Q

'14

1Q '1

52Q

'15

3Q '1

54Q

'15

1Q '1

62Q

'16

3Q'1

64Q

'16

1Q'1

72Q

'17

3Q'1

74Q

'17

1Q'1

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PE-OWNED U.S. MIDDLE MARKETSource: 1Q’18 Middle Market Indicator Report

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WHAT WOULD YOU DO WITH AN EXTRA DOLLLAR OF REVENUE?

COSTS AND PRICES MAY BE BEGINNING TO STIR …

EXECUTIVES CITING A COST ISSUE AMONG TOP THREE INTERNAL CHALLENGES

17% 19% 21% 22% 20%

20171Q

20172Q

20173Q

20174Q

20181Q

Source: NCMM Middle Market Indicator 4Q 2017

42% 42% 40% 48% 45%

52% 50% 55% 48% 50%

6% 8% 5% 4% 5%

PRICE ACTIONS EXECUTIVESEXPECT TO TAKE THIS YEAR

Decrease

Stay the same

Increase

… BUT COMPANIES FEEL COSTS ARE UNDER CONTROL AND MARGINS SAFE

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%

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%

0%

5%

10%

15%

20%Profit Margins Cost Structure

Expected Change in

LONG TERM CHALLENGES

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

Long Term Internal Challenges54%

19%

15%

10%

7%

48%

25%

15%

9%

20%

6%

4%

4%

4%

Talent managementEmployee retention

Talent acquisition/recruitment

Management/leadership

Training

Core Business IssuesMaintaining growth (sales, expansion, new

client acquisition, innovation)Managing capital (cash flow, cost/availability

of capital, profitability/margins)

Technology/IT

CostsCosts/increasing costs (unspecified)

Cost of health care

Cost of labor/rising wages/minimum wage increase

Construction/infrastructure costs

TALENT CHALLENGES HAVE INTENSIFIED STRONGLY

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%

43%47%

39%45%

40% 41% 39% 38% 40%

50% 51% 50%54%

14%17%

12%

19%15%

18% 18% 16% 17% 19% 21% 22% 20%

20151Q

20152Q

20153Q

20154Q

20161Q

20162Q

20163Q

20164Q

20171Q

20172Q

20173Q

20174Q

20181Q

Core Business Issues Talent Management Costs

RISK AND RESILIENCE

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• Understand the prevalence and impact of different types of business disruptions among middle market companies

• Create a comprehensive picture of the major risks companies face

• Assess companies’ resilience to withstand disruptions

ABOUT THE RESEARCH

• Administered to more than 1,000 C-level executives in December 2017

• Completed in the aftermath of Hurricanes Harvey and Irma and the northern California wildfires

• www.middlemarketcenter.org

RESEARCH OBJECTIVES SURVEY FACTS

Source: NCMM, Risk & Resilience in the Middle Market, 2018

http://www.middlemarketcenter.org/

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Industry consolidation, disruptive technology, global megatrends, changing regulations or economic conditions, changes in ownership

THREE TYPES OF BUSINESS DISRUPTIONS

STRATEGIC DISRUPTION OPERATIONAL DISRUPTION DIGITAL DISRUPTION

Natural disasters, supply-chain issues, port closures, strikes, facility shutdowns

Cyber breaches, data-integrity issues, system downtime, compatibility issues


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Industry consolidation, disruptive technology, global megatrends, changing regulations or economic conditions, changes in ownership


STRATEGIC DISRUPTION

EXAMPLES OF PAST AND FUTURE STRATEGIC DISRUPTION:• Significant changes in industry competitive dynamics, such as the effectof Amazon and others on brick-and-mortar retail• The impact of demographic changes—such as Baby Boomer retirementsand Millennials maturing—on the talent pool• A change in company capital structure and ownership due to retirementor sale• Major changes in regulations, international trade agreements,or macroeconomic conditions

» Most prevalent» Hardest to prevent» Biggest impact» Most difficult recovery


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OPERATIONAL DISRUPTION

Natural disasters, port closures, strikes, facility shutdowns

EXAMPLES OF OPERATIONAL DISRUPTION:• Hurricanes, earthquakes, fires and other

disasters• Strikes or other labor actions• Product recalls due to quality, safety, or health

problems• Supply chain breakdowns

» Most prepared» Highest likelihood of complete recovery» Impact is greatest on operationsand people


