Should European companies drop quarterly reporting?
November 2015 has come and gone, and European issuers are no longer beholden to produce quarterly reports, yet companies that have made the decision to drop them are yet to hit the headlines.
The majority of companies are yet to make a call either way. Though firms in the UK had a year’s head start, many European companies have a large US shareholder base, many of which will still expect a quarterly earnings update. More complicated companies – and especially financial organizations – will want to keep shareholders updated regularly.
For those facing the decision, it is a case of examining the environment in which a company exists in and the timescale it runs to, says Aarti Singhal, director of investor relations at National Grid, which pulled its quarterly reporting in January 2015. ‘To report on a quarterly basis or not depends on whether the performance and outlook can change from quarter to quarter,’ she explains. ‘It is best to take the lead from investors on what level of disclosure and updates are helpful to them in tracking the performance of the company.’
Singhal adds that the majority of National Grid’s revenues are regulated and the firm’s financial performance does not change much from quarter to quarter, running the risk of National Grid’s interim management statements becoming a box-ticking exercise. One tool Singhal and her team uses is an IR newsletter to capture such updates, which can be sent out whenever is appropriate – often, she adds, more frequently than quarterly.
‘Of course, where there is a need to update the market in between the half and full-year results, we are proactive in meeting our obligation to update the markets in a timely manner,’ Singhal continues. ‘Our communications are not necessarily only about meeting legal requirements, but also about information we think our investors would find useful. It is preferable that such sharing is not dependent on a rigid timeline framework.’
This view is echoed by Catherine James, head of investor relations at Diageo, after the beverage manufacturer released its last quarterly update in April 2015, moving to a half-yearly reporting structure. Diageo’s customers, James explains, do not follow normal purchasing patterns, because the company’s products are not being bought every week, making every quarter look very different.
‘One issue is that we were spending time explaining why quarterly trends were not necessarily the same as annual trends, whether investors could extrapolate the same information from both, or whether either was applicable,’ she continues. ‘It was a repetitive conversation that did not help inform any investor’s view, and wasn’t helpful for us.’
James adds to Singhal’s point that investor communications do not begin and end with a quarterly update, and points out that Diageo maintains a ‘very full program’ of updates, including five conference calls with the firm’s presidents each year. ‘I wouldn’t suggest that any company move away from quarterly reporting if IR does not have a number of alternative routes for communicating with investors,’ she says.
Might it be right for your company to drop quarterly updates? There are some fundamental questions you can ask yourself, says Singhal, which ultimately comes down to how useful investors and analysts find it. ‘There can be some value if you are a cyclical business and can usefully update on sales volumes, customer footfall, and so on,’ she says.
James suggests that IROs should ask what they are truly withdrawing. ‘If you only produce an annual report alongside the quarterlies, withdrawing the quarterlies would obviously severely cut down on the interface you have with investors,’ she points out. ‘I think that in the current environment that’s probably a dangerous thing to do.’
Checking what a broad range of your investors thinks about any change is the best move, James adds. For instance, quarterly updates tend to be more useful for smaller shareholders that get less face-time with issuers than for larger investors that are seen at meetings or one-on-ones. ‘We communicated with investors and checked it was an acceptable move for them – obviously, it would probably have been a different decision had they told us ‘no’,’ she summarizes.