As we enter the second half of 2022, there is a clear impact of the economic slowdown across the capital markets. Public reporting companies have shifted from the demand-driven priorities of 2021 to responding to headwinds including rising inflation, business contraction, and difficulty accessing capital.
Supply chain challenges, continued effects of the COVID-19 pandemic, and the consequences of the Great Resignation still ripple through the U.S. and global economies, though the slowdown in many sectors has lessened the impact of labor and supply shortages. The war in Ukraine, broader geopolitical anxiety, and the coming midterm elections further complicate the landscape and present management teams and boards with a complex range of issues to contend with — all requiring thoughtful and strategic communications to a wide range of stakeholders.
The team at ICR has guided companies through many of the issues that are happening today, including inflation, rising interest rates, and an impending economic downturn. Below, we provide our expert advice and discuss strategies that have worked in the past, so you can gain insights for the months ahead.
Inflation has impacted nearly every corner of the market. While inflation means different things for different companies, investors and analysts are increasingly interested in unpacking the implications of it for each company. When communicating with stakeholders and analysts, companies should be upfront about the issue, highlighting any areas of their business that have served as natural inflation hedges and what steps they have taken to mitigate any cost inflation.
Investors and analysts are particularly interested in a company’s ability to pass along costs to their customers and whether they have received pushback from these customers. In the wake of large price increases virtually everywhere in the past six months or so, there is a growing concern about consumers pushing back and trading down. This is especially troubling for companies that are late to realize this and expect to be able to implement material increases in the second half of 2022.
Overall, company leaders should aim to help investors understand how inflationary pressures are impacting financial results on a year-over-year basis, and how these pressures may transition or abate over the remainder of the year. For example, most companies started seeing higher freight and logistics costs in Q3 of 2021, which means that inflationary headwinds from freight/logistics costs were more pronounced in the first half of 2022 but will likely ease in the second half.
However, there are areas of business that are not transitory — specifically the area of labor inflation. The costs of finding, hiring, and keeping good labor are unlikely to go away, thus represent structural headwinds to operating margins going forward.
Ideally, companies have been proactive in regard to managing their fixed vs. floating mix of debt on their balance sheet or, for companies with shorter term bank debt, working with their bank groups to refinance and lengthen the maturity of their debt.
In any case, it is critical that companies be transparent with respect to the implications of rising interest rates if they have variable rate borrowings. This discussion is clearly easier and more strategic if the company’s guidance strategy for 2022 included a thoughtful approach to earnings impact from changes in rates year over year. Regardless, however, management teams should proactively address how non-operating items will impact year-over-year changes in profitability and cash flows.
With many expecting slowed economic activity, it is important that companies focus on general disclosure involving risk management practices, including their ability to mitigate higher costs with hedging opportunities, securing long-term contracts with suppliers and customers, and fixing a greater percentage of debt outstanding.
Management should keep an eye on the actions that peers and competitors are taking, which can help them better prepare to address questions from investors and analysts. It may also be helpful to prepare an answer for how your business fared during the 2009-2010 recession, including what has changed since than that has positioned your company to better navigate another downtown.
The common denominator among all of these concerns is the need to be proactive. Generally, it is best to clearly and actively address any potential headwinds. Given the broad expectations for slowing economic activity, to leave it unaddressed could appear tone deaf and may set your company up for more criticism in the future when you are forced to cut expectations without much warning.
Overall, don’t bury your head in the sand; now is the time to be even more communicative. Rather than waiting for investors and analysts to ask questions, preempt their concerns with answers around your current situation and how you plan to address concerns going forward. For more guidance around communicating with investors and analysts, download our eBook, “Insider’s Guide to Investor Relations.”