Through the gloom

Talking to investors when the economy is stricken and the word ‘trust’ increasingly seems like a quaint term from a bygone era is a thankless task. The sheer amount of financial and economic distress littering the landscape is unprecedented, as is the speed at which it arrived.

So when red ink streams across income statements and your share price is taking bullets from another round of grim economic numbers, how do you manage the company message? What is the point in talking about your company when the market, to all intents and purposes, is simply in no mood to listen?

Hold steady, advises an established financial commentator: if an IRO tries to tell any good news in the current environment, he or she just won’t be believed. ‘That news is also in severe danger of being lost in all the bad news,’ she explains. ‘The message is now about basic survival rather than profitability. It’s a big change, so if you’ve got bad news, then for goodness sake get it out there and out of the way. When everyone is conditioned to hearing bad news, give it. What you don’t want is to be the company still making very public write-offs the following year.’

Consuming loss
One IRO doesn’t have much choice about delivering bad news: his company owns a phalanx of global consumer brand names. Its share price, when he talked to IR magazine recently, had plummeted 15 percent. In one day.

‘Today it was down for no particular reason,’ he says. ‘So I speak to brokers to see whether I can get some insight or whether there’s much stock on loan that could indicate shorting. More often than not the brokers will say something not very useful like, There are more sellers than buyers today or People are worried about the recession.’

This IRO is also increasingly conscious that investor time horizons have contracted, and that’s the reality for many. ‘I suppose when I talk to shareholders now there is an element of, Well, I’m willing to talk to anyone who is interested,’ he continues. ‘It’s about maintaining the dialogue.’

Another IRO says he increasingly sees his role as akin to a politician’s – and, like a politician, he is not allowed to say those three simple words: I don’t know. ‘What I can talk about is process,’ he says. ‘When I talk to investors I’ve got to be robust enough to talk about different outcomes. The thing is not to get nailed to a point when they can say, Oh, but you got that price forecast wrong. So I talk about how the business is managed and the range of possible outcomes in the current climate, making it less about crystal-ball gazing. Now, it’s about the contingencies of responding to different circumstances.’

Peter Morrissey, an associate professor at Boston University College of Communication, has helped many companies deal with major communication issues over the years. He says stand-out companies like Johnson & Johnson, IBM and Coca-Cola have a long history of talking to the Street in good times and bad; they don’t pull up the welcome mat when the market takes fright. He also points out that the current tough environment is especially hard on smaller companies.

‘For early-stage companies and small-cap firms it is very difficult, simply because investors are seeking low or no-risk opportunities,’ Morrissey explains. ‘If there are no revenues, unless you are in a long-horizon type of business like biotech, it is very hard to get the attention of investors. They simply won’t take the risk. The shortage of IPOs is testimony to this.’

Given the overwhelming concern about earnings and cash flow, Bruce Davidson, head of research at Blue Oar Securities, an investment banking advisory operator in London, now urges IROs on roadshows to pay special attention to issues like debt repayment schedules and pension liabilities.

‘What are the repayment schedules?’ he asks. ‘What are their maturity and currency profile and how will debt need to be replaced?’ Of course, pension funds heavily exposed to equities may need large injections of capital, too.

Davidson’s words of advice are recognized by Simon Ward, head of IR at Kesa Electricals, listed on the London Stock Exchange. He has noticed increased numbers of questions about protecting cash generation and the balance between reinvesting in the business and payment to shareholders.

‘Debt funding is a big issue now, whether it be when it needs to be refinanced, the cost, covenant levels or headroom available,’ Ward notes. ‘Very recently, there have also been questions about potential changes in supplier credit insurance cover. It’s basically symptomatic of an investor focus that has moved into areas that in good times would not have been of concern.’

Changing the scenery
Many consumer electronics companies in particular have been pounded in recent months, especially as domestic technology equipment becomes increasingly more sophisticated, but also more ubiquitous. Shopped-out consumers are visibly retrenching.

David Lloyd-Seed, group communications director at DSG International, which owns UK electronic retailers PC World and Dixons, says part of his job now – more than ever – is demonstrating very clearly to investors what separates his firm from the competition in an incredibly tough trading environment.

‘Mass affluence has brought good-value products into people’s homes,’ Lloyd-Seed points out. ‘People want a different shopping experience when they are choosing products. So our issue now is showing investors just how we’re upgrading and revamping stores, visibly showing them the process in the current environment.’

It’s also about flexing the business model, Lloyd-Seed adds, keeping a tight line on stock and preserving business cash. ‘We have refocused our cap-ex spend and cut it by £30 mn ($45.2 mn).’

Shortly before IR magazine went to press, the US Federal Reserve, acknowledging that economic recession could be here longer than expected, cut its outlook for the US economy for 2009. The US Labor Department also reported consumer prices plunging by the steepest amount since records began in 1947. Good news, of course, for those with that increasingly precious and valuable commodity: cash.

‘Most jobs are easy, or relatively easy, in good times,’ reminds one IRO. ‘But in bad times you can’t be thrown off course. There are an awful lot of data out there saying how dreadful things are. But you live with this – and you learn to get through it.’

Four tips for surviving the downturn

Ignore your share price
There’s no such thing as the market. ‘Really there isn’t,’ says one financial pundit. ‘What there is is a lot of traders who have their own slant and imperatives on issues. What we should be judging is how a message supports the system, whether the traders like the announcement in the next two hours or not. Use your common sense.’

Get to grips with fixed income if you issue debt
Work closely with it and your treasury department. Consider organizing separate roadshows for debt analysts, especially after quarterly results. Don’t forget to update your website’s debt section, if you have one.

Advertise your know-how
If management has previously experienced downturns, it is more likely to make the right decisions to survive and possibly prosper this time around. How many individuals – management and IROs – were running a company in the early 1990s? This also makes the reputation of individual managers more important.

Ditch the presentation
Talk about key themes in the current market. Make sure you engage genuinely with investors. Craft your message to the mood of the times.