As you’ve likely seen in financial news over the last several days, a few companies have begun to provide public disclosure of the potential impact of COVID-19 on their business and financial outlook. From what we’re hearing today, beyond companies that have already made public statements on this topic, a far greater number of companies are having internal discussions around doing so in the next several weeks.
As management teams try to wrap their arms around the ongoing developments of this global pandemic, it’s important to separate the noise from the reality around how public companies have publicized information around COVID-19 thus far, and how your company might consider providing public disclosure in the future.
Contrary to an article CNBC published on March 11th, the majority of public companies are still in the early stages of publicly disclosing how recent coronavirus developments may impact their near-term financial outlook. As of today, outside of the course of normal earnings cycle reporting, few companies have provided an updated view of the anticipated financial impact of COVID-19. Conversely, most companies internally are contemplating issuing statements to address misperceptions around the story, potential near-term impacts to the stock for calendar year first quarter 2020, or suspending annual guidance as a result of new developments over the past several weeks.
Companies that have published a recent business update on COVID-19 over the last week have largely done so within their normal earnings release, for example:
- On March 9th, Vail Resorts, a $6B mountain resort company, rescinded its previously issued guidance from January 17th, citing a marked negative trend in business performance due to the coronavirus for the week ended March 8th. The Company also announced it would provide updated commentary on its results by March 18th, 2020.
- Then just yesterday, Broadcom withdrew its full year 2020 guidance while companies more susceptible to the current environment, such as hospitality and energy companies, are adjusting their guidance outlook as well.
Over the coming weeks, we expect the number of companies issuing pre-announcements or guidance updates to accelerate, as the market continues to digest the developments related to COVID-19. The unprecedented level of market volatility is adding in an extended layer of anxiety from investors today, who are still processing the early stages of the bear market we entered on March 11th.
What Investors are Thinking
At the onset of the last bear market, which began in October 2007, the original iPhone had just been released, social media as we know it today was nonexistent, and the majority of investors driving investment into your stock today were not in the market.
That was a long time ago. Consider some of the biggest developments that have changed the investment management landscape since then:
dissemination of public information
- With smart phones that put the power of personal computing at our fingertips, information is transmitted and priced into the market at a much faster pace today.
- In addition to the increasing speed at which information is distributed today, the expansion of information distribution channels that may not always have correct information intensifies investor fears during periods of heightened volatility.
in algorithmic trading and “dark pool” trading
- The rise of algorithmic trading, a method of trade execution that utilizes automated pre-programmed trading instructions to execute trade orders, has added an increased layer of volatility into global markets, increasing the potential for eruptive market events such as the “Flash Crash” in 2010.
- Trade volume within dark pools, private forums for trading securities, has surged in recent years – according to the CFA Institute, non-exchange trading accounted for an estimated 40% of all U.S. stock trades in spring 2017, compared to an estimated 16% of U.S. stock trades in 2010.
rise of passive investment
- The robust growth of equity assets allocated to passive investment management has pressured active investors to cut costs and perform. Increasing pressure for alpha-generation is likely to keep active investors more invested during the present bear market than they may have been otherwise.
Current, active investors cannot leave money on the sidelines for the long term. Today, when investors are faced with a decision between a company they know well and a new name, they are going to pick the safer choice – companies they already know. The companies with the highest level of trust among investors will benefit at the expense of those who don’t. That said, we would expect value investors to come back in the market once the market volatility has abated and there is a clearer view of the macro environment.
Clermont Partners Recommendations
With mass amount of uncertainty around every corner, communications to the Street should be transparent, effective and consistent as you aim to ease anxiety and share a view into where the company stands today. Before updating previously issued guidance, we recommend thinking about these six things.
In the face of any crisis, time is of the essence. Providing transparency and risk mitigation plans sooner rather than later should be top of mind. While investors understand that companies can’t possibly have all the facts as new information rolls out daily, they do want comfort that your organization is taking proactive steps to minimize the impact of recent developments on your financial performance.
When it’s time to communicate, tell them what you do know. These will most likely be near-term impacts versus longer-term, such as:
- What is happening in your supply chain?
- How diverse is your supplier base? Have you been ramping other suppliers?
- Do you have business continuity plans in place?
- What you are hearing from customers?
- What is in place in your current contract agreements that provides near-term comfort?
- What variable expenses can, and will you control?
These will be top of mind questions coming from the Street, so management teams should plan to address quickly and transparently.
Management teams should utilize this time to clear any misperceptions shareholders, or potential shareholders, may have on the company’s ability to manage through the current environment. Leverage your communications to address their highest priority questions, acknowledge the most important elements that are top of mind and be transparent in what is outside of your control – at this point in time. Investors want to see a management team that is informative, open and flexible.
Then, decide how much of the alarm bell you should ring. It is tempting to pull out the absolute worst-case scenario and then sandbag it – we believe this is a mistake. When markets calm back down, it will be tough to reign expectations back, and you may trigger additional, unintended risk-based selling.
As you think about assessing the severity of your company’s situation, we recommend:
- Widening your guidance ranges versus a complete pull back or withdrawal if more time is necessary to assess the entirety of the situation
- Fairly gauging the impact you are experiencing today versus where your company was one year ago or even one quarter ago, and layer that into your messaging
- Providing an early view of the quarter as it currently stands and paint a clear picture of what you see happening in the next one-to-three months
- In the event pulling or commenting on annual guidance is necessary, list the factors that you are withdrawing guidance around. To the extent you can refer to external numbers the better, such as the ISM study on supply chain risks, so it is clear the decision is based on independent analysis
4. Balance Sheet
For highly levered companies, it’s important you are acknowledging the worst-case scenario for your balance sheet.
- Lead with your free cash flow strength but talk about the variable costs and levers that can be pulled
- Remind investors how much is left on credit facility and how far away you are from triggering your covenants
- Discuss how controllable investments in capital expenditure and maintenance are in this environment, and if you have made the decision to delay expenses, reconfirm it
5. Ongoing Updates
Tell investors when they can expect to be updated again. Remember, this is a process, not a one-and-done situation. The Street will expect a regular cadence of information, and we recommend giving notice as to when, and how often, they can expect to hear from you in your first communication blast. Then, stick to it. This is the time to build corporate reputation with the investment community by instilling investor confidence in your ability to manage today’s constantly changing environment.
6. Communication Channels
While it’s standard to issue wide-range investor updates through press releases, in situations of crisis or anxiety, we recommend integrating new content to your communication channels, such as video communications and dynamic FAQs, when and where able. Information like this shared through a calming CEO video will likely ease shareholder tensions and would be better received than through more traditional channels. Video production teams have the scalability to produce videos on the fly in times of need and dynamic content like videos have a better chance of actually making it in front of your investors. Couple that with robust FAQs that address all your major stakeholder questions as a one-stop shop for getting answers quickly and efficiently.
Once the video and FAQs are complete, send them out to your investor list and follow up for a call as soon as possible.