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18ºEncontro nacional de Relações com Investidores e Mercado de Capitais
São Paulo, June 28, 2016
Perspectives on Best Practices in Investor Relations
18º Encontro nacional de Relações com Investidores e Mercado de CapitaisPerspectives on Best Practices in Investor Relations
São Paulo, June 28, 2016
McKinsey & Company 3|
Objectives of investor relations more than increasing share price
Investor relations objectives Why is this important?
▪ If market value above intrinsic value: high risk of future decline, management loses credibility, and employees lose motivation
Align market value and intrinsic value in light of overall industry valuation
▪ During challenging periods, critical to have strong shareholder support that enables decision making for long-term health of company
Develop a core group of supportive investors
▪ You will hear conflicting demands from investors, focus on those who matter
Gather feedback from investors who matter
▪ Too much time takes away from running the business
Use management time effectively
Prepare for potential activist activities
▪ Awareness of issues can ward off events or help you respond effectively
McKinsey & Company 4|
Four issues for investor relations
What should the company be worth?
Who to talk to?
What to talk about?
What channels?
McKinsey & Company 5|
Two companies can create same value with different combinations of growth and ROIC
ROIC
Value creationValue of $1 invested in 1985
$14
$14 16%
29%3xGeneralMills
22xWalgreens
GrowthRevenues, 2012/Revenues, 1985
GROWTH AND ROIC DRIVE VALUE1
McKinsey & Company 6|
Growth and return on invested capital drive value
7 9 13
8 11 143
6 11 166 21
4 11 199 27
25
ROIC Percent
GrowthPercent
S&P 500
Fix ROIC
Unlevered price-earnings ratioCost of capital = 9%
16
SOURCE: McKinsey’ Strategy & Corporate Finance practice
WHAT SHOULD THE COMPANY BE WORTH?1
McKinsey & Company 7|
Growth creates more value for high return on capital companies
High Return on Capital Moderate Return on Capital
5%
15%1% higher returnon capital
1% highergrowth 10%
6%
SOURCE: McKinsey analysis
Percent change in value
GROWTH AND ROIC DRIVE VALUE1
McKinsey & Company 8|
Different types of growth create different amounts of value
-0.1-0.20
Competing for share in a stable market -.25-0.40
Growing share in a growing market
Acquisition
0.1-0.5
Expanding an existing market 0.3-0.8
New-product 2.0
Shareholder value created for incremental $1 of revenue
Consumer products example
GROWTH AND ROIC DRIVE VALUE1
McKinsey & Company 9|
The IR group needs to clearly understand the value gap between the market and the Company’s internal view
SOURCE: Company reports; analyst reports; McKinsey analysis
1 Differing views on growth, market potential, achievable margins, risk, and other
Example: Disaggregating equity value for a leading resources Company
Market valuation
Capital invest
MarginLongterm
Shortterm
Internal valuation
Drivers of the value gap
Growth expectations ROIC expectations Unknown
Equity valueCdn $ Billions
WHAT SHOULD THE COMPANY BE WORTH?1
Identifying significant unknown figure will necessitate further investigation into the value gap
McKinsey & Company 10|
Four issues for investor relations
What should the company be worth?
Who to talk to?
What to talk about?
What channels?
