PR TECHNIQUE PROFIT WARNINGS: Tackle profit warnings head-on - If low profit warnings aren't issued properly, negative perception gains momentum. Julia Hood examines how best to handle bad earnings reports

No one wants to issue profit warnings, but the way the process is managed can determine how soon a company will recover and begin to steer toward profitability.

No one wants to issue profit warnings, but the way the process is managed can determine how soon a company will recover and begin to steer toward profitability.

No one wants to issue profit warnings, but the way the process is managed can determine how soon a company will recover and begin to steer toward profitability.

Here's a typical scenario: analysts predict that company X is heading for an earnings problem, but company X denies it. Then, in the not-too-distant future, company X announces an expected shortfall, confirming analysts' predictions.

Here's the rub: company X makes a crucial mistake when, instead of admitting it failed to predict the problem, it abdicates responsibility by blaming an external data source for providing inaccurate information.

Howard Zar, SVP at Porter Novelli's IR practice, recently found himself in this situation with a client he refused to name. 'It made management look worse than it should have. They should have taken responsibility,' he says. 'It took a good year before the company was back on track.'

Earnings warnings are becoming more common. According to Fortune magazine, 946 companies issued pre-announcements as of mid-December 2000, compared to 703 for the whole of 1999.

A company must work to maintain credibility in the eyes of investors. If it fails, by prevaricating or hiding facts, long-term damage will be greater than short-term problems that arise from a disappointing earnings announcement.

'Profit warnings are perceived far better than negative earnings releases,' says John Cathey, director of IR at Ketchum. 'It is particularly important, from a communications standpoint, that the company shows that it's concerned about managing Wall Street's expectations.'

Wall Street hates surprises and can be unforgiving to companies that attempt to deflect attention from their weakening position. Managing expectations is the full-time job of the financial communications professional. 'The objective is to keep analysts from being unduly bullish or bearish,' says Ted Pincus, vice chairman of BSMG and CEO of the Financial Relations Board.

'Make sure nobody has a distorted view. The best way to do this is through frequent up-dates.'

The new, stricter reporting requirements under Regulation FD give that philosophy an even greater, legal imperative. 'Under Reg FD, a public company can't help but be questioned by stockbrokers, analysts and stockholders all wanting to know what is going on,' says Pincus. 'It is not smart to say, 'no comment.''

Once it is apparent that a company is under-performing, there are two ways to manage the flow of information. One is to issue a general press release, followed by a conference call or Webcast. The other is to reveal expected shortfalls via the full-disclosure media sources - Dow Jones, Reuters and Bloomberg. Giving just one of these outlets an interview equals full disclosure in the eyes of the SEC and the stock exchange.

'A company executive can sit down with Bloomberg and no one else, and give information about the quarter,' Pincus says. 'The reporter is required to maintain confidentiality until it goes on the wire.'

Pincus says companies that speak to one of these news outlets will often be given ample time to explain the problem. 'If you sit down with Dow Jones or whatever, they love it, appreciate it and will give you more space than you would ever get out of a press release to everyone,' Pincus says.

There are three questions that need to be addressed in any information a company disseminates: What has happened? Why did it happen? And what is being done to address the problem? The IR agency's job is to help clients find these answers, which can be difficult if the company is not prepared to be straightforward.

'One thing companies do is play PR agency at the beginning,' says Zar.

'They see the numbers and deliver them to the agency with the spin already prepared. It is an intuitive defense mechanism.'

IR consultants should work as insiders (subject to regulations) and help clients pull together honest statements. 'Often the companies don't have good answers in these situations,' Zar says. 'The agency has to think it through and say, 'OK, what can we answer?' This also helps companies focus on what has happened, helping them position for the future.'

If a company isn't clear about what has happened to its revenues, Wall Street usually surmises that management has no real understanding of its own business. Investors will not have confidence in a company that is not able to identify the reasons for its own earnings shortfall. 'First, understand the issue and frame it so it puts the company in the best light of the media,' says Carin Warner, president of Warner Communications.

Beyond supplying a valid reason for an earnings loss, a company must explain plans to stabilize the business and prevent the shortfall from dragging on. 'It's not about looking for excuses, just offering a sensible answer,' says Kelley MacDonald, SVP and director of IR at Brodeur. MacDonald recommends being realistic about the time frame for solving problems, not just offering an unrealistically positive view. 'That will usually come back to haunt you.'

Trying to keep a low profile won't work. 'One silly thing people do is try to hide,' says Richard Torrenzano, chairman and CEO of The Torrenzano Group. 'They let earnings go at 5 o'clock on a Friday, which is just silliness because nobody misses this stuff, and you don't want bad news sitting over-night without a management perspective.'

Confronting an earnings problem head-on and offering an honest evaluation of the situation is the only way to move a company forward. 'You cannot take the short-term view on this,' says Torrenzano. 'You are there for the long haul, and so are the investors.'

Announce earnings shortfalls as soon as possible.



DOS AND DON'TS

DO

1 - Work to manage expectations at all times

2 - Positively communicate specific plans to correct the problem, with realistic deadlines

DON'T

1 - Try to hide. Be accessible to the media and investors

2 - Keep the IR agency out of the information loop.





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