Financial planning

A solid IR strategy is vital for all companies - whether they're in the middle of a turnaround or just starting out.

A solid IR strategy is vital for all companies - whether they're in the middle of a turnaround or just starting out.

For O'Charley's, a line of more than 200 casual dining restaurants throughout the Southeast and Midwest US, the trouble came from several directions.

The company enjoyed success throughout most of the 1990s and into the new decade, but by late 2005, the outlook was not positive. Operational problems, such as costs that were out of line with the industry average, were sapping the company's competitive strength; Hurricane Katrina impacted some of its locations; rising gas prices led consumers to stay home more instead of eating out; and financial results were not looking good.

On top of that, hedge funds had taken an almost 18% stake in the company. Moreover, one was publicly agitating against management in what was feared to be a prelude to pushing for a sale or breakup of the chain. Conventional wisdom on Wall Street was that O'Charley's was on an inexorable decline.

Starting a turnaround

Gregory Burns, the company's CEO, determined that O'Charley's was due for a drastic overhaul. Its three brands needed to be redefined; management changes had to be made; and, most importantly, the message of the company's work had to be effectively communicated while it was ongoing.

Burns hired a new CFO, Larry Hyatt, who in turn brought in Makovsky & Company to serve as O'Charley's new IR firm.

"At the end of the day, how you make your shareholders happy has less to do with the words that you communicate than with how you perform," he explains. Hyatt found that the easiest way to appease activist shareholders was to improve the company.

"There's nothing I like seeing more than shareholders making money on O'Charley's stock," Hyatt says.

But his role as CFO during the turnaround has been particularly notable because he also holds the position of the company's chief IR officer.

When Hyatt joined the company in 2005, he says, it was in a "classic turnaround" situation, but had adopted a "bunker mentality" in its communications work. He set out to restore its credibility among analysts, investors, franchisees and employees - seeking to prove that his dual CFO/IR role would allow him to build trust in the financial community on the back of a credible and accountable rebuilding plan.

"There isn't any sort of credibility meter, any kind of credibility index," Hyatt notes. "It's an intangible measure - it's what the analysts are saying about you, even if they're not writing about it... It's the feedback from the buy-side investors."

The company shifted its focus from growth to strengthening its existing product, and began to shore up its operational issues and guest satisfaction. As that process began to slowly bear fruit, Burns wanted to ensure that all-important financial stakeholders knew exactly what he was trying to do.

"We did have, like a lot of companies, some activist shareholders who invested in the company during this process and wanted us to take a different course of action," he says. "While we're in the course of focusing internally, we had to deal with that. And even if we didn't have the activist shareholders, we had to communicate to our current shareholder base on what we were doing."

Burns himself, along with Hyatt, were the public faces of the company throughout the extended turnaround. That entailed everything from appearances at investor conferences to opening up and speaking with financial and trade media - something that O'Charley's was loathe to do during the days of its worst problems.

As the company's program of change began to take hold, however, some analysts slowly became more positive on its prospects. That sentiment trickled through to the media coverage, making the press seem like slightly less of an excruciating prospect.

Three-stage process

Burns breaks the company's communications work during the process into three stages.

First, he explains, because O'Charley's was just getting its turnaround underway, it needed Makovsky to help "hold the dogs off" until results could come in.

The next stage was telling investors exactly what steps the company was taking, but acknowledging that it was too early to tell what the exact effects would be.

The final part was communicating early results - which is the stage the company is in at present.

"Hopefully, the next stage we'll get to, over the next six to 12 months" will be a more definitive public rendering of exactly what results the company is seeing and its future plans, which, Burns says, "puts more meat on the bones" for investors.

The results so far, though, have been encouraging. Jet Capital, the most threatening hedge fund, has cut its stake in the company significantly. Analyst coverage is now much more favorable. Most importantly, O'Charley's stock price has risen and stabilized, hovering over $20 since last fall after bottoming out under $14 in the fall of 2005.

As Hyatt and Burns concentrated on the financial community, VP of corporate communications Melissa Thompson has focused her work in the past year on internal communications to keep the company's 26,000 employees informed of the plan's rationale. She also worked to ensure that the company's work is well represented in the restaurant trade media, positioning it as a desirable destination for top talent.

"We've got all these different audiences - guests, team members, [and] prospective team members," she says. "We want to have stories about what we're doing to move from where we were to where we want to go, which is best-of-class."

Though Burns has been the primary public face of the company during the turnaround, Hyatt himself has emphasized his own unique position as a chance for investors to get information with no filter. At conferences, road shows, and in numerous phone calls, he has touted O'Charley's progress to stakeholders.

"I would like to think that's been a very important part of us regaining credibility in the financial community," he says.

Gene Marbach, the Makovsky group VP who heads up the O'Charley's account, says the agency came in to help the company sharpen its message and handle some of the day-to-day work of IR and communications.

