Best-laid plans tossed
Public companies pull their guidance as COVID-19 scrambles everything
Predicting the future — known in the business world as providing financial guidance to investors — has always fallen somewhere between sophisticated modeling on one end and a fool’s errand on the other.
This year, company forecasts jumped from one to the other overnight as the COVID-19 pandemic made a mockery of financial projections and left investors wondering how much of what they thought they understood about their holdings still applies.
By early April, public companies began officially withdrawing their previously issued guidance for the year.
“It is impossible to confidently forecast the immediate future of our business,” Leroy Ball, president and CEO of Koppers Holdings, told analysts on April 27 as the Downtown-based maker of wood products and chemicals pulled its guidance and suspended issuing any future forecasts “until further notice.”
Instead, Koppers pledged to provide monthly updates to investors.
“In a global crisis like the COVID-19 pandemic, we believe that 90 days is too long between business updates, considering the frequency and magnitude of market movements,” Mr. Ball said.
Aluminum-maker Alcoa Corp. had pulled its already pessimistic market outlook a few days earlier and announced it would idle its smelter in Washington state.
Analysts who rely on company forecasts often note that it’s not the precision of the numbers but the underlying assumptions that hold the secret sauce to evaluating how a company will fare. When those assumptions no longer bear a resemblance to the world unfolding in this health care crisis, the numbers lose their meaning.
Pittsburgh-based bank FNB Corp. said as much during its latest call with analysts.
“The outlook we shared in January is no longer relevant, given the impacts of the COVID-19 pandemic on the overall economy and the uncertainty around the length of time it takes to recover,” FNB Chief Financial Officer Vincent Calabrese said.
These Pittsburgh firms are in good company. IR Magazine, which has kept a weekly tally of companies that withdraw their guidance, estimated there were more than 400 firms on the list as of April 22.
More than 70 companies also suspended their dividend programs, the publication calculated.
Downtown-based natural gas driller EQT Corp. was among them. EQT decided to use that money to reduce its debt instead, the company told investors.
Only a month after Dick’s Sporting Goods told shareholders it was increasing its dividend by nearly 80%, the Findlay-based retailer said on April 14 that it was suspending dividends.
In a statement, the company divided the world into pre- and postpandemic.
“Prior to the impact of COVID-19, the company was very pleased with its comparative sales performance through March 10, 2020,” Dick’s said in a statement.
After that date, customer traffic and demand plummeted. Dick’s closed its stores on March 18.
A richer picture of how companies are evaluating the impacts is in the risk factors that all public companies are required to disclose.
Emerson Electric Co., for example, sees the drop in oil prices, from the pandemic-driven slowdown and other market forces, as drag on demand for its products.
It worries about higher rates of employee absenteeism and supply chain disruptions, the company disclosed, and how the “potential deterioration and volatility of credit and financial markets could limit our ability to obtain external financing.”
Emerson told investors that its guidance “assumes, among other items, continued significant demand deterioration for the remainder of the fiscal year, particularly in the third quarter, with demand remaining negative through the first half of 2021.”
“The decline in demand is expected to be particularly pronounced in the U.S., with a longer recovery period compared to Europe and Asia, Middle East and Africa.”
Akron, Ohio-based FirstEnergy Corp., which owns the southwestern Pennsylvania utility West Penn Power, updated its pandemic-related risk factors with concerns about “reduced availability and productivity of its employees, increased operational risks as a result of remote work arrangements, including the potential effects on internal controls, as well as cybersecurity risks and increased vulnerability to security breaches, information technology disruptions and other similar events.”
Nevertheless, FirstEnergy used the occasion of its first-quarter earnings call on April 24 to
reaffirm its earlier guidance. The company told investors that it would be able to lean on its regulated — i.e., guaranteed returns — distribution and transmission businesses to pull through this period of uncertainty, even as it expects commercial and industrial demand to suffer.
CNX Resources Corp., a Cecil-based oil and gas company, also sounded an optimistic note during its call with analysts on April 27, even as it reduced its capital budget and lowered production guidance.
“It’s hard not to think back to where we were at the end of January on our last quarterly call and consider just how much the world has changed in three short months,” CEO Nick DeIullis said during the call.
But CNX didn’t shy away from future predictions. In fact, it rolled out a sevenyear plan for the company.
Consol Energy Inc., a coal operator that spun out from CNX in 2017, is also no stranger to market downturns and the uncertainty that comes with being part of a commodity business. Still, the COVID-19 pandemic is in a different league.
The company pulled its financial and operational guidance for the year on April 8, having suspended operations at one of its mines for two weeks after several employees tested positive for the virus and then idled another mine because of low demand.
Just two weeks before South Side clothing retailer American Eagle Outfitters pulled its financial guidance, its chairman and CEO, Jay Schottenstein, told analysts how the company’s “healthy brands and strong balance sheet position us well to compete in today’s market.” That was March 4. By March 17, the retail market had imploded, and American Eagle announced it was closing all of its stores.
Even companies that expected to finish 2020 better than 2019 didn’t feel comfortable putting numbers on paper in such a fluid situation.
Dutch company Royal Philips, which makes breathing machines at its production facility in Murrysville, gave investors broad strokes during its first-quarter earnings call — the second quarter will be down and sales growth will return in the second half of the year, the company said — but declined to provide specific guidance for the year.
“There’s a lot of moving parts,” CFO Abhijit Bhattacharya said when an analyst prodded for further details. “For us, to be precise at this point is not possible,” he said.