Developing an IR PlanNIRI Introduction to Investor Relations Case Study

Keith MabeeVice Chairman, Dix & EatonFairmont Copley Plaza Hotel, Boston

September 23, 2009

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Agenda

Introduction• The role of IR in value creation

Developing an IR plan• Assessment• Plan• Action• Measurement

Case study (small group breakout)

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What is Investor Relations?

Investor relations is a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication between a company, the financial community, and other constituencies, which ultimately contributes to a company's securities achieving fair valuation.

(Source: National Investor Relations Institute)

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The Goal of IR

Create Fair Market Value

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What is Fair Market Value?

• When a current stock price accurately reflects the full value of the company– Based on the absolute value of the

company (on paper) and the perceived value of the company in the future

– Driven by perceptions; intangibles play a key role

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How Fair Market Value is Created

Solid Execution

Compelling Corporate Strategy

Revenue Growth

Steady Earnings Growth

Fair Market Value

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Role of IR in Value Creation – Market awareness and feedback to management– Credibility and consistent communication– Number of long-term investors; optimize

shareholder mix– Analyst following– Access to capital– Share liquidity– P/E ratio– Share value– Corporate governance

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BUY-SIDE ANALYST

SELL-SIDE

ANALYST

INSTITUTIONAL SALES FORCE

RETAIL BROKER

PORTFOLIO MANAGER INDIVIDUAL INVESTOR

INDUSTRY ANALYSTSMEDIA

REGULATORS

Outside Factors Affecting Fair Value

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The IR Equation

PerceptionStock Price = Performance +

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Performance-Related Variables

• Revenue growth• Sector attractiveness• Earnings growth• Return on invested capital• Cash flow• Balance sheet strength• Dividend yield• Beta• Share float• Liquidity

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Perception-related Variables

Intangibles

• An intangible asset is an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.

Source: Cap Gemini Ernst & Young

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Intangibles Are Growing in Importance• Non-financial performance accounts for 35% - 50% of

institutional investors’ valuation • The more sell-side analysts rely on non-financial

performance, the more accurate are their earnings forecasts• Consistent set of non-financial drivers that analysts rely on:

Strategy Execution

ManagementCredibility

Quality of Strategy

Innovativeness

Ability to AttractTalented People

Market Position

Management Experience

Quality of Executive Compensation

Quality of Major Processes

Research Leadership

Source: Cap Gemini Ernst & Young

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Perception-related Variables

Other intangibles– Management credibility and integrity– Customer loyalty– Employee commitment– Corporate reputation– Business ethics– Unique corporate culture– Intellectual know-how– Brand image

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Developing an IR Plan – Assessment

• Begin with assessment of your company, its current business/strategic plans and competitive set– SWOT Analysis

• Strengths• Weaknesses• Opportunities• Threats

• Include an analysis that factors in the impact on valuation of the economy, business sector, company performance or other issues

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Developing an IR Plan – Assessment

• Analyze historic changes in the ownership profile– Growth – GARP

– Value – Hedge Funds– Income – Momentum Players– Index – Insiders– Retail

• What’s been the company’s guidance track record?

• What are analyst expectations about performance and how it gets communicated?

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Developing an IR Plan– Setting Program Objectives

Typical IR Program Objectives– To focus investors on your business, financial results and

long-term prospects for creating value– To provide meaningful and relevant public disclosure tied to

business dynamics– To establish timely and consistent communications and

appropriate transparency with existing and potential investors

– To attract the optimal shareholder mix – To educate management and employees about how their

efforts can impact share price– To provide management and the Board with timely

competitive feedback, corporate governance and market analysis

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Developing an IR Plan– Setting Program Objectives

Benefits• Reduced volatility• Expanded liquidity • More optimal and diversified shareholder

base• Lowered cost of capital• Enhanced shareholder value creation• Higher multiple relative to

peers/company-specific benchmarks

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Developing an IR Plan– Identifying and Prioritizing Target Audiences

• SEC• Stock exchange• Rating agencies• Sell-side analysts• Buy-side institutional analysts and investors in the

U.S. and international markets• Individual investors• Financial media• Governance rating firms• Management and board of directors• Other employees• Customers

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Developing an IR Plan – Components of a Program

• Quarterly disclosure • Release, Conference Call, Timing• Approvals: Disclosure, Audit Committees

• Management presentations at industry conferences• On-site visits with investors (groups of buy/sell side)• Quarterly road shows• Analyst days; analyst-hosted conferences• Targeted one-on-ones• Annual report to shareholders• IR/corporate governance sections of web site• Targeted financial media placements

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Tactics: Broaden Institutional Base

Retail

Pension

Employee/Insiders

Institutions

40%

18%

5%37%

Current

25%

10%

5%

60%

Pension

Retail

Employee/Insiders

Institutions

25%

10%

5%

60%

Goal

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Tactics: Attracting the Best Shareholders

Institutional targeting program• A comprehensive quantitative and qualitative

determination of the best institutional prospects, as well as an assessment of what shareholders may be close to selling

• Prioritization of targets, key meetings, one-on-ones with senior management

• Secure and leverage sell-side coverage comparable to peers

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Targeting Criteria

• Interest in the sector

• Investment philosophy, alignment with your company’s performance and outlook

• Meaningful purchasing power

• Long-term investment orientation

• Sizeable equities under management

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Program MeasurementEvaluation is critical for all IR Programs• Must set measurable goals• Should set management expectations• Use benchmark investor perception research

periodically• Provide both quantitative and qualitative

views• Short-term share price and analysts ratings

should not drive IR strategy and goals

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Program MeasurementInternal• Management’s view of IR

– It’s not just communicating, but also participating in strategy formulation; marketing the ‘investible story’

– Management always has good intelligence about investors’ perceptions of strategic issues and concerns

– The market doesn’t over-react to good or bad news; built-in ‘credibility quotient’

– IRO is an integral part of the management team

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Program MeasurementExternal• Perception Study

– Interviews• Buy Side · Key Media• Sell Side · Industry Analysts• Portfolio Managers · Recent Sellers

– Measures perception of company’s strategies and management team

– Identifies gaps between what management is communicating and how it is being received

• Analyze and report out ongoing dialogue and feedback

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Program MeasurementObjective Measures• Number/quality of analysts following the company• Number/quality of meetings held with investors• Number/quality of conference presentations made• Long-term share price relative to performance• Long-term share price volatility• Successful conversion of targeted investors• Achieving optimal shareholder base• Keeping management and BOD informed; minimize ‘market

surprises’• Managing within budget; delivering ROI on company’s IR

objectives

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Program Measurement

Subjective Measures• Is the message being understood?• Are analysts and investors not surprised?• Are analysts and investors enthusiastic?• Is IR effective in a crisis? In capital raising?• Are management/Board well informed?• Does the IRO have credibility? Who do

management and investors turn to first?• Is the IRO an effective corporate governance

sentinel?

CASE STUDY

TRIFECTA CORPORATION