"The rallying theme early on was 'Not business as usual at O'Charley's,'" he explains. He offers the example of the phasing out of its longtime policy that children could eat free as a case of taking painful medicine for the sake of the overall health of the business.

"Kids Eat Free was a very successful program they had," he says, "but you don't make money on things you give away."

He credits O'Charley's willingness to stick to its turnaround program through times of market skepticism with helping restore its financial credibility.

"It's not like the plan-to-fix-things du jour," says Marbach. "It's been a consistently orchestrated plan."

Investor relations work has a reputation for being the most staid of fields, full of those whose affinity lies more in spreadsheets than in the flashier realms of publicity. In reality, though, the pulse of IR rises and falls largely with the fluctuations of the economy, meaning that professionals must be ready for just about anything.

And when a company must rebound from hard times, it is the IR team that is often called on to shepherd the stock price through the delicate process, ensuring that the financial foundation is strong enough to prevent the organization from crumbling down.

The array of causes that can lead to corporate financial problems is infinite; but in almost every case, two things are certain. First, that the company's leadership will develop some sort of plan (wise or not) to pull the company out of the doldrums. And second, that the skill of the IR team - both internal and external - will play a large, but largely uncredited, role in determining that plan's ultimate success or failure.

Wooing Wall Street

Of course, challenging IR programs do not just come for companies trying to dig themselves out of a hole. In some cases, a promising young company needs an IR plan built from the ground up in order to get on Wall Street's radar.

That was the situation Pacific Ethanol (PE), a renewable fuel producer based in California, found itself in at the end of 2005. With its stock price under $10 and little trading volume or attention, it brought in Hill & Knowlton to figure out how to energize analysts and investors without the publicity value of an IPO to work with.

"This was positioning the company as a leader in an emerging sector," says H&K SVP of financial communications Gregory Pettit. Luckily, the company had two things going for it: the media's intense interest in alternative fuels, and a fortuitous mention of ethanol by President Bush in his 2006 State of the Union address that briefly sent the stock soaring.

The agency served as PE's de facto IR department, booking it at investment conferences, securing financial media coverage, and positioning CEO Neil Koehler as an expert on alternative energy. Though the stock has dropped back to earth since its brief moment in the spotlight, Pettit emphasizes that, like O'Charley's, PE is pursuing a steady strategy in its IR plan.

"What's important is to be consistent in your long-term messages," he says, "and point out that regardless of whatever the fashion might be on Wall Street at the moment, that the company continues to execute against a long-term plan."

After securing $200 million in invested capital last year (including a hefty investment by Bill Gates), Koehler says that its work with H&K has gone a long way toward educating investors about what was once an esoteric company and sector.

"In 2003-04, investors could barely spell ethanol, let alone know anything about it," he adds. "[But] most of the institutional investors now are pretty aware of ethanol and [are] relatively sophisticated in their understanding."

Agencies with strong IR and financial communications practices say that business is brisk from clients seeking to boost their stock prices or reassure investors about new management teams or strategies. A common thread in the work, according to Cara O'Brien, deputy director of FD's IR practice, is the need to unify management behind a well-researched and rational plan. The investment community is savvy, and colorful communications tactics are rarely enough to salvage a company, unless they reflect a solid and viable foundation.

"The last thing you want to do  in that [turnaround] situation is sound too vague to the public," says O'Brien. "We help companies get very specific and create a piece-by-piece strategy."

Silence can be golden

James Lucas, an MD in the LA office of Abernathy MacGregor, has helped several clients recently navigate minefields, such as stock option backdating improprieties. He notes that success in the more crisis-oriented corners of corporate IR rehabilitations sometimes comes in silence.

"The happiest of endings are the ones where everything is resolved much more quietly and without people defining the company by its failure," he says.

Messaging to the investment community remains remarkably consistent across all manner and size of business-turnaround situations: Our plan is solid; our management is solid; and our prospects are solid. But, as Lucas admits, even if a crisis is averted, the IR work is never done.

"The kinds of businesses, the kinds of challenges, the specific situations are constantly changing," he says. "These are businesses that are ongoing."

Getting back on track

Important IR message points for companies in turnaround situations:

1. We have a plan, and here it is. As simple as it seems, being specific with your plan and criteria for success is critical to convincing investors you are serious.

2. Investor churn is natural and not to be feared. Many companies get nervous when they see a great deal of turnover in their shareholder base. But churn is not necessarily bad - it just means that a different set of investors now believes in you.

3. Our CEO is the face of the company and an expert in our field. Faith in a CEO of a public company is one of the last important cults of personality in the numbers-driven world of investing. A CEO with a good reputation can buy time for a troubled company, or lead an unknown company to greater visibility.

4. We will make the tough decisions necessary for our turnaround. When a company is in a negative situation, it's impossible to please everyone. Investors want to know that the company will not be deterred.

5. We will continue our plan consistently. Investors are skittish. They must be reassured that vital business will continue, even through a crisis. Surprises are the enemy.

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