Trendsetter barometer Business outlook

Transcription

1 Trendsetter barometer Business outlook Q What s inside: At a glance Economic sentiment Corporate performance Opportunities and barriers Hiring International expansion

2 Contents At a glance 1 Economic sentiment US outlook still rosy, but confidence in world economy waning 2 Corporate performance Profitability is up: Strongest margins in nearly a decade 4 Opportunities and barriers Private companies remain intent but not bullish on growth 6 Hiring Employers stay choosy, keep wage increases flat, despite tightening labor market 9 International expansion China is looking increasingly important for companies that seek international growth 11 Trendsetter barometer Business outlook

3 During election season, the economy is usually front and center in any candidate debate. Should the government spend on building infrastructure or social programs, or should it cut back? The federal, state, and local governments certainly all influence the direction of the economy, and the election winners have the opportunity to help. But the real keys to growth are in the hands of the private sector. In our latest Trendsetter Barometer survey, private-company leaders told us they remain optimistic about their prospects for the coming year, though they re eyeing the world economy with increasing wariness. Companies selling in China are decidedly more confident about their revenue forecasts, compared with their peers, while companies selling in Europe or solely in the United States are less sanguine. There s more to the private-company story than just hitting revenue marks, of course. We see Trendsetter businesses continue to hire, but on a very selective basis. We also see concerns about healthcare regulations and some growing unease about interest rates. Likewise, business leaders are mindful of various resurgent global threats that have dominated the news cycle recently. But Trendsetter companies don t need to manage to quarterly results, and so they generally have a measured response to such threats, rather than abruptly change course. For the most part, our survey respondents describe a solid, stable US economy one where they re firmly on track. This report presents what we ve learned about private-company sentiments in the quarter running up to the midterm election insights we obtained through conversations with 230 executives. We are grateful for their input, as always, and pleased to share it with you. Rich Stovsky US Leader Private Company Services Ken Esch Trendsetter Partner Sponsor Private Company Services Trendsetter barometer Business outlook

4 At a glance Private-company sentiment has moved up (é) or down ( ê ) across a variety of areas. At 63%, the number of private companies feeling optimistic about the US economy is up from last quarter s 59% the highest level since early UP é Economic optimism DOWN ê Optimism about the world economy declined, with just 37% of international marketers voicing this sentiment, down from 42% the prior quarter. Private companies expect an average of 9% revenue growth, up from last quarter s 8.1%. Nearly one-third expect double-digit growth. UP é Corporate performance UP é Private-company profitability reached a high-water mark, with 17% reporting margin increases (net) the highest since 2006, when 18% reported this. Over one-third (35%) of private companies are planning major new investments one of the highest levels in the past few years. UP é Capital spending DOWN ê At 6.4%, private companies new capital spending as a percentage of sales is down from last quarter s 8.4% but resembles the 6.6% seen at the start of the year. Though the majority (60%) still plan to hire, up from last quarter s 56%, they intend to increase headcount by only 1.6%. UP é Hiring UP é Over one-quarter (27%) of product companies say they ll hire blue collar workers with specialized skills, up from 21% a year ago. Though 58% say lack of demand is a barrier to growth, that s markedly less than the 74% saying so a couple of years ago. DOWN ê Headwinds UP é Lack of qualified workers is a growth barrier for 34% (up from 27% a year ago) only the third time since 3Q08 that this stat has reached 30%. Increased spending on geographic expansion is planned by 20%, down slightly from the prior quarter s 23%. DOWN ê Expansion UP é Companies planning joint ventures inched up from 13% to 17% this past quarter, and more of them plan strategic alliances than a year ago (15% vs. 21%). Trendsetter barometer Business outlook 1

