The threat of war in the Gulf is on everyone’s minds, and the economy is suffering as a result. According to business forecasting web site Economy.com, the uncertain climate knocked up to $50 bn off US business investment last year, and with the buildup to war continuing, investors are remaining cautious. To add to the depressed situation, consumer confidence in the US is continuing to fall, down to its lowest level in a decade according to the Conference Board.
‘The prospect of war with Iraq is a headwind that’s dragging on the economy, and people have grown increasingly nervous about the short-term outlook,’ comments the Conference Board’s chief economist, Gail Fosler. As a result, investors are demanding more contact, more attention and more detailed analysis about the companies they invest in. But with no-one certain of what the next few months will bring, IROs are finding themselves fighting a battle of their own to overcome these war worries.
Of course, the sorry state of the economy isn’t purely the product of potential war. The economy was already slowing before 9/11, and many sectors have yet to recover from the free-fall following that day.
As Gus Faucher, senior economist at Economy.com, says, ‘Since 9/11, there has been a general malaise that’s spread across most of the economy.’ And he says the uncertainty over war continues to depress the stock market: ‘Investors are sitting on the fence, waiting to find out what’s going to happen in Iraq before going ahead with investment decisions. Until this uncertainty is resolved, investors are going to remain on the fence, becoming increasingly jittery.’
Question mark
One of the sectors most heavily affected by these jitters is the airline industry, never very profitable at the best of times and suffering heavily since 9/11. The threat of war however, is ruining any chance of recovery, and means sleepless nights for more than a few IROs.
‘I would say there would be a modest amount of recovery without the current threat of war in the Gulf,’ says Michael Thomas, director of investor relations at American Airlines, the world’s largest airline. ‘We’re in a period right now where there’s so much uncertainty and so much that is beyond our control, and that is having an impact on us.’
That impact involves American Airlines suffering the industry’s biggest ever net loss in 2002 of $3.5 bn, and currently losing $5 mn a day. Its shares have lost more than 90 percent of their value over the past year.
Pierre de Bausset, senior vice president of investor relations at the European Aeronautic Defence and Space Company, the world’s second largest aerospace and defense company, says he too is seeing investors affected by war concerns. ‘The last downturn in the airline industry was triggered by the previous Gulf war, so people are obviously concerned,’ he says. But, without knowing what the war will look like, it’s very hard for IROs to talk about its impact with any confidence. ‘This buildup is a question mark everyone is struggling with,’ de Bausset adds.
So much uncertainty means more questions for IROs to field. ‘Investors have become much more demanding and much more detail-driven,’ says Alastair Scott, IR manager at UK-based Six Continents Hotels. ‘They want to really understand the business thoroughly, which is a good thing, but it’s harder for us as IR professionals.’ Six Continents is currently the target of a £5.7 bn hostile takeover bid by entrepreneur Hugh Osmond. Some say Osmond is preying on the weakened state of Six Continents due to the pre-war downturn in tourism.
Scott says that since 9/11 he has tripled the amount of his time he spends speaking with the buy side, from 20 to 60 percent, and it’s been increasing steadily over the past few months. ‘On top of this, I did eight buy-side trips to the US last year, but just half that number the year before,’ he adds. ‘This year it looks like I’ll do even more.’
But it’s not just an increase in talk time that investors are demanding; they want more detail, too. David Wills, partner at Canadian IR consultancy Media Profile, says that in the current climate companies should focus on real answers, not speculation. ‘IROs have to spend more time focusing on their strategy, and the reality of the market that they’re in, as opposed to the potential of what they’ve got. Investors are now more interested in the nuts and bolts.’
Constant communication
All of this means IROs have to communicate more frequently, and in more depth, to ensure their investors understand the current situation and how it’s affecting their portfolio companies. ‘Previously what was important was communicating your news effectively,’ continues Wills. ‘Now you really need a consistent, constant communication flow as opposed to just picking your news to release.’
The current communication flow involves being more proactive. As American’s Thomas says, ‘We used to do major updates every quarter. Now, with the world changing as quickly as it has been doing recently, we’ve realized that we need to adapt to the current situation and to do updates as often as suits our investors.’
Despite all the hype around as emotive an issue as potential war, IROs have to keep the matter in perspective. As Wills says, there are a lot of companies with no real impact from war in the Gulf. So for some IROs, addressing the war threat may just be an irrelevant distraction. In that case, he continues, ‘What is important is to explain why it’s not relevant, and why there isn’t an impact.’
IROs are also struggling with the fact that they are dealing with hypotheticals, and a situation in which it is impossible to give accurate answers. ‘None of us can affect what happens in the Middle East,’ notes Thomas. ‘So while our investors are asking us more questions and want more information, they know we can’t give specific forecasts.’ Instead of providing vague, unqualified statements, IROs are communicating as honestly as possible, providing investors with both good and bad news with equal emphasis.
