INFLUENCING SELL-SIDE COVERAGE Growing And/Or Managing Sell-Side Analyst Coverage Is a Key Element of IR Strategy

SEPTEMBERFEBRUARY 20152011 the voice of the investor relations profession

INFLUENCING SELL-SIDE COVERAGE Growing and/or managing sell-side analyst coverage is a key element of IR strategy.

A Closer Look at NIRI Approves NIRI Appoints 4 Sell-Side Coverage 20 New Strategic Plan 21 James Cudahy as President and CEO

FEBRUARY 2015

Vice President, Communications and Practice Information & Editorial Director Matt Brusch Searching for Editor-in-Chief Al Rickard the Holy Grail [email protected] 6 What small caps can do to make the Advertising Sales search for sell-side coverage easier. Mike Hyatt By David Calusdian Manager, Professional Development 703-562-7684 [email protected] Art Direction Thor Design Studio [email protected] Managing Sell-Side Contributing Editor Linda Daily Analyst Coverage Consensus estimates based on Contributing Staff cumulative analyst coverage influence James Taube 10 investors in a big way – large-cap Letters to the Editor companies must work to ensure that IR Update welcomes letters to the editor. analysts provide educated estimates. Please send feedback to arickard@ By Margo Vanover Porter associationvision.com.

About NIRI Founded in 1969, the National Investor Relations Institute (www.niri.org) is the professional association of corporate officers and investor relations consultants responsible More Companies for communication among corporate management, shareholders, securities analysts Providing Guidance and other financial community constituents. 16 A new NIRI survey finds most NIRI is the largest professional investor companies are in the business of relations association in the world, with more discussing their outlook. than 3,300 members representing over 1,600 publicly held companies and $9 trillion in By Alexandra Walsh stock market capitalization. NIRI is dedicated to advancing the practice of investor relations and the professional competency and stature of its members.

About IR Update DEPARTMENTS IR Update is published monthly by the National Investor Relations Institute as a service to its members. 4 At the Bell 20 NIRI Now ISSN 1098-5220 Taking a Closer Look at Sell-Side Coverage • NIRI Board Approves New Strategic Plan © 2015 by the National Investor By Mark Donohue • NIRI Appoints James M. Cudahy, CAE, Relations Institute. All rights reserved. President and CEO For Change of Address, Contact: • Quick Takes NIRI–IR Update • In Memoriam: Howard A. Christensen 225 Reinekers Lane, Suite 560 • Professional Development Calendar Alexandria, VA 22314-2875 USA phone: (703) 562-7700 [email protected] www.niri.org

IR update FEBRUARY 2015 3 Editorial Advisory Board AT THE BELL DarinAlexandra Arita Deignan INGSchnitzer North Steel America Industries, Inc. MikeScott BecksteadDudley StillwaterThe Laclede Mining Group Company MarjAlan CharlierEngbring Taking a Closer Look at ConatusInvestor RelationsPharmaceuticals Consultant Hala Elsherbini Sell-Side Coverage Halliburton Investor Relations t’s hard to believe it’s been 15 years since Y2K…aka, the Year 2000 Problem. There was JamesLaura Gagnon(J.T.) Farley InvestmentThe Mosaic TechnologyCompany Group, Inc. an incredible amount of fear and hype that there would be an interruption of operations Clint Halverson around the world. Computers were predicted to fail and hundreds of billions of dollars Laura Gagnon I TheExtra Mosaic Space CompanyStorage Inc. were spent on preparation. When New Year’s Day arrived, there was hardly a blip. Julie Kegley How long have we been hearing about the eventual death of sell-side research coverage? The Julie Kegley Tyson Foods, Inc. sell side might not be what it was in the year 2000, but it’s still alive and kicking. This issue of AndreaDave Parker Passalacqua IR Update takes a closer look at sell-side coverage. If you’re a small-cap company, you’ll find TheMEDNAX, New York Inc. Times Company advice on ways to increase your coverage. You’ll also learn about sell-side coverage from the Andrea Passalacqua Heather Rowe The New York Times Company other side of the coin in an article that provides tips to large- and mega-caps that have many Kythera Biopharmaceuticals, Inc. analysts, some of whom aren’t engaged in their story but are influencing consensus. Heather Rowe Maryellen Thielen Kythera Biopharmaceuticals, Inc. One great NIRI member benefit is our research program. In 2014, NIRI conducted IR The Allstate Corporation practice studies on such topics as IRO compensation, earnings calls, and retail shareholder Tony Takazawa EMC Corporation programs, among others. This issue of IR Update highlights the recent member research NIRI Board of Directors report on providing guidance. If you haven’t already read the report, I highly recommend NIRIMark BoardDonohue, of NIRIDirectors Chairman downloading it from the NIRI website. Impax Laboratories At our December 2014 meeting, the board approved the OneNIRI 2015-2018 Strategic Hulus Alpay, NIRI Chairman Lee M. Ahlstrom Medidata Solutions Worldwide Plan. The plan’s vision continues to focus on ensuring that we leverage the unparalleled Paragon Offshore Jane Okun Bomba depth of expertise within our organization and expand the strong NIRI brand. The plan Liz Bauer IHS Inc. includes an aggressive set of goals and objectives across four primary areas: professional CSG Systems International, Inc. development, community, information, and advocacy. In 2015, we will communicate Robert Burton RobertLambert, Burton Edwards & Associates numerous elements of the plan including the launch of an IR certification credential program Lambert, Edwards & Associates John Chevalier supported by a practitioner-developed, peer-validated, practice-domain framework. DavidThe Procter Calusdian & Gamble Company I look forward to completing the new NIRI website in the second half of 2015. The site Sharon Merrill Associates Ruth Cotter will leverage online tools to provide a customizable platform that incorporates multimedia LauraAdvanced A. Graves Micro Devices Polycom, Inc. and other channels to engage members through an individualized online experience. In addi- Mark Donohue tion, we will continue to expand NIRI professional leadership globally and extend efforts to AnneImpax Guimard Laboratories, Inc. FINEO Investor Relations support IR practitioners and communities throughout the world. Anne Guimard This is also a good time to start planning for the NIRI Annual Conference in Chicago, ValerieFINEO HaertelInvestor Relations BNY Mellon June 14-17. This marks the first time the conference will be in the “Windy City.” Block the Dennie Kimbrough time on your calendar and register now (www.niri.org.conference). DennieMicrosoft Kimbrough Corporation Microsoft Corporation If you have any questions or comments, please feel free to e-mail or call. Mary Beth Kissane FeliseWalek Kissell& Associates HSN, Inc. Felise Kissell AngelineHSN, Inc. McCabe OuterwallAndrew Kramer Inc. NilsInteractive Paellmann Data Corporation Mark Donohue T-MobileJeffrey D. USMorgan Chair, NIRI DeborahNational InvestorPawlowski Relations Institute Vice President, Investor Relations and KeiDeborah Advisors Pawlowski LLC Kei Advisors LLC Corporate Communications Moriah Shilton Impax Laboratories TesseraMichelle Technologies, Levine Schwartz Inc. [email protected] CharlesMoriah ShiltonTriano PfizerTessera Inc. Technologies, Inc. MarkCharles Warren Triano 4 FEBRUARY 2015 IR update VulcanPfizer Inc. Materials Company Valuation = f (growth, returns, investor perceptions)

