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Year-End 2023 MMI Insights
711 Plays8 months ago
Welcome to our special Year-End Middle Market Indicator episode, where we dive deep into the end-of-year 2023 insights of the U.S. middle market, brought to you by NCMM Managing Director, Doug Farren.
Throughout 2023, U.S. middle market companies shattered records, boasting double-digit year-over-year growth in both revenues and employment. The year concluded with unprecedented achievements, including an all-time-high rate of year-over-year revenue growth at 12.4.
To watch the full MMI webinar or download the report, visit www.middlemarketcenter.org.
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Transcript
Insights and Trends of Mid-Sized Companies
00:00:05
Speaker
You are listening to a preview of our latest webinar with NCMM managing director, Doug Farren, where he discusses key insights and current performance trends of mid-sized companies from the 2023 year end middle market indicator. Thank you everyone for joining us today as we go through the latest results from the middle market indicator.
00:00:28
Speaker
Hard to believe we're already in the early parts of February, so it seems a little belated to wish everyone a happy new year, but hopefully 2024 is off to a great start for all of you personally, as well as your organizations. We are happy to go through these insights as we've done for now a number of years. I'll talk a little bit about that.
00:00:54
Speaker
as we've hit some milestones here. This is actually our 40th wave of the MMI. And I'll talk a little bit about that history, but we have now 12 full years of data on the US middle market in terms of performance and sentiment. So I've learned a lot of interesting insights over those years and continue to do so.
00:01:16
Speaker
And hopefully some of this information that I go through today will prove to be both interesting as well as helpful as we all think about the middle market, some of its unique challenges and needs, how they can be supported, so on and so forth.
Company Performance Compared to Previous Year
00:01:33
Speaker
I will start moving into some of the areas, starting with kind of at the highest level of performance. I generally start these presentations with the very first question that's in the survey tool, which we always look at yearly upon each of these MMI surveys. And it's a, for lack of a better description, qualitative,
00:02:02
Speaker
by these executives of just flat out, tell us how your company is doing. Now we don't describe that, we just ask them to really think about where you are today versus where you were a year ago. Is your company doing better or is it doing worse?
00:02:20
Speaker
And as you can see here and I've tried in this case to include in many of the charts you know the trend because we have so much of this data to show you a little bit of what was happening kind of pre pandemic during and post because it's really interesting to compare those three time periods. So here you can see that a majority of the middle market is feeling pretty good.
00:02:43
Speaker
about their performance versus the year-end 2022.
Positive Performance and Growth Metrics
00:02:50
Speaker
77% have said that their company is doing better. Only about 5% of the companies are saying that their performance has deteriorated. You can see in the boxes there the average. That is going back all the way through the history of the MMI. But you can see, we have been tracking now for the last five rounds of this, so roughly two and a half, almost three years.
00:03:13
Speaker
a pretty good streak and trend of companies saying that they're doing much better. Now, we certainly expected that coming out of the depths of 2020, but it has continued on pretty consistently. Now, we will talk about, later on in this overview, the headwinds that have been kind of top of mind for the last two, almost two years now, macroeconomic conditions,
00:03:41
Speaker
We have now added another geopolitical conflict in the Middle East to add on to what's going on in Eastern Europe, as well as the ongoing issues of talent, which at this point have been running for at least nine or 10 years, have been the number one challenge in our MMI survey. So we'll kind of get some updates and refresh on what that looks like for these companies as well.
00:04:07
Speaker
This is our dashboard. I say this time and again, if I were to be limited to one slide, like a one slide presentation, I'd probably use this one just because I think it provides a pretty good overview, hence the main dashboard of what's been going on from a growth investment confidence standpoint. Starting on the left, again, extremely strong revenue growth numbers. The 12.4% is actually the highest overall average.
00:04:36
Speaker
that we've ever had in the MMI. You compare that to the S&P 500, which again, we have access to that information, less than a percent growth in the last 12 months. So outpacing performance there, we think about the next 12 months in 2024,
00:04:59
Speaker
There is a theme, and you're going to see this throughout some of these slides and charts, that the growth is projected to be lower in 2024. It's only projected at 8.1. Now, we've seen time and time again when we map this up, the projections versus the actual, they almost always exceed the projection. But this 8% is quite a bit lower than we've seen in the last two years in terms of the forecasted growth.
00:05:28
Speaker
And we'll see some of the reasons why.
Employment Growth and Revenue Utilization
00:05:31
Speaker
And I think it's actually going to be closer to reality in this case. Employment growth, again, very robust at around 9.5%. We use ADP. They have a monthly employment report. It is based on headcount, but serves as a great proxy for us. And you can see small business grew at a little over 2%. And large business was primarily flat.
