Having a detailed IR strategy to explain your stock to investors is all very well, but sometimes a little tactical astuteness has to be brought into the equation – especially when forecasts don’t quite match market perception.
It’s a useful lesson for all IR practitioners to understand what has to be done when the credibility of the information they give out is called into question by an extreme discrepancy between company forecasts and reality. After all, it’s only human nature for an analyst to be less confident about what he’s told next time if his estimates differ greatly from a company’s actual results.
It doesn’t match
NEG Micon, the Danish wind power equipment company, experienced such a test of confidence recently when half-year profits looked worse than some analysts had expected. A half-year loss of Dkr70.3 mn was a surprise to some observers.
But the company’s president, Torben Bjerre-Madsen, suggests that such a mismatch was the result of broader-based scrutiny of the stock from analysts that deal with a diverse spectrum of companies. ‘Normally, when we come out with our annual figures in March, we give indications on turnover and profit level for the new year,’ he explains. ‘Then on the half year we don’t give any indication. This harmed us this year. We only said for the first half that we expected a loss due to the fluctuation and seasonal nature of our market, and this hit us when we then came out with the actual figures.’
As usual, a notice was first sent to the Copenhagen Stock Exchange and then to everyone on NEG’s mailing list. The results were also posted on NEG’s web site. Indeed, the company is ‘very careful that the whole world gets the same message at the same time,’ says Bjerre-Madsen, emphasizing that retail shareholders are treated the same as institutional investors. He admits, though, that there is always a risk that such information may not match analyst expectations.
‘NEG’s business is seasonal by its very nature and it does not announce quarterly forecast revisions,’ Bjerre-Madsen continues. ‘Analysts should know that they need to factor fluctuations into their estimates.’ For that matter, some analysts did try to probe about what could be expected before the results came out but were told they would have to wait and see.
Bjerre-Madsen implies that the mismatch between results and expectations is not about failure to communicate to investors – it’s more about the expanding group of analysts who do not specialize in NEG’s particular market.
‘Two years ago I would say we had five to eight people following NEG Micon, most of them being Scandinavian. We now have more than 25 and most of the newcomers are European or US analysts who – of course – are more and more demanding in terms of the information they require,’ Bjerre-Madsen describes. ‘When we meet with analysts or investors in a one-on-one meeting, we can be more specific if someone wants to know more about what’s going on in Norway, but we try to stick to what we have said about the company or we say we won’t comment.’
In contrast, Danish communications company TDC, formerly Tele Danmark, does not experience such seasonal fluctuations.
It has no problem matching results to forecasts because it is, in the words of TDC’s investor relations manager, Ole Soeberg, ‘a very stable business’.
Caught napping
However, TDC’s recent Swiss acquisition hit results and caused a 30 percent drop in the stock price. Soeberg insists the analysts knew all about the short-term impact of this acquisition. So was it unexpected or were the analysts caught napping?
TDC has ‘a very clear outlook statement’ which details how each division is performing, he says. There’s also a 2004 outlook from a group-wide perspective. Soeberg explains: ‘This outlook statement gives analysts and investors a foundation for finding out how we are doing. On each quarterly report we explain what has been going on, how we are going to meet the full-year expectations, and there is a minor adjustment to the outlook statement. The Swiss acquisition impacted us negatively – but after a few years it will be positive. This was explained when we first released the news.’
But some analysts appeared deaf to these explanations and tactical steps had to be taken to hammer the message home. ‘A number of analysts didn’t do the proper work so I called around saying they should take this and that into consideration. Then I saw the new estimates and they had not taken these factors into account, so I called them once again. But they still didn’t react.’
Of around 25 analysts who follow TDC, only ten actually adjusted their models to take these factors into account. When full-year figures were released, it was still something of a surprise to the market, despite all the IR effort.
Ole Soeberg, who has seen life on the other side of the fence as an analyst, looks at it this way: ‘I can only draw their attention to it by a certain amount. If I do it twice then I think that’s enough. It is not my job to update their models. They can take my advice, but if they don’t, then I can’t go much further than that.’
Tactical astuteness
In the six weeks after the stock was affected in this way the company staged 100 meetings – 85 of them one-on-ones with key investors. This additional effort clearly paid off. Soeberg says the company is now outperforming the European communication providers index. So a little tactical astuteness helps turns things around when analysts won’t rebuild their models.
Analysts who follow TDC will be much more aware in future that they should at least pay attention when the company calls them. Soeberg tries to make them especially aware of certain pages and certain paragraphs in TDC’s reports because some analysts may not scrutinize every page as much as they should.
This isn’t always an exact process – indeed Soeberg admits it’s more an art than a science. It’s basically ‘just a lot of hard work’ sending e-mails, looking at analyst models, and guiding the investment community based on the information already distributed.
For Sweden’s leading telecoms equipment company, Ericsson, there is at least some scientific scrutiny that it can apply when it experiences unexpected fluctuations in performance. Case in point: a profits warning earlier in the year, ahead of Ericsson’s interim statement. ‘The guiding principle must always be to provide the market with an adequate picture of the situation and future prospects,’ says Lars Jacobsson, Ericsson’s vice president of financial reporting and analysis.
