CML's succession story

Jan 30, 2013
<p>Award-winning IR helped pilot CML HealthCare through turbulent times. Now investors want to know: is CML back on course?</p>

September 18, 2012 was the date investors had been waiting for: it was the day medical diagnostics provider CML HealthCare, one of Canada’s few publicly traded healthcare companies, had promised to lay out its new strategic vision – and it had been a long time coming.

The swift departure of CML’s CEO and COO in May 2011, soon after the company’s transformation from an income trust to a corporation, had left the top spot without a permanent incumbent for nearly a year.

Thomas Wellner, CML’s new chief executive, had been in the driver’s seat for six months. He had been talking the talk, getting to know the firm and its staff. Now it was time to walk the walk. ‘We need to go back to our roots,’ Wellner told analysts and investors at a 7.30 am conference call. ‘We need to explore opportunities to build upon our core capabilities in the lab sector in Canada.’

Clearer view

Indeed, CML’s 2008 foray into the US had been a disaster, depressing revenues and adding volatility to an otherwise predictable business. Soon after the departure of CML’s outgoing CEO, executive vice president and CFO Tom Weber had struck a deal to sell the company’s US operations.

Meanwhile, under chairman and interim CEO Patrice Merrin, CML refocused on Canada, casting off medical imaging businesses while loading up on blood testing labs. ‘Our focus going forward is really on expanding the laboratory business,’ announced Wellner.

And there it was. The cloud of uncertainty that had shadowed CML for so long finally lifted to reveal a clear vision of the future. For the IR team, it was a huge relief.

Alice Dunning‘Much of my job in the last few months has been keeping analysts and investors at bay,’ says Alice Dunning, director of corporate communications. ‘First it was, Please wait until we have a new CEO. Then it was, Please wait until he has formulated his growth strategy.’

Nevertheless, Dunning, together with Weber, proved a powerful IR combination throughout the transition. For his part, Weber expanded his role beyond finance to become spokesperson for the company at an operating level.

While stepping back from roadshows, he handled institutional investors and led conference calls while Dunning attended to the retail side.

‘The message was: the firm is financially and operationally stable,’ says Weber. ‘It was business as usual and I worked well with Patrice and the rest of the board. There was a solid management team in place that was being enhanced in certain areas.’

For many, ‘stable’ meant a stable dividend. Each time rumors circulated suggesting CML’s dividend was at risk, its stock took a hit. CML could do little except reiterate what it had been saying in conference calls. With a strong balance sheet (including a refinanced $400 mn credit facility), when it looked at growth opportunities it wouldn’t be aiming for a home run.

It would seek instead ‘measured growth and a series of small bets’, making progress through modest investments and partnerships where it could best use its infrastructure to introduce new tests and services.

But the biggest threat to CML’s dividend wasn’t a new over-reaching growth strategy. Rather, in an age of austerity, CML was – and is – dependent on provincial governments for more than 90 percent of its revenues. The new strategy is expected to address that issue.

‘No one has a crystal ball [for predicting government spending plans],’ concedes Weber. ‘We’ll be doing our best in an uncertain environment to focus on strengthening our core operations to build capacity and expanding our non-government pay revenue sources. This transformation will take time but is necessary to diversify our income streams in order to both grow the business and reduce risk.’

On the road again

Having withdrawn from virtually all marketing since fall 2010, Wellner, Weber and Dunning went back on the road after the strategic plan announcement. Their cross-country tour included institutional investor one-on-ones as well as retail broker lunches (retail investors own 65 percent of CML’s stock).

Once the front person, Weber’s IR role has been scaled back. Still, he knows the business well and remains a ‘continuity executive’ and expects to split IR duties with Wellner for the foreseeable future.

‘We complement each other,’ says Weber. ‘Tom Wellner is a driven and engaging CEO with new ideas and good relationships in the life science community. With my financial background, history with the business and relationships with the financial and investment community, we work well together.’

Indeed, if Wellner lacks anything it is experience with the public markets. To help shepherd the transition, Dunning prepared a study book containing older investor presentations along with information on key investors, their positions and concerns. ‘You can see themes develop,’ says Dunning.

‘You can anticipate particular hotspots you’ve focused on in the past, which has been helpful.’ Meanwhile, to help investors better understand Wellner, she put together a ‘Meet the CEO’ video for CML’s revamped website while organizing more media exposure.

No longer spending their days ‘appeasing’ analysts and investors, both Dunning and Weber are eager to communicate CML’s new story. ‘It’s better now in that we aren’t deflecting and deferring anymore,’ says Weber. ‘Instead, we are able to articulate: here’s what we are doing. Here is why and here’s how. Now we can focus on executing.’

Even so, for CML, execution amid uncertainty remains a key challenge: on November 8, 2012, it announced below-expectation third-quarter results.

Disappointing revenues reflected, in part, changes to government policy. That led to management comments about the need to review business plans associated with CML’s medical imaging footprint – and the need to revisit its dividend policy.

CML’s stock price plunged 25 percent following that release; the management team was not in a position to comment further as IR Magazine went to press.

Leadership and stock price

A 2011 study from PR firm FTI Consulting finds the most dangerous period for a company changing its chief executive is six months after the new CEO takes the reins. That’s when investors expect the new boss to have a new strategy in place.

FTI found that companies usually underperform the overall stock market by 1 percent on the day the management change is announced. Companies with unsuccessful CEO transitions underperformed the market by an average 17 percent six months later.

FTI says its study shows corporate boards shouldn’t fixate on immediate investor and media reaction to a CEO change. Instead, they should focus on making sure a company’s leadership team takes the time to outline plans for the firm and make sure investors know what to expect under the new boss.

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