With the first quarter of 2020 having drawn to a close and the wide-ranging effects of COVID-19 continuing to reshape both daily life and global financial markets, public companies across all industries are preparing to issue financial results in an environment of unprecedented uncertainty. While the global financial crisis of 2007-2008 presented a unique and acute set of business and communications challenges, the sudden stoppage of vast swathes of the economy due to global lockdowns is without rival in the modern era. Companies are now grappling with the prospects of declining sales and earnings at levels that would have been unfathomable months or even weeks ago, and the prevailing projections for specific industries and the overall economy cover a range far wider than even the most volatile periods of the recent past.
In these uncharted waters, it is critical that management teams revisit the well-choreographed earnings process and give extra thought to how they can most effectively communicate results and future expectations in this upcoming earnings season. Companies that can successfully navigate these challenges and achieve the right balance of transparency, humility and strategic focus are positioned to emerge from this crisis with significant good will from investors and employees. To assist in earnings preparation, The IGB Group has provided the following guide for internal management discussions of some of the most pressing IR issues.
Should we consider issuing an interim update release, shareholder letter or pre-announcement prior to earnings?
Amid the profound market volatility and uncertainty of the ongoing COVID-19 crisis, providing timely information to the market, both material and non-material, is more important than ever for maintaining trust and enabling investors to make informed decisions. While some companies regularly provide business updates on a quarterly basis before releasing results, and others issue pre-announcement releases in order to re-set market expectations, management teams must now consider whether to issue an extraordinary communication to update the market on the extent of realized or anticipated impact related to the crisis.
For those companies with an established precedent of providing interim updates, it is clear that the practice should be maintained to the extent feasible, since deviating from an established practice during uncertain times would likely be perceived as a negative signal to the market.
For those that do not generally issue such announcements, it is important to keep in mind the goal of such an extraordinary update, whether that is to re-adjust earnings expectations, to address recurring questions from investors in a manner that complies with Reg FD, to provide an operational update on adaptive measures being taken, to correct misinformation or misunderstanding among investors, or simply to maintain a presence and mindshare with the investment community. At the same time, while the current situation may call for updates that would not be provided in ordinary circumstances, it remains critical that any voluntary update take place only at such time as management has a firm grasp of the situation at hand, that it doesn’t introduce undue disruption or additional uncertainty, and that it doesn’t come across to investors as frivolous or premature. Important questions to be considered include the following:
- Does an appreciable period of time exist between management attaining clarity on an extraordinary financial or operational impact and the company being prepared to announce its quarterly earnings?
- Have covering analysts and investors misinterpreted the prevailing market environment such that financial results significantly diverge from expectations?
- Has company-specific misinformation gained traction in the market that the company could correct without divulging commercially or strategically sensitive information?
- Are investors and analysts repeatedly raising important questions that could reasonably and accurately be addressed in advance of earnings, if certain non-sensitive information were made widely available?
- Has the crisis introduced new costs or challenges that are being underappreciated?
- Is the market significantly underestimating the resiliency of the company’s business model in the face of a challenging environment?
How should we approach issuing, amending, or suspending guidance in a highly uncertain environment?
Fundamentally, the feasibility or advisability of providing guidance is dependent upon management’s ability to accurately foresee future results, which is in turn based upon an individual company’s market exposure and visibility on future developments. Far more than a normal adjustment of expectations up or down, the uniqueness and scale of the COVID-19 crisis present a daunting challenge for a management team seeking to make predictions about the months and years ahead.
While decisions related to the provision of quarterly or annual guidance most frequently come down to following historical precedent, it’s incumbent upon management to respond to large, exogenous events like COVID-19 by taking a step back and conducting a candid assessment of what is and is not knowable, given the facts on the ground. Confidently delivered guidance undoubtedly provides comfort for investors, especially in situations where there is a long history of providing guidance. However, due to the uncertainty around COVID-19, the market can be expected to be more understanding of companies who need to change or temporarily suspend their guidance practices. Ultimately, investors will look to a company’s decision to maintain, amend, or suspend its guidance less as a communications issue and more as a reflection of the current uncertainties and risk of the business:
- For those companies that need to change or suspend their quantitative guidance, what additional qualitative guidance can be reliably provided to communicate current expectations and demonstrate that management is actively monitoring and managing the impact of COVID-19?
- Has the degree of uncertainty in the market increased to such an extent that high conviction guidance cannot be provided on some or all of the metrics usually provided to investors?
- Is the extent of such things as forward contract cover, quality of counterparties, and the overall resiliency of the business such that normal guidance practices can be maintained with high conviction?
- Would the introduction or widening of a guidance range enable guidance to be maintained with high conviction? Would the width of that guidance range have to be so wide as to lack meaningful utility for an investor?
- Have circumstances materially changed in such a manner as can be reasonably quantified or clarified with updated guidance?
- For companies that may update guidance outside of earnings, can an extraordinary guidance update be provided appreciably in advance of a normally scheduled update without also increasing the likelihood of an additional change in the future?
How should we think about cutting, suspending, or eliminating a dividend policy or buyback program?
As with guidance, investors look at a company’s expected dividend payments as an expression of both the current performance of the business and a management team’s assessment of the predictability of the business model and future cashflows. Particularly in a market like today’s, the value of a dividend has as much or more to do with its sustainability as its absolute amount. Similarly, investors evaluate a share buyback program both as a capital investment and as a signal of management’s conviction in the company’s future prospects. When faced with extraordinary circumstances such as the COVID-19 crisis, it’s important that companies paying dividends and buying back shares contend with these issues in a robust manner that fully acknowledges not only the important corporate finance considerations of whether it’s preferable to keep cash on the balance sheet or return it to shareholders, but also the wider capital markets signals and implications of that action. Investors appreciate that a company’s ability to survive and maintain a prudent balance sheet will ultimately take precedence over voluntary returns of capital, but a range of questions should be asked in determining whether to cut, suspend, or eliminate a dividend or buyback:
- Does maintaining the current dividend policy or buyback program now introduce strain or uncertainty that calls into question the viability of a company’s business and its ability to prudently navigate the current crisis?
- Is there an alternative use of capital (e.g. debt reduction, opportunistic M&A, building cash reserves, etc.) that could strengthen a company’s prospects and that the current investor base could reasonably be expected to prefer to the current dividend or buyback?
- Are the current challenges facing the business reasonably expected to resolve in the coming months, such that a dividend or buyback could be temporarily suspended, rather than permanently reduced or eliminated?
- Does the positive signal of maintaining a dividend or buyback through a period of crisis outweigh any increased risk related to its expense?
- Do investors understand the current dividend policy or buyback as providing the flexibility to toggle up or down to accommodate market fluctuations of the scale currently being experienced?
- How central is the dividend or buyback to the investment thesis of the current investor base? Following a change, is there a compelling investment thesis for the company?
- If financial or operational strain predated the current crisis situation, would a reasonable investor interpret the crisis as a justification or an excuse for the change?
To speak with The IGB Group about navigating the unique Investor Relations and Strategic Communications challenges of being a public company during COVID-19, call Leon Berman at 212-477-8438 or email at lberman@igbir.com
