Top 10 Questions for Top IROs / Nasdaq OMX IRHub

10 Questions for Top IROs – IR Hub Insights, Nasdaq OMX

Af: Arzu Cevik, Nasdaq OMX

We [Nasdaq OMX IRHub] spoke with Nils Paellmann, VP of IR – T-Mobile and asked him some of the most popular questions we have received from investor relations teams.

1. The sell-side has changed a lot over the past five to ten years. How do you interact wqith sell-side analysts? How do you deal with Sell recommendations on your stock?

The sell-side has changed as they used to be much more inter

bank but communication hasn’t changed that much. In general, I find that sell-side analysts have become more junior, less knowledgeable and less useful.

Having said that, the sell-side still has some influence especially when it comes to consensus estimates. I still actively interact with sell-side analysts so that hasn’t changed all that much.

If an analyst has a sell recommendation, personally, it doesn’t bother me. I group analysts into knowledgeable analysts and less knowledgeable analysts. Some analysts who have a sell recommendation may be very knowledgeable and be very good analysts.

In fact, if somebody has a sell recommendation and is a good analyst, I might devote more time to that person to change his opinion about our company. So a sell recommendation, by itself, doesn’t really matter to me.

I think for a road show, obviously at the margin, I think I’d be more favorably inclined to do a roadshow with a broker who has a positive opinion. It’s a little awkward to be on the road with somebody who has a sell recommendation on our stock.

I’m not sure how closely our senior management monitors sell recommendations. Obviously, they would like to see more positive opinions and I think that’s always an implicit goal.

2. How do you monitor market expectations for your company? What can you do if market expectations start to run too high?

We regularly compile a quarterly consensus referred to as a “company-provided” consensus. We’ve found that it’s a useful tool to pull in some of the outliers. I can be a little bit tricky of course, but that’s the main tool that we use. If the reality is very different from expectations, then we have a problem. At that point profit warning.

If the outliers don’t change their estimates, all you can do is talk to those analysts. Some analysts have their opinion and won’t change them; while others realize that they didn’t take certain factors into account. A good example for us is, since we are followed by European analysts, they don’t follow the U.S. market that closely.

But T-Mobile is a big part of Deutsche Telekom. Sometimes it’s useful to point out peer developments based on feedback I’ve received from the market. I find, especially with European analysts, they’re quite grateful if you give them some additional insights to the U.S. markets, because they typically don’t cover our peers in the US like Verizon and AT&T. If you’re able to give them a little bit of color on the market, they generally appreciate that. I’ve found that to be useful.

It’s all a bit touchy in the age of  Regulation Fair Disclosure (Reg. FD). As a foreign company, we’re not subject to Reg FD. Nevertheless, it is obviously a best practice to follow. The US IROs in our industry, like Verizon and AT&&, they also steer expectations. And the U.S. sell-side analysts are quite smart about it. They won’t say AT&T just called; they will say that based on market checks, we’re revising our estimates.

Selective disclosure is against the law in Germany too. You want to avoid a situation where suddenly all the analysts are revising down their estimates and writing, “the company is talking us down.” So you have to be very subtle about it. If the differences are that great, it’s pretty much impossible.

You could do what Verizon does. They have senior speak at a conference; they do it in a not so-subtle way. They say what their expectations are at conferences and they also issue a press release which summarizes the statement.

They use regularly scheduled appearances to update market expectations and that’s probably a good way to do it. They would never call it a profit warning. We do not speak as frequently at conferences.

What’s very common among our peer companies in Europe is that they all do a company consensus. That’s the standard. Usually what we do is, we put together this consensus a month before the results and then we play it back to the analysts and have one last round of talks with the analysts before we go into the quiet period prior to the results. Our quiet periods vary; they usually last three or four weeks.

3. What advice would you give to an IRO who knows that upcoming numbers will not meet expectations?

It’s a similar situation. Again, one piece of advice is to do what our peer Verizon does: provide a public updating of expectations at that point. What you want to avoid is, if you can, is having a very negative surprise on your earnings day. Sometimes it’s not possible because the difference is too great. Some companies are doing a better job of steering expectations than others, like the big telcos.

I think that’s generally acknowledged by the analysts as well. In the German context, we have very strict rules. If we know that actual results will be materially different from the expectations, then we have to pre-release at that point. 

