business banking | bank of ireland - sector insights …...€889.94 2018 up 2% on q1 2017...

Sector Insights & Trends

Looking Ahead

The Sectors Team in Bank of Ireland is a team of sector specialists, recruited directly from industry, who provide real-life, in-depth, practical experience. This gives us a level of expertise and insight that is unique in the market, and is a key differentiator for Bank of Ireland, adding significant value for our customers. It also demonstrates our commitment to the sector, and shows the importance we place on understanding our customers’ business.

The team works closely with our Relationship Managers to support business customers across the country. Whilst ensuring that our customers’ story and strategy is understood by the Bank, their industry experience means that they add significant value for our customers in relation to industry developments, trends and commercial insights.

We also publish regular updates on the latest trends and outlooks for each sector, including six-monthly reviews and a bi-monthly Sectors Update, which are all available on the Bank of Ireland website.

Pierce ButlerHead of Sectors

Pierce Butler Head of Sectors

Email: [email protected]: 087 281 1717Phone: 07662 31734

Introduction

1

Table of Contents

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Pubs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Agri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Retail Convenience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Pharmacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

The Sectors Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2

Continued growth

Investec Manufacturing Purchasing Managers’ Index (PMI) Ireland report shows that the sector has had over 5 years of consecutive growth.

Brexit plans and Sterling exchange rate

With Brexit implementation scheduled for March 2019 and a transition phase up to December 2020, manufacturers are establishing a deeper understanding of their exposure and are increasingly putting Brexit action plans in place.

Nationwide skills gaps highlighted

Research commissioned by Bank of Ireland and HRM (conducted by Red C), found that hiring a skilled workforce is a key challenge for 4 out of 10 Irish Manufacturing SMEs and highlighted significant nationwide skills gaps. Marketing is the most significant skills gap for almost 2 in 5 (39%) manufacturers nationwide, followed closely by sales (35%) and production (33%). Larger SMEs are reporting particularly high skills gaps in technical areas such as R&D (47%), engineering (50%) and quality (42%).

Investment in factory premises

Companies are investing at an accelerated rate in purchasing, constructing and upgrading factory premises.

Fewer industrial rental properties available

According to CBRE mid year report, over the past 12 months consistent demand for properties especially in the 20,000 – 50,000 sq. ft range (1,858m2 and 4,645m2) has reduced availability of industrial units. New industrial unit construction has seen a small increase in H1 2018. Rental costs for Dublin prime industrial properties have risen by 2.7% in H1 2018 while prime provincial industrial rents have risen 11.5% to €60per sqM.

Ireland 6th in world competitiveness rankings

Ireland ranks in 6th place in the world competitiveness rankings out of 63 countries, compiled by the IMD business school in Lausanne for year ending 2017. Ireland’s rank has improved one place from 7th in 2016.

ManufacturingKPIs & Trends 12

MONTHS

3

Continued positive growth anticipated

Based on conversations with more than 230 manufacturing companies we anticipate continued positive growth in the manufacturing sector.

Managing currency and commodity price volatility

With Brexit negotiations ongoing and new US Trade Tariff policies, manufacturers will need to anticipate and manage exchange rate impacts related to currency and commodity price volatility.

Expected growth in demand for business funding

We expect continued growth in manufacturing output requiring capex and working capital to fund the business and we anticipate increasing number of requests for funding of factory expansion, new factory construction and leasing of industrial and logistics premises.

Managing the effects of potential trade wars

While there will be continued strong growth in mechanical engineering, construction materials, plastics, metal fabrication, materials handling and precision engineering, it is expected that some SMEs will need to manage the impact of global trade wars on input materials prices and tariffs on some US bound products.

Attraction and retention of staff a growing concern

Bank of Ireland research with 252 Irish manufacturing SME companies, shows that 37% of our manufacturing SME’s have a concern around ability to attract new staff.

ManufacturingSector Outlook

Implications of Brexit on trade with UK

With 43% of indigenous exports going to the UK many Irish manufacturing firms will be monitoring the Brexit negotiations and will develop new markets outside of the UK.

