Promoting a long term view during earnings season

Three things to consider including in your earnings release and conference call.

It is earnings season.   We frequently forget that the quarterly earnings release and conference call are opportunities to promote a long tem view of the company and its prospects for growth. As a reminder, here are three things public companies will want to consider including in their release of earnings to show investors how well the executives are managing the business during rapidly changing market conditions and fluctuations in the economy.

1)     Future financial performance

2)     The plan for converting sales into earnings

3)     Adequate resources to achieve goals

Focus on Future

The calendar year is more than half over and many investors are already looking toward 2011. The results for the quarter and year-to-date are not nearly as important as the financial results for the rest of this year and next.   By clarifying how this quarter fits into the bigger picture, you can put those results into context with the company’s future outlook longer term.

Talking about future plans and initiatives can be tricky, but manageable. You will want to avoid providing information that would help your competition such as future changes in markets, pricing or promotions. Equally important, employees and suppliers should not be surprised by initiatives discussed in an earnings release or conference call. Talking about actions such as closing facilities, freezing compensation, reducing the work force should not occur in advance of discussions with the people who would experience the greatest impact from the changes. 

Converting Sales to Earnings

If you don’t already do so, make sure you give equal time to other line items on the income statement in addition to sales. How you plan to convert sales into earnings is more interesting and more attractive to existing as well as prospective shareholders than explaining and defending your sales trends.  Even if sales increased this quarter, questions about sustainability are difficult to answer in an uncertain economy.   Besides, companies that grow earnings at a faster pace than sales deserve a premium compared with their peer group.

Regardless of whether your company provides its view on sales and earnings expectations in actual dollars and cents, explaining how the company plans to achieve those results is valuable to investors in relationship to the amount of risk they are willing to accept.   From the company’s perspective, it is advantageous to explain the underlying plans and initiatives that will support future growth. Later, you will have an established structure that will help you explain the impact of meeting, exceeding or falling short of particular initiatives when discussing financial results. This builds credibility.

Every quarter provides the opportunity to prepare investors for future events that could result in unfavorable as well as favorable comparisons. Here are some examples . . .

• The bulk of expense reductions instituted within the last 12 to 18 months are behind us and we expect to hold expenses flat.
• We are increasing expenses in preparation for a recovery in the markets we serve and plan to do the following (fill-in the blank), which will increase expenses within range of x to x percent.
• More expense reductions are necessary in anticipation of continued weakness in the markets we serve and we plan to do the following (fill in the blank), which will decrease expenses within a range of x to x percent.

Only highlight the most significant contributors and detractors. There are external factors outside of your control which you may want to include if you expect them to have a significant adverse impact on future financial results such as the rising cost of health care, changes in governmental regulations and inflation/deflation. Decide early what you want to share with the financial community and then be prepared to provide updates on a regular basis.   

Also remember, anything discussed during an earnings call or release will be expected to have a significant financial impact such as changes in R&D, payroll and interest expense. Talking about future initiatives that do not significantly change your income statement, balance sheet or cash flow will only raise investor expectations for a financial impact that will not be realized. If you mention it in your release or conference call, investors will assume you believe it is important to the financial health of the company. 

Adequate Resources

Don’t forget the balance sheet.   We frequently get caught up in over-explaining the income statement in the earnings release and conference call because that is what is usually published by the sell side and the media. Your access to capital to fund growth is critical to the long term health of your company and its ability to pursue future growth prospects. It speaks to the strength of your management team and the amount of control you may have in relationship to the timing of your future goals.   

Discussing the following can help avoid future surprises by allowing investors to evaluate the amount of risk associated with your prospects for growth.

• If you have made any changes to your debt during the quarter or have plans to do so which would result in a significant increase or decrease in interest expense in future quarters, it is best communicated in advance of appearing on your income statement. 
• Also include any plans to change your inventory level, CAPEX spending or anything else that would reflect your expectations for a recovery or retrenchment in the markets you serve.
• If you are in the enviable position of being able to invest in the business without incurring debt, you should definitely discuss this in the earnings release and conference call. 

This earnings season is another opportunity to promote a long term view of your company’s prospects for growth.   You can increase existing and prospective shareholders’ understanding of your current challenges and opportunities by discussing your future plans and initiatives along with your access to capital to pursue those goals.