Out of an Abundance of Caution
7 October 2020
By John Nunziati
The investor relations community has just wrapped up the third calendar quarter. Most teams are now in a quiet period, working closely with their internal partners to make sure the books are closed and the results are fully understood. These partners include groups such as Financial Planning & Analysis, Corporate Accounting, External Reporting, and Legal. For all these teams, having worked in a remote environment for nearly all of the past six months, the prospect of preparing for another virtual earnings call this quarter doesn’t seem quite so daunting. However, some teams are beginning a dialogue on another topic – guidance.
Each quarter, the Q4 IRSP team does an analysis of earnings results which we call the Earnings Intelligence Dashboard. We track announcements across the S&P 500 as well as many of our clients who are not part of the S&P 500. We share that analysis with our IRSP clients. In the last version of our Q2 analysis, the findings suggested that of the 151 S&P 500 companies who withdrew annual guidance during the initial COVID outbreak, 22 companies which had reported Q2 results by August 31st had reinstated guidance. We’ll discuss some observations about those 22 firms who have already reinstated guidance.
We reached out to IR teams at companies who altered their ongoing approach to get their insight into the processes and practices they used in deciding to make the change. I believe some of what we’ve gleaned from last quarter may be of help to all IR teams, but especially to the more than 100 companies who have yet to reinstate guidance.
First, let’s understand what led companies to retract their guidance. In mid- to late-March, as the first calendar quarter was ending, the COVID pandemic was descending on businesses everywhere. City and state-wide lockdowns were being announced and companies were stopping production, closing offices and retail outlets, and sending employees home. The focus from the investment community was on the immediate impact and steps being taken to preserve financial flexibility. Companies who were faced with earnings releases in the late-March and early-April timeframes not only had to report their results while adapting to a remote working environment, but also had to provide insight regarding the effects on their business.
The use of the title phrase of this article became fairly common in the Q1 earnings season. It showed up in nearly 10% of S&P 500 company earnings call transcripts. Many IR teams moved quickly with their management teams to reduce the risk of rapidly outdated guidance. Shawn Bevec, VP of IR at Quest Diagnostics explained the shift in approach, saying “We provide annual guidance on our 4Q call in late-January/early-February. We generally only update guidance concurrent with subsequent earnings announcements throughout the year. We pulled guidance in an 8-K right around the end of March given the extreme uncertainty and deterioration of our base business.” Other IROs we heard from spoke of opaque data sources and extremely limited visibility. That led nearly one-fourth of the S&P 500 to withdraw their guidance.
Once Q2 results were reported, the impacts of the pandemic became more apparent. However, some companies began to consider a return to more normal operations. This led to the first round of company guidance reinstatements. “We gained sufficient comfort that customers’ production and our own shipments had returned to a level of normalcy that we could rely on the data inputs we were receiving to guide for the immediate forward quarter,” said Jacob Sayer, VP Finance, Sensata Technologies.
Visibility wasn’t the same for all companies though, particularly given seasonality for businesses like Pentair. In their case, Q2/Q3 represents a higher percentage of sales in its largest markets. “With six months behind us and a look at July trends,” explained Jim Lucas, SVP, Treasurer and Investor Relations, “we reinstated annual EPS guidance, but not quarterly.”
Now, heading into earnings season for the third quarter, there are companies who’ve resumed guidance. Digital Realty, who had retracted guidance due to a strategic transaction earlier in the year, considers itself “very fortunate that our business has not been adversely impacted by COVID-19” states John Stewart, SVP of Investor Relations. Digital Realty provides “full-year guidance for roughly 20 KPIs and financial metrics from the top-line to the bottom line.” Others will consider changes such as tightening the wide ranges provided when guidance was reinstated or adding sales/revenue detail previously withheld.
Since investor demand for information has not subsided, IR teams will continue to work with their management teams to provide insight into their business. IR leaders should strive to communicate a clear picture of how the business is being run, what the indicators are that drive results, and, whenever possible, reasonable estimates of growth prospects and company performance. Those who can accomplish this balancing act provide their company with the best potential for accurate enterprise valuation.