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Corbin Ad_8.5x11.indd 1 2014-05-05 5:54 PM Searching for the Holy Grail What small caps can do to make the search for sell-side coverage easier.

By David Calusdian

6 FEBRUARY 2015 IR update SELL SIDE

nvestor relations officers of micro- As commissions decrease, it takes a higher ronment by having their analysts each cover and small-cap companies often share of trading volumes for a sell-side firm a larger number of companies, making them hear a common question from their to make money on particular stocks and increasingly time constrained. As a result, for CEOs and CFOs: “Why can’t we defray the cost of issuing research coverage. a director of research at an investment bank get sell-side coverage?” Of course, Therefore, it becomes inherently more dif- to decide to dedicate resources to covering a for a sub-$500 million market-cap ficult for small-cap companies with limited particular company, he or she needs to have company, obtaining analyst coverage trading activity to gain coverage. a high level of confidence in the potential for Ican seem more difficult than finding the One potential solution is to expand the a positive return on investment. Holy Grail, climbing Mount Everest, and buy/sell spreads for small-cap companies. In solving the world’s energy crisis – all in the June 2014, the SEC announced a proposal Evaluate Your Coverage same weekend. In fact, for many compa- to implement a 12-month pilot program Viability nies, getting covered by even one sell-side to widen the trading increments for certain So what’s a small-cap company to do with analyst can be a highly challenging – and small-cap companies. SEC Chair Mary Joe the deck stacked against it from a number frustrating – endeavor. White said, “It is time for a careful assess- of different angles? First, do a company Certainly, management expectations ment of the impact of decimalization on our analysis to evaluate your chances for sell-side regarding the sell side can be dramati- equity market structure and the interests of coverage. Ask yourself a number of relevant cally misaligned with the reality of the investors and issuers.” The SEC recognizes questions. How high is your trading volume? financial markets today. Long gone are the impact of decimalization on the markets Is it only 50,000 or even 10,000 shares a the days – if they ever existed – when and listed “market maker profitability” as day? If so, your liquidity will be a significant good financial performance and an inter- one potential benefit from the so-called obstacle to obtaining coverage. As you get esting growth story were all that it took “Tick Size Pilot Plan.” closer to 100,000 shares traded a day, you’re to attract analyst attention. In 2003, the Global Research Analyst nearing the ballpark. Settlement was intended to separate the Look at your company’s recent perfor- Why Coverage is So Difficult linkage between research coverage and invest- mance and its growth prospects. Analysts So why is obtaining sell-side coverage ment banking. And certainly, some say that seek to cover companies that have per- so difficult today? Not surprisingly, it all the settlement has been a factor in the reduc- formed consistently well, and have the comes down to profitability, and the busi- tion of sell-side coverage, especially for small opportunity to exhibit further short-term ness model of the modern sell-side firm. caps. With the separation of banking from and long-term growth and stock apprecia- Investment banks do not directly make coverage, sell-side firms would not be incen- tion. The analyst’s goal will be to pick up money from research coverage. It’s actually tivized to provide research on companies they coverage of the company and recommend a cost center for these firms. are courting for banking business. it to their buy-side clients prior to the next How does the system work? Sell-side Of course, newly public companies nearly stock uptick. firms are paid in “soft dollars” from their always end up being covered by the banks In addition, be sure to consider whether buy-side clients through trading commis- that manage the deal. It also is rare not to the company has missed its own guidance sions. Those fees have been decreasing see the disclaimer at the end of an analyst’s in the past year or the expectations of the since trading commissions were deregulated research note stating that “this firm expects few analysts who may already follow it. in the late 1970s, and particularly since to receive or intends to seek investment Analysts do not want to be embarrassed the advent of decimalization. In 2001, banking-related compensation from the by companies that perennially miss their the Securities and Exchange Commission company.” So in reality, unless they are estimates, and will shy away from those that required that securities prices be quoted newly public, small caps find it difficult to cannot be trusted to meet expectations in in decimal increments versus the historical obtain coverage if they are not involved in this area. fraction method. This change reduced the investment banking deals. Finally, look beyond your specific com- buy/sell spreads and, in turn, the profits At the same time, investment banks have pany and determine whether you are in a that investment banks made on trades. been managing the new research cost envi- “hot” sector that would interest analysts

