Posts Tagged ‘Financial communication’

Metrics are the message

March 26, 2012

Flipping through the annual report of an oil company I own a few shares in, I skimmed over the usual headline cliches (“proven business model,” “rigorous execution,” “strong results”). As a shareholder – and a practitioner of investor relations – I’m glad they don’t have a discredited business model, lackadaisical execution or weak results. But maybe there’s something more to take the measure of this company.

As a casual weekend reader, I passed over the gray-looking shareholder letter. I did have to circle back and see if there was an explanation of that puzzling schematic diagram on the cover – it was an engineer’s view of the company’s proprietary oil sands technology, of all things, decorating the cover of the annual report.

Finally I landed on a page headed Financial Highlights. And there I dug in.

You often hear investors say, “It’s about the numbers.” Or if you talk a bit more, the numbers and management – because having the confidence to bet money on a company includes believing in the management team.

But the numbers – more particularly, key metrics – are the main thing investors are looking for in a company’s disclosures, reports and presentations.

The metrics and what management is doing about them are the strategic message.

When I landed on the financials in this report, my eye was drawn to the 5-year history of sales and a similar line for net income – both up nicely in 2011, looking like the last time oil prices were high, in 2007-08. I scanned down to ROE and ROCE, both of which which this company provides – nicely. Other metrics of interest … well, they weren’t there, until I went to work on the financials with my calculator.

My thought is that investor relations people ought to make key metrics – those viewed by management and your investors as driving the share price in the long term – easy to find in news releases, reports and presentations. Because key metrics are what investors, whether institutional or individual, are looking for.

A few metrics are likely to be top-of-mind for nearly any company:
  • Earnings per share. Sure, I know the theories about cash flow or some other measure being more important, and some managements are passionate about EBITDA as the key metric. For most shareholders EPS is still the bottom line.
  • Growth rates of sales and earnings. Whether the picture is pretty (sales up 23% in the current period) or ugly (earnings down 14%), companies ought to make growth rates easy to find. And do the math for investors; don’t make ’em get out their calculators.
  • Return on equity – or capital employed or assets. To know whether a business is attractive as an investment, the most basic question is whether it earns more than its likely cost of capital. If  ROE is 27.5%, as an investor I’m comfortable on that issue. If it’s 7.5%, I’m going to look a little closer.
  • Profit margin & its trend. Gross margin seems to be the most popular, or operating margin. Investors want to know the power of a business to take raw material or merchandise, sell it and turn a profit. Margins provide an objective view of the impact of rising costs, dropping prices or lack of scale.

Every industry and many companies have their own key metrics. Same-store sales growth. Net income margin. Proven reserves. Milestones in drug development. Whatever investors see as driving the value of the company for the future.

Of course, companies also offer up all kinds of non-GAAP metrics like “adjusted EBITDA” or “ongoing operating earnings” – which investors may or may not trust. If it works for you, OK, but you may want to validate that with your investors.

In any case, settle on your key metrics (not 20, just a few) and then use them …

Investor reporting ought to emphasize, say, three or four key metrics – make them highly visible in words, tables and graphs – and explain what you are doing about them. When they improve, take credit on management’s behalf – this is what we did to add 50 basis points to margin. When they go the wrong way, acknowledge it and tell shareholders what management is doing now to turn the situation around.

I see metrics as the core message of investor relations. What do you think?

© 2012 Johnson Strategic Communications Inc.


Explaining your secret sauce

February 27, 2011

Warren Buffett’s latest letter to shareholders of Berkshire Hathaway, posted Saturday, rewards the reader with pithy quotes on nearly everything in business, as have so many of his annual reports in the past (a 34-year archive is here).

Most of us wouldn’t suggest that our CEOs write a 25-page shareholder letter, but neither do we work for a cultural icon nicknamed “the oracle of Omaha.” Most of the time I think Buffett speaks more from self-interest than from revelation, but what he says – and how – bear examination by everyone engaged in investor relations.

Explaining the business is at the core of Buffett’s 2010 Chairman’s Letter, just as explaining the business should be the heart of every IR presentation or report.

But not just the business – this letter works to explain the “secret sauce” that makes Berkshire Hathaway Berkshire Hathaway. The secret sauce isn’t secret, of course. It’s what makes a company different from – better than – anyone else around. This is not likely to be obvious from a glance at the income statement and balance sheet. But in Berkshire Hathaway’s case it is really a financial story, which Buffett lays out in between those quotable quips on everything else.