5 Economic sentiment Asia and some markets in Europe rebounding that would be the biggest boost to economic growth in the US and abroad. CFO, Restaurant franchiser US outlook still rosy, but confidence in world economy waning There are two stories to tell about private companies economic sentiments as we head into the homestretch of One story is local to the US, and the other looks farther afield. Domestically, leading private companies continue to feel good about the economy, and this upbeat attitude is supported by economic indicators. The US Bureau of Economic Analysis now estimates that the country s gross domestic product (GDP) rebounded at a torrid 4.6% pace in the second quarter, after shrinking slightly over the first three months of the year. Optimism snapshot Today and a year ago US economy Today 63% A year ago 55% World economy The long view Economic optimism over time Percentage of respondents 80% 60% 40% We find it more helpful, however, to look at growth on a trailing fourquarter basis. This shows that our economy grew at a less-heated but altogether respectable 2.6% each year, virtually tied with the 2.5% average GDP growth we ve seen over the past quarter century. 20% 0% 3Q 08 3Q 09 3Q 10 3Q 11 3Q 12 3Q 13 US economy World economy* * World optimism reflects responses only from private companies selling internationally 3Q 14 Trendsetter barometer Business outlook 2

6 Economic sentiment So it s no wonder that roughly two-thirds (63%) of Trendsetter companies are optimistic about US economic performance in the coming year. They re seeing an economy that is firmly back on track after a protracted period of uncertainty. But when they look abroad, the good mood starts to fade. Only about one-third of international Trendsetter companies believe the world economy continues to grow; roughly two-thirds are on the fence about that. Similarly, when these firms peer into the future, just over one-third feel confident the global economy will fare well in the next 12 months. That said, we ve often seen Trendsetter sentiment about the global economy wane and then rebound in the next quarter or two, and so this latest international outlook will bear further watching. Economic barometer 12-month outlook US economy World economy* 63% 29% 37% 54% Optimism Uncertainty 8% 9% Pessimism * Optimism about the world economy reflects responses only from companies selling internationally Trendsetter barometer Business outlook 3

7 Corporate performance Political stability, inflation, and energy prices would be the main success factors underlying future growth in our business and industry. Marketing and finance executive, Multistate commercial truck dealer Profitability is up: Strongest margins in nearly a decade When we asked Trendsetter companies about their revenue prospects, we heard the same solid response from both domestic-only companies and those that sell internationally: Growth over the next 12 months should be strong. In the third quarter, companies forecasted a 9% revenue growth rate, which is one of the highest figures we ve seen over the past three years. Firms that sell only in the US expect their revenue to grow by 8.2% over the next 12 months, while companies doing business internationally predict they ll grow revenue even faster, at 9.9% (though the latter growth won t necessarily be driven in large part by sales abroad international Trendsetter companies tend to be more growth-focused generally, compared with their domestic-only peers). For Trendsetter businesses, these latest figures aren t spectacular; they re just slightly above the long-term averages. But they reinforce a positive story, Private companies forecast higher revenue growth 12-month revenue growth rate* Forecast in 3Q 9.0% Forecast in 2Q 8.1% * Projected Growth expectations Most private companies project revenue growth for the next 12 months. Nearly one-third expect double-digit growth. 11% 49% 1% 7% 32% Positive growth 10%+ Positive growth less than 10% Zero growth Negative growth Not reported Trendsetter barometer Business outlook 4

8 Corporate performance which is that private companies continue to gain ground in the economic recovery. One set of figures did stand out when we looked at the third quarter s operating results: gross margins. They ve been climbing for most of the past two years, but their growth is now the strongest since mid Thirty percent of Trendsetter companies told us their gross profit had risen in the third quarter. Just 13% saw a margin decrease. This resulted in a net 17% reporting increases the highest since 2006 (when it was 18%). Various reasons may underlie this. Companies are seeing higher productivity now that technology investments have begun to pay off. They re also seeing lower energy costs as a result of the domestic energy boom. All of this translates into positive news at the bottom line of their income statements. It s interesting to look behind the margin shift, because we see strength with both revenue and managing expenses, says PwC s Ken Esch. Over the past year, more and more companies have been able to raise prices, even though the broad inflation indicators are staying low. Nearly one-quarter (24%) of Trendsetter companies raised prices in the past few months, drifting up from a longer-term average of 19%. And over the same period, a small but growing number of companies saw their costs drop. Profitability reaches high-water mark The number of private companies reporting increased gross margins is at a post-recession high Up Gross margins Costs Prices 30% 23% 24% 13% 14% 6% 17% net 9% net 18% net Down * Percentages denote the number of companies reporting increases in margins, costs, and prices. Trendsetter barometer Business outlook 5