IR update FEBRUARY 2015 7 SELL SIDE

If you find that the challenge of obtaining sell-side coverage is insurmountable, remember that the sell side is only a means to an end – and that “end” is visibility with the buy side.

and their buy-side clients. For example, a is made to wait a month for face time, you Life Without the Sell Side company that stands to benefit from the probably have missed an opportunity. There is no silver bullet to obtaining trend toward 3D printing or is in the value Analysts live on management access and sell-side coverage, especially for a small- stream for the next version of the iPhone information. If they determine that your cap company. Very often, the economic stands a far better chance of gaining cov- company is not “investor-friendly” or is model of the modern sell-side firm is at erage than a slow-growth manufacturer of a too busy to provide them with manage- odds with the company’s financial charac- commodity product. ment access, your courtship with them teristics. If you find that the challenge of will be very short-lived. They will see this obtaining sell-side coverage is insurmount- Be Proactive as a sign of things to come if they were to able, remember that the sell side is only a After you have a good understanding of pick up coverage, and will move on to the means to an end – and that “end” is vis- your company’s positive and negative fac- next opportunity. ibility with the buy side. tors, start proactively communicating with Also be attentive in providing any pro- When there is no sell side to serve as sell-side targets. For a small-cap company, spective analysts with all of the information a conduit to shareholders and prospec- it is more likely that you will find success they need to conduct their due diligence. tive investors, enhance your outreach to with small regional or boutique firms. They And in doing so, make sure they have an the buy side. Conduct your own investor often are more open to picking up coverage excellent understanding of the company’s targeting and schedule road shows each on an underfollowed growth company than investment thesis and catalysts for near-term quarter on your own. Many under-covered covering a large cap with 17 other analysts – stock appreciation. Remember, in the end, and uncovered small-cap companies have all trying to differentiate their research and analysts are looking for ways to make money been very successful in building visibility fighting over commission table scraps. for their clients and increase their firm’s with the investment community and Evaluate the boutique and regional sell- trading commissions. No stock appreciation enhancing shareholder value by taking their side firms that follow other small-cap com- catalysts = no commissions = no coverage. message directly to investors. panies in your space. Those firms may have Finally, offer to go on the road with them Of course, in addition to the chal- a higher propensity to cover your company to meet with their buy-side clients, even lenging task of gaining sell-side coverage given their familiarity with your market. before they pick up coverage. Remember and communicating directly to the buy Keep in mind, however, that these firms that corporate access is extremely important side, investor relations officers also must may only be following your peers because of to their financial model. manage the often-unrealistic expectations past investment banking relationships. For Going on the road before they initiate of their management and board. Educate example, the bank may have initiated cov- coverage demonstrates your willingness to them on sell-side economics and the steps erage after managing the IPO or brokering meet with their clients on an ongoing basis. that small-cap companies can take to an acquisition. In addition, assuming the analyst you are obtain coverage. Then, start searching for You also need to make it exceptionally targeting accompanies you on the road, he that Holy Grail. IRU easy for analysts to follow your company. or she will be able to hear your story, listen First and foremost, provide them with to the questions posed to you by investors, David Calusdian is executive vice president and access to management. If a prospective ana- and get a sense of the buy side’s interest in partner, Sharon Merrill Associates; dcalusdian@ lyst requests a meeting with your CEO and your company. investorrelations.com.

8 FEBRUARY 2015 IR update IR update FEBRUARY 2015 9 10 FEBRUARY 2015 IR update SELL SIDE

Managing Sell-Side Analyst butes we’re trying to communicate to the investment community.” His solution is to reach out to “the analysts that cover us in name only” after Coverage the earnings call and ask them questions, including, “Do you understand the key Consensus estimates points we were trying to make during the based on cumulative call and in the earnings release?” His goal: analyst coverage Get a dialogue going. Every other year, he also invites all 25 influence investors in sell-side analysts to an investor day. (In a big way – large-cap lthough it may be the opposite year, he hosts a site visit.) companies must work tempting, you can’t “We build large, complex refineries, discriminate among petrochemical facilities, roads, and power to ensure that analysts your company’s sell-side plants around the world,” he explains. provide educated analysts, insists Jason “The investor day is a chance for those estimates. Landkamer, director who don’t follow us closely to hear straight of investor relations, from the senior management team and By Margo Vanover Porter AFluor Corporation. “You can’t play favorites investor relations: ‘Here are the key drivers between the all-star analysts who are fol- in the company and our vision for the lowing your company and industry very future.’ It’s hard for them not to become closely and those who don’t.” aligned to some degree.” Landkamer readily acknowledges that Jeff Smith, director, investor relations, not all of his company’s 25 analysts provide FedEx Corporation, takes a similar approach the same depth of coverage. “Some are not when dealing with his company’s 27 ana- close to the story,” he admits. “They rarely lysts. “We’ve got an IR team of four who call or e-mail questions. They don’t cue up are actively on the road. We split up our in the quarterly earnings call to ask ques- sell-side coverage so each of the four has tions. Yet they still put out research reports. seven or eight analysts [for which he or she You do see situations where they have esti- is] responsible. We reach out to them pro- mates that are unrealistically high or low or actively after our earnings call to see if they they miss the key talking points and attri- have any follow-up questions.”

