THE MARKET THAT MOVES AMERICA FINDINGS FROM THE NCMM S Q3'18 INDICATOR SURVEY

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1 Q3'18 MIDDLE MARKET INDICATOR ACG WEBINAR OCTOBER 24 th, 2018 THE MARKET THAT MOVES AMERICA FINDINGS FROM THE NCMM S Q3'18 INDICATOR SURVEY Thomas A. Stewart, Executive Director The National Center for the Middle Market

2 TODAY S WEBINAR I. 3Q MIDDLE MARKET INDICATOR OVERVIEW II. THE DNA OF MIDDLE MARKET GROWTH: FINDINGS FROM RECENT NCMM RESEARCH Source: 3Q 17 Middle Market Indicator Report 2

3 THE NATIONAL CENTER FOR THE MIDDLE MARKET 3 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 Quarterly Middle Market Indicator Share Research & Discuss Trends EDUCATION Research and Expert Perspectives Executive Programs Interactive Benchmarking Tools Webinars 3

4 2 THE MIGHTY MIDDLE MARKET 4

5 THE MIDDLE MARKET INDICATOR 5

6 MIDDLE MARKET INDICATOR OVERVIEW A Quarterly National Survey Cut by Geography and Industry 6

7 Q3'18 MIDDLE MARKET INDICATOR EXECUTIVE SUMMARY THE MIDDLE MARKET CONTINUES TO LEAD THE U.S. ECONOMY IN REVENUE GROWTH AND JOB CREATION. REVENUE GROWTH REBOUNDED FROM 2Q. CONFIDENCE (PARTICULARLY FOR THE LONG TERM) IS HIGH JOB CREATION IS APPEARS TO HAVE STABILIZED AT A HIGH LEVEL, AND EXECUTIVES STRUGGLE TO FIND THE TALENT THEY NEED. A SUBSTANTIAL MAJORITY OF EXECUTIVES SAY TARIFFS WILL HURT THEIR BUSINESS. IN ADDITION, IT APPEARS THAT THESE AND OTHER COSTS ARE EATING INTO PROFITS. PRIVATE-EQUITY-OWNED COMPANIES OUTPERFORMED THE NATIONAL AVERAGES, AND EXPECT TO CONTINUE TO THRIVE Source: 3Q 17 Middle Market Indicator Report 7

8 Q3'18 U.S. MIDDLE MARKET EXECUTIVE SUMMARY REVENUE GROWTH 8.6% PAST 12 MONTHS EMPLOYMENT GROWTH 6.4% PAST 12 MONTHS CAPITAL INVESTMENT CONFIDENCE 79% GLOBAL ECONOMY 8.0% 5.3% NEXT 12 MONTHS 1.2% 2.6% 71% SMALL LARGE S&P 500 BUSINESS BUSINESS WILL INVEST 4.6% NEXT 12 MONTHS 88% NATIONAL ECONOMY 93% LOCAL ECONOMY Source: 1Q 18 Middle Market Indicator Report 8

9 Q3'18 MIDDLE MARKET INDICATOR REVENUE GROWTH 16.0% PAST 12 MONTHS 8.6 % U.S. MIDDLE MARKET 12.6 % PE-OWNED FIRMS 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% 8.0 % S&P 500* -6.0% U.S. MIDDLE MARKET S&P 500 PE-OWNED 9 Source: 3Q 18 Middle Market Indicator Report S&P numbers include only companies that had reported as of 9/30

10 THE RISING TIDE CONTINUES TO LIFT ALMOST ALL BOATS 3Q Q 2017 Performance improved Performance was unchanged Performance deteriorated 71% 68% Source: 3Q 18 Middle Market Indicator Report 10

11 Q3'18 MIDDLE MARKET INDICATOR INDUSTRY REVENUE GROWTH 10.3% 6.8% 8.4% 5.8% 9.2% 6.2% 9.4% 5.4% 6.1% 4.3% 9.6% 6.2% 5% 1.9% 11.2% 6.9% Source: 1Q 18 Middle Market Indicator Report 11

12 Q3'18 MIDDLE MARKET INDICATOR REVENUE GROWTH FORECAST NEXT 12 MONTHS 5.3 % U.S. MIDDLE MARKET 16.0% 14.0% 12.0% 10.0% 7.0 % PE-OWNED FIRMS 8.0% 6.0% 4.0% 2.0% 0.0% 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 3Q'18 Source: 3Q 18 Middle Market Indicator Report U.S. MIDDLE MARKET PE-OWNED 12