9 Opportunities and barriers Companies need to decide to spend more of their cash. They are sitting on it. President, Personnel staffing company Private companies remain intent but not bullish on growth When we ask Trendsetter companies about their capital spending plans, we re really trying to assess two things: Do they feel confident about their longer-term growth prospects, and how much are they prepared to bet on that growth? By either measure, this latest quarter showed privately held businesses firmly on track, reaffirming their expectations and intentions from previous quarters this year. Slightly more than one-third of these businesses project major new capital expenses over the next year, with their planned investments representing 6.4% of sales, on average across industries. While nearly three-quarters of Trendsetter companies will also increase their expenses for things like information technology, product introductions, and geographic expansion, in many cases they re just catching up with historic means. So we don t see this as Trendsetter executives going on a sudden spending spree. Top areas where private companies plan to increase their spending over the next 12 months More companies are planning increases than a year ago Information technology New product/service introductions Geographic expansion Marketing & sales promotion 20% 17% 16% Percentages denote the number of companies who plan increases. Financing and organizational activity can be good indicators of long-term optimism, says PwC s Ken Esch. We re seeing healthy attitudes, but nothing excessive. For the most part, Trendsetter companies haven t really changed their use of supplier credit, private placement, debt restructuring, or 20% 28% 30% 28% 33% Today (3Q 2014) A year ago (3Q 2013) other financing sources. One in five companies did tell us they d taken on new bank loans in the third quarter, somewhat higher than the long-term average. But they don t seem to be using the borrowed money to fund much organic growth. Trendsetter barometer Business outlook 6

10 Opportunities and barriers Nor do they report plans to use the money to fund other kinds of expansion: intentions to purchase other businesses, form new joint ventures, enter strategic alliances, and initiate similar activities haven t changed much. In fact, for the past two years, Trendsetter companies have pulled back a bit on expansion to new markets abroad, and this past quarter is no exception. It s possible that companies are taking advantage of favorable interest rates in anticipation of future credit tightening. That is, they re borrowing money because it s cheaper right now (and leaving the cash on their balance sheet), not because they re looking to spend. Certainly, there are macroeconomic indications that the US Federal Reserve could change its interest rate policy over the next year. And while privately held businesses told us they re now paying an average of 3.5% for bank financing hardly a high number it does show a rise of 11 basis points, after a year with virtually no movement. Growth obstacles We also routinely ask Trendsetter executives about barriers to their companies growth. Some of these barriers can be seen as a proxy for how executives feel about the general business climate. For example, last year 63% of respondents cited lack of demand as a barrier to growth, and this has now dropped to 58% a positive sign about how companies view the economy overall. But there are ongoing concerns around hiring and wages, and these seem unlikely to recede any time soon. In fact, the number of companies worried about finding qualified workers is growing. A year ago, 27% of our respondents saw the talent gap as a growth barrier, compared with 34% who flagged it in this latest quarter. Likewise, early this year only 13% of Trendsetter executives saw wage pressure as a problem a number that rose to 23% in the third quarter. Growth barriers in the next 12 months Top barriers loom less large than a year ago, except for the skills gap Lack of demand Legislative/regulatory pressures Lack of qualified workers Profitability/decreasing margins Increased taxation Oil/energy prices 27% 26% 29% 34% Percentages denote the number of companies who plan increases. Concern about other potential barriers hasn t grown much or at all, with the exception of interest rates. In 3Q nearly twice as many Trendsetter executives flagged a 24% 26% 24% 24% 43% 52% 58% 63% Today (3Q 2014) A year ago (3Q 2013) possible increase in interest rates, compared with those who cited this in 2Q. Still, the numbers are relatively low 14% in 3Q, up from a mere 8% the prior quarter. Trendsetter barometer Business outlook 7

