2012 FinCom Session 3

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Reporting and financial communication - 3

Skema - MSc Finance - 2012
Agenda
Main targets, expectations and impact

1. Main targets and expectations
2. Periodical communication : case study
3. Impact of analysts forecasts
Skema 2012 - Reporting & Financial Communication - Session 3
Main targets and expectations
The public involved and its expectation

Funds Managers Will take the final decision Individual shareholders / Employees shareholders Financial analysts buy & sell side Recommendation to Fund managers Press agency, journalists Important source and relay of news Internet sites : chat and forum To have an eye on them : watch for the rumour Banks Rating agencies : credit, SRI
Skema 2012 - Reporting & Financial Communication - Session 3 4
Fund Managers
Fund Managers
Decision process
\ A large combination of investment types : value, growth, LT, ST,
event driven, yield, SRI, index driven, generalist, sector specialist, geographical allocation, stock picking, midcaps, largecaps
Analysts sell or buy side
\ Stock selection process \ Choose the right momentum
Expectation
\ To maximises the Total Shareholder Return
Dividends Valuation
\ To understand management decisions / strategy \ To anticipate market reaction
Investor Relations
Focus : Hedge Funds

An unavoidable market !
\ AUM US$170 billion in 1994 \ vs US$ 1,900 billion in 2010
Hedge Fund Assets Under Management ($ billions)
Source: HFR Industry Reports HFR, Inc., Fourth Quarter 2010, www.hedgefundresearch.com
Investment types
\ long/short equity, global macro, event
driven, merger arbitrage
\ Short selling process
Issuer interests
\ Different type of questions :
more direct to the point discussion
\ Could be more aggressive, dynamic \ To adapt the message in line with the
investment type
\ To reduce the volatility on the stock \ To limit the number of rumors

Focus : Sovereign Funds

ID
\ Market: ~ US$ 3,800 billion1 AUM in 2009 \ Highly concentrated :
Top 10 have a 80% AUM market share
\ Passive shareholder / usually : no take over bid

process
\ 75% are from Asia or Middle East \ Directly or indirectly supervised by their
respective government Reserves
\ Implemented to improve the return of State
Investment case
\ Bonds : 30% \ Shares of listed stocks : 50/60% \ Others : 10/20%
GIC - Singapore Norwegian Abu Dhabi Same geographical area 23% 50% 80% Large cap. 55% 90% 80%
Issuer interests
\ LT investment \ An indicator for potential value
1 Source : FMI, OECD, FED / 2 source : Les Echos, Thomson One Banker, Fund
Focus : SRI
ID
\ European Market: ~ 3,000 billion AUM in
2010 vs 1,033 billion in 2005
Issuer interests
\ Specialised funds \ LT investment \ Brand name recognition \ A different process : to fill in annual
\ Active funds management \ Mutual funds management \ Management of employees profit sharing
plan
questionnaires or dedicated presentation Growth of SRI European Markets 2001-2009
Investment case
\ Exclusion strategy / social, environment or
corporate governance theme SIRI, trucost,) .
6000
5000
4500
\ Rating agencies (Vigeo, Innovest, Eiris,

Billion
\ SRI index : FTS4good, DJSSI, Aspi, Ethibel,
3000
2700
1500
1033 336
0 Skema 2012 - Reporting & Financial Communication - Session 3
2002 (EU 8)
2005 (EU 9)
2007 (EU 13)
2009 (EU 14) 8
Source: Eurosif
Fund managers: main concerns

Level of visibility / Level of risk Market liquidity and market cap. Volatility of share price Understanding the business model
\ How the company generates profit and cash \ Which factors can impact the business model
Strategic Personal Highly professional
Cash flow generation

\ Future cash flows condition the valuation
Management Growth potential of the share price: is worth selling/ buying
Individual Shareholders
FINANCIAL MARKET
Highly segmented and heterogenous target

\ A dedicated team \ Difficulties to identify shareholders \ An expensive communication plan
Individual Shareholders
A low impact and share price valuation

\ High stickiness \ Employees profit sharing plan
Issuer interest
\ LT investors \ Needed to reach a quorum at the AGM \ Management friendly in case of a take over bid
Investor Relations
10
Individual Shareholders: main concerns

Many different investment profiles

\ Long-term \ Opportunist \ Speculative \ With a greater access to sophisticated
Main concernes
\ Stock performance \ Profitability \ Reputation, fame \ Business sector \ Dividend policy \ Strategy \ Shareholders orientation
tools: SRD, warrants, trackers, graphic analysis
Information sensitive
\ Wide access to infomation: trading
websites, corporate websites, media, road shows
\ Sensibles aux risques de manipulation
Pegagogical Mass communication Afectio societatis