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DIGITAL DISRUPTION

Cyber breaches, data-integrity issues, system downtime, compatibility issues

EXAMPLES OF DIGITAL DISRUPTIONS:• Data breaches affecting a company, its employees, its customers,or its suppliers• Widespread malware attacks such as 2017’s “WannaCry”• IT system failures like those that grounded hundreds of United,Delta, and British Airways flights in 2016 and 2017

» Least prevalent—reportedly» Quickest recovery» Greatest impact on informationsystems


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BUSINESS DISRUPTIONS ARE COMMON —THEIR IMPACT IS SUBSTANTIAL

STRATEGIC DISRUPTION

OPERATIONAL DISRUPTION

DIGITAL DISRUPTION

PREVALENCE IMPACT RECOVERY

27%OF COMPANIES

14.2%OF ANNUAL REVENUE

40%RECOVER

COMPLETELY*

21%OF COMPANIES


77%RECOVER

COMPLETELY*

17%OF COMPANIES


60%RECOVER

COMPLETELY*

40%

46%

14%

77%

21%2%

60%

38%

2%

Recovered completely

Recovered partially

Not recovered at all

*As of survey date


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FEW COMPANIES FEEL WELL PREPARED FOR STRATEGIC RISKS


Preparation to Deal with Event

Impacted by

4% 2% 1%

16%4% 11%

47%

33%34%

26%

41% 32%

7%19% 22%

S TRA TEGIC OPERA TIONA L CYBER

Extremely well prepared

Very well prepared

Somewhat well prepared

Not very well prepared

Extremely/Very well prepared

Not prepared at all

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THREE OUT OF TEN COMPANIES LACK A CONTINUITY PLAN

Total Middle Market

COMPANY HAS ESTABLISHED, UP-TO-DATE BUSINESS CONTINUITY PLAN

71%


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DEGREE OF PLANNING VARIES BY SIZE AND INDUSTRY

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Company Has Established, Up-to-Date Business Continuity Plan

64% 76% 80%

Total MMRevenue Segment

$10M -<$50M $50M -<$100M $100M - <$1B

Services Manufacturing Wholesale Trade Retail Trade Construction Financial Services Healthcare

71%

76% 72% 61% 74% 73% 83% 75%


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DEGREE OF PLANNING VARIES BY SIZE AND INDUSTRY

Total MM $10M -<$50M $50M -<$100M $100M - <$1B

Base: Have Business Continuity Plan in Place

(364) (117) (71) (176)

Back-up power sources

Alternate facilities/locations

Associate training

Line of credit

Alternate supplier

Other

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Plan in Place – By Revenue Segment

57%

43%

38%

37%

36%

4%

52%

35%

41%

44%

39%

2%

60%

48%

37%

19%

31%

8%

62%

50%

36%

35%

35%

4%


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A FRAMEWORK FOR MANAGING RISK

STRATEGIC

SHARPENINGRECONNAISSANCE

IMPROVINGRESILIENCE

PREPARING FOR RECOVERY

DIGITAL

OPERATIONAL

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Annual board-level assessment of known, known-unknown, and unknown-unknown threats: Industry changes, potentially disruptive technology, impact of megatrends, impact of outside factors (e.g., government)

Review financial cushions, flexibility, preparedness, and relationships

Develop “fight or flight” plans to respond to most likely strategic risks

Review and strengthen key-person relationships and succession plans

Review key customer/ supplier relationships and contracts

Create strategic options via R&D, M&A readiness

Ensure long-term investor support

Develop capability to create/execute restructuring plans

STRATEGIC


IMPROVINGRESILIENCE



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Annual board-level assessment of vulnerabilities to all operations from natural events, disruption in supply or distribution, etc.

Include possible disruptions from and to communities in which you do business

Review insurance

Review banking relationships

Build redundancy into key operations and supply chains

Maintain an up-to-date business continuity plan

Have plans in place for employees, business partners, and community

Run fire drillsOPERATIONAL


IMPROVINGRESILIENCE


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DIGITAL

Annual board-level risk assessment and review of cybersecurity strategy

Real-time threat monitoring

Ensure backups of all data either with own orcloud resources

Have a disaster recovery plan

Pre-identify internal and external resources needed for recovery

Run fire drills

Fully train all employees

Establish protocols for communication with vendors/customers/authorities

Review and update legal risks

Review and update insurance


IMPROVINGRESILIENCE



MIDDLEMARKETCENTER.ORG37

Q1'18 MIDDLE MARKET INDICATOR | ACG WEBINAR - ACG Global · q1'18 middle market indicator....

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