11 Opportunities and barriers Growth triggers Each quarter, we work with a subset of our survey group to delve into a particular issue. This time, we asked 219 of the panelists to consider triggers the events or circumstances that could spur additional growth over the next year or two. The growth factors that Trendsetter companies say matter most fall into two broad categories: those that are within companies control (triggers they can pull), and those to which companies will primarily react. With respect to the first category (trigger-pulling), roughly half of our respondents said their companies initiatives around product innovation and US market expansion would help fuel growth in the next year. But just as many businesses flagged the reactive impact of potential future healthcare developments 52% said that lower or stabilized healthcare costs would have a material effect on their growth, while another 47% cited the positive impact they felt would result from a trimming back of healthcare regulations. Stepping back to contemplate growth triggers for the US economy as a whole, the vast majority of Trendsetter executives (82%) felt that more capital spending by public and private businesses alike would have the biggest impact on the economy (nearly half said the impact would be major), as would infrastructure spending by government and industry (cited by 69%). Roughly three-quarters of these executives also noted that ripple effects from a stronger US housing market and a US manufacturing resurgence would certainly give the economy a boost as well. When we asked these Trendsetter executives about their appetite for capitalizing on or pulling growth triggers, 42% of them said they re more willing to take on new business risks in pursuit of growth today than they were five years ago; only 13% said that they were more risk-averse. So, as opportunity knocks, Trendsetter companies are prepared to answer. Top factors triggering corporate growth in the next one to two years Market expansion in US Healthcare costs lowered or stabilized Less government regulation of industry New products or service innovation Tax reform, lower corporate taxes 38% 45% 45% Percentages denote the number of companies who cited these factors as growth triggers. Consumer confidence and continued low interest rates would trigger increased growth for our business over the next 12 months. CFO, HVAC contracting company 52% 52% Trendsetter barometer Business outlook 8

12 Hiring Capacity and skilled labor are critical to our company s growth. COO, Industrial screws/components manufacturer Employers stay choosy, keep wage increases flat, despite the tightening labor market In November, the US Bureau of Labor Statistics announced that the country s unemployment rate had dropped to a six-year low the latest in a fairly consistent decline over the past five years. While this is welcome news, of course, we see signs that the rate of decline may be slowing. The majority of private companies plan to hire in the next 12 months 5% Hire new workers Keep workforce the same Reduce headcount To gain insight into the broader national employment numbers, we routinely ask Trendsetter companies about their hiring plans. Over the past few years, the share of Trendsetter companies reporting hiring intentions has mostly fluctuated in the 50%-60% range. Survey results from the third quarter are at the top of that scale. But we find it even more helpful to look at the size of planned net hiring. Trendsetter companies project a 1.6% net increase to their headcount over the next 12 months: one of the lowest in years. So while, yes, employers are hiring, they re being very selective about it. At the same time, wage growth has remained pretty constant. Trendsetter companies told us they have budgeted for a 2.75% wage 35% increase for their typical hourly worker over the next year, which is in line with the budgeted increases reported in the preceding 12 months. By and large, the types of employees most sought after remain the same, with technology workers being in highest demand (cited by 40% of respondents). But we ve also observed a sustained increase in one other notable area: For seven quarters running, we ve seen a rise in the number of companies 60% planning to hire skilled blue collar workers, says PwC s Rich Stovsky. Highly targeted hiring like this is something we re seeing not only among Trendsetter businesses, but also at many of our private-company clients. It points to demographic shifts in the workforce and to core changes in US manufacturing, where employees with specialized skills are increasingly replacing workers who typically manned prerecession factory floors. It might also signal wage growth down the road. Trendsetter barometer Business outlook 9

13 Hiring In their own words How private companies size up the jobs situation The company needs to expand, hire more people, and therefore increase our business. CEO, Commercial real estate company A manufacturing resurgence would have a huge impact, creating new jobs. CEO, Collection agency for banks, credit card companies, and healthcare providers Reduction in unemployment would lead to more available money. CFO, Manufacturer of engine components for utility vehicles With more jobs and more hiring, spending will follow. CFO, Restaurant, hospitality, and gaming company Help wanted, but only skilled workers need apply, for the most part Which skilled workers are most in demand? 60% of private companies plan to hire in the next year 35% of service companies seek technology workers 22% of companies in general seek marketing & sales professionals 27% of product companies seek blue collar workers with specialized skills People need to have more disposable income. CFO, Restaurant franchiser Fair wages for middle class workers that s the biggest factor that would trigger economic growth. President, Construction firm specializing in high-tech commercial and government buildings Trendsetter barometer Business outlook 10