43% of exports going to the UK

#brexit

4

Average weekly wage in manufacturing sector for Q1 2018 up 2% on Q1 2017€889.94

Ireland’s indigenous exports (including food at €4.4bn) go to UK annually€21billion

43%

ManufacturingKPIs & Trends

Staff retention as a key issue by SME size

37%MEDIUM

20%

SMALL

12%

MICRO

5

Skills Gap: 22%Retention: 16%Training: 54%Operational HR: 12%Future Challenges: Aquisition of New Staff 29%

Marketing – noted to be a significant gap, arising in 2 out of every 5 SME’s

Micro

Dublin

Rest of Leinster

Connacht/Ulster

Munster

Small Medium

Region Reporting

Highest Gap:Connacht/Ulster

Sales – large gap is reported in sales talent with a national average of 35%

Production – a third of all organisations report a skill gap in production talent




Challenges as reported by Region Skills Gaps amongst SMEs

41%

36%

32%

37%

32%

37%

26%

37%

29%

45%

40%

43%

ManufacturingSector Outlook

6

Strong RevPAR growth

Double digit growth was reported by Irish hotels in a number of locations.

Stable food and beverage profit margins

Despite growth in turnover, food and beverage profit margins have remained stable. Pressure from competing hotels as well as other food and beverage premises has kept price increases at bay.

Payroll to sales ratio still improving

Payroll to sales ratio continues to improve driven by turnover growth running ahead of wage increases.

Current wages to sales ratio average 30% - 34%

Sales to EBITDA Ratio

Current EBITDA to sales ratio average 10% – 30%

HotelsKPIs & Trends

Current beverage profit margin average 63-68%

Current food profit margin average 65-70%

Fit out costs 3 star from €13k to €21k per bedroom (reference only)

Fit out costs 4 star from €21k to €28k per bedroom (reference only)

Development/Refurbishment/Extensions

New figures from the Society of Chartered Surveyors Ireland indicate that construction tender prices will rise by 7% this year, bringing prices back up to 2008 levels. Last year, the Surveyors said tender prices went up by 6.2%. CSO indicates general inflation is running at an annual rate of just 0.2%.

7

Branding

Brands continue to penetrate the Irish market. Aloft, Moxy, Motel One, and Hard Rock Café are among the brands planning hotel openings in the not so distant future.

Growing numbers of overseas visitors

Overseas visitor numbers expected to grow further thanks to increased access

provided by new air routes introduced recently (Hong Kong,

Beijing and Toronto among others).

Hotel investment projects

Refurbishments and extensions are likely to continue driven by prevalent industry sentiment and strong sector cash flows.

Focus on ‘in room’ and ‘property management’ technology

Hotel operators are increasingly considering advantages of investing in technological upgrades as part of their asset investment strategy. Marriot hotels recently announced a partnership with Amazon’s ”Alexa” to introduce the voice activated device to some of its hotel bed rooms. From tablets/smart phones in rooms to touchscreen computers in the lobby, properties want to offer a tech-forward experience.

HotelsSector Outlook

8

PubsKPIs & Trends

Current beverage profit margin average is now

65-70%

Current food profit margin average is now

60-65%

Current wages to sales profit margin average is now

25-30%

Current EBITDA to sales profit margin average is now

5-25%

Marginal improvement in beverage profit margins

The lower end associated with higher dependency on draught beer sales.

Improved food sales

Improved performance of food sales and associated margins. Their dedicated efforts to improve their food offering is paying off for a number of publicans.

Improved payroll to sales ratio average

Payroll to sales ratio average has moved slightly upwards due to the increased focus on quality food production.

Sales to EBITDA Ratio

Large variances are due to the impact of location/footfall and sales mix.

9

PubsSector Outlook

Rising domestic & overseas demand

As Ireland advances towards full employment, the pub sector continues to benefit from a moderate increase in domestic demand. Record numbers of overseas visitors continue to benefit licensed premises particularly in well-established tourism destinations.

Improvement in food & beverage margins reported

A slight anecdotal improvement in food and beverage margins has been reported by publicans throughout the country. The improvement is being led by stock control systems and purchasing consultants as well as a marginal improvement in supplier rebates, menu reviews and other initiatives.