00:05:57
Speaker
What we can say is that when we look at government-based jobs reports and things like that, we haven't done the exact mapping, but middle market is driving a lot of the growth at this point. And again, a little bit lower of a projection for this year at 8.7%. We move into that middle column. So we asked this, the question in the survey is phrased as, if you had an additional dollar of revenue, what would you do with that dollar?
00:06:25
Speaker
We divide it first by who would save it and then who would invest it. The savers, we say, what would you do with that? A lot of them, as you would suspect, say we would just save it as cash. Cash is king for us. It's an important part of how we run our business. The investors are where we really want to dig down a little deeper to understand where those areas where they are looking to reinvest and grow their business. And we've got some information to share on that. And then finally,
00:06:56
Speaker
We think about confidence in various levels of the economy, global, national, and local. This pattern is pretty typical. I'll show you here the trend in a bit. It's pretty much in line with what we've seen over the last couple of waves. So not a lot of big change there. I will just point out that confidence is always going to be the highest locally because this is the area that these businesses know.
00:07:23
Speaker
Let's click down a little deeper then. So this is the revenue trend. Again kind of a little bit of pre pandemic and then heading into when everything kind of fell out for almost every business in the U.S. and globally. But I put a box around the last five waves. So I mentioned twelve point four being the highest. But there's remarkable consistency. If you look
00:07:52
Speaker
at kind of bouncing out of a recovery in the early part, middle of 2021. And then there has been just this kind of consistent 12 plus percentage growth over the last two and a half years. Again, far outpacing what we've seen in large companies in the S&P. The average, by the way, just in this four year view is a little under nine and a half percent.
00:08:20
Speaker
And that takes into account the negative growth rates that happened in 2020. What we're really looking at though is that more muted forecast for this year. And we'll talk about some of what that, you know, the uncertainty that's kind of driving some of that. But for a few years, you know, we've been saying, well, will this really rapid accelerated growth continue? And we believe
00:08:47
Speaker
that what we're seeing is maybe more of a regression back to the normal rates that we saw for many years from 2012 to 2019. So that'll be the interesting thing for us to watch. Just another way to look at this. So if we think, OK, growth is great. We know we've had high inflation. We know that a lot of these companies have raised their rates.
00:09:14
Speaker
Yeah, top line revenue growth is going to grow. We get it. We understand that. But this kind of gives a little bit more context to the story when you think about the level of growth. So yes, across the top, you see over 80 percent of the companies have increased their revenue in the last year and a half. Very few are saying they've had revenue declines. And
00:09:42
Speaker
What strikes me is the number of companies that are in that 10% or higher bucket. They've stayed pretty consistent in the mid to high 50% range. Now, this latest round, we're a little bit lower than we were a year ago. We're about four percentage points lower, but we're also three percentage points lower in the decline category. So it's overall a really good story here that's going on with these companies.
00:10:10
Speaker
And then one more way to look at this is if we look at it by industry. So we track there's seven industries here plus a catch all called other. We also have kind of a separate category that isn't shown here which are technology companies which tend to be interwoven into a lot of these other industry segments. But
Sector Growth Projections and Challenges
00:10:34
Speaker
You know, with our ability to cut this data, we can look at the growth rates by certain industries. I've highlighted the three kind of high flyers here. When you think about financial services, healthcare and construction. And those three are generally gonna be the ones that are forecasting the highest growth over 2024 as well. So kind of a consistent story there. Although I would say services is just under 10%.
00:11:01
Speaker
has a pretty aggressive growth projection as well. So I briefly mentioned the point of inflation. I mean, certainly now this has been about two years we've been dealing with the four decades high inflationary environment. And while yes, it is true that does play a factor into, I'll just go back really quickly, some of this growth, we understand that.
00:11:31
Speaker
but we also look at things like expansionary activities that companies are undertaking. And there's been a little bit of a dip here from what we saw, particularly in the mid-year. The rates are kind of flat to where we were a year ago, but some of the ones that stand out, when you think about expansionary or growth activity, introducing new products and services,
00:11:53
Speaker
Thinking about new domestic markets, so about a third of the companies are saying that they've done that over the course of 2023. Adding a new plan or facility, so new assets, new locations, things of that nature. And then taking on new debt, which really hasn't been too attractive in the high interest rate environments that we are facing. So yeah.
00:12:21
Speaker
A little bit of a dip here from maybe what we saw, like I said, certainly over the summer, in line with a year ago, maybe a little bit muted from where we saw two years ago. The other thing I wanted to share are plans for this year. And you can see there's been a significant drop off. So what this is, it's basically the same list of activities, but it's the plans for 2024.
