Q1 Financial Reporting During COVID-19: Far from Routine

Many issuers who have withdrawn full-year guidance amid the uncertainty around COVID-19 have used this communication to provide high-level commentary on current and expected impacts to their businesses. Given the speed of change and ambiguity around how long the crisis will last, further color and context will surely be expected in coming earnings reports. In fact, U.S. SEC Chairman Jay Clayton has urged companies to try to provide as much information as possible, not only about the current state of their business, but also looking out beyond the reported results. For most, given the ongoing uncertainty, that will be a challenging task.

Leveraging the learnings from our current activity with companies across all industries and regions, we have developed some strategies for management teams to consider as they begin preparing to report their first earnings results since the crisis began.

As this is the first time the business impact of COVID-19 will be addressed at length in a public forum, the tone and narrative will be equally important. All stakeholders want to hear about the journey companies have been on and, most especially, the path they see ahead. We believe the time is right to tell the broader story of the business: why it matters, how it is built for resiliency, actions taken to navigate at this time and what durable changes can be made to thrive in the new, different economic reality.

Considerations for Q1 Earnings Reporting

Recognize that the audience has broadened – Now more than ever, beyond analysts and investors, the audience for earnings calls includes employees, regulators, customers, elected officials and others. Affirmations of the commitment to shareholder value need to be treated with care to strike the right tone. Keep it anchored in humanity and a reflection of the challenge we all face right now. ESG issues, which in some ways will take a back seat while the focus is on stabilizing the economy, cannot be ignored as they will be more heavily scrutinized in the coming months from several angles, especially if taxpayers become equity holders.

Prioritize messages away from growth to safety – We are all in the same boat but the impact on the manufacturing of and consumption of products and services differs. Investors always want to understand changes in growth trajectory, but their mindset has moved from growth to safety as they seek to assess core risks in the business and connected risks to the economy. They will undoubtedly have questions about supply chain disruption, liquidity, customer retention, end market health and actions the company has taken/can still take to be best positioned to “weather the storm.”

Focus on now – Investors will be most interested in hearing about the current operating environment. The first quarter results will be less meaningful than the outlook ahead. Depending on the timing of when you are slated to report, supplement your discussion of first quarter results with an update on business momentum and weight comments heavily on current conditions, ability to continue to execute, need for and access to capital, cost containment levers you have pulled and can pull, customer health, etc.

Affirm resilience – Reinforce those core attributes of the business that support long-term resilience and buoyed the company through past challenges. The enduring appeal of the brand, the diversity of global revenue, long-term contracts, the strength of the balance sheet, etc. Being able to articulate these fundamental aspects of the investment thesis will help affirm stability to investors and other key stakeholders alike.

Offer incremental metrics – Companies can consider including certain additional metrics. For instance, data confirming brand strength, or characteristics of the business model, like long sales cycles, well suited to new economic realities, or tenure of employees, or operational redundancies that proved critical can be shared. The goal is to provide investors and other stakeholders with a better understanding of how a company is performing now and preparing for the future. Defaulting to silence in the face of uncertainty misses the opportunity to highlight the perseverance and agility companies have shown. In answering hypothetical questions asking management to assume a return to normal by some date certain, redirect to key messages about operational and financial resiliency.

Avoid exhaustive lists – Resist the urge to mitigate risk by listing every action the company is taking to address the challenges; investors are being overwhelmed with information and are seeking better context and weighting of impacts. Instead, provide an accurate documentation of how the company is faring, a record of key actions to maintain business continuity, capital position and reasoned judgment as to the company’s ability to execute in an extended period of dislocation. Consider offering a view into the key factors that would need to exist for a return to effective guidance.

Clearly state capital priorities, including impacts from government relief
programs – Cash preservation is top of mind for investors and therefore they will be keenly focused on learning about companies’ plans for allocating capital in the months ahead. Additionally, investors are trying to calibrate the impact the recently passed relief bill will have on the economy. Consider articulating how these funds may affect the business, peers, employees, customers and suppliers.

Buybacks, even for companies not accessing relief funds, are currently frowned upon. Deployment of cash to support employees and communities, while noble, will still be scrutinized in the context of the current financial strength and outlook of each company. Opportunistic M&A carries reputation risk. PIPES are on the rise. But what is the true cost/dilution, is a poison pill warranted or short-sighted? Criticism will flow regardless, so be sure to tie all capital allocation decisions to prior stated long-term growth strategies.

Demonstrate leadership – In a crisis leadership can create both perceived and tangible value. Investors will look to assess how the company’s executive team is functioning effectively to drive the business forward in this global crisis. Balance a description of key organizational actions with anecdotes of how the team operates well. The bottom line: investors need to walk away from the call thinking management has a handle on the challenge, is deeply engaged, and is steering the company successfully through these turbulent times.

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