Developing an IR Plan

NIRI Introduction to Investor Relations Case Study

Keith Mabee
Vice Chairman, Dix & Eaton
Fairmont Copley Plaza Hotel, Boston

September 23, 2009

Agenda
Introduction
• The role of IR in value creation
Developing an IR plan
• Assessment
• Plan
• Action
• Measurement
Case study (small group breakout)
1
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)

2
The Goal of IR

Create Fair Market Value

3
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

4
How Fair Market Value is Created
Fair Market
Value

Steady Earnings Growth

Revenue Growth

Solid Execution

Compelling Corporate
Strategy
5
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 6
Outside Factors Affecting Fair Value
INDUSTRY
MEDIA ANALYSTS
SELL-SIDE
ANALYST

BUY-SIDE ANALYST RETAIL BROKER

INSTITUTIONAL SALES
FORCE

PORTFOLIO MANAGER INDIVIDUAL INVESTOR

REGULATORS
7
The IR Equation

Stock Price = Performance + Perception

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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
9
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

10
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  Market Position

 Management  Management Experience
Credibility
 Quality of Executive
 Quality of Strategy Compensation
 Innovativeness  Quality of Major
Processes
 Ability to Attract
Talented People  Research Leadership

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 Source: Cap Gemini Ernst & Young
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

13
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 15
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
16
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
17
 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

Current Goal
Retail
Retail 10%
18% Pension 10%
5%
Institutions 5%
Pension 37%
5%
Institutions
Employee/ 60%
Insiders 60%
25%
25%
40%
Employee/
Insiders

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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

21
Program Measurement
Evaluation 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

22
Program Measurement
Internal
• 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 Measurement
External
• 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 Measurement
Objective 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?

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 CASE STUDY

TRIFECTA CORPORATION