13 Q3'18 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH PAST 12 MONTHS 6.4 % U.S. MIDDLE MARKET 14.0% 12.0% 10.0% 1.9% SMALL BUSINESS 2.4% LARGE BUSINESS 8.0% 6.0% 9.2 % PE-OWNED FIRMS 4.0% 2.0% 0.0% Source: 1Q 18 Middle Market Indicator Report 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 3Q'18 U.S. MIDDLE MARKET LARGE SMALL PE-OWNED FIRMS 13

14 Q3'18 MIDDLE MARKET INDICATOR INDUSTRY EMPLOYMENT GROWTH 8.8% 5.6% 5.2% 4.9% 6.1% 4.4% 6% 4.3% 6% 4.4% 7.6% 5.2% 4.2% 3.6% 7.7% 4.8% Source: 3Q 18 Middle Market Indicator Report 14

15 Q3'18 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH FORECAST NEXT 12 MONTHS 4.6 % U.S. MIDDLE MARKET 5.1 % PE-OWNED FIRMS 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 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 3Q'18 Source: 2Q 18 Middle Market Indicator Report U.S. MIDDLE MARKET PE-OWNED FIRMS 15

16 CONFIDENCE, INVESTMENT PLANS, AND CHALLENGES 16

17 Q3'18 MIDDLE MARKET INDICATOR ECONOMIC CONFIDENCE Confidence Remains Strong Across the Board 100% 90% 80% 70% 60% 50% 40% 30% 20% 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 3Q'18 GLOBAL ECONOMY 80% 85% PE-OWNED U.S. ECONOMY 88% 89% PE-OWNED LOCAL ECONOMY 93% 93% PE-OWNED GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY Source: 3Q 18 Middle Market Indicator Report 17

18 INVESTMENT APPETITES CONTINUE TO RISE 80% INVEST VS HOLD CASH 75% 70% 65% 60% 55% 50% 45% 40% Source: 3Q 18 Middle Market Indicator Report PE-OWNED U.S. MIDDLE MARKET 18

19 Q3'18 MIDDLE MARKET INDICATOR INVESTMENT PLANS WHAT WOULD YOU DO WITH AN EXTRA DOLLAR TO INVEST? Save It-Hold as Cash Save It--for Making Investments CapEx--Plant & Equipment CapEx--Facilities Acquisitions Add to HR--More Personnel Add to HR--Training & Development IT U.S. MIDDLE MARKET PE-OWNED Other Source: 3Q 18 Middle Market Indicator Report 19

20 THE NCMM SHORT-TERM INDEX HAS DROPPED Short Term Index is calculated by taking expected net positive change in business climate plus expected net positive change in demand plus expected net positive change in sales over the next 3 months Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 Source: 3Q 18 Middle Market Indicator Report 20

21 TALENT CHALLENGES REMAIN INTENSE Core Business Issues Talent Management Costs 50% 51% 54% 54% 50% 51% 47% 45% 43% 39% 40% 41% 39% 40% 48% 47% 48% 50% 38% 47% 45% 40% 35% 38% 40% 39% 40% 39% 40% 43% 26% 14% 17% 19% 15% 18% 18% 16% 17% 19% 21% 22% 20% 20% 12% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

22 A TIGHT TALENT MARKET IS PUSHING COMPANIES TO RAISE PAY Areas Considering Expanding To Increase Talent Retention Salaries Flexible work arrangements Additional incentive compensation Training/education Health insurance Employee financial wellness Vacation time 48% 44% 41% 37% 28% 25% 23% Salary is increasingly important and up from 38% in the third quarter of 2017 Maternity and/or paternity policies 13% Some other area None of these 2% 6% Source: 3Q 18 Middle Market Indicator Report

23 BY A 2-1 MARGIN, MIDDLE MARKET FIRMS SAY TARIFFS WILL HURT BUSINESS Source: 3Q 18 Middle Market Indicator Report

24 TARIFFS WILL HURT WHOLESALERS AND RETAILERS MOST Impact of Increased Tariffs (by industry) Positive No change Negative Wholesale Trade 8% 29% 62% Retail Trade 17% 41% 41% Construction 24% 42% 34% Manufacturing 24% 48% 29% Healthcare 22% 51% 27% Services 19% 56% 26% Financial Services 9% 66% 26% Other 18% 55% 27% Source: 3Q 18 Middle Market Indicator Report

