The Quarterly Show

January 29, 2007
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Brian Walker, president and CEO of Herman Miller Inc., opened the call in roughly the same way he had every quarter since succeeding Michael Volkema three years ago.

“Good morning, everyone. As always, I’ll open our presentation with a few introductory remarks …” said Walker in the Dec. 21 conference call and webcast for the company’s second quarter of fiscal 2007. “As you’ve already seen in our press release, we had another great quarter …”

The big story that morning was the company’s record quarter, with earnings per share of 56 cents, “surpassing the 54 cents we earned back in 2001, when our sales were 23 percent higher …” and operating income at 11.8 percent. “While we’ve reached our 2010 goal of at least 11 percent, we’re not yet prepared to set a new target.”

After some discussion of raw material costs, China, the company’s Convia launch and the macroeconomic drivers of the office furniture industry, Walker passed the floor to CFO Beth Nickels for a review of the company’s finances, who in turn called on Joe Nowicki, treasurer and vice president of investor relations, to talk about cash flow and the balance sheet. Walker ended the call with a forecast for the current quarter and a signoff until the next episode in March.

Scripted as a TV newscast, the quarterly conference call and accompanying financial disclosures have become the signature event of the investor relations world. Nearly 1.6 million Herman Miller shares traded hands that day, with shares gaining nearly three dollars from the night before. It was the stock’s most popular day since its last quarterly disclosure, Sept. 21, when nearly 3 million shares were bought and sold.

“Ten years ago, not many companies did a quarterly call with their earnings release,” said Jeff Lambert, founder and managing partner of Grand Rapids investor relations firm Lambert Edwards & Associates. The Securities and Exchange Commission requires publicly traded companies to disclose quarterly financial information to its investors. The actual SEC filing has always been the form 10-Q, but the accompanying communications to investors and analysts has evolved with technology.

“The common way to do that was through an actual quarterly report in brochure form mailed to investors,” Lambert said. “But with the speed of transmission and online financial and news sites, the quarterly report is now almost nonexistent as a printed piece.”

Lambert Edwards manages 15 quarterly disclosures for clients each quarter, roughly half of which use a webcast model. In this manner, the conference call can be heard by any interested party. Court rulings related to Sarbanes-Oxley regulations state that the call alone can satisfy disclosure requirements; no press release is necessary, but virtually every company issues one in the morning or evening before the call.

Here’s how it works: As the financial results from the previous quarter settle into place, a firm’s investor relations counsel will alert its investors, research analysts and the general public to the upcoming conference call. Portfolio managers, analysts covering the company and certain media outlets are often contacted directly by phone or e-mail.

In the week leading up to the release, pertinent financial results for the quarter and key business drivers are woven into a press release and a script for the conference call. At larger companies, a slide show is prepared to accompany the Internet broadcast. Investment relations writers work with company officers to write a script “in their voice.” Some companies rehearse the presentation and possible questions from analysts. Answers to obvious questions are woven into the script.

Meanwhile, the release draft is reviewed by dozens of stakeholders. At Mercantile Bank in Grand Rapids, the draft is tweaked by senior management, external and internal auditors, external corporate counsel and the board of directors’ audit committee.

“It’s typically a frenzied finish,” said Lambert. “The day before is the most stressful one.”

Mercantile Bank, which uses a Cleveland-based investor relations firm, releases its financial statement at 8 a.m. on the second Wednesday after the end of the quarter. Its conference call is at 10 a.m. Much like Herman Miller, which releases its results after market close on the third Wednesday with a Thursday morning call, the bank’s presentation is carefully scripted with defined roles.

Chairman and CEO Gerald Johnson leads with opening remarks, followed by Executive Vice President and CFO Charles Christmas with a financial discussion, President Michael Price with assets and COO Bob Kaminski with operations.

“Everyone has their part,” said Christmas.

Throughout the year, Johnson and Christmas travel around the country pitching the company to potential investors. The quarterly presentation is an important extension of that effort.

“We’re trying to paint a story on why they should want to purchase Mercantile stock,” Christmas said. “This is a carry-on to our normal PR work.”

This sometimes has a noticeable impact on the market, Lambert said, citing numerous examples of a release triggering frantic trading in the hours leading up to the call, only to steady in the hours after. “There is a level of comfort you can get from management that you don’t from a stoic press release.”

The call is also one of the few times non-institutional investors have exposure to management.

“Ultimately, the business will be judged on its performance,” said Mark Schurman, Herman Miller director of corporate communications. “With that said, a critical aspect of the company’s performance is the assessment of the strength of the management team, and that they are perceived as credible, highly competent and comfortable in their roles.”

Schurman was involved in the company’s first conference call a decade ago. It was an easy business case to make, he said, as in prior years the company would spend days on the phone with analysts, investors and reporters. Besides the time concern, there was always the possibility that the conversations would not be consistent.

At most companies, the prepared statements constitute 15 minutes of the presentation, with an additional 30 minutes to 60 minutes of discussion with analysts. This is often “the meat” of the presentation, where analysts pick apart the financials in order to prepare their recommendations later that day.

Managing this portion is troublesome for at least one local firm: Wolverine World Wide. With 12 analysts, it has twice the following of any local firm other than Gentex Corp.

“We try to keep it brief,” said Christi Cowdin, Wolverine director of corporate communications. “We want to hold our audience’s attention, and we have a lot of people to get through.”

Even so, officers and spokespeople from the company plan on spending most of their day on the phone after the call ends at 9:30 a.m.

For Lambert Edwards, the days following the presentation can be as busy as the days before it. Prospective buyers and analysts never register to ask questions on the call, as it would telegraph their intentions, but they will register for the broadcast.

“We follow up with them and ‘onboard them,’” said Lambert. “We want to know if they’re interested. The investment community is our customer — we want to introduce them to our story and let them know we’re responsive and engaged.”

John Sztykiel, CEO of Spartan Motors, a Lambert client, believes the most important part of all investor relations is to establish trust, “I don’t go to sleep at night worrying what people think about the company. It’s a fairly simple business model and we believe that what we have the right methodology. We need them to know we value integrity.”

Analyst Coverage In West Michigan

Company    Ticker  Market Cap. Sell-Side Analysts
Steelcase Inc    SCS    2.8 billion 5
Herman Miller Inc.   MLHR  2.4 billion  4
Gentex Corp.   GNTX  2.3 billion  13
Perrigo Co.    PRGO  1.6 billion  6
Wolverine World Wide  WWW  1.6 billion 12
Universal Forest Products Inc. UFPI  895.4 million  4
Independent Bank   IBCP  551.7 million  6
Spartan Stores Inc.   SPTN  495.0 million  2
Macatawa Bank Corp.  MCBC  317.4 million  4
X-Rite Inc.    XRIT  316.4 million  4
Spartan Motors   SPAR  309.8 million  3
Mercantile Bank Corp.  MBWM 269.7 million  7
Fremont Michigan Insuracorp Inc. FMMH  39.7 million  0
Riviera Tool Co.   RTC  1.4 million  1

Note: Data as of Jan. 22, 2007

Source: Thomson Financial/Lambert, Edwards & Associates
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