Let me see if I can capture the essence of it (summarizing the sage):

  • Berkshire Hathaway is basically an investment company. It held $158 billion worth of stocks, bonds and cash instruments at year-end. The secret sauce, apart from the legendary instincts of Buffett and Charlie Munger, is the interest-free financing for more than one-third of those investments. Buffett explains: “Insurance float – money we temporarily hold in our insurance operations that does not belong to us – funds $66 billion of our investments. This float is ‘free’ as long as insurance underwriting breaks even, meaning that the premiums we receive equal the losses and expenses we incur.” Figure the income on $66 billion, and investing the cash for those insurance companies becomes very profitable.
  • Second, Berkshire Hathaway owns 68 non-insurance companies – businesses Buffett and Munger have fallen in love with and decided to marry – and these operating companies generate earnings. Over 40 years, the pretax earnings of those companies has grown at a compounded 21% rate; the value of those earnings is quantifiable. Buffett explains, somewhat persuasively, that the operating companies benefit from good managers who love running those businesses and from a pervasive owner-oriented culture. The secret sauce? The operating businesses aren’t limited in reinvesting the cash they generate – they’re part of Berkshire Hathaway. A typical furniture store chain, let’s say, would feel compelled to plow earnings back into the furniture biz. But Berkshire Hathaway can allocate cash thrown off by Nebraska Furniture Mart into a railroad … or the stock market, or T-bills … whatever looks promising.
  • Finally, Buffett cites a more subjective source of value: the company’s ability to deploy today’s retained earnings into investments that earn good returns in the future. While nearly every company accumulates retained earnings, he says, “some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.” And the secret sauce? Well, it comes back to Buffett and Munger, plus some younger investment guys they’ve brought in to carry on after Warren and Charlie are no longer around. I assume shareholders will increasingly ask for tastes of these newer versions of the investment sauce.

We should each think about our companies’ secret sauce. Is our financial structure geared to create higher ROE? Are assets minimized to boost ROA? Do we get 2 cents per transaction, times a billion transactions, with volume growing daily? Do we have a brand or intellectual property that can’t be matched for years to come?

We need to have our CEOs analyze – and explain over and over – our secret sauce.

Meanwhile, the Omaha oracle and his long-time partner are carrying on. The letter defines growing book value as a metric for success, a proxy for Benjamin Graham-type intrinsic value. It walks shareholders through what’s happening in each of the key businesses. Explains the rationale for the big M&A deal of 2010: BSNF Railway. And comments on the business environment and stock market. All worth reading.

Buffett lays out the near-term expectation: “Charlie and I hope that the per-share earnings of our non-insurance businesses continue to increase at a decent rate. But the job gets tougher as the numbers get larger. We will need both good performance from our current businesses and more major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”

The 2010 annual report of Berkshire Hathaway, of course, has financial tables and footnotes and an MD&A – even a cover. But every year, the way Buffett explains the business makes his shareholder letter the star of this show.

© 2011 Johnson Strategic Communications Inc.

Investors, golf, cancer & social media

May 7, 2010

Two communication folks from American Century Investments, a mutual fund firm with about $60 billion under management, gave a great talk today at the Social Media Club of Kansas City on an online campaign building the company’s brand.

As investor relations and corporate communication people at many companies are exploring social media – dipping our toes in the water – I thought I’d share some lessons from the American Century experience. They’re privately held, but dealing creatively with interactive new media in our highly regulated financial world.

Brent Bowen and Jamie Needham of American Century gave a case study on the American Century Championship celebrity golf tournament at Lake Tahoe – and what the company does to promote its brand through social media from the event.

Of course, the event starts with some advantages. This is golf, with a network TV audience that also can be online. The tourney draws celebrities ranging from Charles Barkley to Ray Romano. They’re playing because the event is a benefit for Lance Armstrong’s LIVESTRONG campaign against cancer. And golf is somehow woven into the DNA of many investors – American Century’s audience.

So it’s a natural. But the American Century team did a nice job with social media approaches that I think would fit for small or large companies – even firms that can’t bring Michael Jordan to their event. A video is available here (uncut, so fast-forward to ~12 minutes to skip Social Media Club housekeeping stuff).

My own interpretations from the American Century experience:

  • An event helps ignite the online conversation. To get people you’re not paying to start posting on Twitter or their Facebook pages, you’re best to tap into their interests with something that’s happening. Could be an earnings announcement, but don’t expect that one to go viral. Social media focus most easily on events that build corporate brand awareness or help launch products. IR is a smaller part of the picture – but should be present.
  • A feel-good cause gives momentum to a social media campaign because people get excited about doing good more than about a company making money. American Century wisely put all the emphasis on LIVESTRONG and helping cancer patients – all except, of course, that the event is called the American Century Championship. People who are online get excited about supporting cancer patients in the battle of their lives. Or about their favorite sport. Or an art show or concert. Or defeating hunger or disease.
  • Listening comes first. American Century started with “no social media presence – no Twitter account, no Facebook account” – Brent says. They began by searching out 20 to 25 key words in the online interactive space. What are people out there saying about us, our cause and our partners? They asked people in the industry what they want to hear – and the answer was, in addition to just investment products, to learn what makes the company tick. Investment people asked for that softer side, in other words.
  • Plan the content. As Brent says, “Content plan, content plan, content plan.” Sure, tweeting looks all spontaneous. When people post to Facebook it’s personal and folksy. YouTube videos capture those wacky moments. But the corporate message comes through because it is planned. Spontaneous stuff comes from being flexible in addition to following the plan.
  • Legal can get comfortable with social media. American Century puts on webinars in which its investment officers help the investing community understand what’s going on in the markets. The communications team decided to “live tweet” a webinar – which means giving a series of 140-character messages summarizing what the speakers say, as they say it. Anyone who follows @AmericanCentury gets the tweets in real time. The “story behind the story” is that a compliance officer sits next to the person doing the live tweeting – it’s real-time compliance review. Hey, IR could do that.

If you’d like more, watch this morning’s video or explore American Century’s golf tournament site. Congrats to this Kansas City company on a cool national event.

© 2010 Johnson Strategic Communications Inc.

Substance over style

November 13, 2009

The CFO of a local company made a good point today during a panel discussion on the state of the capital markets: It’s the substance of a company’s story that matters to investors, more than style or charisma – especially in tough times.

Ryan VanWinkle, senior VP and CFO of NYSE-listed Ferrellgas Partners LP, was asked at the Kansas City chapter of Association for Corporate Growth to explain the company’s success in raising funds in both debt and equity markets in 2009.

“In the end it’s not any one person. If you have a good story to tell, it doesn’t matter who tells it,” VanWinkle said. For a good company with a track record and a good transaction, he said, “the capital markets are wide open.”

This is a change from late 2008, when even good companies couldn’t raise money, he said. And the day may come again when the doors all slam shut, so VanWinkle suggests that companies add some liquidity to protect against that contingency.

Just thought this was a worthwhile insight on investor relations: The reality of the story makes the difference, more than the marketing flair we show in telling it.

IR as a roadmap

November 4, 2009

Roadmap NJ-NYYou gotta love Global Positioning Systems – finding almost anything, guiding you through the streets, offering data to get you to your destination. And you don’t have to fold them back up, like the roadmaps people used in the old days.

I thought about roadmaps – and their GPS counterparts – as I was working on a strategy for communicating a company’s value to investors.

We need to provide roadmaps to our investors, to enable them to envision our destination and see the path the company is taking. A few broad examples:

  • Investors need to see the path back to financial health for most companies coming through the recession. How will the P&L improve, through cost cuts or recovery in revenues? What steps are we taking, and when will we get there? Where do we need to take the balance sheet? (See earlier post on recovery IR.)
  • Investors in biopharma and other R&D-based companies need to understand the path for commercializing new drugs or high-tech products. What’s the process? Where are the challenges? How will we navigate them? What’s the timeline, and will investors see the mileposts along the way?
  • Investors in companies affected by government policy changes – health care reform, cap and trade, tax increases on dividends, you name it – need to visualize the different routes their investments may take depending on what Washington does in specific areas.

We, of course, are the map makers (or people who load data into the GPS devices).

Investor relations professionals should think more about roadmaps. A good map would tell investors where we are, what the destination is, and how we plan to get from here to there. We can’t assume investors – especially those new to a company – know the road. To create understanding, we must craft the clearest possible explanations of how our companies are moving forward to reach our goals.

The analogy to roadmaps suggests one more thing: We should also try hard to give visual expression to key investor messages. Seeing how a company intends to create value adds persuasive power to the verbal explanation of the strategy.