11
Employee Shareholders: main concerns

Low awareness of financial an market mecanisms

\ Need for a simple and dedicated
communication
Main concerns
\ Strategy and forecast for the group and
for its subsidiaries policy
\ Dividend policy vs Social and wages \ Tax and legal papers \ Employees representativity
\ In messages and in communication tools \ Jointly managed by CFO and HR \ Specific regulation framework \ Relationship with Work council \ Corporate investment plan regulation \ High risks of information disclosure /
conflict of interest
Pedagogy Specific tools: intranet, internal letters, face-to-face

communication
High probability of internal tensions Strong incentive for motivation and performance
Brokers : a close partner for IR team

Sell-side analyst : Fundamental analysis, market experts, valuation model, recommandation, target price, Marketing : an expertise for roadshow organisation, shareholders targeting, best practices, market benchmarks, organisation of conference Sales team : specialised / generalist sales. The last link with the investor Corporate : source of information for the trading activity on the stock
Capitalise on brokers expertise Well placed to anticipate market trend
13
Brokers : Sell-side analyst

FINANCIAL MARKET
A powerfull guy/girl
\ 1st contact between the issuer and the broker firm \ 1st source of information for investors \ Direct impact on the stock price (recommandation /
Sell-side analysts
target price)
Market & sector expert

\ An in depth knowledge of the issuer and its competitive
market
\ Information on investors needs / will \ A more and more regulated and complex market
Highly concerned by his/her own credibility toward investors Investor Relations
To establish a win/win relationship with the issuer

14
Financial analysts: main concerns

Analysts missions
\ Analyser companies, sector, competitive
environment, prospects and results
Main concerns
\ Sales and margin breakdown \ Deep understanding of every accounting
issue
\ Establish financial forecasts \ Determine a fair value and compare it

with the actual stock price strong buy, hold, sell the analysis
\ Underlying hypothesis fof company

forecasts
\ Give an investment recommendation: \ Support marketing and dissemination of \ Follow the company and the valuation
\ Risks of failure
Technical and detailed Personalised Ongoing and proactive

Financial communication on debt

Why ?
\ To set up a fair and good relationship with
banks
Increasing interest from the market in the context of limited access to corporate funding
\ Rating agencies : S&P / Moodys / Fitch \ The rating has a direct impact on the
spread or cost of debt
\ To have access to a lower cost of debt \ An interest for LT investors : liquidity risk ?
Dividend level ? stock
\ To integrate a LT view in the valuation of the \ HF needs : debt / equity arbitrage
Communication on :
\ Covenants \ Liquidity : debt structure and amortizing
profile
of In the midst: to a financial crisis : one motto be transparent
Build a debt story along-side the equity story Deliver the same information to sell-side and credit analysts,
equity or debt investors, credit rating agencies, banks
16
\ Diversified financial sources (bond issue,

bilateral credit line, ) evolution / hedging
\ variable or fixe rate : sensibility to rate \ ratios (gearing, Net Debt/EBITDA, )

Journalists : main concerns

Always in a rush and not always expert

\ Low financial background \ Increased pressure due to media crisis
and cost cutting among news companies
Main concerns
\ Competitive position \ Strategic vision of top management,
interview
High impact, high risk

\ Journalists are totally free \ They can make big misunderstanding or
misleading resume
\ Products and clients \ Innovation \ Prospects
\ They can write even when you do not

want to talk to them
\ They prefer late trains
Proximity Ongoing and pedagogical Proactive and positive
17
Other audiences
Employees, management, recruiting \ Employee shareholders, stock options... \ Corporate Brand image Business, industrial and financial partners \ Customers, providers, sub-contractants,
real estate owners companies...
Competitors and competitive authorities \ Publicly traded or not \ Listing creates a distortion of the
competitive environment
Civil society \ Administrations, NGOs, \ Trade unions, lobbies \ Consumers associations...
\ Banks, credit insurance , leasing
Anticipative Specific
18
Who is really influent on the stock price?