IR update FEBRUARY 2015 11 SELL SIDE

“It’s when the story gets complex and the stock gets volatile and they have a tricky transaction that the smaller analysts can have an outsized impact because they are writing reports that have a different viewpoint than the others.” – Beth Saunders, chairman, FTI Strategic Communications, The Americas, FTI Consulting

Plus, every year or every other year, something important and see an analyst them or give them a lot of access to the he brings in a group of sell-side analysts, with an incorrect perception.” CEO and CFO, but they do try to get them particularly those who haven’t been to the In her experience, if the company is as much information as possible.” headquarters before, and sets them up with performing perfectly well, the story isn’t Laura Paugh, senior vice president of a full day of meetings with the executive very complex, and the sell-side coverage is investor relations, employs that strategy at team. The night before, the IR team takes relatively uniform, IROs might feel less com- Marriott International, which has about 40 the group to dinner and then on a tour pelled to talk to smaller sell-side analysts. sell-side analysts. “I provide a great deal of of the Memphis facilities. Unfortunately, “It’s when the story gets complex and guidance on the upcoming quarter and on he says, many of the analysts who don’t the stock gets volatile and they have a tricky the year we are in,” she explains. update their numbers or don’t provide transaction that the smaller analysts can have “We do a long-range plan that provides accurate information are the same ones an outsized impact because they are writing three years forward and an outlook for the who decline the invitation. reports that have a different viewpoint than P&L, making certain topline assumptions. “It’s an ongoing battle,” Smith says. the others,” she observes. “People are looking Although nobody knows what the economy “We’re limited in what we can do. It’s really for that in times of complexity.” will be like in three years, the plan gives tough to make an analyst choose to do There is another reason to keep these investors the opportunity to play “what if” more work on the stock. We would almost analysts in the loop, she says. “In a crisis situ- and ‘Here’s how the model might work.’” be happier having fewer analysts who gave ation with a complex message, there are an After delivering a wealth of information to better coverage.” awful lot of investors and certainly members the Street, if a small sell-side firm decides to of media who view a Morningstar report in write a contrary point of view about Marriott, Why Bother? the same way they view a J.P. Morgan report,” Paugh believes very few pay attention. “What every large-cap IRO wants to do she says. “When reporters cannot get “The Street is pretty savvy,” she says. is say, ‘I already have enough coverage. access to one of the larger, better-covered “The Street knows which analysts who Why am I bothering with them?’” says analysts, they’re going to get their quote cover us do a good job, and their research Beth Saunders, chairman, FTI Strategic and comment – they just have to go further gets substantially heavier weighting than Communications, The Americas, FTI down the list to smaller analysts willing to analysts who don’t really spend any time Consulting. “Then they are faced with the be quoted, and that’s who the reporter uses and effort. I think it just takes care of itself. outlier consensus estimates from guys who as a valid source.” “Frequently, what these – I won’t even don’t know the story.” Several large-cap companies make so call them second-tier firms, I’ll call them She believes IROs can spend the time much information readily available that it’s fifth-tier firms – do is a very cursory read of beforehand trying to ensure the consensus very difficult to poorly cover the company, a press release and then write something, I estimate is correct or spend the time after- Saunders says. “Much of the information don’t think there is a meaningful audience ward in an often futile attempt to correct is aimed at small investors for whom they for it. Our primary focus is on educating the estimate. “It’s one of those painful don’t have the time and inclination to the buy side and our resources are not things, like teeth cleaning, that you must reach out to and sell-side analysts they wish unlimited, so we focus our efforts on the do,” she declares. “The most frustrating would do a better job covering them. They high-quality sell-side research that the buy thing for a client is to read an article on probably won’t spend a lot of time with side values.”

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Analysts should be treated much like reporters. Determine motives. Landkamer points out that some analysts may only be tan- “In both cases, you can’t treat the poor performers gentially curious about your company’s as second-class citizens because they are the ones prospects – their real motive is seeking in- depth knowledge about the sector, which with the ink.” – Jason Landkamer, director of investor relations, Fluor Corporation your mega-cap company is in a position to provide. Because Fluor is the largest publicly traded engineering construction firm in its space, a boutique firm might say, “I’m You Can Say You Tried their research and take a look at their models really a machinery guy. I follow Caterpillar In Landkamer’s opinion, analysts should to see what their assumptions are.” and John Deere so I’ve got to cover you for be treated much like reporters. “In both He points out that one benefit of Wall insight on that value chain.” cases, you can’t treat the poor performers Street is it does tend to be a meritocracy. “If Takazawa reports a similar experience. as second-class citizens because they are people are out there with unusual points of “Unfortunately, I think some analysts have the ones with the ink,” he points out. view that don’t pan out over time, eventu- to cover us because we’re one of the bigger, “They’ll put out reports that may be nega- ally they get what they deserve, which is more interesting names in the space,” he tive or not be aligned with the rest of the lack of clients and notice. You can’t change says. “They know they probably won’t add investment community. Then you will have their minds, but if they’re wrong enough, any value, which is why they don’t call us. a much bigger problem on your hands. eventually people stop paying attention.” Their attitude is ‘I’ve got to cover them. Take the time to reach out with a phone Try out junior team members. According They’re in my universe,’ but they figure call or e-mail at the end of each quarter. At to Saunders, several mega-cap companies they can make more of an impact following least you can say you tried.” with large IR teams develop a script and then a different company.” Other advice from IROs includes: assign junior members to talk to in-name-only Ask for insight from the buy side. Double-check outlier numbers. It analysts on a quarterly basis. In addition to “Talk with your buy siders to see if doesn’t hurt to check in with FactSet or First developing a dialogue with the IRO team, this they’re listening to these analysts,” urges Call about outlier numbers, according to Tony approach has the added benefit of providing Takazawa. “That will give you a sense for Takazawa, vice president, investor relations, practice to less experienced IROs. how much danger you’re in. Over time, EMC Corporation. “If an analyst is way out- Use your leverage. Landkamer remem- it all shakes out and the people who are side the range and there are particular things bers when one of Fluor’s analysts didn’t wrong are known to be wrong. Buy siders in [his or her] model that are a mistake, Fact update the company rating for three years, tend to pay less attention to analysts who Set or First Call will go back to the analyst didn’t call IR with questions, and then are wrong.” to double-check the assumptions,” he says. wondered why the company hadn’t done Smith agrees. “Pick your battles,” he says. “Sometimes it’s because they have a particular any road-show marketing. “I took that as an “If you recognize that a particular analyst is point of view, which they are entitled to opportunity to say, ‘We believe you’re out of not doing very good work, there’s probably [have]. You can’t do anything about that. But touch with our key growth drivers and mes- many on the buy side that recognize it, too. sometimes it’s a numerical mistake.” sage points, and I’m not comfortable going While you want to be proactive and reach Examine the models. You do yourself on the road with you or with our senior out and offer them access to information, a disservice if you ignore analysts who are management team. We need to find a way to you have to be careful about going on a outliers, claims Takazawa, whose company bridge this gap.’” campaign to correct people. Just realize has about 40 analysts, 38 of which are in con- After that conversation, the analyst there will be good and bad analysts, and sensus about earnings per share. “You may not started calling IR every quarter, had a call there’s only so much you can do.” IRU be able to influence them, but you have to stay with management, has now reviewed and aware of them. You have to monitor what they changed his rating, and has become much Margo Vanover Porter is a freelance writer based are saying and what their estimates are. Read closer to the story. in Locust Grove, Virginia; [email protected].