14 International expansion Expansion will be our success factor. Finance executive, Warehouse food retailer China is looking increasingly important for private companies that seek international growth Over the past year, we ve seen international sales become less important for Trendsetter companies that sell abroad. At the end of 2013, international marketers attributed 20% of their revenue to foreign sales; this has dipped to 16% today. And as mentioned, we ve also seen some pullback in international expansion. This is curious, because the rev enue growth forecast for companies selling internationally (9.9%) is much higher than the forecast for domestic-only companies (8.2%). There are still far more companies seeing growth in foreign sales than companies reporting declines (28% vs. 5%). And yet, two-thirds of companies selling abroad saw flat sales during the past quarter the highest percentage of international marketers reporting that in several years. Nearly half of Trendsetter private companies sell internationally International markets 46% 54% United States only 18% Private-company revenue from international sales Market presence International markets generally Emerging markets* specifically Percentage of total revenues derived from international sales 16% 27% * Here, the term emerging markets refers to Brazil, China, and India only. Emerging markets* Trendsetter barometer Business outlook 11

15 International expansion Quite possibly the explanation for this conundrum can be found in one word: China. When we look at the two-thirds of Trendsetter international marketers who do not operate in China, we see companies that are actually forecasting a lower growth rate than their domestic-only peers (7.5% vs. 8.2%). Conversely, Trendsetter companies doing business in China project that international sales will make up almost 30% of their overall revenue in the next 12 months. As for international marketers that don t sell in China, they expect sales abroad to make up only 10% of their revenue. All of this suggests that even when growth in China is muted, as now, it has an outsized effect though this will bear further watching in the coming quarters before we can call it a definitive trend. A trend we do see is a steady increase in the number of international companies that say they re planning expansion to new markets abroad (a reversal of what we saw in 2013). A year ago, 15% of these companies planned to tap new markets; this has jumped to 21% in the most recent quarter. International firms are also more likely to make capital investments: 41% vs. 30% of domestic-only firms. They re also more apt to increase non-capital spending, especially in areas such as new product introductions (43% vs. 19%) and R&D (18% vs. 4%). International companies plan to be more growth-focused than their peers over the next 12 months Plan major capital investments International 41% 30% Domestic only Plan increased spending on new product/service innovation 43% 19% * Percentages denote the number of companies planning these expenditures. Plan increased spending on R&D 18% 4% Trendsetter barometer Business outlook 12

16 About this report Since 1995, PwC s Trendsetter Barometer Business Outlook has tracked the views of top executive officers at privately held US businesses and the trends these reveal. This quarter, we spoke with 230 privatecompany leaders, including 132 from companies in the product sector and 98 in the service sector. How the Trendsetter companies break down Products 57% Manufacturing 28% Trade/Distribution 14% All other 15% Services 43% All (230) Product (132) Service (98) Average number of employees 1,626 1,449 1,864 Average enterprise revenues $459 million $505 million $399 million Five-year growth rate 45% 50% 39% Survey interviews were conducted by the independent research firm BSI Global Research, Inc. by phone between July 2, 2014 and October 1, The same companies are interviewed and tracked from quarter to quarter, with occasional changes to the survey population due to turnover. Trendsetter barometer Business outlook 13

17 To find out more about private-company trends and to discuss the survey findings, please contact: Rich Stovsky Private Company Services Leader Ken Esch Trendsetter Partner Sponsor About PwC s Private Company Services Practice To see more charts and graphs, including those showing trends over a span of years, and to download the complete survey findings, go to our website: private-company-services/ publications/pcs-trendsetterbarometer.jhtml Located in all major U.S. markets, PwC s Private Company Services (PCS) is a national practice with more than 170 partners who provide tax, audit and advisory services especially for private companies, their owners and high net worth individuals. More than 60 percent of America s largest private companies are PCS clients.* They span a broad range of sectors and industries, from manufacturing to retail, and industrial to professional services. A hallmark of PCS is thought leadership to give clients timely, thoughtprovoking information to help manage and grow their businesses and wealth. Visit us online at pwc.com/us/pcs * Forbes America s Largest Private Companies PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. MW