Nothing but the Truth
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Counting investor relations constituencies, Lonnie Arnett sounds like a birdwatcher ticking off sightings. "You have your sell-side analysts, your institutional investors, the indexers, the people who rotate in and out of cyclicals. In fact, a large mutual fund just became our largest stockholder within the last two or three months because it rotated into cyclicals, and saw our industry on the verge of recovering," says the vice president and controller of Bethlehem Steel. "We have another very large owner - he's not a banker, not a mutual fund, not an indexer - who just looked at our stock and thought it was time to get into it. About 65 percent to 70 percent of our ownership is institutional, ranging from classic value to growth to index funds. A smaller percentage is retail, and lastly there are the employee owners."
Bethlehem Steel uses an outside investor information service to monitor both its own shareholders and those of its competitors. "We may identify potential investors by looking at who may own other steel companies but not Bethlehem," says Blaise Derrico, Bethlehem's general manager of financial planning, investor relations and credit. When they identify such prospects, Bethlehem's investor relations people move to set up meetings, invite them aboard for conference calls, send them regular earnings statements and updates, and generally treat the prospects as if they were already shareholders. "The objective is to make sure that people who have a lot of investment choices get our story and understand our company," Derrico explains.
But investor relations is about more than marketing the stock. Institutional investors don't work in a vacuum. They talk to each other and, more important, to the press. "If the Wall Street Journal wants to write a story on the steel industry, they'll call one of the analysts to get a quote," Arnett says. Customers and suppliers looking for information about Bethlehem are also likely to read analysts' reports. Because the words heard on Wall Street eventually get repeated on Main Street, good investor relations can have an impact on more than the stock price.
Bethlehem's rules of investor relations are simple and clear. "The most important thing is to maintain credibility. Once you say you're going to do something, make sure you deliver," says Arnett. Bethlehem isn't shy about phoning analysts whose expectations for the company look too rosy, to ask about their assumptions and acquaint them with costs or other threats they may have overlooked. Ditto analysts whose prognostications are overly grim.
In fact, analysts' estimates of short-term performance are generally pretty close to each other, but longer-term predictions can be all over the map. Bethlehem tries to make sure the longer-term estimates don't diverge too widely by making the same information available to all investors as close to simultaneously as possible. Though there's a limit to the number of people (typically 75 to 100) who can participate in quarterly conference calls, Bethlehem was one of the first companies to broadcast its calls live over the Internet, where there's no limit to the number of people who can listen. The company prepares a full set of financials every quarter - including the fourth - sends them to the full list of owners, analysts and potential investors and posts them on the company web site.
What's the payoff for all this effort? Take for example the third quarter of 1999. Bethlehem had been generating good earnings and cash flow when it was hit by a one-two punch. Asian producers whose home markets had withered away in the regional economic crisis dumped inventory in the United States. Meanwhile, in the third quarter of 1999, Bethlehem had taken some production facilities offline as part of a strategic investment program. Prices in some product lines fell by as much as 40 percent, and because the company was producing less, fixed costs that might have been capitalized as inventory had to go right into the earnings statement. Bad news for analysts who had been expecting the good times to continue. Bethlehem could have waited until the end of the quarter to break the bad news, but decided to go ugly early.
"We felt we had to keep the world informed about what was happening, but it was changing daily," says Arnett. "Our third quarter was very disappointing. One of our competitors had an extremely difficult earnings release conference call just before ours, so I thought we'd have a very difficult call, too. But ours was mild compared to what it could have been - because we'd kept them informed all along."
In this case, the payoff for full and frank disclosure was trust and understanding. For an example of another approach, look to the Columbus, Ohio-based Scotts Company.