BOAT LOGOBOAT LOGOBOAT LOGO



Continued growth in Overseas visitors

Slight reduction in alcohol consumption

A slight reduction in alcohol consumption was reported for 2017. New government regulations (Alcohol bill) are aimed at reducing the figure even further. The Bill passed the Seanad in December 2017 and has now been put before the Dáil for debate and vote.

Investment & refurbishment

Ongoing investment/refurbishment projects are being driven by positive sector sentiment. According to a recent survey carried by the VFI, the majority of publicans believe their business will improve over the next three years.

10

Dairy

MeasureCurrent sectoral

average*2025

Target**Milk Delivered (Kg / cow) 5,036 5,739Milk Solids (kg fat plus protein/cow) 372 448Calving Interval (days) 391 385Herd Economic Breeding Index (EBI) €93 €180Concentrate feed per cow (kg) 1,008 750

Beef


average*2025

Target**Calves/cow/year 0.81 0.85Calving Interval (days) 407 397Live weight output (kg/ha) 422 505Carcass output (kg/ha) 230 273Concentrate per LU (kg) 393 390

Tillage


average*2025

Target**Yield Winter wheat (Tonne/ha) 9.2 10.2Yield Spring barley (Tonne / ha) 6.8 7.4Percentage of certified seed used in cereal production

75% 85%

Number of farmers following specific nutrient guidelines for crop production (percentage of total)

80% 90%

Sheep


average*2025

Target**Litter Size 1.32 1.65Lambs weaned per ewe 1.29 1.45Stocking rate (ewes/ha)) 7.3 9Carcass weight (kg.ha) 191 260

Pigs


average*2025

Target**Number of pigs produced/sow/year 27.01 27Pig Meat/sow/year (tonne) 2.28 2.27Feed conversion weaning to sale 2.44 2.35

AgriKPIs & Trends

*Current sectoral average date is sourced from Teagasc National Farm Survey, ICBF Herd Performance Reports and Teagasc Pig Department e-Profit monitor reports.

**2025 Targets are sourced from Teagasc Sectoral Roadmaps.

11

Drought conditions having an effect

Irish Livestock and arable farmers are being forced to amend normal farming practices in response to weather events in 2018. The late arrival of spring and prolonged drought during June and July has dramatically reduced grass growth and crop yields forcing farmers to introduce alternative feeds and some tillage farmers are replanting harvested land with catch crops to grow additional fodder before year end.

Concern over Brexit outcome

35% of Irish Agri Food and 50% of Irish beef exports are to the UK. The outcome of Brexit is critical given the high tariff rates on food imports to the UK that could be introduced under a Hard Brexit.

Drystock farmers

Drystock farmers are reviewing their options to generate positive net margins. Contract rearing of young replacement dairy stock is in its infancy but is on the increase at the expense of suckler and beef enterprises. Templates for widespread adoption are in development currently.

Basic Payment scheme to be replaced in 2020

Beef, sheep and tillage farmers rely most on the EU funded Basic Payment scheme for net income. The current Basic Payment scheme is due to be replaced in 2020 and negotiations to agree a CAP budget for Europe are ongoing. Cuts of c.5% to the current budget are proposed and impacted by the planned absence of UK funding contributions to CAP post Brexit.

AgriSector Outlook

12

Store revamps

Progressive retailers are delivering sales growth of 5% - 10% and margin growth of 0.5%-1% from targeted revamp investment in their stores.

Managing shrink/waste

Given that Fresh and Deli categories form an integral part of many store revamps, the management of shrink/waste is critical to ensure that the maximum benefit is derived from the investment. A maximum shrink level of 1.5%-2% should be targeted as a sustainable metric.

Identifying targeted metrics

Given the competitive nature of the Irish employee market, retailers may need to address remuneration levels to attract and retain quality staff. The wages and salaries metric will vary depending on store format - Grocery, Convenience, Forecourt - and location - regional, city-centre etc. In Bank of Ireland, we are available to support retailers in identifying appropriate targeted metrics for their store based on appropriate bench-mark information.