Do you have any examples of useful “roadmaps” in the financial or strategic realm?

The website: your front door

June 8, 2009

As investor relations professionals, we need an audience-centered approach to communicating with investors. And the audience, more than ever, is online. So we need to think strategically about our company websites and their IR sections.

Do they deliver what investors need and want? Do they accomplish what we want?

Think of a corporate website as a place that people experience. When an investor comes to your home page, it’s like a prospect stepping onto the front porch of a house you’re trying to sell. The investor looks in the front door, takes it all in, and prepares to go in and walk around. Other sections of the site are the rooms.

An investor has three kinds of experiences when he or she visits your website:

  • Finds information – which, of course, is why he’s there.
  • Forms impressions – your company brand comes across in many ways.
  • Interacts in some way – which may be your one chance to engage.

We should evaluate our websites in terms of these experiences for our audience – what they’re looking for and what drives value in their minds.

Over the years, I’ve worked on corporate websites to benchmark best practices for what IR content should be there, and I’ve done a good deal of writing for the web.

In a panel discussion today at the National Investor Relations Institute (NIRI) 2009 Annual Conference, I’m sharing some ideas on websites in a workshop called “Trends in Media and Technology.”

The strategic IR focus for a website looks at whether we are delivering the right information for investors in easy-to-find, usable forms, creating the right impressions of a company committed to creating value for shareholders; and inviting investors to interact with the company in convenient and helpful ways.

The IR purposes of the website must integrate with other goals – marketing, recruiting and retention, public affairs – because all of these audiences overlap. A corporate website must integrate with offline sources of information – the print reports, SEC filings, product promotion, media releases and so on that all of these audiences also see.

Tactically, we can do a great deal to maximize the value of our websites to investors. My own “audit” checklist for IR websites has about 40 potential features or content items.

But checking off information items isn’t the main point. The experience of the investor when he or she comes to this place – your front door – is the main point.

Some resources to guide IR people in maximizing our websites:

Who’s most shareholder-friendly?

March 24, 2009

The March 2009 Institutional Investor is a must-read for IROs.

The names of top-ranked firms in 57 industries are reason enough to take a look at “America’s Most Shareholder Friendly Companies,” an II ranking based on relationship evaluations by 675 buy side analysts and portfolio managers. Yes, the list includes some of the market’s longtime “blue chips,” but also a few you might not have considered.

You can check rankings in your industry here for a mini-benchmarking.

But the common themes among top-ranked companies are even more compelling. Beyond working hard on delivering fundamentals amid a tough economy, managements are focusing more than ever on relationships with their investors. Here’s a sampler.

Southwest Airlines:

“Any time that circumstances are difficult, it puts that much more stress on providing the right information,” [CEO Gary Kelly] says. “We work hard to establish a baseline understanding of Southwest Airlines’ vision and who we are, and we do the best we can to set reasonable expectations.”

Baxter International:

“The thirst for information from investors has grown significantly over the past 12 months,” says Mary Kay Ladone, vice president of investor relations. The challenge, she explains, is trying to find the right balance between “delivering a simple message that allows shareholders to make investment decisions, but not simplifying the message to the extent that we mask some of the uncertainty. This has always been the case, but the current environment has heightened it.”

… she adheres to five basic principles when communicating with shareholders and potential investors: “simple, transparent, responsive, timely and accurate.”


[CEO Thomas] Falk and his investor relations team keep shareholders informed of developments – even when the news is not good – by scheduling regular meetings in the offices of buy-side analysts in major markets and by making themselves available to answer questions. “Good investors are always probing for the soft spots in your strategy and your deliveries,” he says. “They have done their homework.”

Procter & Gamble:

“At the heart of our investor relations approach is the clear understanding that our shareholders are the owners of the company and that we need to be pro-actively responsive to them,” [CFO Jon Moeller] says, adding that P&G hosts investor meetings eight times a year at its headquarters and also attends most major investor conferences. “We make sure they understand our strategy, how we’re competitively advantaged and how we’re building on that.”

You might say it comes down to basics. Companies that execute well on the fundamentals of investor relations – clear communication of strategy, timely disclosure of changes and generous access for shareholders – earn favor and loyalty from the buy side.

And those relationships pay off in an uncertain era.