25 PRICES, MARGINS WILL SUFFER; RELATIONSHIPS WILL BE DISRUPTED Impact of Increased Tariffs (by industry) Increase No Change Decrease Will explore new No Change Will renegotiate Price will Cost will Margins will customer base supplier base Wholesale Trade 91% 9% 89% 11% 8% 36% 56% 36% 55% 9% 34% 58% 8% Retail Trade 58% 36% 5% 56% 38% 5% 19% 46% 36% 32% 58% 10% 32% 56% 12% Construction 62% 36% 1% 61% 36% 3% 17% 51% 32% 21% 71% 9% 36% 51% 13% Manufacturing 51% 45% 3% 61% 35% 4% 25% 47% 28% 34% 48% 18% 30% 50% 20% Healthcare 45% 53% 2% 51% 49% 1% 16% 56% 28% 26% 65% 9% 26% 54% 20% Services 43% 56% 1% 52% 47% 2% 16% 60% 24% 27% 64% 9% 24% 63% 13% Financial Services 28% 68% 4% 38% 60% 1% 11% 66% 23% 24% 69% 7% 14% 76% 10% Other 43% 53% 3% 53% 45% 2% 19% 56% 25% 29% 63% 8% 26% 60% 14% 25 Source: 3Q 18 Middle Market Indicator Report

26 THE TRADE WAR IS FUELING ANXIETY ABOUT COSTS 25% 20% LONG TERM EXTERNAL CHALLENGES: COSTS Imports/exports/transportati on costs/tariffs Raw material/commodity availability/costs Costs/increasing costs (unspecified) 15% 10% 5% 0% 10% 6% 8% 5% 5% 4% 5% 3% 3% 3% 3% 3% 4% 3% 3% 4% 2% 3% 2% 2% 2% Q Q Q Q Q Q Q Source: 3Q 18 Middle Market Indicator Report

27 PROFIT MARGINS MAY BE UNDER PRESSURE 20% Expected Change in Profit Margins Cost Structure 15% 10% 5.9% 5% 0% 3.1% 2.3% 1.7% 2.4% 3.1% 3.4% 2.6% 2.6% 1.9% 2% 2.3% 2.1% 2.1% 1.6% 1.2% 1.1% 4.3% 3.2% 3.2% 3.4% 3.2% 3.1% 2.6% 2.8% 2% 1.5% 2.3% 2.9% 3.2% Source: 3Q 18 Middle Market Indicator Report

28 THE DNA OF MIDDLE MARKET GROWTH: FINDINGS FROM RECENT NCMM RESEARCH 28

29 A VAST DATA SET Five years of Middle Market Indicator data ( ) 20,000 U.S. middle market companies Hundreds of data points for each company Source:NCMM, The DNA of Middle Market Growth, 2018 A Bayesian network analysis reveals the strength of relationships between various factors and a target metric in our case, growth Identifies 9 key growth drivers, 7 of which are under management control Shows the weight of each factor in the growth model and the relationships among them Defines 3 clusters of activities and behaviors groups of high-growth companies that act in similar ways. These growth typologies tend to outperform their peers

30 AFTER ELIMINATING GROWTH FACTORS BEYOND MANAGEMENT S CONTROL The overall economy Industry effects Source:NCMM, The DNA of Middle Market Growth, 2018

31 WE IDENTIFIED SEVEN KEY GROWTH DRIVERS Source:NCMM, The DNA of Middle Market Growth, 2018

32 THE GROWTH DRIVERS INTERACT AND ARE MUTUALLY REINFORCING Source:NCMM, The DNA of Middle Market Growth, 2018

33 FACTOR ONE: EXPANDING MARKETS, LED BY GREAT SALES MANAGEMENT Source:NCMM, The DNA of Middle Market Growth, 2018

34 FACTOR TWO: MAKE A GREAT PLAN AND DRIVE IT THROUGH THE ORGANIZATION Source:NCMM, The DNA of Middle Market Growth, 2018

35 FACTOR THREE: INVEST AND INNOVATE PROGRAMMATICALLY Source:NCMM, The DNA of Middle Market Growth, 2018

36 FACTOR FOUR: GET AND KEEP GREAT PEOPLE Source:NCMM, The DNA of Middle Market Growth, 2018

37 FACTOR FIVE: RUN A TIGHT SHIP HAVE A GREAT COO Source:NCMM, The DNA of Middle Market Growth, 2018

38 FACTOR SIX: FOLLOW THE MONEY HAVE A GREAT CFO Source:NCMM, The DNA of Middle Market Growth, 2018

39 FACTOR SEVEN: HELP PEOPLE GROW Source:NCMM, The DNA of Middle Market Growth, 2018

40 PUTTING IT TOGETHER: HOW SHOULD MANAGEMENT ALLOCATE RESOURCE? MARKET EXPANSION FORMAL GROWTH STRATEGY INVESTING & INNOVATING ATTRACTING & RETAINING STAFF FINANCIAL MANAGEMENT COST EFFICIENCIES STAFF DEVELOPMENT Source:NCMM, The DNA of Middle Market Growth, 2018

41 KNOWING YOUR GROWTH TYPE WILL HELP YOU GROW MORE SMARTLY Source :NCMM, The DNA of Middle Market Growth, 2018

42 MIDDLEMARKETCENTER.ORG 42