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The quarterly sandwich technique

Mr Prospector has found the time to go through 43 recent earnings reports. He is less than impressed.

The gloomy weather up here in Airdrie has not been conducive to a great deal of bright optimistic thoughts at the Working Man’s Club bar. It’s interesting to note that Big Jocky the barman recently put up a new list of offences that get you barred. It still includes fighting, threatening behaviour, etc, but he has now added ‘Talking about Vale’s exports’ and ‘Discussions on the impact of IMO 2020’. So, in need of something positive I decided to go back to some of the earnings calls of publicly-listed dry bulk companies over the last three years. They always have an upbeat outlook, even when the results stink the town out.

What’s in an earnings call these days? A run through the reduced daily expenses, some refinancing gobbled gook, a graph to show how (despite the fact that the fleet is better than the index) an index has been out-performed, then disclosure of the loss. The loss is due to ‘market conditions’ and usually some help from (seemingly ever-present) ‘one off costs related to . . .’, so overall the loss has actually been a success. ‘The company is now in a better position to benefit from any upside in the underlying markets in which it operates’. The loss was encouraging. Good for you!

Here comes the good bit. ‘The market is showing good potential for upside going forward’. ‘Why?’ we all cry. Well, because although we lost money before, it turns out that now we know more. Historically low orderbook, longer tonne-miles, economic growth forecasts, tea leaves, birds singing at night. I totally agree that this market is incredibly tough to understand and impossible to forecast, so why not say ‘It’s going up’? Your guess is as good as the next person’s. And if I sold apples for a living I’m sure I’d be very positive about the near term outlook of apple consumption. So, before we get stuck in the ‘it’s all rubbish’ rut, this is not why I am boring you with this.

If you check the forward looking statements from any company presentation in almost any industry they are unanimously self-serving guesswork. Why else would they need so many disclaimers? What I am asking is this: what is the impact of these calls and positive market statements? To be loved is self-reaffirming, to be hated is challenging, to be ignored is downright rude.

I took a little bit of time to check the impact of these calls on share prices, volumes, markets, anything really. Looking at a group of the largest dry bulk stocks and the earnings presentations over the last few years comes up with an interesting dilemma for investor relations departments and PRs. I looked at 43 reports, quarterly and annual, which showed 29 losses and 14 profitable periods. A comparison to the previous year and previous quarter showed 33% of the reports were improvements, the rest declines. That’s not overly surprising, the market has been tough over the past few years.

Of the 43 reports, only one CEO said that things didn’t look optimistic, and that was only once and heavily caveated. The rest were indeed looking forward to using their improved corporate position to take advantage of the approaching market conditions. As I said, this is perfectly reasonable. What is perhaps more pertinent is that those earnings calls that were not connected to buying more ships did nothing to increase the share price on 72% of occasions, whatever the results were. Trading volumes went down rather than up in the two weeks following the call on 38% of cases, stayed largely the same on 37% of cases, up on only 25%. We must acknowledge that volume in almost all cases was light in the first place, but all the work that went into the calls appears to have been wasted at best, often just plain counter-productive.

Share prices were mostly down, but not really in an aggressive way, more in a ‘who cares?’ way. If what is being served up to interested investors, as rare as they appear to be, is having a zero to negative impact, then why do companies do it? And more poignantly, what would happen if they just stopped, or heaven forbid, talked about something else? Obviously there is a minimum reporting that has to occur, but when a CFO mumbles through a thousand lines of a PnL statement we are all thinking (a) I can read it and (b) I don’t want to read it, let alone read along with it. They do have to tick the regulatory boxes, but the disappearance of equity analysts should be a warning sign that earnings calls are more like singing at empty pub karaoke competitions than headlining Glastonbury. Question time these days are set ups with a single analyst asking a rhetorical question that the CEO then agrees with.

Publicly listed companies are always the easiest to shoot at, because they have to stand on stage and sing even when they can’t hold one in a bucket. However, the evidence of the impact of calls with investors is direct feedback of people’s interest in the shipping market generally and should be pricking the interest of private companies and investors. After all, reaction to public companies is a superb barometer to how the outside world sees the sector, public and private, as a whole. When some of the highest profile shipping CEOs talk about earnings, the market and their outlooks target audiences appear to switch off, even reacting negatively in many cases.

OK, so what is positive about this? Well, firstly if CEOs of public or private companies feel a sense of overriding gloom at the prospect of churning out more half-hearted tosh about order books and tailings dams, the feedback seems to be that they are not alone. If evidence suggests saying it makes people hate you, then not saying it appears to be a sensible alternative. Then what do you say? Maybe they can think of something different and more personal to say and investors may even start to listen a bit. When I hear a CFO start reading through a financial statement, sorry but I just wish the fire alarm would go off.

A look beyond the shipping compound might see that in other sectors businesses are communicating about the creation of networks, improved transparency of corporate action, how are they building brands and businesses that align with consumers (and not just their immediate buyers), creating innovative partnerships, grabbing agendas like emissions and driving them rather than discussing compliance strategies. Addressing serious issues that matter in other markets like wage exploitation and worker welfare, sustainability, environmental issues, circular production cycles and partnerships are all adding value to big corporations that are looking at the global economic model and wondering if there is an alternative future and a place for their companies in a post consumption landscape. And what about data? The largest corporations in the world are data companies. And yet shipping companies, which seemingly can’t stop talking about data, never mention it, or its uses, or discuss a company’s strategy to harness it in any earnings call. Just more shit about rain in Argentina.

I am not suggesting for one second that any of the above are the answer, or even an answer. However, for shipping the norm continues to be ‘announce cost savings, then some financial jiggery pokery, announce the loss, say all is going to be great, explain that the market is very positive now’. This is a financial version of the so-called sandwich technique where the bad news – the filling – is mentioned briefly between more positive news – the bread. This isn’t producing the goods and is being ignored. Hire a juggler, do the presentation under water, give the audience a bottle of tequila each and make them down a shot every time the CEO says ‘positive’ or ‘loss’. Who cares what it is? Just something else please.

Not come across Mr Prospector before? Here’s a little soupçon of his Twitter feed to give you an idea of who he is.


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