In the current climate, investors and shareholders are very open and willing to listen to IR departments. Joey Brown, president and CEO of the Canadian Investor Relations Institute, says this is a chance for IR departments to bridge the gap in transparency with clear and understandable information. ‘When times are good, people go along with the market,’ she says. ‘But when markets are down and uncertainty pervades, people are keener to hear what companies have to say. This is a real opportunity to get investors’ attention with a solid story.’
Fire in the belly
While ramping up their communication flow, IROs know it’s crucial to maintain, or win back, the confidence of their investors. Richard Torrenzano, CEO of the Torrenzano Group, a New York-based strategic communications firm, has been advising his clients on pre-war IR for the past few months. He says investor confidence is in part the responsibility of a company’s senior executives. ‘Investors can read the numbers. They will look to see if a company’s strategy is sound, and how this strategy will fare in difficult times. What they also want to see is the fire in the belly of management. They want to have confidence in their leadership.’
Thus many IROs are increasing the visibility of their senior management to make sure their company message and profile stay strong. ‘We make sure that our executives, particularly the CEO, address the issue of a potential conflict whenever they speak in public,’ says Gerry Spahn, head of investor relations at Nissan in Japan. ‘It’s the CEO’s job not only to deliver the commercial message, but also to deliver a clear message on what’s happening in the world, based on facts, not speculation.’
Greg Ebel, VP of IR at Charlotte, North Carolina-based Duke Energy, agrees with Spahn: ‘With our stock trading at historical lows in January this year, what we’ve focused on is an increased use of senior executives in conversations with investors and analysts.’
IROs can make the best of a bad situation by directing the attention of their investors to areas where the company is strong. Nissan’s Spahn says one of the advantages of being an international company at a time like this is the potential to shift focus to other growth areas. While Nissan predicts that war worries mean it will sell almost half a million fewer cars in the US in 2003 compared to last year, Spahn is making sure investors know that markets such as China, Mexico and Japan are growing fast and continuing to be profitable for the car company.
‘Very often people get caught up in where the risks are and they forget to talk about the opportunities,’ Spahn points out. ‘But you don’t invest in the region of a company, you invest in the company as a whole. We ensure we focus on the overall profits of the company, and we try to give a global perspective to our shareholders and to our investors.’
Long-term focus
If shifting focus to other market segments isn’t possible, IROs are making their investors focus on the long-term picture. This is particularly relevant in very cyclical or very counter-cyclical industries such as oil and gold. Oil prices have reached their highest level for twelve years but, as Jean Côté, investor relations manager at Toronto-based Imperial Oil, says, ‘No investor believes that the prices we see today of $30-plus per barrel are reflective of prices we’ll see in the future; commodity prices are much higher than one could expect on a sustainable basis.’
Lars Sorensen, investor relations officer at Norway-based Statoil, confirms, ‘The oil industry is quite used to volatile prices so we have to try to explain to our investors that this is not a situation that will last forever.’ If you’re selling shoes, this oil IRO says, you’re concerned with next summer’s fashion, but Statoil is focused on the next ten to 20 years, so that’s what he communicates to investors.
‘It’s important not to overreact to short-term noise,’ adds Russell Ball, head of IR at Denver-based Newmont Mining. With gold trading at a six-year high of around $370 an ounce, up 7 percent this year after increasing nearly 25 percent in 2002, Newmont has seen its stock rise by about a third in the past twelve months. But, as Ball says, ‘This war situation drives prices up but they’ll go back down again. In various roadshows, discussions, conference calls and presentations, we address the war issues but we say they’re for the short term and let’s focus on the bigger picture.’ This shifts attention away from the present uncertainty, and turns it instead to the long-term industry fundamentals.
Sticky situation
One industry benefiting from the present uncertainty is duct tape. After the US Department of Homeland Security’s recommendation that the sticky stuff is one of the key things every home should stock up on in preparation for a biological or chemical attack, duct tape manufacturers are boosting production. Ohio-based Henkel Consumer Adhesives, which supplies its Duck brand duct tape to Wal-Mart, Lowe’s and Ace Hardware, has increased its production by 40 percent and has implemented a ‘rapid response inventory control system’ to keep up with demand.
‘Our primary goal is to make sure every single person who wants to buy duct tape is able to,’ says Heather Sefcik, assistant communications manager at Henkel. She adds that it is in the coastal and border states where the demand has been at its strongest, implying that the US is building a giant layer of duct tape around its perimeter. ‘We always recommend duct tape as a general item to keep with you anywhere you go,’ continues Sefcik, ‘especially in your house.’
IROs in troubled times should take heart from these words. Whatever the outcome of the lead-up to military conflict, it seems there is something that can stick everything back together again. Could it work on the economy, too, perhaps?
