Quarterly reporting: Less is more?

It wasn’t until two months after the UK’s Financial Conduct Authority (FCA) changed its rules on quarterly reporting – or interim management statements (IMS) – that the issue really hit the headlines. FTSE 100 firm National Grid became the most high-profile company to drop its quarterly reports in January, citing benefits including an emphasis on the long term and time savings for senior management. It’s also about moving to a more flexible timeframe, says John Dawson, director of IR at the energy distributor. ‘It’s not about a lack of willingness to talk to investors or analysts – it’s actually exactly the opposite.’

John Dawson, National Grid

Rather than issuing a quarterly report under the ‘rigid’ format previously set out by regulation, National Grid now has the flexibility to update the market as and when – and how – it deems necessary, replacing the IMS with ‘an alternative way of communicating that can be customized to suit the emerging news at the time.’ Dawson says communication may potentially offer guidance, but is essentially a framework for delivering news and updates that allow investors to better engage with the mega-cap company. These updates will cover everything from ‘when we’re meeting investors and what conferences we’re attending to what events we’ve got coming up and the impact of recent news on the company,’ he elaborates.

As well as giving National Grid the flexibility to choose the content of its updates, dropping the IMS also means the firm can choose when to issue news, allowing it to do so closer to events and at a time better suited to the market. ‘If you’re tied to a timetable that only really allows you to update the market at these arbitrary points in the year, you’re in danger of either overreacting when something happens or waiting too long and making too little of something that’s more important than it might have been seen to be,’ Dawson says.

For him, the new reporting timetable – under which the firm will continue to issue full and half-year reports, as well as its less rigid regime of updates – is also better suited to National Grid than the pre-close statements still issued by United Utilities, another company that dropped the IMS following the FCA’s rule change.

‘[For National Grid], having a pre-close at the end of March is pretty useless because by then we’ve already spent most of the month talking to investors, so what are we going to do?’ Dawson asks. ‘Should we talk to investors and then put out market-sensitive information that changes expectations?’

While he confidently states that there are no disadvantages to the decision to end interim statements at National Grid, he acknowledges that this is largely down to the stability of the company’s stock and the type of investors that choose it. ‘The long-term investors that dominate our register are really interested in low-risk, stable outcomes and predictable performance from the business,’ he says, adding that investors have welcomed the move.

As well as the focus on the long term, Andrew Bonfield, National Grid’s finance director, estimates in an interview with the Financial Times that ending quarterly reports could save up to a month of senior management time each year. For those in IR, however, Dawson says the move will likely increase the burden. ‘I think that’s actually a positive thing, though,’ he says. ‘It means you’re going to be reflecting more progressively over the year on what you’re saying – rather than thinking about it only at the times of these statutory reports.’

The Unilever story

While Unilever’s decision to drop quarterly guidance six years ago might not be quite comparable to National Grid’s recent decision to end quarterly reports, each company was motivated by largely the same goals: to reduce short-termism and save time.

Andrew Stephen, Unilever

Unilever CEO Paul Polman said at the time that he wanted to create an environment ‘where we are not chasing 20 targets for the short term, but are able to do the right thing for the long term’ – a sentiment echoed by Andrew Stephen, head of IR at the consumer goods giant.

‘We think the business delivers value over years, not over quarters,’ explains Stephen. ‘We were seeing a lot of trading around the quarter’, with too much focus on whether the company would hit or miss predictions. Time was also an incentive. ‘We were wasting time trying to explain away movements that would be up one quarter and down the next because of phasing, which made no difference at all to the overall performance of the business,’ he points out. ‘And frankly the market’s time was being a bit wasted.’

Stephen says that although the company is listed in Europe, it was comparisons with companies in the US that held it back from making the move earlier. ‘About 20 percent-30 percent of our shareholder base is in the US,’ he explains. ‘Many of our peer group companies are [also] in the US and still do full quarterly reporting. I think we felt we might be less visible if we didn’t do quarterly profit reporting in the way they all do.’