A surprise in the cereal box

March 23, 2009

surprise-in-cereal-boxImagine my delight when I opened up a box of Cheerios and found a surprise inside: a snap-together plastic sports car. Cool! … Yes, I know. They say men are just 8-year-old boys in grown-up bodies, and this explains my glee upon running across a cheap little toy.

Call it quirky, but the surprise in the cereal box made me think of investors and their reactions to a pleasant surprise. We’ve all seen the pop in a company’s stock price when it beats earnings estimates.

But there are other surprises a company can give its shareholders.

Investor presentations offer an opportunity. How about surprising an audience with a speech offering deep insights into your industry and markets, rather than the usual data-dump-in-a-Powerpoint-file? How about announcing a news item at a meeting, approximately simultaneous with a broad release? Or brightening up an analyst day with a bit of entertainment? In a small way, just running on time is a nice surprise (beating a 10- or 20-minute limit demands two disciplines: saying only what matters, and practicing to nail the time).

A little psychology on the substantive side also can help relationships. Sure, there aren’t many positive surprises – earnings or otherwise – in today’s brutal economy. And you can’t hold back material information.

But IROs can help management look for opportunities to highlight an unexpected benefit or unpromised outcome. An acquiring company can deliver synergies faster than projected. A new CEO can implement changes he hasn’t been ballyhooing publicly. A cost-cutting program can exceed its targets. In each case, management can influence both what it promises up-front and how well the company executes. Never over-promising should be a core principle of IR.

For investors, a surprise is like finding a toy in the cereal box. Cool!

(I’m going to go play with my car now.)

© Copyright 2009 Johnson Strategic Communications Inc.

McKinsey: Good time to open up

March 19, 2009

Transparency is “in” again, big-time. But what transparency should look like in ongoing conversations with investors isn’t always clear.

McKinsey & Co. consultants Robert Palter and Werner Rehm outline a sensible strategy in “Opening Up to Investors” in the January ’09 McKinsey Quarterly. It begins with not hiding in tough times:

As the credit crisis sorts itself out, one outcome investors and regulators will almost certainly demand is more transparency into the strategy and the underlying operating and financial performance of companies—not only the financial ones at the storm’s center but all companies. Managers should enthusiastically embrace such reforms.

The consultants urge companies to take action by thinking through and bolstering disclosure in three areas:

  • Give additional detail on how you create value, such as more granular P&L and balance sheet data to help investors value business segments.
  • Provide a candid assessment of performance, including initiatives that don’t work out and discussion of trade-offs such as pricing and margin.
  • Offer long-term guidance on your value drivers – estimated ranges on a handful of key operating metrics that drive value (not quarterly EPS).

The McKinsey piece suggests quite a few examples of disclosures to implement these three broad actions in specific industries. It’s available on the McKinsey website, with free registration. (Thanks to financial communicator Nick Iammartino for passing along the McKinsey article.)

Communicate your relative strengths

January 29, 2009

A couple of Boston Consulting Group gurus urge companies to “Seize the Advantage in a Downturn” in the February 2009 issue of Harvard Business Review – and investor relations is part of their story.

After listing actions management can take to maximize cash and working capital, reduce costs, and drive revenue, authors David Rhodes and Daniel Stelter cite valuation as a competitive tool:

Your company’s share price, like that of most firms, will take a beating during a downturn. [Been there, done that – my comment.] While you may not be able to prevent it from dropping in absolute terms, you want it to remain strong compared with others in your industry.

Enhancing relative valuation, a familiar benchmark for IR people, calls for communicating your strengths vs. the peer group. Of course, messages to investors must follow concrete actions by management:

In a downturn, our data shows that markets typically reward a strong balance sheet with low debt levels and secured access to capital. Instead of being punished by activist investors and becoming a takeover target for hedge funds, a company sitting on a pile of cash is viewed positively by investors as a stable investment with lower perceived risk.

Stability that may seem sleepy and boring in good times is suddenly popular – but you need to talk about it, the BCG guys say:

For that to happen, you need to create a compelling investor communications strategy that highlights such drivers of relative valuation. This will also be important as you try to capitalize on the competitive opportunities that a recession offers, such as seeking attractive mergers and acquisitions.

The consultants also say raising dividends has proven more effective than share buybacks in driving valuation. But they note the potential conflict between richer dividends and maintaining a healthy cash hoard.

(Call or email me if Johnson Strategic can help you put together a compelling IR strategy or craft messages for these turbulent times.)