Key information
‘When we have had unexpected increases or decreases in profits, our approach is to highlight whether this is related to macro factors and not within our direct control or, alternatively, industry factors not within our direct control yet possible for us to influence,’ Jacobsson continues. ‘Lastly there are Ericsson-specific factors within our control such as costs, efficiencies and the need to streamline our organization. In other words, we want to explain why we had a variance and if there is a likely impact on our future performance.’
‘Of course, it is also important to communicate what corrective measures we take,’ adds Maria Bernstrom, Ericsson’s director of investor relations. ‘The IR function must work closely with other key people, especially those within finance and the market strategy unit, to understand the driving forces in the industry. Of fundamental importance is providing key information to everybody at the same time through press releases, webcast seminars and easy-to-access presentation materials on the web.’
Of course, major shareholders and potential large investors have the benefit of being treated to one-on-one meetings with top management and other key executives. Several such meetings have been arranged to explain Ericsson’s latest efficiency program. In keeping with good disclosure practices, Bernstrom says the company avoids giving out any new information at such meetings. The aim is to shed ‘some more light and understanding of the reality’ in line with earlier public communications.
It’s a tough time for telecoms, meaning many of Ericsson’s customers are under financial strain. The result is much effort by the IR team to educate investors about next generation technology even while explaining the current financial situation.
Risk factor
‘Share price sensitive information is of course targeted to all shareholders and analysts at the same time,’ adds Jacobsson. ‘We also target the major ones with more in-depth interactive information and education, all the while emphasizing that we are in a market-leading position in an industry with a great potential.’
Can investor relations managers help get senior managers to supply more profit forecasts more frequently to the markets? ‘Yes,’ responds Maria Bernstrom. But ‘frequency is not the key.’
Indeed, the IR department should promote clear financial guidance in the investment community, but only when business conditions allow it. In turbulent times it can be misleading to be too specific even while keeping the information flowing. And to be able to interact properly with management, the IR department must act as a ‘sensor’ of true market sentiment.
Overall the aim is to keep the market continuously well-informed, especially during a period of uncertainty such as this. Indeed, Bernstrom believes this is Ericsson’s responsibility as a market leader in its field.
Finance director Paul Garvey at Axis-Shield, an Anglo-Danish medical diagnostic equipment company, also believes appropriate and timely information helps control volatility. ‘It’s a case of being up front with our shareholders,’ he says. ‘If there have been specific reasons for fluctuations, then we would explain the background. Or if the figures reflect certain trends then we would try to explain the dynamics behind them. Either way we would try to ensure our shareholders understand the reasons for any unexpected variations and most importantly know what to expect going forward.’
Clearly you cannot make complete preparations for the unexpected, says Garvey. But if a company has a robust reporting system, then signals should be picked up internally at an early stage and expectations raised or lowered as the case may be.
Influences
Garvey says there’s little an IRO can do in the face of drastic swings in company performance. ‘I don’t believe IR departments can ensure that unexpected results never occur – after all it is the nature of business that not everything works out the way we predict. However, the IR department can minimize surprises by being fully aware of the ongoing details of the business and by communicating that to the investors and the analysts who follow the company.’
Finnish companies Sonera and Fortum say that sticking to the script is the only way to deal with such unexpected occurrences. As Samppa Seppala, vice president of IR at wireless communications company Sonera, observes, ‘Any communication about higher or lower than expected results has to be considered from a securities legislation viewpoint. A listed company has to publish a profit warning if performance will substantially vary either way from a well-grounded market consensus estimate.’
Seppala adds that Sonera closely monitors the development of consensus forecasts to help avoid there being any surprises. That’s a wise move considering that the company has experienced credit downgrades in recent months and is part of the same troubled sector as Ericsson.
As soon as possible
Raija Norppa-Rahkola, vice president of investor relations at energy company Fortum, has a straightforward strategy: ‘Fortum was listed in late 1998 and so far we have had no need to send out any profit warning. In all communication we strictly follow the rules given by the Finnish Securities Act and the Helsinki Exchange. If something unexpected occurs, we’ll publish a stock exchange release as soon as possible.’
This perhaps indicates that regulatory constraints in different Scandinavian markets can have some impact on the candor and the swiftness of any tactical response. However, with US and international reporting standards now widely observed, the need to communicate on a quarterly basis establishes clear channels for regularly realigning the market’s expectations.
Managing expectations is a corporate process older than the hills. So perhaps the real lesson from NEG Micon, TDC and others is: Re-double those IR efforts to ensure the message is getting through to an increasingly diverse audience.
Leading the way
Stockholm will play host to the first annual Investor Relations Magazine Nordic Awards on December 4. The milestone event is being held in conjunction with the Nordic Investor Relations Event, as hosted by Sweden’s investor relations association.
The award winners have been identified through an independent survey carried out by Mary Maude Research. Over 164 buy-side analysts, sell-side analysts and portfolio managers were interviewed. Not only did they vote for the winners and comment on the IR performance of specific companies, they gave their general views on investor relations and corporate governance in the region.
The respondents were mostly from the Nordic region but also included UK analysts and investors who cover Nordic companies. Specifically, they were asked for their opinion about what would improve investor relations and what they consider to be the most essential elements of an effective IR program: is it the quality of IR personnel, transparency and disclosure, quality of information or access to senior management?
The winners and the full results of the survey, including verbatim comments, are kept secret until the awards gala. See www.irawards.com.
