Insights: Engaging with Investors about your Recessionary Playbook

  • On 01.26.2023
  • Categories:
  • General

By Chris Kettmann

While economists differ on many fronts, there is one common opinion among them as they gaze into their crystal balls – we are likely headed for a global recession. Fueled by the ongoing impact of Covid-19, Russia’s war in Ukraine, stubbornly high inflation, and the impact of labor shortages and rising wages on the recovery of the global supply chain, 70% of economists surveyed by Bloomberg in December 2022 expect a U.S. recession in 2023, with higher estimates for Europe and other vulnerable regions. The real debate is not whether an economic pullback will occur – but how deep and how long will it last?

This leaves public company CEOs and CFOs with a major challenge: how to guide their investors and analysts about financial expectations when visibility is murky at best?

Some companies may attempt to bury their heads in the sand, avoiding any use of the “R” word and hoping it goes away. But when it comes to leadership, credibility and effective investor relations (IR), that approach is the antithesis of owning your message and setting expectations by which you believe you should be judged, or in this case, valued.

Investors fear a lack of visibility and uncertainty more than anything, so avoiding the issue – and hoping it won’t be asked about during the earnings call Q&A – cannot be the approach for companies looking to effectively engage and build trust among their shareholders and other key stakeholders. Instead, every public company should develop a “recessionary playbook,” outlining scenario plans and strategies to navigate through a prolonged economic downturn.

Why does it matter if a company proactively addresses its expectations should a recession occur? Won’t institutional investors simply move most of their portfolios to cash as a recession approaches? The answer is a definite “no.” History tells us that investors will remain invested in the market, albeit at a lower level, and will likely hone-in on companies they believe will be resilient in a downturn.

With that in mind, for investors to remain engaged in your company’s equity story, you must credibly discuss a) the performance characteristics of your industry during challenging macroeconomic times, b) how your company is positioned to outperform your competition, and c) how your company will emerge into the post-recession environment positioned to succeed.

That’s where your recessionary playbook becomes indispensable.

While the specifics will vary based on your company, key areas of potential strength should be highlighted during your earnings announcements, in investor presentations, and other IR materials and engagement. These include:

  • Balance Sheet strength – financial flexibility stemming from a strong liquidity position – a manageable level of debt and ample cash to navigate a challenging market – is one of the first areas that risk-averse investors will investigate. They will check this box before digging deeper into the business model, capital allocation plan, and long-term growth opportunities.
  • Success navigating prior recessions – remember earlier when certainty and visibility were mentioned as critical areas for an investor? Being able to specifically highlight how prior recessions were navigated, lessons learned, etc. carries significant weight when talking about a company’s near-term future. If a current CEO or CFO successfully led the company during prior turbulent times, even better.
  • Flexible operating / expense structure – companies that tend to be punished more than others during a recession often have large operating footprints and fixed costs that are difficult to flex down. Having a flexible, nimble operating structure with considerable levers to pull, if needed, will give investors greater comfort and trust in your ability to manage through a recession.
  • Ongoing demand for products or services – although the broader market is important for nearly every company, there is one area that is even more important: the current demand environment for their products and services. A company whose customers keep coming back, through thick and thin, stand out among the public company universe and reinforce the quality and stickiness of their business. Highlighting pent-up demand in an inflationary environment riddled with supply chain uncertainty is another way to show how your business will be insulated from a potential market downturn.
  • Countercyclical nature of business – certain companies (or segments of a business) do not align with the rise and fall of GDP, benefiting from slowing economic growth or a consumer shift to certain types of products and services. This is an opportunity to proactively target and engage with investors unfamiliar with your business who may want to rotate their holdings into “safer” plays when the economy takes a turn for the worse.

In addition, many financial media outlets, such as Bloomberg, Seeking Alpha, and Barron’s, write stock-picking articles highlighting the opportunity of investing in companies with countercyclical products or services. Proactively engaging with these outlets (if your business tends to outperform in a downturn) can generate media attention that opens the door to new investors – particularly on the retail side.

  • Ability to generate cash – nowhere is the phrase “Cash is king,” truer than during a recession. Some companies, including those in manufacturing and distribution, can generate more cash during macro downturns as they trim inventory or benefit from reduced capital expenditures. Highlighting this phenomenon (or simply the ability to generate cash in all market conditions) will set your company apart and potentially attract investors who do not typically invest in your industry. This is also the time to highlight a strong dividend, which further reinforces the company’s ability to generate strong cash flow.
  • Opportunistic / well-positioned exit strategy – many companies hunker down during a recession. However, long-term-focused companies lean into the theory that the best defense is a good offense, and focus on gaining market share, outperforming competitors, building trust with customers, and taking steps to create significant financial leverage for when the market inevitably recovers. These companies often talk about making opportunistic acquisitions, opening new locations, and gaining market share to further their competitive advantage, which makes them even more attractive to investors (as long as there is financial strength and flexibility).

Although the above-mentioned characteristics may not all fit for your company, some likely will. Let your tailored playbook guide the way. Diligently prepare for the scenarios your team has identified, ensure your financial and operational levers are ready and know which ones will be most compelling to articulate, and modify your action plans as needed in real time. This agility and critical preparation will allow you to demonstrate how the company will weather the storm and management is at the helm well before a recession. This prudent approach is key to getting ahead of the situation and alleviating investors’ concerns.

While managing through a recession is not a fun experience for most, a company should view it like other vulnerabilities – by communicating your experience and track record in prior recessions as well as the ways the company is prepared to withstand potential financial impact. A few of the companies that do a commendable job communicating their recessionary playbooks include EnerSys, Dow and Sterling, by differentiating their businesses and articulating why they will be well-positioned to compete during – and following – the  economic downturn.

By saying the “R” word out loud, developing their recessionary playbook, and proactively communicating their strategy, relative strength and resilience, companies will be better equipped to maintain their shareholder base while attracting new, long-term investors to their stock and protecting enterprise value to the greatest degree possible.

Chris Kettmann is a Partner at Dentons Global Advisors and is based in the Chicago office. He specializes in capital markets communications, including investor relations, transactions, new public listings (IPOs, SPACs and spinoffs) and shareholder activism. Throughout his career, Mr. Kettmann has advised public and private companies of all sizes and geographies on developing and executing comprehensive, strategic communications and engagement programs, incorporating in-depth research and analysis and a network of relationships built throughout his 20+ years in the financial communications industry. He can be contacted here.

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