As soon as the board is aware that things are very different than expectations, then you have to issue a pre-release (a “profit warning”) which is not the most fun thing to do. If you repeat that too often, it’s not good for the tenure of the CEO. That’s the ultimate ratio.

I do find the “company-compiled” consensus to be a useful tool. The problem is, if you look at Bloomberg’s consensus or Thomson Reuters’ consensus – they sometimes have stale estimates. Whereas, I think with the “company-compiled” consensus, you have a little bit more control.

The way we’ve done it at Deutsche Telekom is that we have about 40 analysts covering us and we’ve defined 20 analysts as “core analysts”, those are the more important firms. We only include the core estimates in the company compiled consensus. We don’t include the small guys.

And then we do a quality check of all the estimates we have received. So if something’s is obviously wrong, we would also tell the analysts in that context. Because people can make mistakes, we do a quality check before we incorporate it into the consensus.

Some U.S. companies have started doing a “company-compiled” consensus as well; Sprint does one, Leap Wireless I believe does one. I’m not sure whether other big telcos do so.

In Europe, I know it’s very common: KPN, Vodafone, France Telecom – they all have a “company-compiled” consensus.

We found that it’s a useful tool because then you have some dialogue around the consensus with the analysts at that point.

Most analysts refer to our “company-compiled” consensus when discussing earnings. That may be a little bit different in Europe than in the U.S.

Analysts use our consensus numbers in Europe, and there has been some improvement in that process. Our press department has also started to distribute the “company-compiled” consensus to some of their contacts.

The other advice I would give is to maintain and on-going dialogue with all of the important sell-side analysts. Make sure you touch base with them, especially shortly after earnings so that they understand your earnings properly.

4. How do you identify and target new investors? How do you prioritize time between holders and non-holders of your stock?

We do some internal targeting which is based on peer holdings among other things. We also look at fundamental peers, such as high dividend paying peers and also defensive plays. Our peers are basically the other telcos, other high dividend paying stocks and other defensive stocks. We then come out with a list of target investors who are underweight and overweight.

The overweights would be the ones we would like to retain; the underweight would be the ones who are potential investors. We have a list of 20 investors globally who are the top targets. We also work with brokers and listen to their input. 

In terms of time between holders and non-holders, I would say it’s probably 50% holders, 50% non-holders. We do try to meet with the top targets and with our largest investors to make sure that they remain committed.

We try to keep in touch with our top 50 investors on regular basis especially via phone calls. We also try to keep in touch with the top underweights.

When we issue earnings, we try to call up all the key sell-side analysts, along with the key buy-side investors. We don’t have a previous list of shareholders but a lot of the underweights have been previous shareholders.

Typically, we have a lot of focus on the European macro environment. We don’t operate in Spain or Italy but we do provide services in Greece although it’s a small part of our portfolio. We emphasize the fact that we are in Germany which is obviously seen as the most stable economy in Europe at this point.

Part of my job is to monitor our peers, not just earnings, but any significant development around what they do. I do that primarily for the US competitors of T-Mobile; so that would include Verizon, AT&T and Sprint. And for my European colleagues, based in Bonn, they monitor what our peers are doing including: France Telecom and Telefonica among others.

With peer reporting, we try to coordinate with France Telecom and try to avoid reporting the same day as they do.

5. Do investor days add value and what advice would you give on how to hold a successful event?

Yes, they can add value especially if you have a new strategy and need to announce it. I would only do an investor day if there was something new to tell, so we don’t do one every year at the same time. We only do it if we have a major new strategy announcement or something significantly new.

We did one in 2010 to announce a new strategy for Deutsche Telekom. Presumably, we will have an investor day at some point either this year or next year to present a new longer-term outlook.

The last time we hosted an analyst day, we presented a three-year outlook. Last year, we did a big investor day in the U.S. to announce a new strategy and it was well-received. If you don’t have anything new to say, hosting an analyst day can be counterproductive and lead to disappointment among investors and analysts.

Ideally, when you have an investor day, you would like to see a positive reaction in your stock price. If your stock trades lower, that can be frustrating.

We don’t typically provide analyst day gifts but instead host a social event.

6. What do you think about social media for IR? Are you utilizing Twitter, Facebook and other social media tools?

I think it’s useful to a certain extent. We do use Twitter; we have a Twitter feed for Telekom IR which is done by one of my colleagues in Germany. He works on the website content and  appearance. T-Mobile also has a Twitter account. We dont utilize Facebook or any other social media.

