Guidance: Restating, restarting and introducing some color
By mid-May 2020, as the Covid-19 pandemic continued to sweep the globe, 70 percent of S&P 500 companies had revised or withdrawn their earnings guidance, according to research from Gartner.
Since then, however, we have learned to live – to some degree – with the new normal and, for some companies at least, the time has come to reinstate guidance. At Irish housebuilder Glenveagh, that time came in September, when it published its interim results under the heading ‘Strong demand for starter-homes reaffirms group strategy’.
‘We were comfortable restarting guidance due to the visibility we had on trading,’ Conor Murtagh, director of strategy and IR at the company, tells IR Magazine. ‘But we provided caveats around the guidance outcome. So when we were saying we would deliver x units by the end of the year, that was predicated on there being no further lockdowns and the group having the ability to continue to build and deliver to our customers.’
Guidance isn’t necessarily what it used to be, though, with Glenveagh offering new metrics as well as traditional guidance and also moving to a shorter timeline. ‘We’re very much a growth-focused business – there’s a large ramp-up required: from 800 units last year to 3,000 units in 2023,’ explains Murtagh. ‘Traditionally we’ve set out unit guidance over a four or five-year period to give investors visibility in terms of the direction of the business [but] recent guidance has been limited to 2020 and 2021 so the pandemic has certainly shortened the length of guidance we’ve given. When that [might] expand again remains to be seen.’
He says the company was looking to ‘split the post-lockdown period from everything that went before it’ and that ‘investors really wanted to get a feel for what the current dynamics were in the ‘new normal’, after having been shut down until the middle of June.
Going beyond traditional guidance
To help investors get a better understanding of where Glenveagh was, the company began to offer numbers for sales leads – a metric Murtagh says helps paint a more immediate picture for investors. ‘With some of the traditional measures, it can take a while for current market conditions to flow through but leads allow you to get a feel for where the market is at a particular point in time,’ he says.
The pandemic has changed how Glenveagh – and many others – interact with their customers and the company has begun sharing some qualitative comments around website activity, conversion rates and online interactions with customers, both during the lockdown period and post-lockdown.
‘Covid-19 has resulted in a shift – or an acceleration – of industry trends in terms of the buyer experience moving online,’ says Murtagh. ‘And because things have progressed in that environment so quickly, we’re probably going to continue to give that qualitative commentary. But I think what we’ll gradually move away from is data linked to narrow periods of time – there’s going to be less need to give the last two months’ or six weeks’ experience on leads and customer activity, because we’ll be into more of a normalized operating environment.’
Murtagh stresses that the company felt comfortable giving these numbers – and reinstating guidance in September – because it had the visibility to do so and the prevailing narrative at the time was: We’re not going into lockdown again because we’ve figured out a way to manage [the pandemic].
‘Homebuilding is the type of industry where once you’ve got your sites open and reservations in place, you have good visibility on future revenues, particularly when it’s backed by strong customer demand,’ he explains. ‘So we felt we had enough visibility there to give that guidance in September – obviously with the caveat that numbers could change if there was another lockdown.’
One industry, two stories
That isn’t the case for all housebuilders, however. At McCarthy & Stone, a company focused on retirement communities, the outlook is quite different. While some in the industry might cater to younger, first-time buyers looking to take advantage of the UK’s stamp duty holiday – which ends in March 2021 – or the Help to Buy scheme, which ends in 2023, McCarthy & Stone caters to a different client, not one rushing out in a pandemic to buy property.
‘[Looking at others in the housebuilding industry], many are up from last year and they’re seeing a bit more certainty. Some are starting to reinstate the dividend and guidance,’ says Marina Calero, head of IR at the Bournemouth-headquartered company but also IR director at consultancy Powerscourt.
‘At McCarthy and Stone, we’re 40 percent down Q4 2019 vs Q4 2020 on net reservations, and with a national lockdown in place the market is expected to remain challenging,’ she tells IR Magazine. ‘So we cannot reinstate the dividend, nor can we provide any guidance. This causes a bit of a disconnect within the same sector, as we serve a different demographic that is more cautious than the broader population.’
It all goes back to how comfortable the board feels with the level of uncertainty and the visibility the firm has – or doesn’t have – says Calero. But ‘if no guidance is given, then the market would expect an explanation,’ she adds.
Putting her Powerscourt hat on, Calero says she is seeing more companies offering alternatives to guidance. ‘What other companies are doing more of is providing something that’s not specific, numerical guidance but that provides context and explains in far more detail the environment they are operating in, the expected trends in their sectors and the assumptions used in their internal scenario planning,’ she details.
At McCarthy & Stone, this has taken the form of more information about market dynamics and the potential behavior of its customers post-second lockdown – ‘all of which will have an impact on the company’s [future] sales rates.’
But does she feel pressure to offer more specific guidance given that others in the industry have begun to cautiously do so again? Calero says yes, but that the pressure comes predominantly from analysts keen to update their models.
‘There is less pressure from investors because engagement with investors is really about the delivery of strategy over longer-term rather than short-term forecasts,’ she explains. ‘With investors, conversations are more about the context for your operating environment and the strength of the balance sheet to withstand the short-term challenges.
‘For example, at McCarthy & Stone’s half-year results we provided an annual breakdown of expected workflow to get the business back to pre-Covid-19 unit delivery volumes and made it clear that the second half was going to be tougher than the first with a clear explanation of anticipated trends vs first half.’
The company took the same ‘trends and implications’ approach to its full-year results, too. ‘We talked about the trends we are seeing in the market and the implications of the second lockdown on the timeframe of returning to profitability,’ says Calero. ‘The focus continues to be on striking a careful balance between strict cash-control measures aimed at preserving headroom to navigate short-term uncertainty vs the need to invest in land and construction to support future unit deliveries and sales.’
Time for change
While no one wants to have to suspend guidance, there are some companies that didn’t issue it in the traditional sense at all – and recent years have certainly seen a push away from the short-term quarterly numbers focus of the past. Cole Lannum, a multi-IR Magazine Award-winner currently at Zimmer Biomet, has worked on both sides of the guidance fence (though never at a firm that issued quarterly guidance – something he says he particularly hates) and says companies should view the uncertainty of 2020 as an opportunity to perhaps change old habits.
‘I don’t think guidance will go away,’ he tells IR Magazine. ‘But I hope every company is looking at this as an event that makes it ask itself: are there things we’ve just done out of habit over the last several years that we should now look at differently? You don’t have to do it the same way you always did.’
Echoing Calero’s comments, Lannum also notes that it is the sell side, not the buy side, that is most keen to have guidance back. ‘If you talk to most buy-siders – especially the ones that are very good at what they do – many of them like companies that don’t give guidance because it gives them the ability to generate alpha by understanding what’s going on and analyzing the situation,’ he says.
‘That is, after all, what their job is. A lot of sell-siders love guidance because it makes their job easier. And that’s fine if your goal is to make your sell-siders’ job easy but it may not necessarily be the number one priority every company should have.’
For Lannum, companies can become overly focused on guidance and even make mistakes in an effort to avoid ‘being wrong’.
‘In general, companies and management teams overthink guidance and spend too much time focused on the wrong thing,’ he says. ‘To me, the issue is not guidance, it’s never guidance: guidance by itself is irrelevant – it is only a means to an end. Instead of focusing so much on guidance, management teams should continually ask themselves: what are the expectations that are out there?’
Lannum advocates for the kind of ‘expectation management’ more companies have been opting for, with extra color where they don’t feel comfortable giving official guidance, but says some firms have been guilty of simply staying quiet because they don’t feel they have enough visibility. ‘Welcome to the world of uncertainty,’ he says. ‘But what [these companies] fail to factor in is the fact that even if you don’t give guidance, investors still have expectations. They always have expectations. That never goes away under any circumstances.’
In such cases, he says IROs need to look internally and find metrics the company is using to help guide decisions. ‘What are you telling your board?’ he asks. ‘Hopefully, it is not, We have no idea what is going to happen to operations because of the pandemic. I suspect every single management team is trying to forecast things better than that – even with the uncertainty.’
The focus, he continues, should therefore be less on when to reinstate guidance, and more on bridging any gaps in expectation.
It is management’s responsibility, he says, no matter what the circumstances are, to do its best to help investors make decisions. ‘Managers should ask themselves: what do we see internally that may be different from what the market is expecting? In its simplest form, that’s what guidance is. But I think a lot of companies are finding that, now, it’s not that simple.’