Stakeholders
--
++ Individual Shareholders Funds Managers Journalists Sell-side Analysts Rating Agencies -Impact on the share price ++
19
The targets of financial communication

Financial analysts/rating agencies Employees Institutional investors Private investors eco/fin. media News / professional media Clients/providers Banks Communities
20
Periodical communication : case study
21
Regulatory disclosure of financial results

Issuers shall inform the market on a regular basis, about:

\ corporate performance \ changes in operational environment since the previous release \ short and medium-term outlook
And shall guarantee fair access to information for every audience
\ shareholders or not \ professional or retail \ local or international
22
Information is used by market players with the purpose of :
Adjust and update valuation models in accordance with actual corporate achievements and prospects Assess what are the potential risks of the company not reaching targeted forecasts Calculate the corporate / share fair value Compare this value with the current share price Make investment decisions:
\ purchase / sell, at which price ? \ choose between the company stock and other comparable assets or other asset class
23
Provisional FY financial results

Provisional annual results as approved by the Supervisory Board

\ Profitability: Group P&L \ Financial soudness : Balance sheet and cashflow statements \ Details : Group complete financial reporting \ Outlooks and forecasts / guidance
Disclosure process
\ Press release: immediate and simultaneous dissemination \ Analysts meeting: detailed presentation used as a key source for analysts
recommendations Press conference: detailed presentation in order to get press coverage direct contacts to address every concerns and questions
\ Meetings with institutional investors:
24
FY financial results approved by the AGM

Financial results become definitive once approved by the Annual General Meeting of shareholders
\ Approval of financial statements \ Approval to the management team \ Approval of dividend distribution policy
Disclosure process
\ Annual Financial report : legal request \ Annual report : communication to general public, brand image \ Reference Document : not legally requested, but eases the procedures for AMf certification
in the case of a market operation
\ Annual General Shareholders meeting
25
HY Group financial results

Interim results equivalent to the FY release

\ Same level of detail on financial statements as provided for FY consolidation \ Except from Allocation of result (only once a year) \ Outlook: generally an update on annual guidance and outlook previously released
Disclosure process
\ Equivalent to FY result process \ With a lower symbolic impact
26
Quarterly releases
Legal requirement: Quarterly disclosure on Turnover

\ As required by Transparency Directive:
detailed information per business segment information on elements affecting business activity
\ Press release: immediate and simultaneous disclosure \ Analysts conference call:
allows to concentrate and share the answers on all questions at the same time
No requirement about full financial results Although some companies do so

\ More complete image \ Increased short-term prospective \ Is correlated with best practises among the sector and the competitors
27
Organisation and internal agenda

Example of a disclosure schedule in he case of a company releasing interim information J-60 J-5 (1st July / 22nd August) Consolidation process Audit of financial statements Analysis of financial performance Conception of messages Communication materials design Training with management, Q&A sessions 9h-12h : Board meeting 16h00 : information to Work Council 18h00 : press release disclosure 08h30 : press conference 11h00 : analysts meeting 13h00 : investors lunch 15h-18h : RV One2One meetings with investors / journalists Road show program, organised with the broker Follow-up of press clipping Follow-up of analysts publications Consolitation team + CFO + CEO External auditors Audit committee IR team Consolitation team + CFO + CEO External auditors
J-8 J-4 (18 / 22 August)
J-1 (Monday, 25 August)
CEO + CFO + Boardmembers External auditors IR Team, HR CEO + CFO IR Team Communication team, PR, agency Broker, analyst CEO + CFO IR Team Communication team, PR, agency Broker, analyst
28
J (Monday, 26 August)
J +1 to J + 17 (Friday 12 Sept.)
What is the impact

In theory, the market integrates any new information and re-assess he company / asset valuation (market efficiency)
\ Analysts update their forecasts and release new recommendations \ Journalists put the information into perspective \ Investors re-evaluate their investment position
In reality, sometimes, information may not have the expected impact

\ Confusing message, lacks of visibility \ Lack of credibility of the issuer \ Issuers newsflow is out of phase with the general or sectorial market environment \ Information is hidden into a dense general newsflow
29
Case study
Zodiac presentation FY 2010/2011 ID Midcap Research note about Zodiac disclosure
30
Impact of analysts forecasts
31
Consensus
Analysts ratios and financial focus

\ Turnover breakdown by segment \ EBIT / EBITDA \ Net profit : reported / restated \ EPS / PER \ Others : Capex, change in working
capital needs , FCF, net debt ...
Sector specificities
\ Programming costs : for a TV channel \ Order book for constructing, aerospace,
capital intensive companies
\ Number of active subs /ARPU / SAC /
Churn for telecom or pay TV operators
32
33
Sell-side analysts and their impact on markets

Analysts are seen as financial experts and some of them are very popular among the media Sell-side analysts and their impact on markets have been widely studied by academics Their impact on markets and prices
\ Schipper, 1991: as information producers, thir main activity consists in analysing and selecting
companies and recommending their customers to sell/buy those companies when they change their recommendations they attract unsophisticated investors
\ Womack, 1996: Analysts publications generate increases in transactions volume, namely \ Easley, OHara, Paperman, 1998: analysts also have a positive effect on market liquidity as \ Brennan et Subrahmanyam, 1995: analysts publications tend to decrease asymmetry of
information for every market agents, even if these are not direct clients increase their sales and profit
\ Irvine, 2004 ; Jackson, 2005: thus, they allow the brokerage companies employing them to \ Brennan et Subrahmanyam, 1995: the consequence for investors clients is to reduce
transaction costs related with the adverse selection dlemma
What is the real efficiency of analysts ?

