Investor expectations

The Financial Reporting Council (FRC’s) Lab has produced a report which describes the reporting expectations of investors during the coronavirus crisis. The key messages are outlined below. This follows up the infographic produced in March. The report contains many useful examples of how different companies have dealt with the reporting challenges.

One of the main messages from the report is that investors want up to date and transparent information, and that communications should not be limited to regulatory requirements. The website can play a key role in helping with this, but adhoc reporting should present information that is consistent with information in a company’s annual reporting (such as the KPIs) and, where differences do occur, the reasons should be explained. 

Resources available

Top of the priority list for investors is what cash and liquid resources the company has or could get access to.

Cash

Boards could look to include the following in disclosure of their current cash position:

• the amount and nature of cash and liquid resources, eg currency;
• the cash location within the group or legal entities and how it is moved within the group, eg the level of control of subsidiary boards and the possibility that moving cash could trigger group tax liabilities; and
• the barriers to accessing the cash, eg capital controls, regulatory issues, customer deposits.

Debt & financing

Investors are also keen to know about the debt facilities and capacities of a company including:

• how much debt is owed and where it is within the group;
• for each significant borrowing: the principal borrowed, the currency of denomination, and the carrying amount on the balance sheet;
• a contractual maturity table showing a total for principal payments, a comparison to the carrying amount in the balance sheet and a list of maturity dates for each obligation;
• interest rates in detail by obligation and on an aggregate weighted average basis and whether debt interest or principal has been hedged;
• the terms of bank facilities, showing drawn and undrawn amounts, describing the process for renewal and explaining financial covenants;
• if rating triggers are in place an explanation of what they are; and
• for any new debt, the terms and whether there is any connection to a government support scheme.

Where companies need to raise financing or are dependent on the renegotiation of existing finance, investors expect this to be disclosed within the half-year and year-end reports.  

When finance has been accessed investors find it helpful to know the following.

• What security/guarantees were provided (if debt)? What voting rights attach if it was equity?
• What is the company planning to do with the new cash/liquidity? How will these decisions affect stakeholders?
• How does the new cash/liquidity impact the previous viability assessment made by the company?
• What is the impact on related key performance indicators such as net debt, or EPS?

Practical example - Next PLC

Next’s trading statement provides an update on its stress test using three different full price sales scenarios, which then links through to their discussion of stock and other cost savings, net cash cost, generating cash and securing debt facilities, and the stress test summary.

Business model

Understanding how the business model may be adapting and how it is generating cash in the shorter term is critical. Areas which could be enhanced and disclosed include:

• disaggregation of profit generation, by product line, segment or geography, level of regular activity etc; and
• detail around the conversion of profit into free cash or another cash metric.

Changes to the business model could result in changes to the Alternative Performance Measures (APMs) used to run and monitor the business. Readers should be informed of any such changes and provided with an explanation of why they provide reliable and more relevant information. APMs should not attempt to provide a measure of ‘normalised’ or ‘pro-forma’ results, excluding the estimated effect of the coronavirus crisis.

It may be useful to provide further disaggregation of KPIs by period or dependent on the impact of coronavirus. The disclosure of any additional split should, however, not be at the expense of longer-term reporting segments or trends.

Actions and their impact 

Investors want details of actions taken to reduce expenditure, cash outflow and the potential impact of these. For example, investors want to know how changes to health and safety will impact supply and demand, ie will it limit how much the company can supply and / or build customer confidence?

Supply chain

Supply chain disclosures should include:

• details of management's actions to reduce risk in the short term, eg alternate suppliers, stockpiling, alternative processes;
• longer-term supply chain de-risking;
• actions on payments to suppliers; and
• details on any other action to support suppliers.

Over the medium term, investors will also consider how the company has treated its suppliers during the crisis. Decisions on financing and payment facilities are likely to be an essential part of treating suppliers fairly.

If companies are using supplier finance, investors want to understand the resilience of the scheme:

• how it is being used and under what circumstances it can be removed;
• the obligation of the company; and
• where it is no longer available, the impact is on the company's working capital requirements.

Practical example - Balfour Beatty plc

Balfour Beatty issues a weekly newsletter that sets out the impact of the crisis on its supply chain. The report highlights the level of restrictions relevant to key suppliers and provides more detailed narrative for each operating business line.

Capital expenditure and expenses

Investors would like information about the nature and timing of capital expenditure commitments, whether there is any flexibility and what actions management have taken including:

• actions taken on key expense drivers and an indication of the impact that actions might have on the ability to recover;
• details of government schemes used to support or defer expenses;
• details of short-term cash outflows expected;
• capital commitments and actions taken to defer or delay short-term outflows, including any penalties;
• amount and timing of committed capital and other expenditure;
• amount of discretionary capital and other expenditure which can be delayed or cancelled and any associated penalties and costs;
• agreements reached which impact the timing or quantum of expenditure, and the scope and nature of the agreement;
• nature and quantum of current costs and the impact that coronavirus has had on these;
• impact on future capital expenditure and details as to whether it is new, accelerated, or planned; and
• expected impact on performance and margins.

