March 30, 2020
Investor Relations Amid COVID-19: Considerations for the Q1 2020 Earnings Season
As we end the first quarter in the midst of the coronavirus pandemic, companies are grappling with how to communicate the near- to medium-term business and financial impact of COVID-19. This challenge is exacerbated by uncertainty around the duration and magnitude of its effects.
Those U.S. public companies most immediately affected — primarily in retail, travel and hospitality — have issued initial capital market communications related to the financial and operational impact of the virus to-date. Based on our experience, and a review of a sample of U.S. public company announcements related to COVID-19 issued in February and March, the following are overarching guideposts and themes for companies to consider as we enter first quarter 2020 earnings season:
- Alleviation of uncertainty is more critical than current performance. The sheer speed of market condition deterioration has driven an initial wave of guidance withdrawals, revolver drawdowns, dividend and buyback suspensions, and workforce reductions as well as other urgent cost-saving and liquidity-enhancing moves. For many companies, the question remains: should we issue standalone updates ahead of Q1 earnings? In the current environment, firms should err on the side of removing as much uncertainty as possible. Since few, if any, investors or sell-side analysts expect previous projections to hold, we recommend companies convey the immediate impact to outlook, capital allocation and other near-term actions as soon as practical.
- For Near-Term Announcements, Emphasize “Just the Facts.” These near-term announcements can be brief and factual, with minimal strategic messaging that can be evolved later. The speed with which the situation is changing will invalidate any longer-term commentary. The communications cadence of guidance withdrawal, etc. to be followed by fuller comments in earnings materials establishes a tone of management taking control, while clearing the noise for a more productive quarterly call on which to establish the path forward.
- Prepare to Describe Go-Forward Scenarios: The financial community’s focus will shift from the significant decreases in revenue, profitability and cash flow to calculating the range of possible longer-term impacts from COVID-19 — and how those impacts translate to medium- to longer-term performance. Management teams should build an earnings narrative and script that walks through different performance scenarios and timeframes. Based on the sector, these could include base, downside and upside scenarios based on COVID-19 impacts to supply chain, capacity restorations, store re-openings or other variables. This type of transparent, scenario-based commentary will enable analysts and investors to begin the process of rebuilding and adjusting their models for the business.
Considerations for Q1 Earnings
- Earnings communications are now stakeholder communications. Companies must begin their earnings scripting with an overarching leadership message on COVID-19, which amplifies a focus on care, empathy and attention to all stakeholders. We will likely remain in the heart of the COVID-19 crisis phase throughout this earnings season, and possibly beyond. Thus, management teams must portray a broad leadership tone beyond that of a normal course earnings call. Media, regulators and politicians will take note of earnings calls and listen for company updates on treatment of, and support for, employees, customers, suppliers and communities. In many ways, COVID-19 is posing an ESG “moment of truth,” and CEOs should acknowledge this in how they describe their approach to protecting their companies and their people.
- Detail the contingency plans. Notwithstanding the extreme uncertainty, leadership must, above all else, assure analysts and investors of the ongoing monitoring, initiatives, adjustments and measures in place to mitigate COVID-19’s impact. Earnings commentary should address the damage assessment, but, more importantly, clarify the company’s pivot to address the market challenges. This should include specifics on, among other things, planning around supply chain, customer retention, and capacity adjustments, based on current assessment of the business.
- Sharpen the media strategy. Companies should consider expanding their earnings-related media strategies to ensure their messages can break through the noise. Companies will need to work harder in their owned and earned media engagement for broader strategic messages to be heard — and for management to be seen as effectively leading the charge. For larger companies, in particular, Q1 results will be reported as a barometer on the health of their industry, and the wider economy. A robust media strategy will aid the market’s understanding of the quarterly results and position management as forcefully leading the charge.
Despite the unprecedented scope of the strategic and logistical challenges posed by COVID-19, thorough preparation, commitment to transparency and crisp messaging about the company’s potential performance outcomes will help deliver the best outcome possible.
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