How to Guide Through Uncertainty. 5 Ways to Address Market Uncertainty on Your Next Earnings Call.

Written By Victoria Sivrais, Partner & Andrew Janata, Senior Director

October 20, 2022

It’s not shaping up to be a fun earnings cycle for anyone. Regardless of size, industry, or geography, companies have no shortage of tough questions to contemplate – how to talk about the remainder of 2022. Whether or not to speak qualitatively about 2023. And, for those closing out their fiscal year – the ultimate question – how should we guide?

Given the ongoing uncertainty around everything from supply chain pressures, to inflation, to changing customer demand, good answers to these questions will be more challenging to come by, particularly for those in the industrial sector. The best approach? Candidness, clarity, and having clearly articulated scenarios for what could happen in 2023, and how that will impact your business.

Here are five ways to prepare for challenging earnings calls ahead:

1. Err on the side of caution when talking about the remainder of calendar 2022. Investors are already looking ahead to next year—and with a significant degree of trepidation. In other words, they are more concerned about what you will do than what you’ve already done. Even for companies that outperformed in Q3 and expect a solid Q4, investors aren’t necessarily convinced that you’re ready for what lies ahead.

That said, if you are considering updating prior guidance or narrowing the range for the remainder of this year, keep in mind that going over your skis in this environment will not be rewarded. You will need to inform the Street on assumptions that were contemplated in the outlook and articulate what you do and don’t have control over. Whether you revise guidance or not, focus on addressing the issues that you see affecting your company most over the next quarter and your plans for managing their impacts.

2. Keep the focus on 2023. For calendar year filers, issuing quantitative guidance for 2023 is likely off the table in this environment. Regardless, management is inevitably going to get the question, “How are you starting to think about next year?” Companies will need to begin laying the groundwork for 2023 expectations, at least qualitatively, as there is likely going to be a re-rating from analysts and investors given the current macro environment. In other words, make sure you take advantage of this to get analysts’ and investors’ expectations aligned to your thinking.

For fiscal-year filers that will be giving quantitative guidance for 2023, management will need to think carefully about whether to include upside/downside scenarios as well as how wide of a range is too wide in these uncertain times.

For both sets of organizations, leaders can expect questions related to the many macroeconomic factors posing significant headwinds. The key here will be to keep messaging clear and to the point. Answer the questions candidly and transparently, addressing the issues you see today while giving management enough room to operate the business and properly respond to dynamics that can and will change on a dime.

It’s a good idea to prepare responses for pressing topics that might come up, including:

  • The expiration of COVID-related benefits tied to the emergency declaration in the wake of President Biden’s declaration that the pandemic is now over, and how that might impact the health of the consumer.
  • Persistent supply chain pressures for certain input costs including raw materials and wages, despite the fifth consecutive month of easing for the Global Supply Chain Pressure Index (GSCPI).
  • How the strengthening U.S. dollar and foreign currency translation directly impacts earnings results and weakens demand for U.S. goods and services as prices translated into local currency skyrocket.
  • Changes in your ability to borrow and/or roll over existing debt, especially for companies with lower credit ratings.
  • Challenges managing inventory levels as consumer behaviors continue to shift more rapidly than historical norms and traditionally price sensitive consumers show signs of trading down between brands or to private label store brands to save money.

3. Dust off your recession playbook. With all these issues swirling, the threat of a recession just around the corner isn’t going away. Investors will want to know that you have a plan in place. Companies working tirelessly to hone their strategy in this inflationary environment and hoping to persevere through a potential recession can lean on (and speak to) lessons learned the last time around. Consider the ultimate impact of the last economic downturn on the company as well as what strategies were useful in mitigating the damage. How will those strategies be incorporated into your plan based on today’s environment? What will you do differently to further mitigate negative outcomes?

4. Make post-earnings engagement a top priority. The competition for capital is real. Investor fears continue to be stoked by persistent market dynamics and valuations that continue to fluctuate. Companies need to step up their relationship building efforts and actively position themselves with the right investors, not only to quell concerns, but also to elevate visibility among investors searching for the right investment haven for right now.

While this group is likely to include small- and mid-cap U.S. investors who are always more likely to practice active stock picking, it could also include institutional investors that have traditionally taken a more passive stance on management engagement. These major investors may be more likely to meet, engage with your narrative, and act upon it right now as all types of investors are looking for those companies that have solid plans for weathering the recession and coming out stronger than before. Make sure you’re telling your best possible story to capitalize on the heightened attention your narrative is receiving now.

5. Don’t lose sight of ESG. Even with other macroeconomic concerns at the forefront of their minds, ESG continues to be a top priority for investors and regulators alike. Despite a short delay, the SEC climate risk and cybersecurity rules are expected to be finalized before the end of the year. Companies looking to differentiate themselves from stodgy peers may find the avenue through ESG communications that emphasize long-term value creation potential, which could help offset some of the shorter-term impacts of the current economic climate. And companies behind peers in terms of ESG reporting and commitments will need to catch up quickly.

However, companies that wish to be leaders must start doing the work now to understand what disclosures will look like under the new rules and where they need to strengthen data collection, processes, and controls to deliver compelling and meaningful investor-grade ESG disclosures.

It all boils down to preparation. 

In times of uncertainty, the most prepared companies win. Executives need to prepare to face the tough questions from investors as they head into earnings, prepare for how they will engage the investment community in the near term, and prepare for how they will respond to what is just around the bend, especially if the macro environment takes a turn for the worse. The quality and clarity of your messaging will directly impact management credibility with the Street – something that is at a premium these days. It will also help keep both traditional activist and non-activist activists at bay, giving your management team the space it needs to guide your organization through uncertainty and deliver the best possible results for all stakeholders in the end.

If you’d like support preparing for earnings, give us a call. We’re here to help, and we know the messages and tactics that resonate with investors, especially during challenging times.

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