14 FEBRUARY 2015 IR update America’s Most Honored Companies Awards will honor and award the following U.S. companies who rank at the top of the All-America Executive Team for their corporate leadership and investor relations expertise as voted on by top portfolio managers and analysts, including those that comprise our All-America Research Team. For complete details, visit www.iimosthonoredcompanies.com.

Actavis Covidien Jack in the Box Quanta Services Activision Blizzard CSX Corp. Johnson Controls Range Resources Corp. Aetna Cummins JPMorgan Chase & Co. salesforce.com Alaska Air Group CVS Health Corp. KapStone Paper and Packaging Schlumberger Corp. Alcoa Danaher Corp. Kraft Foods Group Sealed Air Corp. Allergan DDR Corp. Kroger Co. Signature Bank Altria Group Deere & Co. L Brands Signet Jewelers American Airlines Group Delphi Automotive Las Vegas Sands Corp. Simon Property Group American Express Co. Delta Air Lines Lennar Corp. Sirona Dental Systems Anadarko Petroleum Corp. Discover Financial Services LinkedIn Corp. Starbucks Corp. athenahealth Dollar General Corp. Lockheed Martin Corp. Tesla Motors Avis Budget Group Ecolab LyondellBasell Industries Texas Instruments Ball Corp. Electronic Arts Macy’s Thermo Fisher Scientific BlackRock EMC Corp. Marriott International Blackstone Group Toll Brothers Enterprise Products Partners MasTec Boeing Co. Travelers Cos. EOG Resources MasterCard BorgWarner U.S. Bancorp Exxon Mobil Corp. McKesson Corp. Cardinal Health UDR First Republic Bank Mead Johnson Nutrition Co. Carnival Corp. Union Pacific Corp. Fluor Corp. MetLife Caterpillar United Parcel Service Freeport-McMoRan MGM Resorts International CBS Corp. Gap Micron Technology United Rentals Celgene Corp. Gilead Sciences Microsoft Corp. United Technologies Corp. Cerner Corp. Google Morgan Stanley Universal Health Services Chevron Corp. Hain Celestial Group NextEra Energy V.F. Corp. Chipotle Mexican Grill Halliburton Co. Nike Valeant Pharmaceuticals Church & Dwight Co. International Hartford Financial Services Group Northeast Utilities Cisco Systems Verizon Communications HCA Holdings Pandora Media Coach Visa Hewlett-Packard Co. PepsiCo Coca-Cola Co. Walt Disney Co. Home Depot Plains All American Pipeline Cognizant Technology Waste Connections Solutions Corp. Honeywell International PNC Financial Services Group Colgate-Palmolive Co. Humana Polaris Industries Webster Financial Corp. Comcast Corp. IBM Corp. PPG Industries Wells Fargo & Co. ConocoPhillips Illumina Precision Castparts Corp. Westlake Chemical Corp. Constellation Brands Intel Corp. Procter & Gamble Co. Costco Wholesale Corp. International Paper Co. PVH Corp.

To attend, or to order your Summary Report or IR Perception Study, contact:

Michele Luthin, 212-224-3360, [email protected] by ordering the IR FEBRUARY 2015 Ursula Kizy, 212-224-3124, [email protected] updateAccess your detailed results 15 IR Perception Study. More Companies Providing Guidance A new NIRI survey finds most companies are in the business of discussing their outlook.