McKinsey & Company 11|
A practical approach
Mechanical Or
▪ Uses pre-determined criteria that neither consider nor require ongoingcommunications from company
▪ Is a de facto mimic of index fund portfolio with minor deviations (“closet indexer”)
Trading
▪ Tries to anticipate major events or sentiment changes that result in short-term share price movements
▪ Has a deep understanding of potential economic performance based upon intensive reviewIntrinsic
WHO TO TALK TO?2
McKinsey & Company 12|
Typical investor characteristics
Closet indexers 20-80
Quants 100-300
Indexers <20
Traders 200+
Intrinsic 20-50
150-200
1,000+
500+
400+
40-60
50-300
50-100
200-500
20-100+
5-10
SOURCE: McKinsey Corporate Performance Center estimates
TurnoverPercent
Number of positions
Positions perprofessional
WHO TO TALK TO?2
McKinsey & Company 13|
Start at $30 – All intrinsic investors buy
25
30
35
40
45
50
55
60
65
70
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34
Upper level value for intrinsic investors
Lower level value for intrinsic investors
Share price model$ per share
Time
Share price goes up
WHO TO TALK TO?2
McKinsey & Company 14|
Step 2 – in intrinsic range
25
30
35
40
45
50
55
60
65
70
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34
Some intrinsic investors buy, some sell Momentum investors buy
Share price model$ per share
Time
WHO TO TALK TO?2
McKinsey & Company 15|
Step 3 – Momentum drives overvaluation
25
30
35
40
45
50
55
60
65
70
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34
Share price model$ per share
Time
All intrinsic investors start to sell Momentum investors still buy but will slow down
WHO TO TALK TO?2
McKinsey & Company 16|
In the end, share price fluctuates around an average expected value even if no new information is available
25
30
35
40
45
50
55
60
65
70
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34
Share price model$ per share
Time
WHO TO TALK TO?2
McKinsey & Company 17|
New information changes Share price band
25303540455055606570758085
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34
Share price model$ per share
Time
WHO TO TALK TO?2
McKinsey & Company 18|
U.S. equity assets under management
100% = $19,500 billion
Proportion of intrinsic investors is similar in Brazil and U.S.
1 Volumes calculated as AuM * Turnover (based on quarterly 13F). Since this methodology significantly understates the most frequent traders (ST, News, Quants), we adjust the trading volumes based on estimated average holding period for each segment. The results are supported by another approach (adjusting Thomson turnover data for frequent traders) and also by academic research
SOURCE: Thomson; McKinsey
Institutional investorsIntrinsic
42%
Closet Index
27%
Index
31%
Top 150 investors
100
Leading Brazilian top 150 institutional investors
100% = shares held by the top 150 institutional ivnestors
Intrinsic investors hold ~40% of shares held by top 150 investors in leading Brazilian company
0.35% ST Intrinsic,Event
9% LT Intrinsic
8%
Retail
41%
Corporations
18%
Quantitative6%
News
2%
Activists
2%Insiders6%
Index Funds 8%
Closet Index Funds
WHO TO TALK TO?2
McKinsey & Company 19|
Intrinsic investors can be systematically identifiedChemicals example
SOURCE: Thomson One; Mckinsey Investor database; McKinsey analysis
▪ Excluded investors that already invest in the company (103)
▪ Of these excluded– Index investors (23)– Closet index (46)– Traders (21)– Other (1)
Top investors in Chemicals
(300)
Investors that do not invest in
client(197)
Investors overweight
on chemicals(148)
Select intrinsic investors (57)
1 Less than ~2.6% of equity assets invested in chemicals
▪ Excluded sovereign wealth funds/ government related (2)
▪ Excluded investors underweight on chemicals1 (47)
HIGHLY PRELIMINARYWHO TO TALK TO?2
McKinsey & Company 20|
Example: Initial view on top intrinsic investors
Sector overweight
Chemicals as % of World ~2.6%
Client as % of Chemicals ~1.2%
Company overweight in Sector
Funds overweight in both Chemicals industry and client
Client investment as a % of AUM
SOURCE: Thomson One; McKinsey investor database; Team analysis
Investment in client as a % of investment in Chemicals
Investment in Chemicals as a % of AUM
TOP 10
02468
10121416182022242628303234363840424446
0 5 10 15 20 25 30 35 40
RS Global Natural Resources Fund
DWS Invest Global Agribusiness (USD)
American Funds American Balanced Fund
Shapiro Capital Management LLC
American Funds Washington Mutual Investors Fund
American Funds American Mutual Fund
American Funds Fundamental Investors Fund, Inc.
American Funds Growth Fund of America
Franklin Income Fund - US
HIGHLY PRELIMINARYWHO TO TALK TO?2
McKinsey & Company 21|
Four issues for investor relations
What should the company be worth?
Who to talk to?
What to talk about?
What channels?
McKinsey & Company 22|
How to talk to intrinsic investors3 WHAT TO TALK ABOUT?
