Anatomy of the Conference Call

Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There were three companies whose earnings conference calls last week promised to address three very different sets of circumstances.  Stericycle (NASDAQ: SRCL) was having its first call after naming a CEO-elect in January.  At Corning Inc. (NYSE: GLW), the weak global economy has caused a severe drop off in demand, which has hurt profitability and share price the past four quarters.  And Compass Minerals (NYSE: CMP) has had to cope with three extreme weather events which, incredibly, all occurred within the past year. 

As I listened to these calls, I paid attention to the tone of management (using a scale from extremely cautious to cautious, neutral, positive, and extremely positive), their candor in the question & answer session (using a scale from "not candid" to "uncertain candor", "candid", and "fully candid"), and information gleaned from answers to certain questions about revenue, cash flow drivers, and market conditions.  I was also tracking updates to certain metrics, any substantive announcements made during the call, and of course earnings and sales guidance.  Before listening to these calls I reviewed the previous call for each company to generate my set of expectations, metrics, and specific questions or issues to monitor.

With Stericycle's CFO, COO, and CEO-elect making brief statements in turn, the opening statements were more quantitative than qualitative, but overall the call was positive in tone.  My belief is that management limits their comments so as not to produce artificially high investor expectations.  I estimate that there were eight significant, open-ended questions from analysts that were adversarial or probing in nature.  Of these eight, three were answered satisfactorily, four were not answered directly, and one was answered satisfactorily but indirectly.  My impression is that management is satisfactorily candid with their communication but could improve to the preferred "fully candid" level with more direct answers.  There were few, if any, company or industry specific metrics discussed and no substantive announcements. 

I am satisfied that management answered all relevant questions and addressed all important business areas but I wanted to hear more from CEO-elect Charlie Alutto, whose only participation was his opening statement concerning guidance.  Management guided EPS in the range of $3.24 to $3.28 for full year 2012 and revenue in the range of $1.85 billion to $1.9 billion for the year.  This is a raise from EPS of $3.21 to $3.26 and revenue of $1.8 billion to $1.9 billion given as guidance last quarter.  I rate this call a solid B and more importantly am confident in management's capability to guide the company forward.  Investors bid the share price up from $87.10 before the call to $87.64 by week's end.

Of the three calls I listened to, Corning's was most likely to generate analyst skepticism because of continued economic weakness and share underperformance.  As expected, there was a greater number and higher percentage of questions that I consider adversarial and these were much more pointed than either Stericycle's or Compass Mineral's questions.  Fifteen of the questions were confrontational or accusatory with management satisfactorily answering ten of these, either directly or indirectly.  The remaining five were not answered to my satisfaction so my conclusion is that management falls into my "candid" category.  Corning did present a fair number of metrics, most importantly the Q4 supply chain inventory metric for the Display segment, which was essentially flat at 15.2 weeks.  The company provided an informative summary of the recent acquisition of the Discovery Labware business from Becton Dickinson including reasons for the transaction and expectations going forward. 

Unfortunately, Corning provided guidance for only limited information, by segment, for Q2 2012 rather than earnings and revenue guidance for Q2 2012 or an update for full year 2012.  This call earns a B because I am satisfied that no important business areas were neglected and all relevant questions were addressed to an acceptable degree.  The market reaction was very positive to this quarter's results and investors bid the share price up from $13.35 before the announcement and subsequent call to $14.45 by week's end.

Compass Minerals, whose primary businesses are de-icing salt and sulfate of potash production, was expected to report weak results due to a tornado that did significant damage to its primary salt mine, the warmest winter period on record and an unusually wet period in the Southwest, all within the past year.  The reported results were essentially in line with these lowered expectations but management assumed a fairly positive tone centered on the notion that each of these weather events is exceedingly unlikely to recur in the foreseeable future, thus recent capacity additions and acquisitions should lead to increased growth. 

Compass' management provided direct and satisfactory answers to three of  the six important questions that were either adversarial or probing.  The other three questions were answered in a satisfactory but indirect manner.  Like Stericycle and Corning, I consider the responses of Compass' management as acceptably candid, just below "fully candid".  Where I am disappointed in the call is the lack of explicit earnings or revenue guidance.  These were given in relevant terms like "more", "less", "higher" and "lower" but specific figures were not given. 

However, the company was very effective in quantifying the impact that the weather events had on "normalized" results.  In keeping with the practice followed in Q4 2011, the company did provide explicit updates to projected potash sales and capital expenditures for next quarter and fiscal year.  Potash sales are projected to be robust.  There were no significant announcements made by the company.  Aside from the lack of earnings and revenue guidance, I am satisfied that management answered all relevant questions and did not neglect any important business areas.  I am confident in management's capability to guide the company forward and rate this call a B.  For a more detailed look at Compass Minerals see my article.  Investors' reaction to the announcement and subsequent call was muted with the share price essentially unchanged from $75.44 before the announcement to $75.46 by week's end.

I will be paying attention to a few key issues for each company in each of their calls next quarter.  I hope that CEO-elect Charlie Alutto takes a more active role in the Q2 2012 Stericycle call.  For Corning I will be looking for status updates on the Discovery Labware deal and the Q1 2012 supply chain inventory metric.  And I will be interested to hear how well Compass Minerals is ramping up its recent capacity additions and acquisitions 90 additional days beyond last year's unprecedented events.

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