Jun 08 2020
Lessons Learnt From Swedish Companies’ Q1 Reporting

Being in the midst of the COVID-19 pandemic does not make corporate financial reporting any easier. However, while challenging, the situation has not yet led to any radical changes in how companies present quarterly reports, apart from one major aspect –financial guidance.  

JKL Kekst CNC has analysed quarterly financial reports from January-March 2020 that were published by the 50 largest listed companies in Sweden. We compiled the financial guidance and outlooks provided and evaluated how each company communicated the effects of COVID-19 on their results. From this analysis, there are lessons to learn for the upcoming reporting season.

Increasingly uniform guidance

While most companies released their Q1 quarterly reports according to established formats with a similar structure to previous reports, two clear trends emerged.

On the one hand, companies that usually provide financial guidance have become much more vague and used more cautious wording. On the other hand, companies that do not have a track record of offering guidance statements have now chosen to comment on the potential impact that the COVID-19 pandemic could have on their business in the coming quarter, although they have maintained the trend of cautious wording. The discussion on COVID-19’s impact is mainly communicated in the CEO comment but is also frequently seen under the "Outlook" heading of the reports. A number of companies have also added a specific heading for "The effects of COVID-19".

These trends of communication are in line with the European Securities and Markets Authority’s (ESMA) recommendations, which Finansinspektionen, Sweden's financial supervisory authority, and Nasdaq have taken on. Namely that companies should, to the extent possible, highlight the actual and potential effects of COVID-19 in their financial reporting.

More vague and short-term focus

As in the US and many European countries, we have recently seen several companies in Sweden withdrawing their financial guidance for FY 2020.

For the upcoming quarter, just over 10 percent of the companies included in JKL Kekst CNC’s evaluation provided formal guidance or outlooks in their reports. In addition, there is a general lack of explicit numerical updates regarding the expected financial impact on companies’ future revenue and results. Rather, the guidance uses descriptive overall comments about the future – which is described as being uncertain throughout.

Even companies that had not previously provided any form of guidance, have, in almost 80 percent of the cases, now opted to carefully provide qualitative comments about the future, arguably driven by the uncertainty COVID-19 has created, and leading to this increased need for communication.

The manufacturing giants ASSA ABLOY, Alfa Laval, Sandvik, Atlas Copco, SKF, SSAB and Trelleborg have all provided short-term guidance focusing only on the second quarter, which they predict to be far worse than the previous one. Moreover, companies that had a successful first quarter paint a darker picture for FY 2020. For example, Getinge doubled their profit in the first quarter but withdrew their full-year guidance for revenue growth. At the same time, Ericsson and Astra Zeneca have chosen to keep providing their full-year guidance, although they seem to represent the exception to the rule among large-caps in Sweden.

The way forward

Most companies expect that the macroeconomic impact of COVID-19 will have a negative effect on future operations – and that the worst is still to come. We can expect that the financial impact of COVID-19 will reach a new high during the current quarter. While this quarter is already considered a lost one by the financial markets, the next quarterly reports should be expected to be, from a communications perspective, the most important ones in a long time.

The current situation may well force companies to make major and fundamental changes in business models and strategies to overcome existential threats. We should expect that more companies will need to create new narratives for their businesses. Thus, communications will be crucial to build confidence in the changes that companies are and will be making in the future. Confidence in management and their ability to act, as well as trust in their transformation story will be decisive in creating room to manoeuvre and acceptance for their major strategic changes. The financial markets – but also employees and customers – are looking for signs of a long-term direction. Comments that are too vague about the future will not be appreciated, going forward.

In telling this story, companies need to be flexible, transparent and a somewhat creative. In absence of formal guidance backed by hard financial facts and figures, companies need to find other ways of giving their stakeholders a better picture of what their recovery may look like. This could be achieved through a scenario analysis, giving a sincere and transparent picture of the immediate situation, or using alternative measures to estimate development. Business leaders who dare to be clear in choosing a direction, compared to those who do not, will probably come out more successful on the other side of this crisis.