Practical example - EasyJet plc 

EasyJet’s trading update highlights a key action taken to defer aircraft deliveries and highlights the subsequent gross capital cashflows out of the group over the next two years.

Practical example - On the Beach Group plc 

On the Beach Group’s banking facilities update provides high-level detail on the variable element of their costs and provides context by comparing to others within the industry as well as highlighting actions the group has taken to reduce costs.

Government support and other concessions

Companies may have the ability to access government support as well as negotiate private concessions from landlords or other suppliers, eg rent discounts or payment holidays. The IASB has issued an amendment to IFRS 16 Leases on coronavirus related rent concessions. Investors are looking for clarity on:

• the amount of any such support;
• its nature and related timing eg extension opportunities or winddown times;
• any obligations that it creates (and in time how those obligations have been met);

Dividends and deferred payments

Investors need to know whether the company is changing its dividend policy or cancelling a dividend. As this is very likely in the current crisis, if the company is not looking to change the policy, this also needs to be explained. 

Companies should include Information about any other payments that may be deferred, eg tax payments and Information about the company’s approach to its pension funding.

Practical example - Royal Dutch Shell plc

Shell’s dividend announcement highlights the driver of the decision to reduce the dividend (being due to commodity prices and coronavirus) and puts it in the context of other actions that management have taken. It also clarifies that the reduction is a reset of the policy and confirms management’s intention to evaluate capital allocation priorities in future. 

Practical example - Phoenix Group Holdings Plc 

Phoenix Group’s trading update covers management’s decision on maintaining the dividend and highlights why cash generation and the business support the pay-out. It also notes a number of actions for other stakeholders.

Employees and Customers 

Understanding how the company has regard for its stakeholders is critical for investor decisions regarding whether they retain trust in management both in the short and longer term. There is also a new requirement for many companies to produce a Section 172 statement covering how the Directors have had regard to a wide range of stakeholders and factored them into their decision-making. 

Information that may be of interest to investors includes:

• how the company is protecting its employees eg its approach to furloughing and any remuneration changes; and
• how the company is managing commitments with customers.

Practical example - InterContinental Hotels Group PLC 

IHG first quarter trading update supports the highlights with a narrative from the CEO, emphasising how the actions taken now protect the long-term sustainability of the business by considering key stakeholders such as customers, the workforce and society. In addition, it provides a monthly breakdown of some important KPIs, which is also split by region, allowing investors to see the actual effects of coronavirus.

Practical example - Dixons Carphone PLC

Dixons Carphone’s business update discusses how it plans to ensure customer and colleague safety across their stores, in online services and in the head office. This can make the disclosure interesting to a wide audience, including customers, suppliers and investors.

Management & Control

Investors also want information whether there have been changes to:

• Management and oversight: ie has the board re-prioritised and what has happened to all the topics on which the board usually spends its time?; or
• Controls ie have controls: changed because they were not flexible enough to adapt and were IT and disaster recovery plans robust enough?

How actions will impact the future

Information investors seek on the future includes:

• consideration of trends and impact on the market;
• details of the likely impact of shorter-term decisions on the company's key assets and longer-term drivers of value, eg people, brands, licences;
• information about how the company might adapt its business model and strategy in the short/medium term;
• if the company feels that decisions taken in these unprecedented times are consistent with the company’s purpose or whether it will need to change; and
• the company’s ultimate view around prospects and viability, and details regarding impairments where relevant.

Companies that take this opportunity to tie together their short-term operational changes, purpose, business model and longer-term focus may be best placed to respond quickly and effectively to a rapidly changing world and expectations.

Scenarios and forecasts

Investors do not expect that any scenario or forecast prepared by management will be 100% correct but they do expect that companies have a perspective on the future and are preparing for different scenarios.

Useful aspects of disclosure include:

• management’s base case for recovery including plausible outcomes for revenue and expenses over the short term and into a longer transition period;
• the key assumptions and the basis for each assumption;
• the sensitivity of the base case to movements in the key assumptions;
• plausible upside and downside cases;
• the assurance and controls that management have around the forecasts; and
• the process for updating scenarios.

The Bank of England has released a report that considers the impact of coronavirus on the UK and global economies. Whilst companies will have their own views as to the impact of coronavirus on operations and markets, the BOE report forms a useful reference and highlights a number of the impacts that might be considered.

Practical example - Norwegian Air Shuttle ASA 

Norwegian’s presentation to bondholders provides a high-level timetable, considering how it views a return to operations. This is underpinned with more detail on the key assumptions of the scenarios.

For further information on this or other coronavirus reporting issues please contact Danielle Stewart.