7. What’s the best metric for measuring the value of IR?

Feedback is the most important way to measure IR especially, from investors, to find out if IR is adding value. I think this is more difficult to measure, but whether investors are happy to meet with IR as opposed to management. That is, if they are able to meet with the IRO and feel they are getting good information.

That’s the difference between a good IRO and a not so good IRO. I have been in this role since 1998, so people know me and are eager to meet with me, so we get a lot of requests for road shows. We do a perception study each year and we ask for feedback after investor meetings through the sell-side.

You can also look at expectations to a certain extent. For example: How good hare you at managing expectations? Again, that’s more difficult to measure. But I think that’s what a good IRO should be able to do.

Additionally, IROs can look at the Thomson Reuters Extel rankings and awards as a measure of IR. We certainly try to, if we are performing well on Extel, we use that as an internal marketing tool saying that we did well in this survey. And we’ve become a lot more proactive when it comes to the Extel awards in particular. When we vote for analysts or the buy-side, we will inform them that we voted for them as one of our preferred.

I find the Extel awards more interesting than the IR Magazine Awards. The problem with IR Awards is there’s only one category where I could win (best IR for a European company) and I found the whole section process to be opaque and not really clear. I think the Extel awards are more scientific and thus, they are better than IR Magazine’s.

8. What’s the best part of your job? And what do you do best? Please share any tips.

What’s the best part? It’s the communication part. Speaking to the sell-side and buy-side and developing relationships. That’s what I enjoy the most and travelling is part of that. I do a reasonable job of developing relationships.

At the end of the day, it’s called “Investor Relations,” so relations are an important part. Having a longer tenure allows you to develop those relationships unlike at some companies. For example, the head of IR at AT&T is a rotational position

What’s the worst part of your job? Juggling the demands of the different constituents; everyone’s not necessarily on the same page.

9. What advice would you give to a new IRO?

Get lots of sleep before you start! Get out there! Get to know the analysts who are covering your stock. Do the same for roadshows; be proactive. Develop those relationships. Engage in NIRI because IR can be lonely.

It’s good to have peers who you can exchange information with; I’ve really enjoyed that and found it to be useful. Do talk if you can; it’s useful but dicey to exchange views with IROs in the same industry.

For example, I know a former IRO who got a recommendation from the sell-side to talk to me because of my experience in the industry. The problem was that this person didn’t have previous IR experience and was made the head of IR, which made the IRO feel a little overwhelmed.

10. What issues keep you awake at night?

I can sleep well. Ha. In our industry, the one factor that can pose a challenge is M&A which can be a little surprising, sometimes.

The AT&T deal last year, at the end of the day, it was a surprise to me. Those talks were held at the most senior level.

There’s always the surprise factor that you’ll wake up to news of a merger or acquisition especially if rumors have been spreading. There were also rumors that we were doing a deal with Sprint.

Once a rumor starts, then you’re bombarded with questions and you’re not allowed to say, and/or you may not know, so that can pose a challenge to any investor relations executive.

Other Questions:

How long have you been in the role?

I’ve headed up the New York Investor Relations office of Deutsche Telekom since its inception in 1998.

How do you decide when to report?

We try to coordinate with France Telecom so that there is little to overlap. We typically report later than the U.S. companies because we are European.

What role does ESG play at your firm? How do you attract ESG investors?

ESG is very much on my mind because I recently presented on ESG at the NIRI National Conference. We have had an active program of reaching out to ESG investors and emphasizing ESG issues and we regularly look at the ESG efforts of other major telecom companies. Deutsche Telekom has ranked well in ESG surveys.

When it comes to sustainability, we are not part of the problem; we are part of the solution. For example, we conduct more video conferences to reduce air travel.

Nils Paellmann is currently Vice President of Investor Relations at T-Mobile USA, a subsidiary of Deutsche Telekom.

He was previously the VP of IR at Deutsche Telekom, where he led the New York Investor Relations team, a position he had held since its inception in 1998.

Nils Paellmann is a Director on the Board of the New York chapter of NIRI (National Investor Relations Institute). He served as President of the NY chapter in 2008/9.

Nils Paellmann was interviewed by Arzu Cevik, Editor of IRHub. Please contact Arzu Cevik with any questions or comments: