In the coming weeks, many public companies will provide their first public reporting to investors since the emergence of the COVID-19 crisis.
As boards and management teams assess the range of possible financial and operational impacts of COVID-19, and consider the related (and often challenging) questions of what they are required to disclose and what they can or should disclose to the public, the next earnings call will be an important opportunity to communicate with investors and other stakeholders at this critical time. Below are some considerations that companies should be alert to when preparing for their next earnings call1.
Build in time for logistics
This may be the first time when the management team and support staff aren’t able to safely convene in one place to take the earnings call together. Companies will need to budget additional time up front to manage the logistics of remote participation, including additional prep sessions to run through the script and consideration of the best process for managing Q&A. To ensure a smooth process, companies may also want to consider pre-recording prepared remarks. Given the current strain on conference call and internet-based communication providers, companies are encouraged to consult with their communications providers early on to ensure availability, explore strategies for minimizing wait times for those dialing in, discuss the range of communication formats that may be available and any backup plans should there be a communication failure.
Expect a broader audience
Unlike the typical earnings call that largely attracts analysts, a discrete number of principal (or other engaged) investors and external advisors, companies should prepare for a much broader audience on their next earnings call, including employees, customers, vendors, suppliers and the media. Companies should expect their vendors, suppliers and other partners may listen closely and potentially adjust their own corporate strategies depending on what they hear. As a result, management should prepare for an earnings call with questions from stakeholders that go beyond the typical focus on financial results.
Because of the potential for a broader audience, companies will want to be extra sensitive to ensuring consistency in messaging across the organization. If not already adopted, companies should consider putting in place an integrated public communications protocol so that disclosures made in the quarterly report and on earnings calls are carefully vetted by those responsible internally for HR, marketing, vendor/supplier/customer relationships and government relations.
As with all public statements, management should be carefully scripted and assume that any statements made during the earnings call may be quoted in the media or broadly shared over social media.
In light of the potential for a broader audience and to allow for a robust Q&A period, companies may also want to consider extending the scheduled time for the earnings call.
Prepare to focus on your current operating status and future plans
Companies will be under increasing pressure this upcoming quarter to provide investors and other stakeholders with as much information as possible about their current operating status and their future operating plans. Limiting the earnings call (and the related quarterly report and earnings release) to a discussion of historical results will likely be of limited value to investors and other stakeholders who will be seeking a better understanding of how the company has been impacted by COVID-19 to date and what’s to come.
This is consistent with Canadian and U.S. MD&A disclosure requirements, which generally require the identification of known trends and uncertainties that may have a material effect on financial condition or operating performance. This has also been a focus of companies which have accessed the capital markets after the end of Q1 and have disclosed their most recent liquidity position, actions taken to manage leverage and other qualitative and quantitative disclosures that are forward-looking to give investors a sense of the impact of COVID-19 prior to formally releasing Q1 results.
However, for many companies, providing up-to-date “real-time” information about the company or forward-looking information about the company’s operational and financial prospects in their quarterly report or in an earnings call would be atypical—companies are often loath to create a market expectation that such information will be updated as it changes and, for forward-looking information, may struggle with the appropriate disclosure given the number of variables and significant uncertainty about how things may unfold.
This heightened investor focus on forward-looking information was recently highlighted in a joint statement issued by Jay Clayton (Chair of the SEC) and William Hinman (SEC Director, Division of Corporation Finance). Chair Clayton and Director Hinman remarked that “this quarter, earnings statements and calls will not be routine” and urged public companies to provide robust disclosures in response to COVID-192. In particular, Chair Clayton and Director Hinman strongly encouraged disclosure by companies of their current operating status and their future operating plans under various COVID-19-related mitigation conditions, including “information that provides investors a level of insight allowing them to see the key operational and financial considerations and challenges the company faces through the eyes of the company’s management.”
Notably, Chair Clayton and Director Hinman encourage companies to rely on the safe-harbors for forward-looking statements under U.S. securities laws and advise that “good faith attempts to provide appropriately framed forward-looking information” are not likely be second guessed by the SEC. While this statement will no doubt be welcomed by many, we expect that most public companies will (consistent with their past practices) continue to be circumspect about forward-looking disclosures—and financial disclosures in particular—given that future operating plans and market conditions remain subject to many variable, and possibly unforeseeable, risks and assumptions that would expose those companies to the risk of litigation from private plaintiffs.
Nevertheless, companies should be prepared for the earnings call to focus on matters such as:
- measures taken to protect the health of employees (and, depending on the nature of the company’s business, the public), and the corresponding impact on operations and financial results;
- the company’s plans for employee layoffs, salary reductions or reduced hours;
- other short-term and long-term expense-cutting initiatives under consideration;
- the company’s expectations regarding the availability of government programs to mitigate the impact of the COVID-19 (including, if reasonably foreseeable, the timing and quantitative impact of such governmental relief);
- the company’s current liquidity position and any concerns or ongoing discussions with lenders about potential covenant defaults or additional financing needs;
- the status of the company’s relationships with its customers, vendors, suppliers, insurers and other partners and any breaches, or potential breaches, of material contracts (by the company or counterparties); and
- the company’s short-term and, if reasonably foreseeable, longer-term expectations regarding the resumption of business in the ordinary course (which could be based on a range of different possible scenarios reasonably foreseeable by management).
When formulating talking points regarding any of the above, it would be entirely appropriate (and advisable) for companies to be transparent with their stakeholders and acknowledge the unknowns, while at the same time clearly identifying the material risks and challenges expected to affect the business in the near term.
Avoid selective disclosure
Companies are reminded of their obligation to ensure that material information is disseminated by way of press release, and not inadvertently or selectively disclosed on a preferential basis to certain market participants, including on an earnings call. To mitigate against the risk of selective disclosure during the earnings call, companies should carefully think through the COVID-19 issues that they want to address with investors and other stakeholders and the possible questions that may arise (including those identified above), and include disclosure in the quarterly report that is responsive to those matters; this disclosure can serve as a baseline of material information that can be addressed or elaborated upon in the earnings call or other communications.
Companies should also ensure that any presentations and other investor-facing materials that they prepare for the earnings call (or generally) are posted on the company’s website and are consistent with the disclosure included in the quarterly MD&A.
1 See also our prior bulletin entitled “COVID‑19: key disclosure considerations for Canadian public companies”.
2 See “The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19”: https://www.sec.gov/news/public-statement/statement-clayton-hinman.
Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2021 by Torys LLP.
All rights reserved.