▪ Demonstrate that your strategy and aspirations are grounded in a deep understanding of your competitive strengths and your market dynamics
▪ Be open about both successes and failures, they don’t expect perfection and are suspicious of companies where everything goes right
▪ Use concrete examples to demonstrate value added as a corporate owner
▪ Assure them that you won’t invest in low payoff capital projects or M&A transactions
▪ Don’t try to convince them to that they aren’t looking at your company the right way
▪ Treat them like sophisticated thought partners
McKinsey & Company 23|
How important are the following factors when assessing a company as a potential investment?
For intrinsic investors willingness to take risks and management credibility are the most important factors
SOURCE: Long Term Voices Survey 2015
100 96
2513 13
42 6350
3325
38
4
Willingness to take LT risks (+3Y)
Low Earnings Volatility
Neutral
Not Important1
00
Consistently beat consensus for revenues
0
Management Credibility
Important2
Consistently beat consensus for EPS
Percent
1 Includes categories not important and not important at all 2 Includes categories very important and important
McKinsey & Company 24|
Meeting short term estimates is not a cause of concern for long term investors
SOURCE: Long Term Voices Survey 2015
25 63
42
33
13
54
634
4
Neutral Negative1Positive
Situation
▪ Company A, a US-based branded consumer goods company, earns 70% of its revenues and profits from outside the US. The US dollar unexpectedly strengthens by 10% in the middle of 2014, which will reduce consolidated US dollar revenues and profits in 2014 below investment analyst expectations for net income (though margins will remain roughly the same). Company A is deciding among the following actions. Taking each separately, how might you interpret the Company's possible reactions to this scenario?
Actions and investor views
▪ Action 1: Makes no changes and reports lower than expected profits at the end of 2014.
▪ Action 2: Finds pockets of cost reduction opportunities that are easiest to implement in the short time available
▪ Action 3: Issues an order for all its non-US businesses to find cost reductions to offset the currency effect.
Percent
1 Includes categories “Red Flag” and “Yellow Flag” combined
McKinsey & Company 25|
What would be the importance of the company pre-announcing it will stop providing quarterly EPS guidance a year from now?
Percent
EPS guidance is not important for long term investors
SOURCE: Long Term Voices Survey 2015
1 Not Important: Not concerned, Important: This news makes you much less likely to continue to hold your current investment in this company, Neutral: news has been noted, you will watch the situation and ask in-depth questions next time you are engaged with the company
Neutral 0
79
21
Not Important
Important ▪ “EPS is not important, as it is not a metric even to be used when you think of building value over time, though 95% of Wall Street would disagree in general”
▪ “Companies should consistently give you the metrics that they believe matter for their business”
McKinsey & Company 26|
Whether a company meets consensus EPS estimates is not important to LT investors
SOURCE: Long Term Voices Survey 2015
1 Includes categories not important and not important at all 2 Includes categories very important and important
How important is it to meet/beat consensus EPS estimates?
13
38
50Neutral
Important Not Important
Percent
▪ “In general, we think that running a business with a goal of meeting consensus expectations for revenue or EPS creates temptations for sub-optimal choices. We prefer to invest in businesses with fewer, simpler long term goals and no near-term guidance”
McKinsey & Company 27|
Get comfortable with more transparency
SOURCE: McKinsey
Financial transparency
Operational transparency
Performance Assessment
Short term operational guidance
Long term strategy
1
2
34
5
▪ Does the company lay out key performance metrics by BU?
▪ Is this consistent over time?
▪ Does management address how they will make key strategic choices?
▪ Do they follow up?
▪ Does management give useful financial and operational guidance (i.e., not only EPS)?
▪ Does management give guidance on operating parameters that are independent of financials (e.g., # of subscribers for a telecom operator)?
▪ Does management assess success and failures honestly?
▪ Is there transparency about success of announced initiatives?
▪ Can intrinsic investors asses the performance by key business units?
▪ Are the schedules clearly presented, including reconciliations and intra-company items?
Performance and assessment
Guidance
3 WHAT TO TALK ABOUT?
McKinsey & Company 28|
Investors want to be educated by companies
SOURCE: Long Term Voices Survey 2015
▪ “Help me understand your business and strategy. If I disagree, I don’t have to invest. But I don’t necessarily think I know better than management”
▪ “Don’t pander to what Wall Street wants: educate as to what’s important for management and consistently give you the metrics that they believe matter for their business and explain why you should care about those metrics if you care about maximizing LT”
▪ “I want companies to help me understand their business, I want them to teach me”
▪ “We want to understand: how does a business makes money? Why do people pay for our product or service?. Based on this we can form an opinion about what level of profitability is sustainable.”