By Alexandra Walsh

16 FEBRUARY 2015 IR update SELL SIDE

ompanies providing guid- through an economic downturn and finan- “ ance of all kinds are on cial collapse when lots of companies gave the rise, and I’m not sur- up, or modified, guidance practices, but the prised,” comments Judy survey indicates we are now back to prere- Meehan, vice president cession practices,” notes Wilburne. of investor relations for For Darin Arita, head of investor relations American Eagle Outfitters. for Voya Financial, the overall findings of the CMeehan is responding to the recently survey are not surprising, but the impor- released 2014 NIRI Survey Report on tance of what they signify cannot be under- Guidance Practices. In the survey, 94 percent estimated. “Guidance practices are very of respondents confirm their companies much on my mind because I think they rep- provide some form of guidance (either resent a fundamental aspect of why investor financial, non-financial, or both) compared relations exists – to contribute to the value to 88 percent in 2012. of the company’s stock being reflected accu- For IR professionals, providing what rately by the market; not too high relative to most commonly is referred to as “earnings where it should be, and not too low. guidance” is a core concern. The practice “An IRO might dive into the weeds of extends beyond the decision to communi- guidance and lose sight of what we are cate EPS expectations, and the degree of ultimately trying to do here,” continues

“An IRO might dive into the weeds of guidance and lose sight of what we are ultimately trying to do here.” – Darin Arita, head of investor relations, Voya Financial

nuance in how each organization issues or Arita. “The survey helps us step back and does not issue guidance is considerable. reassess the importance of our function. It NIRI regularly conducts this survey in helps us benchmark what we do against order to understand all facets of guidance others, which puts our own practices in per- practice and provide benchmarking data spective, and also helps us to argue for or for best practices. against guidance.” The uptick in guidance provision from two years ago caught the attention of Doug Management Philosophy Wilburne, CFA, vice president, investor “Who is not providing guidance?” won- relations, Textron. “The survey finding that ders Meehan. “I would love to understand got my immediate attention is the 7 per- who helps the management team make cent increase, over the past two years, of that decision and whether that is a board- companies that provide guidance. We went level conversation.”

IR update FEBRUARY 2015 17 SELL SIDE

The survey indicates 6 percent of FIGURE 1: Type of Guidance Provided respondents do not provide any form of guidance, slightly down from eight 7% Do not provide percent in 2012. For the 6 percent of any guidance respondents who do not provide any 7% Provide non-financial form of guidance, the most common guidance only reason reported is management philosophy (59 percent) followed by focus on long-term performance (41 percent). “I’m in the retail sector, which is fairly volatile, but we’ve always provided guidance,” says Meehan. “Otherwise we’re depending on analysts providing guidance to the Street, and whether we 28% 58% like it or not, we will have to deal with Provide Provide the published consensus view of the financial both forms guidance of guidance company. We’re followed by 30 sell-side only analysts, and if we’re not out there providing some form of guidance, it’s hard to manage expectations. “And you can’t guide the Street unless Source: 2014 NIRI Survey Report on Guidance Practices. N=416. Compiled by NIRI, September, 2014. you provide public guidance,” Meehan emphasizes. “It’s nice to be philo- sophical about it and say you refuse to be held hostage by the Street but, practi- cally, how can you be an effective IRO FIGURE 2: Reasons Companies Do Not Provide Any Form of Guidance without providing some form of guidance. I think it would be very difficult to Management philosophy do my job effectively.” “If one could get a little more at what Focus on long-term company performance ‘management philosophy’ means as a reason for not providing guidance, you Increased volatility/economic uncertainty might find there is internal disagreement, Senior management/Board request inconsistency, or misperception of what IR is trying to do,” Arita speculates. Low earnings visibility Debbie Hancock, vice president, investor relations for Hasbro, finds it Industry trends interesting that smaller companies pro- Competitor/peer discontinued guidance vide less guidance. The survey indicates

that 18 percent of micro-cap respon- Other dents do not issue any guidance, while more than 90 percent of mega-caps do 0% 20% 40% 60% issue guidance in one or both forms. “I wonder if it is the lack of resources, Source: 2014 NIRI Survey Report on Guidance Practices. N=22. Compiled by NIRI, September, 2014.

18 FEBRUARY 2015 IR update infrastructure or visibility for a micro-cap “Once you have established a certain pattern, the company – maybe they don’t have a dedicated IRO?” Street will interpret deviance from that pattern as having an ulterior motive.” Defining Guidance – Doug Wilburne, CFA, vice president, investor relations, Textron Financial Hancock wonders if the definition of guidance was broadened, would it impact the percentage of companies that claim to not provide any. If analysts don’t have the right tools, “In our case, severe financial pressures “I think the definition of guidance is the risk is greater that they’ll be all over we faced in 2009 gave us an opportunity expanding,” she suggests. “It’s not just the place with their forecasts, believes to revisit our prior practice of quarterly about revenues and EPS in the next quarter, Arita, who adds that generally, analysts guidance, and we abandoned the practice but a broader conversation about what your should be in a range even without guid- in favor of annual guidance, with no inten- business is going to do over the long term ance, and if they’re not, guidance is tion of going back,” reports Wilburne. “It and what factors go into achieving the long- something of a supplement to get there. doesn’t mean we don’t have internal goals, term objectives of your company.” “But I have to wonder if there are other but it relieves some of the communication Hancock points out that a company’s man- tools that companies use besides the tra- pressures around quarterly guidance.” agement philosophy and strategy will hugely ditional financial guidance of ‘here’s what Wilburne adds that it would have been inform its guidance practices, as they should. we reported and here’s how to quantify difficult to get away from quarterly reporting “It’s a very individual company decision that for the next period.’” without the financial downturn. “Once you based on a lot of factors that may be related Arita says in the life insurance industry, have established a certain pattern, the Street to that specific industry, or visibility to earn- traditional financial metrics aren’t helpful will interpret deviance from that pattern as ings, or strategic competition, and you have for investors to understand a company’s having an ulterior motive.” to craft the right approach for your investors earnings drivers. “So we have provided alter- “We used to provide monthly sales infor- and management team. No one size fits all. native metrics that help investors to under- mation and now we report quarterly,” says “My company has evolved its financial stand what will move earnings this way or Meehan. “We’re usually a month into the objectives and what it communicates and that are transparent and understandable. quarter before we provide guidance. That it’s changed over time,” explains Hancock. “Another approach we used to help set allows less forecasting and a more accurate “We provide guidance on some things and expectations after we report a quarter is sense of how the quarter is going.” have set forth medium-term objectives that to quantify a normalized earnings level Summing up the survey findings, we’re trying to achieve over a certain period or a baseline. It’s a number analysts can Wilburne observes: “Guidance continues to of time. While we don’t provide traditional grow their forecasts off of without us be the practice keystone among the majority revenue and EPS guidance, we do provide having to provide forward guidance. These of companies as it is a very important part visibility through key financial metrics on an approaches can address the most commonly of interacting with the Street and estab- annual and multiyear period.” Hancock says cited reason to provide guidance – to ensure lishing a path toward fair valuation. There’s that’s what is appropriate for her business. market expectations are reasonable.” a lot of diversity and variance in guidance Arita ponders what alternatives to guid- practice in terms of specificity and form and ance companies might choose. He posits Annual Guidance Reporting frequency, but now, as we see in this survey, that maybe, in lieu of guidance, companies Regarding when estimates are provided, most companies are in the business of dis- are providing metrics that make it easier to the survey indicates the majority of cussing their outlook.” IRU understand what’s driving the earnings of a respondents choose to provide guidance company or industry segment and believe that extends across an annual time period Alexandra Walsh is vice president of Association they are giving investors tools with which to (85 percent) and the majority do so on a Vision, the company that produces IR Update; better forecast for themselves. quarterly basis (85 percent). [email protected].