Analysts are supposed to be able to predict the future value of assets In reality, their recommendations impact on the very price of the asset
\ Womack (1996): a change in recommendation generates a change in asset price and this
change is persisting over the time
1 month for an upgrade 6 months for a downgrade
\ Stickel (1995): the impact on market is correlated with the reputation of the analyst and his
brokerage company
And their forecasts are generally too optimistic

\ Francis et Philbrick (1993): analysts forecasts on Profit per Share are systematically optimistic \ Rajan et Servaes (1997): in the case of an IPO, analysts forecast on growth prospects are
systematically optimistic
\ Easterwood et Nutt (1999): analysts under-react to bad news and over-react to good news \ Trueman (1994): analysts tend to herding behaviours and their forecasts are systematically
influenced by the sum of previous available forecasts a SELL recommendation
\ Womack (1996): analysts are reticent about downgrading companies they follow and adopt
Are the analysts irrational and inefficient ?

Some bias have been identified

\ Selection bias: as analysts are paid to make recommendations that generate increased
volume transactions, they have an interest in following high potential stocks ie where they are optimistic companys management
\ Lim (2001): being optimistic is a way for analysts to have a better access to information from \ Michaely et Womack (1999): analysts are influenced by the necessity of corporate banking
to provide optimistic forecasts in the case of market operations (IPO)
Companies may sometimes adapt their strategy in order to follow/ outperform analysts recommendations
Financial analysts are quite not neutral in market efficiency and the relationship between companies and analysts is key
36

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message dentreprise

p!r convaincre vos pa"enaires

Reporting and financial communication - 3

Main targets, expectations and impact

2. Periodical communication : case study

3. Impact of analysts forecasts

Skema 2012 - Reporting & Financial Communication - Session 3

Main targets and expectations

The public involved and its expectation

Analysts sell or buy side

\ Stock selection process \ Choose the right momentum

\ To understand management decisions / strategy \ To anticipate market reaction

Skema 2012 - Reporting & Financial Communication - Session 3

Focus : Hedge Funds

Hedge Fund Assets Under Management ($ billions)

\ Short selling process

\ To reduce the volatility on the stock \ To limit the number of rumors

Focus : Sovereign Funds

\ Passive shareholder / usually : no take over bid

\ Implemented to improve the return of State

Skema 2012 - Reporting & Financial Communication - Session 3

questionnaires or dedicated presentation Growth of SRI European Markets 2001-2009

\ Rating agencies (Vigeo, Innovest, Eiris,

\ SRI index : FTS4good, DJSSI, Aspi, Ethibel,

0 Skema 2012 - Reporting & Financial Communication - Session 3

2007 (EU 13)

2009 (EU 14) 8

Fund managers: main concerns

Strategic Personal Highly professional

Cash flow generation

Management Growth potential of the share price: is worth selling/ buying

Skema 2012 - Reporting & Financial Communication - Session 3

Highly segmented and heterogenous target

A low impact and share price valuation

Skema 2012 - Reporting & Financial Communication - Session 3

Individual Shareholders: main concerns

Many different investment profiles

tools: SRD, warrants, trackers, graphic analysis

\ Sensibles aux risques de manipulation

Pegagogical Mass communication Afectio societatis

Skema 2012 - Reporting & Financial Communication - Session 3

Employee Shareholders: main concerns

Low awareness of financial an market mecanisms

Pedagogy Specific tools: intranet, internal letters, face-to-face

Brokers : a close partner for IR team

Capitalise on brokers expertise Well placed to anticipate market trend

Skema 2012 - Reporting & Financial Communication - Session 3

Brokers : Sell-side analyst

Market & sector expert

Highly concerned by his/her own credibility toward investors Investor Relations

To establish a win/win relationship with the issuer

Skema 2012 - Reporting & Financial Communication - Session 3

Financial analysts: main concerns

\ Establish financial forecasts \ Determine a fair value and compare it

\ Underlying hypothesis fof company

Technical and detailed Personalised Ongoing and proactive

Financial communication on debt

\ To integrate a LT view in the valuation of the \ HF needs : debt / equity arbitrage

of In the midst: to a financial crisis : one motto be transparent

\ Diversified financial sources (bond issue,

\ variable or fixe rate : sensibility to rate \ ratios (gearing, Net Debt/EBITDA, )

Journalists : main concerns

Always in a rush and not always expert

High impact, high risk