Retail ConvenienceKPIs & Trends

SALES5-10%

Rise of contactless payments

The Irish consumer is seeking quick, convenient payment solutions. 2017 saw growth of 150% in card payments via contactless method when compared to 2016. 25% of all card payments in Ireland are now via Contactless. Retailers need to ensure that they are equipped to meet the needs of their customers – investment in self-scan checkouts, mobile app etc.

max

imum shrink level

of 1.5%-2%

13

Revamp activity

Significant store revamp activity continues across all brands facilitating retailers to align their offering to the expectations of the discerning Irish consumer. Detailed analysis pre and post revamp will be an imperative to ensure that maximum return on investment is delivered via sales mix improvement, margin growth and cost saving.

Potential new legislation

Potential legislative developments in the areas of rates, sugar-tax, minimum wage, living wage and inheritance tax / transfer of a business relief will be monitored with interest by retailers and their professional advisors.

Partnerships

The partnership model or ‘brand within a brand’ will continue to grow as leading retailers such as Freshii, Subway, The Chicken Guys, Frank & Honest and Insomnia incorporate multi-brand offerings in-store to meet the expectations and requirements of a wider consumer cohort.

Forecourt store

Forecourt stores category to remain extremely competitive with Circle K, Applegreen and Maxol competing with Spar and Centra forecourt retailers for the convenience and transient shopper. The food-to-go range, dine-in options and in-store coffee brand are now key differentiators for the Irish consumer in choosing a Forecourt store.

Retail ConvenienceSector Outlook

Retention of staff

The retention and recruitment of skilled, experienced staff will continue to be a key focus for retailers in a competitive employment market (running at close to “full employment”). 100%

14

Demographics

The CSO projects the population of >65s will increase to 860,600 over next 10 years. Those >85 will increase by 55% to 104,710 in that period.

Nursing Homes Supply

In May 2018, there were 578 public, private and voluntary nursing homes with c. 30,739 beds registered by the Health Information and Quality Authority (HIQA), in Ireland.

2018 Registered Nursing Home / Bed Census2018 Public Private VoluntaryNursing Homes 122 384 72Beds 6,015 21,350 3,392

Growth in private and voluntary nursing home sector

The private and voluntary nursing home sector has grown by 66% over the last 15 years from 14,946 beds in 2003 to 24,742 in 2018. However, since 2016, there has only been a net increase of 1,154 beds.

Nursing homes demand to increase

Demand for long-term and intermediate care resident places projected to increase by between 40 - 54% by 2030, from a level of 29,000 in 2015. Projections do not take account of the number of nursing homes that may be at the end of their life cycle.

Size of nursing homes

• 52% of the bed stock are in homes with less than 60 beds with 20% of these in homes of less than 40 beds

• 61% of bed stock in home between 40 and 100 beds

• 3,990 beds in 142 Private/NFP which have <40 beds

0 – 2021 – 4041 – 6061 – 80

81 – 100101 – 120121 – 140140 +

HealthcareKPIs & Trends

Nursing Home Beds (2018)

6%4%

9%

10%

19%32%

18%2%

15

Rising construction tender prices

Construction tender prices projected to rise by 7% this year following a 6.2% rise in 2016, bringing prices back up to 2008 levels.

Rising costs of building new beds

Average costs of building new beds have risen over the last 4 years by c.75% from c. €90k per bed to c. €160k per bed. The average increase of Fair Deal rates for the same period has been 3.9%.

Fair Deal rates

Although future nursing home bed demand requirements have been projected, the expected level of building of new homes in counties with lower Fair Deal rates may not materialise as the capital value of greenfield nursing homes once operational may, as a result of the Fair Deal rates and increased staff costs, be lower than the development costs.

New entrants to increase portfolio size

There is continued interest among the new international and domestic investor entrants to increase their portfolio size and exit of some single home owner operators.

Sales activity increases

Increased sale activity with quality ‘fit-for-purpose’ nursing homes achieving price multiples of 8-10 times adjusted EBITDA.

Wages as % of turnover 58-62%Cap Ex per

bed per annum c€1k

16

Demographics

The CSO projects the population of over 65s will increase to 860,600 over the next 10 years. Those over 85 will increase by 55% to 104,710 in that period.

Community Pharmacies

1737 1777 1805 1836 1851

2014 2015 2016 2017 2018

6.6%

Retail Pharmacy

The number of retail pharmacies has increased by 6.6% from 1,737 in 2014 to 1,851 retail pharmacies in June 2018.

