As we enter the calendar Q2 earnings cycle, more states are reopening while others are reporting surges and hot spots. The future is anything but crystalline. But investors are increasingly expecting more information. And they are not as willing as they were a month or so ago to give management teams a pass. That means it’s decision time for CEOs: lines will need to be drawn around several critical investor communication and investment strategy decisions sooner rather than later.
Here are five considerations that should be on your radar right now along with some insight to help you define where your company will stand:
- What should guidance look like in calendar Q2? Many companies chose to withdraw annual guidance in its traditional sense during the calendar first quarter of 2020, citing limited to no visibility at the height of the worldwide economic shutdown. Investors, who largely accepted this at the crux of the pandemic, are now starting to expect at least some qualitative or directional guidance for calendar Q3 or the second half of the year. Some companies are starting to have slightly better visibility coming into the calendar second quarter 2020 earnings cycle. However, especially for those companies just beginning to restart suspended production, guidance can’t and won’t be as definitive as it was before. It will be essential to strike balance between being informative and being credible. As you try to bring the Street’s expectations in line with your own, keep these tips in mind:
- Focus on qualitative versus quantitative guidance and speak to trends.
- If you can, give some flavor around the anticipated trajectory of your demand curve in recovery—will it be V-shaped, U-shaped, or W-shaped?
- Continue to highlight what you can control and the costs you have reduced while emphasizing prudency in investment and capital allocations.
- Be conservative and avoid overplaying positives unless you have hard data and at least two months’ worth of trend information as support.
- How should you quantify the cost reductions associated with COVID-19? Some companies are considering adopting non-GAAP metrics, such as EBITDAC, where the C stands for Coronavirus. This approach effectively adjusts away the impact of the COVID-19 pandemic on a company’s operations. While hedge funds and algos might warm to this tactic, fundamental investors will not. Here’s why: COVID-19 is not a singular, one-time event. It’s more like the “new normal,” and the impact on operations in future periods could be even more significant than it was in the calendar first quarter. Instead of writing it off, we recommend:
- Noting the impact of COVID-19 on adjusted EBITDA at either the consolidated or the segment level. For example, if you shut down a manufacturing facility as a result of the pandemic, include the specified percentage impact on adjusted EBITDA caused by this action.
- Layering in a discussion of structural cost reductions versus those that are temporary to give the Street a better idea of how you expect costs to adjust going forward.
- How much of the longer-term strategy should filter back into your quarterly earnings call? Talking with too much detail about what your business is going to look like a year or more from now can come across as a bit tone deaf considering the high degree of uncertainty that continues to pervade nearly every industry. Still, with fundamental investors coming back, it’s important to tell the story of how your business will emerge quicker and stronger as the economy comes back online. Again, it’s a balancing act. In our recent article on how to reengage fundamental investors, we give some tips for transitioning your investment narrative and focusing on your intermediate-term story. Some ideas include:
- Speaking to the strategic pillars that will position the business for success in 2021 and beyond.
- Illustrating your plans for reinvestment in growth. This may include a discussion of the resurgence of the M&A environment if that is part of your overall strategy.
- Sharing insights from your customer conversations including overall sentiment, level of continued trepidation (if any), or any interesting dynamics that are starting to emerge.
- Should you continue to do share repurchases or pay out dividends in this market? Whether you stay the course or change your policy this quarter, the most important thing you need to do it give the Street a reason why:
- If dividend payout is staying at the same level, address why this is a good use of free cash flow despite a potentially prolonged period of uncertainty. In this scenario, it will be important to speak to near-term confidence in the business.
- If you reduce or delay dividends, don’t worry so much about losing yield and value investors. These investors understand that for a significant number of companies, this is a temporary move, and they are not likely to jump ship in one or two quarters given the more limited options right now.
- Either way, be clear on when your board will next consider or review this policy.
- Will you stay virtual coming out of calendar Q2? Our surveys and experience strongly indicate yes—for the calendar third quarter at least. Most large city governors remain uncomfortable with big events. And since analyst days and NDRs require significant participation from both companies and investors, keeping them online for now is the safest bet. There are definite advantages to this new MO, especially when you know how to optimize a virtual investor day or NDR. However, it’s important to focus on ensuring high-quality targets. Given that corporate access teams can go to all corners of the country, all the time, and investors who aren’t busy traveling have more time available to devote to virtual events, you run the risk of spending time and effort on less-than-well-matched investors. To mitigate this possibility, consider how you can hone in on a specific audience and what you can offer to attract the attendees you really want. Be creative and develop shorter, more targeted events that will engage the right investors in meaningful ways. Here are a few ideas to get started:
- Segment audiences by investor style.
- Host a topical analyst day where you showcase a piece of the business or special topic and do a deeper dive than usual.
- Consider a virtual plant or manufacturing tour or a live product demo.
- Hold an ESG hour to specifically delve into your company’s environmental, social, and governance strengths.
Stay fluid and keep communicating.
If we’ve learned anything from COVID-19, it’s that the “new normal” is evolving all the time. Keeping the pulse of the Street, understanding what investors are seeking, and tailoring your communications accordingly will be the keys to optimizing the best investor engagement opportunities and telling the story your organization needs to continue telling through the crisis, the recovery, and beyond.