In Unilever’s case, however, the company spoke with major shareholders and sell-siders in advance of its guidance change, as well as offering some new information about its sales breakdown that it hadn’t put out before. As a result, the move – while making headlines around the world – ‘was taken really positively,’ says Stephen. It also helped, he adds, that many simply saw the change as part of a new way of doing things under the company’s new chief executive.

So does Unilever have any plans to drop its quarterly reports as well? While this is something the company would consider in the future, Stephen explains that even if it wanted to do so now, its dual listing in London and Amsterdam means this is not an option. That’s because, although the FCA is following a European directive in changing the rules on IMS, it actually implemented the move early at the request of the UK Treasury. Under the EU plans, national regulators must fall in line with the changes by November 2015.

Sticking with the quarterly

As both Dawson and Stephen note, the impact of any change to reporting schedules will affect different companies in different ways and much depends on the sector, the stability of the stock and the investment community’s understanding of any particular firm – as well as the company’s own requirements.

Radek Nemecek, head of IR at FTSE 250 coal producer New World Resources, says that while the company decided to stop providing regular guidance in 2013 – instead choosing to update the market ‘in a timely manner’ – ending quarterly reporting is out of the question. Regardless of whether European regulation makes the IMS a voluntary report, Nemecek says the company is obliged to issue quarterly updates under its bond indentures. Even aside from this, as an IR professional in the mining sector, he sees value in updating the market every three months.

Radek Nemecek, New World Resources

He does, however, acknowledge the downside of the quarterly short-term focus. For example, ‘in one quarter we might have a very high capex spend and we have had situations where an investor has extrapolated this figure for the rest of the year. But this can always be addressed in the conference call,’ he says, adding that ‘we would continue with quarterly reporting even if we were not required to do so by our indentures.’

Another issue Stephen highlights is that if a company were to drop its quarterly reports and, unlike National Grid or United Utilities, only communicate half-yearly, ‘you would have a whole six months between your reporting points.’ As well as the risk of market expectations falling out of line with the business, ‘this could lead to unscheduled trading updates to comply with regulations,’ he says.

‘In principle, these should be as often positive as negative. But the market doesn’t like surprises and there is a risk you would be seen as less predictable. Unfortunately you get more negative publicity associated with an unscheduled trading statement that goes down than the positive publicity you get from issuing one that goes up. It’s illogical, but the market isn’t always logical.’

Dropping quarterlies completely could also become an issue at conferences, investor meetings or on a roadshow, Stephen continues. ‘If you update the market only half-yearly, how do you answer questions from investors?’ he asks. ‘Do you say, OK, I’m going to talk about what happened five months ago but I’m not going to talk about what has happened in the last four months?’ Despite highlighting these issues, he emphasizes that they are not reason enough to disregard ending the quarterly – simply questions to bear in mind.

Taking the plunge

If you do decide it’s time to drop the quarterly report, or simply move to a less rigid reporting regime, communication is key, says Stephen. He offers the following recommendations:

• Talk to shareholders ‘so you know what they’re thinking – which can help influence your decision – and so you can make it clear you have consulted and you’re not just taking this decision unilaterally’
• ‘Make it clear you’re doing this because you want investors to focus on the long term. You don’t want to be seen to be doing it because you’re shy about being transparent or you have a bad quarter coming up and don’t want to have to disclose it’
• See this as a long-term decision. ‘IR officers should be thinking about the timing of this so they’re seen to be doing it for the right reasons.’

This need for good communication is echoed by Dawson, who cites it as a factor in the apparent success of National Grid’s decision to end quarterly reporting. The company put out its first newsletter just one month after the initial statement, reiterating its plan to offer ‘proportionate and timely’ updates and thus reassuring the market. ‘Because we did it in two steps and were very clear, people weren’t unsettled by us canceling the IMS,’ Dawson points out.

‘The absence of communication creates a void and the void gets filled by other people. That can be more counterproductive than just saying what you want to say. You’ve got to fill the void – but in a way that’s relevant, timely and informative to investors. And if you don’t do that, you’re missing an opportunity.’

This article appeared in the summer 2015 print issue of IR Magazine