A Moment of Corporate Darwinism

Preparing H1 financial results in the COVID environment

Alison Allfrey

The advent of Covid-19 has rocked financial market confidence to the core, brought some industries to a near standstill and had a profound impact on working practices and company outlook. Facing a plethora of challenges, management are under extreme pressure, juggling with regaining a base case scenario for performance, navigating new operational and staffing priorities, and taking baby steps towards survival – or not. A volatile backdrop to the first half earnings season, with Q2 results set to be early proof of Covid’s impact. What are the key challenges and how might they be addressed?

Meaningful preparation requires candour, realism and taking some measure of control. Bobbing on continued waves of uncertainty and retreating from frank dialogue with markets is perhaps the riskiest path. Taking the opportunity to reset the stock specific investment case in a changed landscape and explain actual performance dynamics, however, could sow the seeds of clarity and understanding. Showing how you are now positioned, how you might benefit or that you are proactively addressing challenges will pay dividends, mindful of the fact that much of your audience is generalist in nature and will want to see how your company fits into the market context which is emerging.

The market will laser in on management action – whether this has been responsible and illustrative of a company in charge of its own destiny. People will want to understand responses to different stages in the pandemic – the impact on production and supply chain, solutions found, whether the company chose recourse to furlough, how demand has responded to gradual easing of lockdown, what cost cutting has been necessary and the impact on the balance sheet. Looking forward, presenting key sensitivities, possible scenarios and indications of new opportunities will be invaluable.

This is a moment which will reward companies demonstrating agility and innovation. A cogent business model and detailed investment case showing the working parts of the business and what is now driving them are key. Financially, the impact of cost cutting and job losses, dividend decisions, pay or bonus cuts and productivity initiatives are pivotal, requiring a candid presentation of balance sheet strategy and use of cash going forward. Set your furlough decisions in this context. ESG remains firmly on the agenda, so evidence of managing continuity, safeguarding the workforce and being committed to their welfare is essential, as is demonstrable progress towards new disclosure requirements.

These are some of the building blocks for a critical path of expectation management through the coming months. This is a delicate balancing act, but a constructive approach will be better than a vacuum. Companies who lead from the front are likely to be remembered and seen as survivors by institutional investors. Nobody will expect all the answers, but they have the right to expect a clear perspective, evidence of resilience and a credible plan. It’s time for self-help and dialogue.

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