00:12:49
Speaker
And we've just taken the data for companies that have said it's going to be extremely or very likely that they undertake some of these things in the coming year. And 61% are saying they would introduce a new product, about half saying they're thinking about expanding into new markets, almost half saying they would open a new line of credit, so on and so forth. So kind of have to marry up all this
00:13:19
Speaker
rainbow of colors with the chart up here. For instance, a year ago, 64% said they would introduce a new product or service, and we just saw that about 51% did. It was actually less than projected. Similarly, with expanding into new markets, 60% said they would do so a year ago, and 35% did.
00:13:47
Speaker
All the uncertainty that has been floating out there over, you know, certainly the last 12 months impacted some of those plans a bit. So we'll be interested to follow this, you know, as we continue to survey into the summer of this year at our mid year check in, and then certainly at the year end. We can kind of look at some of the same metrics around the employment trends.
00:14:12
Speaker
And I've got a similar box on there because, again, the story is pretty comparable. When you think about revenue growth and employment growth, we had jobs being shed in the first year of COVID. We saw a bounce back, and now we've seen this prolonged and protracted recovery.
00:14:36
Speaker
with a future projection that may be getting us back to that more normalized rate. The average, again, going back through this period, including the down year is 7.6. So it's going to be interesting to see how this shakes out. And then the red and the green lines here, again, are that ADP small and large business comparison. So pretty consistent with the pattern where the middle market is always above those other two segments.
00:15:07
Speaker
And then again, looking at the rates of adding jobs, not much to highlight up top here about percent of companies increasing their workforce other than it's super consistent. And then again, about four out of 10 are increasing their workforce is pretty consistently 10
Confidence and Investment Focus Post-Pandemic
00:15:28
Speaker
% or more with a much lesser amount.
00:15:33
Speaker
decreasing or shedding jobs. So it's again, this is a story we've been telling now for many years, which is the middle market is a great source of job creation and growth, but also very sustainable roles and then similar snapshot with the industries. We see again financial services who had the highest overall revenue growth rate followed by construction and then retail adding the highest percentage of jobs.
00:16:02
Speaker
with really looking out into this year financial services maintaining that number one position in the highest growth rates but manufacturing just under 10 percent. We're also seeing health care just under 9 percent. So those are the projected growth rates for employment confidence. You know what I would say is remaining pretty steady. I love to call out in the summer of
00:16:31
Speaker
2022 was the highest, lowest confidence rates we had seen outside of the pandemic, right? So take that out. But there was a lot of things going on, right? I mean, this is when inflation started to spiral out of control. There are a lot of issues that were weighing on these businesses. So we've seen that across all three of these dimensions, both global, national, local,
00:17:00
Speaker
rebound quite nicely, but now it's kind of stayed pretty consistently in this pattern. So not much to really report there from that confidence standpoint. This is a really interesting chart. I actually stretched this one out because I wanted everyone to kind of see the long running trend that we had around investment planning. So this goes back to that question about what you would do with the dollar
00:17:27
Speaker
The top red line is the percent saying they would invest in their company. The bottom gray line is the percent saying they would save that dollar. And again, that gives us insight into the capital investment thinking of these leaders. And what's interesting here is this pattern was almost unchanged, wave over wave. We were in quarters, we used to survey every
00:17:54
Speaker
order prior to 2019 when we switched to the semi-annual cadence. Very, very consistent. I mean, we could bet on 70%, 30% being the general trend. And then what happened is now we've entered this stage where, yes, there has been prolonged recovery, but there's also been a lag in the willingness to invest.
00:18:19
Speaker
And again, with all the different things that are going on out there, there's been uncertainty and some headwinds that would work against investing that money, whether it be in certain different areas, and I'll show you what those areas are, but it's just interesting to see that this has not yet rebounded quite to the same levels that we saw pre-pandemic, even given all of that significant growth that's been happening.
00:18:49
Speaker
as to where those investment dollars would go. So again, 57% in this wave said that they would invest. Well, where are they doing that? A year ago, it was, again, back to physical assets, thinking about facilities, building new plants, expanding warehouses, things of that nature. 22% of the companies had identified that, followed by adding people and focusing on training. Well, now here we are a year later,
00:19:19
Speaker
And investment in IT, and this is a theme that we're gonna start shifting toward here for the balance of this presentation, is around the ongoing efforts around digital transformation that are taking place, and specifically how this buzzword that is known as AI is contributing to that effort. So we'll talk more about that.
00:19:45
Speaker
To learn more about AI, watch the full MMI webinar and view the side deck at the link in the podcast description, or visit our website at www.middlemarketcenter.org.