IR update FEBRUARY 2015 19 NIRI NOW

NIRI Board Approves New Strategic Plan AT ITS DECEMBER MEETING, the NIRI Board of Directors approved the new OneNIRI 2015-2018 Strategy Statement. The new “OneNIRI 2.0” strategy contains a number of important growth objectives designed to expand the organization’s strengths and increase the value provided to members as outlined below. More information is available on the NIRI website: www.niri.org/OneNIRI.

ONENIRI 2015-2018 STRATEGY STATEMENT OneNIRI Strategic Vision b. Market and launch a NIRI 3. INFORMATION (including IR Leverage the unparalleled depth of exper- certification exam for IR professionals PRACTICE): Create flexible knowledge- tise within the NIRI organization and the governed by professionals. based learning and information-based strong NIRI brand to… c. Provide appropriate support, learning experiences for IR professionals covering 1. Further strengthen NIRI’s reputation mechanisms, and a relevant (initial and the IR career continuum. as the world’s most trusted organization continuing) education delivery framework a. Complete the development of NIRI’s dedicated to the development and for IR certification. website and implement/leverage online tools promotion of best practices in investor d. Evaluate and implement educational to provide a customizable platform that relations and financial communications. programs/materials specifically addressing incorporates multimedia and other chan- 2. Provide the IR professionals, senior the needs of international IR practitioners nels to engage members through a personal, corporate management, and their respective via external partnerships. individualized, online experience. organizations with information, practice, e. Continue to leverage technology to b. Evaluate and consider various methods advocacy, and community to build and develop and provide new educational to foster career development for IROs with improve core IR competencies. opportunities for IROs. differing professional backgrounds (e.g., 3. Create a world-class Investor Relations former sell-side analysts). Charter that establishes NIRI’s role as the 2. COMMUNITY (including c. Develop and/or facilitate sharing of global standard for the education and vali- MEMBERSHIP & IR COMMUNITY): chapter programs that increase engagement dation of investor relations competence and Focus on the evolving needs of IROs of senior-level IROs. capability, thus providing a compelling basis to enhance both the membership and for IR practitioners to aspire to become a community experience. 4. ADVOCACY (including REGULATORY charter holder. a. Analyze, develop, and implement & ADVOCATING ON BEHALF OF THE 4. Elevate the strategic importance opportunities for IROs to foster STATURE OF THE IR PROFESSION): of the practice of investor relations and individual (one-on-one) relationships Expand NIRI professional leadership globally NIRI professionals in IR roles to their within the IR community. and extend efforts to support IR practitioners highest potential and capacity and on a b. Facilitate the use of technology and communities throughout the world. global scale. (video, social media, etc.) among and a. Champion IR certification through active across communities and chapters to engagement with IR professionals and the 2015-2018 OneNIRI Goals and share targeted education, information, broader constituent community to advance Objectives career advancement, and networking the need for certified IR professionals globally. 1. PROFESSIONAL DEVELOPMENT opportunities for members. b. Participate in global events/summits/ (including IR CERTIFICATION): c. Evaluate the potential for programs where NIRI can engage in Launch a certified investor relations specialized community development thought leadership and promote best credential supported with a practitioner- (i.e., by region, like Africa, or by practices for the IR profession. developed, peer-validated, practice- specialty, like small company CFOs) c. Continue select Washington-based domain framework. to ensure inclusion of closely related advocacy to support the IR profession and a. Complete the creation of a peer- disciplines, and provide a learning IR practice with the U.S. Securities and developed “Body of IR Knowledge” and bridge for IROs looking to gain Exchange Commission, other U.S.-based IR certification exam. additional expertise. associations, and federal agencies.