McKinsey & Company 29|
In general, separate the issues
What you cannot influence
What you can influence
Historical Future
▪ Underlying performance
▪ Volume growth
▪ M&A value creation
▪ Strategy
▪ Segment-level (or below) clarity on performance vs. target
▪ Segment-level long term targets based on constant currency, Fx, etc
▪ Exchange rates
▪ Commodity prices
▪ Mechanics of M&A
▪ Tax regimes
▪ Segment-level (or below) clarity on Influence of these factors
▪ If material, sensitivity vs. driver
McKinsey & Company 30|
Many large companies are starting to report return on capital
SOURCE: McKinsey, Company Reports
Depth
Segmentlevel
Corporate
3 WHAT TO TALK ABOUT?
McKinsey & Company 31|
ROIC: Maersk gives great detail on Business unit performance
SOURCE: Source
3 WHAT TO TALK ABOUT?
McKinsey & Company 32|SOURCE: Company annual reports; quarterly reports, and investor presentations
1 Applicable to gold production only
Gold company disclosure examples
Consumables/other
Free cash flow
All-In Sustaining Costs/oz1
Labor
Costs applicable to sales
Regional onlyRevenue
Regional onlyTotal assets
GoldcorpBarrickPer mine reportingYamana Gold
Ore grade
Recovery rate
Capex
Reserves
Depreciation
Production
Regional onlyExploration
Regional onlyPre-tax income
Average mill head grade
Total cash costs per ounce
In some businesses, even more granularity expected3 WHAT TO TALK ABOUT?
McKinsey & Company 33|
What you cannot influence: Alcoa bridges for each BU
SOURCE: Alcoa investor relations
3 WHAT TO TALK ABOUT?
McKinsey & Company 34|
What you cannot influence: Example currency exposure (Alcoa)
SOURCE: Alcoa
3 WHAT TO TALK ABOUT?
McKinsey & Company 35|
Four issues for investor relations
What should the company be worth?
Who to talk to?
What to talk about?
What channels?
McKinsey & Company 36|
One on one meetings and investor day conferences are the preferred method of communication for investors
SOURCE: Long Term Voices Survey 2015
86 79
26 18
1413
43
23
8
30
59
Quarterly CallsOne on One/ Small group meetings with investors
Industry Conference / Corporate Days
organized by banks
0
Neutral
Important2
Not Important 1
Investor Day/ Strategy Conference
Percent
Please rank the importance of how CEOs and CFOs should spend their time with investors
1 Categories not important and not very important combined2 Categories very important and important were combined
WHAT CHANNELS?4
McKinsey & Company 37|
Investors prefer less scripted and more Q&A based calls(1/2)
SOURCE: Long Term Voices Survey 2015
Yes5347No
Publish results and management write-up in advance of quarterly call so investors can absorb the information beforehand
Eliminate scripted reading of results; go right to Q&A (assuming management write-up made available beforehand)
68
32
Yes
No
Ask investors to submit questions in advance, so management can focus on questions most broadly relevant to all investors
17
83Yes
No
Of the following, which experiments would you like to see more of from companies?1
1 Sample of 25 responses for each question, no opinion answers were 6,6 and 7 respectively
Percent
McKinsey & Company 38|
Some thoughts on the current context
Do investors understand, in detail, your exposure to the future growth outlook of the country?
Is your strategy and operations aligned to weather the storm?
Do you talk about liquidity, cash position, debt refinancing, cash flow etc. in a way that investors can assess risk?
Is there a way to create investor confidence by more transparency on planned actions?
McKinsey & Company 39|
Call to action
Lead the change in your company towards developing, communicating, and measuring a compelling strategy
Educate management about the importance of focusing on long-term intrinsic investors and what they are looking for
Change the paradigm – not EPS and short term guidance, but long term return on capital and growth
Ensure that CEO/CFO spend most of their time with intrinsic investors (so that they hear their questions)
McKinsey & Company 40|
Four issues for investor relations
What should the company be worth?
Who to talk to?
What to talk about?
What channels?