Only a few short weeks ago, corporate leaders were faced with a daunting task: host a quarterly earnings call. In the midst of an emerging pandemic when most businesses had been severely disrupted, this routine exercise suddenly had the potential to be a quagmire – awkward, complex and hazardous.
Now as the second quarter – the three months when COVID-19 impacts on businesses were most glaringly felt – comes to a close, companies are once again looking at an earnings season with unprecedented challenges.
Earnings calls for the first quarter took place amid mandated global business shutdowns driving massive economic uncertainty. Despite this, the first quarter may have been just a warm-up. As we approach the second quarter earnings season it seems certain companies will report amid a disjointed patchwork of global regulatory actions, record unemployment and still emerging but hard to discern economic impacts now coupled with renewed and fervent focus on racial inequality in the United States. Meanwhile, the virus that upended the global markets and caused significant turmoil remains a looming threat for the foreseeable future.
We spoke with leading finance executives, investor relations officers and investors across industries ranging from consumer packaged goods to enterprise technology providers to try to get ahead of the complexities this reporting season will bring and to offer a few observations and recommendations.
To Guide or Not to Guide – According to FactSet, more than one in three S&P 500 companies have withdrawn EPS guidance for 2020 [FactSet Earnings Insight by John Butters, Senior Earnings Analyst May 22, 2020] We are hesitant to say that investors were pleased with this turn, but analysts appear to have accepted better insight into the inner workings of businesses in exchange for no top- and bottom-line guidance for the near term. The ongoing uncertainty amid strength in the markets broadly suggests that guidance will remain on the shelf for most companies as most investors view 2020 outlooks as relatively meaningless while COVID-19 dynamics persist. The conundrum for many companies is that bringing back guidance may only serve to deflate valuation. However, we do not think investors will live comfortably with no guidance in perpetuity. Companies would be well-served to carefully watch peers, listen to investor feedback and consider the right mix of metrics to properly educate the market in order to determine when to return to offering traditional guidance.
Speed of Change will Compress Planning Timelines – Usually, before the quarter even ends most companies have a strong view into the results and key drivers of performance for the upcoming report. That is not the case for Q2. The expected narrative for this quarter is one that moves from near standstill in April to a rapidly ramping return to activity through June. However, as the U.S. continues to see prolonged or increasing cases, the threat of government mandated restrictions is rising again. It is always prudent to get ahead on planning, but before settling into a defined approach to the quarter report we recommend a careful review of trends through late June. And for those companies reporting late in July or even August, a preview of trends in those months as well. Remember, investors will be eager to know how the business is performing as of the day of the earnings call not just the end of the quarter.
Pre-Reporting Less of a Need – As Q2 comes to a close, many companies are wondering if they should preview their results early to help recalibrate expectations that may be skewed by the lack of guidance and increased volatility in the market. We saw this a number of times in Q1 as companies rightly moved quickly to provide clarity to a market that had never before experienced the impact of a pandemic. In our view the rationale has flipped moving into this print. Investors are not in the dark about the negative impact of the pandemic, there is universal consensus the quarter was negative for most. There will inevitably be pressure from the market for more information faster, but we think most companies should resist this temptation.
Parse Temporary from Prolonged – The initial response to the pandemic was to sustain business continuity, if at all possible, and at any cost. This reality is one reason the Street has lost interest in earnings per share guidance for 2020. That said, as most companies are reporting Q2, four months of pandemic operations will be in the books. Investors now want to understand what costs will remain elevated, what costs were reduced and where new costs will be incurred regardless of the duration of the pandemic. In some cases, it may be relevant to provide a look at fixed and /or recurring new costs.
Talk to Accelerated Long-Term Trends – In Q1, most were just trying to figure out what the next few weeks would hold and beginning to settle into this new way of life. We recommended increasing the scope of the earnings call to include reiteration of the long-term strategy. As we approach Q2 reporting, the acceleration of incredibly powerful trends across the economy is coming into clear view and companies should be prepared to discuss how they are impacted and how they are responding. From remote work to onshoring supply chains to labor relations, many of the shifts that had been underway for years accelerated. No sector of the economy is immune from these changes. While it remains impossible to assess the long-term impact of the pandemic, investors will want to understand how your company is reviewing its strategy and incorporating lessons learned from the global health crisis to adapt to new opportunities. The best companies can speak to near-term impacts while connecting to long-term opportunities.
Remember Who’s Listening – Earnings calls are a public address to all stakeholders. It is the rare recurring public venue for corporate leaders. As a result, we have seen increasing numbers of other stakeholders from employees, government officials, customers and partners listen in to these calls. While they should not be the venue to address non-financial matters in-depth, corporate leaders would be well advised to use their earnings conference calls as an opportunity to comment on the national moment. And in doing so, they should consider reiterating commitments, reviewing progress and demonstrating general awareness of the broader set of stakeholders listening.
Demonstrate Leadership for What’s Next – In the first quarter, the challenge for CEOs was to affirm confidence and managerial control amid an active crisis. A captain in a squall. Turning the page to the next quarter, it is now imperative for CEOs to articulate what they’ve learned and how they can lead the company forward. Offer anecdotes of how the company found its footing and how business planning is anticipating what is still to come. Keep in mind that given the strength of the markets and the expected caution of corporate leaders, it is imperative to underscore why your actions are prudent not timid.
Sheila Ennis is based in the San Francisco office. Following more than 20 years of equity capital markets experience as a sell-side analyst and investment banker in Silicon Valley, she now advises clients in all industries. She brings to her practice extensive knowledge of corporate finance, reporting metrics selection, competitive positioning and strategic communications. Recent engagements have included planning and execution of shareholder and media engagement during complex M&A, activism defense, business model changes, litigation, capital raising, management transitions and take-private transactions.
Carina Davidson is President of Abernathy MacGregor and leads many of the firm’s investor relations and corporate reputation mandates. She advises clients and their boards across all sectors on their communications to key stakeholders surrounding executive transitions, initial public offerings, earnings announcements, crisis situations, activist approaches and mergers and acquisitions. Carina also works for many leading private equity clients counseling them on announcements surrounding take privates, other significant transactions and issues management.
Pat Tucker is Managing Director, Head of M&A and Activism at Abernathy MacGregor, where he frequently advises public and private companies through transactions including those involving interloping bidders, complex structures, antitrust review, cross-border and foreign ownership review challenges, and special committees. Pat’s recent transaction experience includes advising T-Mobile in its acquisition of Sprint, Intuit in its pending combination with Credit Karma and IFF in its pending merger with DuPont’s Nutrition & Biosciences business.