Guiding the Street During the COVID-19 Pandemic
The global capital markets have experienced an unprecedented period of volatility in recent weeks as the novel coronavirus pandemic has spread rapidly across the world. Concurrently, fear and uncertainty have overwhelmed optimism as investors have attempted to digest one wave of bad news after another.
Communicating clearly and credibly with the investment community is exceptionally difficult when visibility is so fleeting and anxiety so pervasive. While the initial impulse of some companies has been to wait and see, others are jumping from one crisis to the next. Regardless of where you might fit on this continuum today, it is clear the communications playbook you were using only a few short weeks ago no longer applies. Exceptional times like this require us all to question the status quo and to push ourselves outside of the norm. That’s why it is critical for boards of directors, management teams and investor relations departments to begin developing a new Investor Relations (IR) playbook for navigating this crisis.
There is not a universal blueprint for how to go about this. But there are some key objectives and considerations that most public companies should be employing to communicate with the Street.
For most companies, guidance has become a helpful tool to properly condition investors and sell-side analysts on what they can expect in terms of future financial performance. It is a practice that is predicated on reasonable assumptions about the business and the market environment. Given the current dynamics, these assumptions are being stretched and pressure-tested, which we think will result in a dramatic increase in companies discontinuing the practice, and we are already beginning to see this in the daily news cycle as more and more companies suspend or alter their guidance policy.
This certainly does not apply to all companies. For those businesses that are benefiting from the pandemic response, or at least not as severely impacted, reaffirming guidance may help to establish a financial baseline that investors can use to recalibrate their thinking. In all likelihood, these businesses have been punished alongside the rest of the market as investors’ tolerance for risk plummets in a risk-averse environment, and therefore recalibrating the baseline can be valuable. But it is essential to avoid overpromising or downplaying the pandemic’s impact only to disappoint later. This will signal that management does not have a firm grasp of what is happening with the business, and investors are likely to severely punish companies for going down that path.
Regardless of which direction you choose, think of quarterly guidance as an important tool to help you communicate what is happening with the business in the near term and what steps your company is taking to navigate these challenging times. The underlying message focused on business continuity, however, can be delivered without a financial framework.
Widening the aperture to the full year, however, adds a new dimension of risk and uncertainty. How quickly will the global and domestic economies recover and at what pace is still unknown. In fact, some would argue that the possibilities range from a quick recession followed by a strong snap-back to a prolonged and deep depression. Again, if guidance is predicated on reasonable assumptions about the business and market environment, most companies, if not all, will be reticent to forecast the future based on these radically extreme potential outcomes.
The Street is very unlikely to assign credit for a reiteration of full-year financial targets, so the risk-reward proposition of reaffirming the full-year outlook is decidedly unfavorable. Accordingly, the prudent and sound course for many, in our view, will be to suspend full-year 2020 guidance until a clearer picture of the environment comes into focus.
Filling the Information Void
Contending with the pace and magnitude with which business and market conditions are changing right now is an unenviable task. Publishing a series of revised forecasts to the investment community is neither practical nor constructive as each subsequent update will be of diminishing value. Engaging in meaningful ad hoc conversations with investors and analysts is also not recommended as, under Regulation FD (Fair Disclosure), prior communications continue to increasingly diverge from reality. Saying nothing not only allows others to set the narrative, but it can also be mistaken for a tacit endorsement of worst-case assumptions. Threading this needle is a delicate responsibility.
The sell-side has been stepping into this information vacuum by increasingly enlisting industry experts and/or leadership of private companies to provide market updates for institutional investors. While potentially not conflicting, this further distances companies from taking control of their own narratives. Accordingly, and recognizing there is no one-size-fits-all approach, we have provided some key objectives and considerations that most companies should be employing to communicate with the Street.
- Pre-announce ahead of earnings
A lot has changed in two weeks, which may or may not be reflected in last quarter’s financial performance. Establishing a baseline, as we have suggested, can be helpful to recalibrate future expectations. But more importantly, this provides an opportunity for management to discuss what is happening with the business today, and how it is managing through the crisis. For the vast majority of companies, this would serve as an important touchpoint with investors ahead of earnings reports that are scheduled for late April and into May. Given the pace and frequency of information that is hitting the market every day, waiting 45-60 days to provide a meaningful update to investors seems too little, too late.
- Provide recurring business updates
One potential avenue is to replace forward-looking guidance with more timely business updates. Here we are essentially trading forward projections (with low confidence) with more timely information about how the business has already performed (with high confidence). The industry in which you operate, the frequency with which conditions are changing, impacts to your supply chain, and customer spending are all variables that will inform the cadence of updates that work for you and your capital markets stakeholders. Some companies may have the resources and justification to provide bi-weekly updates, while others may find that a monthly publication is more than enough. In any case, selecting key performance indicators (KPIs) that are relevant and accurate modeling tools is the most important element of getting this right.
- Address your COVID-19 mitigation strategies
Detailing your company’s response strategy to the COVID-19 pandemic demonstrates that your leadership is taking the crisis seriously; protecting the well-being of employees, customers, and other key stakeholders; and operating in good faith to protect enterprise value.
- Highlight your liquidity and balance sheet strength
As you update the investment community on the above developments, you also have an opportunity to underscore the stability of your business by highlighting the strength of your balance sheet and liquidity profile. Investors gravitate to quality in uncertain times. And to whatever extent possible, it’s crucial to position your equity and/or debt as relative safe havens. This also includes signaling any changes in your capital allocation policies, including dividends and share repurchase programs. This holds especially true for any company that expects to receive funding from the federal government as a result of the pandemic. As President Trump has already indicated, monies derived from the impending stimulus package will likely be restricted to investments in employees and the businesses (not shareholder returns). Companies that maintain buyback programs, in particular, may very well receive governmental scrutiny from an oversight and investigations standpoint once the crisis ends, and other stakeholders will take note as they did in the aftermath of September 11th and the financial bailout.
Emergence from the Panic
The ongoing disruptions to our collective personal and professional lives make it easy to forget that this pandemic will eventually subside. However, we will almost certainly emerge from the crisis in a global recession or worse. Visibility will remain limited, many industries will be suffering, and uncertainty about the potential trajectory of any recovery will still be widespread. Providing useful and reliable forward-looking information to the investment community in this environment will not be easy.
As the business environment normalizes, your approach to communicating with the capital markets should not necessarily revert to the status quo. Think about the upheaval from this crisis as an opportunity to reshape your protocols of engagement with investors and analysts. The following are among the creative approaches you may wish to pursue:
- Directional guidance
Rather than provide specific revenue, EBITDA and earnings ranges for forward periods, consider offering directional updates relative to a specific baseline. The benchmark could be the most recently completed quarter, or previously articulated longer-term guidelines (i.e. three-year targets established at an analyst day).
- Publish sensitivity analyses
Showcasing how the business might perform under different scenarios using key KPIs or macroeconomic drivers (i.e., commodity price decks; GDP growth) will better equip investors to assess the risk-reward propositions across your capital structure. Providing high-level bull/base/bear case scenarios will enable you to maintain a flexible and credible dialogue with the investment community while you manage through fundamental crosscurrents in the wake of the crisis.
The adage ‘may you live in interesting times’ was clearly cultivated by someone who never had the misfortune of suffering through interesting times. The markets loathe uncertainty, which figures to remain in abundant supply for the foreseeable future. Your responsibilities from a capital markets perspective are to recognize and articulate the challenges at hand; detail your company’s plans to confront them; help your key stakeholders make informed investment decisions, and tailor a thoughtful value proposition in a rapidly changing environment.