20 FEBRUARY 2015 IR update NIRI NOW

NIRI Appoints James M. Cudahy, CAE, President and CEO

THE NIRI BOARD OF search committee recognized the value of • Douglas R. Wilburne, former DIRECTORS has appointed his experience working with association NIRI chair and vice president, investor James M. Cudahy, CAE, chapters as well. Jim views the CEO position relations, Textron. to be its next president at NIRI as a unique opportunity to leverage “The board recently approved our and CEO effective his experience and skill set to expand NIRI’s OneNIRI 2015-2018 strategic plan, which March 2, 2015. value to its members through a broader focuses on several key initiatives including He currently serves as scope of services and to build upon our introducing the industry’s first IR executive director and CEO for the National global sphere of influence.” certification program, further broadening Court Reporters Association (NCRA), an NIRI’s board of directors worked with NIRI’s global brand, and leveraging organization that certifies stenographic court executive search firm Spencer Stuart to technology to build upon our highly reporters and broadcast captioners while assist in recruiting a new CEO. The CEO valued member benefits,” Donohue adds. protecting and advancing their professional search committee was comprised of: “We look to Jim’s skills and experience interests. At NCRA, Cudahy manages a staff • John T. Chevalier, committee chair, to assist NIRI in delivering on these of 35 and a $7 million budget. former NIRI board chair and director of important tasks.” During a career that spans 24 years global investor relations, The Procter & “It’s an honor to be chosen by the working in and around associations, Gamble Company NIRI search committee and the board Cudahy worked for nine years at CFA • Mark J. Donohue, NIRI board chair to lead the association through the Institute as vice president of marketing and and vice president of investor relations next phase of its history as we further communications. There, among his respon- and corporate communications, Impax strengthen NIRI’s reputation as the sibilities, he was responsible for engineering Laboratories world’s most trusted organization dedi- campaigns to build global recognition and • Barbara L. Gasper, former NIRI cated to the development and promotion appreciation of the Chartered Financial director and executive vice president/group of best practices in investor relations and Analyst (CFA) credential. executive, investor relations, MasterCard financial communications,” Cudahy says. “Jim brings strategic leadership and • Valerie C. Haertel, NIRI director “I look forward to engaging with NIRI extensive experience with certification and head of global investor relations, members, chapters, volunteers, staff, and programs, including significant time at BNY Mellon the worldwide investor relations commu- CFA Institute,” says NIRI Chair Mark J. • Deborah K. Pawlowski, NIRI director nity at large to work in concert to achieve Donohue. “In the selection process, the and president & CEO, Kei Advisors LLC our strategic initiatives.”

Quick Takes J.T. Farley Managing Director, Investor Relations How has your job affected your & Corporate Communications personal use of social media? Investment Technology Group

“It has made me a lot more cautious about what I write – Krista McKinney and tweet.” Investor Relations Associate Mid-Con Energy Partners

“I believe it’s important to recognize Christiane Pelz the link between personal and professional. Therefore, I Vice President, Investor Relations try to keep my personal use of social media as profes- Safeway sional as possible.” “I have posted less and generally restricted my posts to innocuous topics.”

IR update FEBRUARY 2015 21 NIRI NOW

In Memoriam: Howard A. Christensen Professional Development Calendar LONGTIME NIRI MEMBER, entrepreneur, corporate executive, and board www.niri.org/calendar director Howard Alan Christensen of Fountain Hills, Arizona, passed away December 3, 2014 at the age of 81. March 2015 Born on August 15, 1933 in Atlantic, Iowa, he graduated from the 24-26 Finance Essentials Intensive for IR University of Iowa and became a certified public accountant with Arthur and Corporate Communications seminar, Andersen. He eventually founded his own company, Christensen & Associates, New York, NY growing it into a leading global capital markets advisory firm. In between, he served as vice president, strategic planning and investor relations, for the $6.5 June 2015 billion American Natural Resources, a NYSE energy company. 13 Finance 101 for IR and Corporate Christensen also served as vice president, CFO, and corporate secretary Communications seminar, Chicago of St. Joseph Light & Power Company, St. Joseph, Missouri, and served 14-17 2015 NIRI Annual Conference, Chicago on numerous corporate boards and committees, including Protection One, 22-23 Finance 101 for IR and Corporate Topeka, Kansas; Research Magazine and Research Video, San Francisco, Communications seminar, New York, NY California; and Blue Shield of Kansas City. He also held leadership positions 24-25 Finance Essentials Intensive for IR in multiple professional and nonprofit organizations, and led strategic plan- and Corporate Communications seminar, ning workshops in the United States, Canada, and Europe for hundreds of New York, NY the world’s largest companies. 26 Managing Shareholder Activism seminar, He asked that donations be made to Cancer Comfort Centers at New York, NY www.cancercomfortcenters.org to help others facing terminal illness.

FIND ANSWERS IN THE NIRI Presentation & Report Library

To help members stay informed about IR developments, NIRI has created a library of presentations, reports, articles and other resources. This library includes links to reports on third-party websites as well as copies of slides and recordings from NIRI conferences, webinars and chapter-hosted events.

To access the library, visit www.niri.org/nirilibrary

22 FEBRUARY 2015 IR update NIRI NUMBERS

45Countries with NIRI members; led by the U.S., then Canada, Japan, U.K., Brazil, Israel, Indonesia, Australia, and Switzerland $9 TRILLION Combined Market Capitalization represented by companies with NIRI members 1969 Year NIRI was founded; founding member Dick Morrill was honored as the first NIRI Fellow in 2013 10,000+ Number of people who have attended NIRI’s “Fundamentals of IR” seminar $300 Savings on Annual Conference registration for members from the non-member rate

32 98.9% Percent of NIRI Annual Conference attendees who would recommend it to a well respected colleague Number of NIRI chapters; These chapters held 96 programs between September and December 2014

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