Overall amount paid by the State to pharmacists reduces by 30%

The 2009 – 2016 Primary Care Reimbursement Service (PCRS) data shows that as a result of an ageing population and associated polypharmacy there was an 8.3% increase in the number of items dispensed under the various State Schemes. However, as a result of changes to the State Reimbursement, the overall amount paid by the State to pharmacists has reduced by 30%.

State payment reduced while pharmacists dispense more.

2009 – 2016

30%

€8.3%

PharmacyKPIs & Trends

17

Value increasing more slowly than volume

Reports from the Central Statistics Office (CSO) demonstrate, between 2014 and 2017, that while the volume of retail sales of Pharmaceutical, Medical and Cosmetic Items increased by 17.8%, the value only increased by 9.6%.

Increased costs

Sector outlook

A positive outlook for resilient pharmacy operators.

Headwinds in relation to staffing and other increasing costs.

20% 5%Wage Costs increased to 20% of turnover.

Rent Costs of turnover.

42%Gross Profit Margin.

18

Software as a Service (SaaS)

Put simply, SaaS is software delivered over the internet and rented by users rather than owned and purchased in a one off transaction. It gives software firms more predictable cashflows but at the cost of upfront revenues. In 2016, SaaS represented 25% of the total enterprise software market. It is expected to reach 40% by 2021 (Boston Consulting Group). SaaS revenues are growing 4 times faster than on premise license (Gartner).

The key to success for SaaS vendors is to master account-based marketing to retain and grow footprint with existing customers. SaaS companies need both hunting and farming sales model, whereas old software model was more focused on new business, as existing customers had high switching costs.

Cloud spending increases

The move to store data and computing power in third party data centres, aka cloud, continues at breakneck speed. Just as most business doesn’t own their own power generator, they increasingly don’t want to own servers. Like electricity grid the cloud offers data storage as scalable resource without upfront capex.

Worldwide spending on cloud increased 47% to US $17billion in the first quarter of 2018.

IT Services: Growth & Challenge

Bank of Ireland research indicates that the top 10 Irish IT Services companies generated over €500m in revenues in 2017. In the past, IT services firms differentiated themselves on customer satisfaction and operating efficiency. Automation and AI level will erode ability to compete on these fronts as the same capabilities will be widely available, so tech services firms will need to offer more innovative and wider scope solutions for their customers. This is driving high level of acquisitions in the tech services space.

Private Equity Investors

Private Equity (PE) accounted for over 50% of software M&A in Europe in 2017. Recent Netwatch and Version 1 deals show that Irish software and services firms continue to attract interest from international PE houses. PE can both enable a business to scale and for founders’ to retain key role and stake.

Technology KPIs & Trends

Software Research & Development

Given rate of change and global competition in software market, Irish firms need a market-led and properly resourced Research & Development strategy. Analysis of leading software vendors such as Oracle suggests they typically invest between 10-15% of headline revenue in R&D.

headline revenue invested in R&D10-15%

Increasingly trading tech firms are using combination of Enterprise Ireland grants and bank finance to fund their R&D.

19

Omnichannel Sales

Specialised IT Services

Connected Health

Data Security

Fintech & Regtech

Artificial Intelligence

Technology Trends Business Focus

Private EquityPrivate equity accounted for

50% of software M&A in 2017

MBO / M&A1/3 of BOI

lending in 2018

Cloud Costs Continue Dropping

Account Based Marketing

IDENTIFY

EXPAND

ENGAGE

ADVOCATE

20

Brían EvansHead of Manufacturing


Hilary CoatesHead of Health Sector


Adrian MullettHead of Technology

Email: [email protected] Mobile: 087 276 0308

Sean FarrellHead of Agriculture

Email: [email protected]: 087 627 1044

Owen CliffordHead of Retail Convenience

E-mail: [email protected]: 087 9079002

Gerardo Larios RizoHead of Hospitality

Email: [email protected]: 087 795 1253

The Sectors Team

21

Bank of Ireland is regulated by the Central Bank of Ireland.

business banking | bank of ireland - sector insights …...€889.94 2018 up 2% on q1 2017...

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