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Economics March 26, 2020

Guiding through Corona – the 2020 outlook of German firms

By Maximilian A. Müller
Concept of virus and economics. 3d render of germ inside a transparent bubble over dark background with dollar and yen icons floating around.
Most firms were just fine towards the beginning of 2020 and their CEOs and CFOs were preparing to release their 2019 numbers and provide outlooks for 2020 to capital markets. Then COVID-19 hit globally, turning not just stock markets upside down, but also firms’ plans and outlooks for 2020.

To understand how German firms reacted to Corona and, especially, whether Corona changed their outlooks, Maximilian Müller, CFRA member and associate professor at ESMT, analyzed around 40 recent earnings conference calls by German listed firms held since the beginning of March. The analysis indicates two common themes: “Cash is king” because “we don’t know” yet how bad Corona will be.

While not all firms are “in [the] state of emergency” declared by Lufthansa CEO Carsten Spohr, many firms indicate they are taking worst-case measures by reducing cash outflows (e.g., CapEx, dividends, short-time work, traditional cost-cutting), securing credit lines, and highlighting the robustness of their balance sheets. This is largely owed to the large uncertainty around the economic effects of the public health crisis. So what did companies have to say on how COVID-19 affects their outlooks for 2020?

Most firms indicate potential negative effects, but emphasize they currently have “low visibility”, i.e., they face large uncertainty. Roughly half of the firms are making an attempt to reflect Corona effects in their financial outlooks for 2020 in some fashion (if they expect material effects at all). The other half provides outlooks that are essentially outdated because they exclude any effects from the global spread of the coronavirus. This pattern is largely similar across listing segments (with MDAX and SDAX reflecting mid- and small-cap firms).

Take Volkswagen (VW), and BMW as an example to appreciate some of the issues involved. Right before the earnings release on March 19, BMW updated its forecast at short notice (as of March 16) with the assumption “that the sales situation will deteriorate in all major markets, [but] begin to normalize again after a few weeks” as BMW CFO Nicolas Peter noted. Several firms reflecting Corona in their guidance worked with a similar assumption of a V-shaped recovery in the second half of 2020. VW, however, in their earnings release on March 17 kept its forecasts at pre-crisis levels (as of February 26) arguing “it is near to impossible to provide reliable forecasts” (Frank Witter, CFO).

Some of this divergence between BMW and VW reflects a peculiarity of the German reporting landscape: Firms’ 2020 outlooks are an integral part of their 2019 annual reports, which must be audited. While the audit was completed at VW by February 26, and VW released “preliminary” figures on February 28, the annual report was released on March 17 as part of VW’s “annual media conference”. This could have happened similarly at BMW, but Norbert Reithofer, supervisory board chair at BMW, reports that, after the board had approved the annual report, there were last-minute changes prior to its release to reflect an update due to the coronavirus (which had to undergo another audit and board approval).

Even absent these seemingly “legal” issues, it is clear that CEOs and CFOs are confronted with a dilemma. On the one hand, the current situation is extremely atypical. Different scenario are extremely widely dispersed (e.g., back to normal soon vs. 1.5 years of interrupted lockdowns) and it’s unclear which scenario is the most likely (if likelihoods can be estimated at all) – implying that any guidance would yield a very wide range of possible outcomes. As a case in point, Karim Bohn, CFO of Patrizia AG, noted: “I wouldn't even know how to adjust the guidance […]. Or the only way to do it is to run 10 different scenarios with 10 different guidance outcomes”, which is something that would be very unusual – at least in normal times. On the other hand, Matthias Zachert, CFO of LANXESS AG, points out that after internal deliberations, they “decided it's better to […] give a financial corridor because, otherwise, you are left on the analyst side […] with complete uncertainty.” Consistent with capital markets appreciating some guidance, many analysts have applauded and thanked those companies that actively tried.

Clearly, it is not trivial to come up with a structured forecast for different scenarios, let alone internally. Even economists are just starting to marry their models of economic activity with pandemic models (e.g., Eichenbaum et al. 2020) in a more sophisticated way than making ad hoc assumptions about the length of the pandemic and how strongly sectors are likely affected (e.g., as in a recent report by the Ifo Institute for Economic Research). Thinking through these interactions may be easier for some executives if they have (or reach out for) relevant crisis and non-business experience and expertise. For one, Lufthansa’s CFO Ulrik Svensson highlights that he was “CFO at SWISS [airlines] at its darkest moments in 2003 in the middle of the SARS crisis.” For another, Stefan Oschmann, heading pharmaceutical firm Merck with a doctorate in veterinary medicine, shared on March 5 that Merck had followed a sophisticated approach by “looking into more or less applicable historical models of other crises [including] disease threats [since] mid-February”. Ironically, while this time around Merck was one of the first firms quantifying the effects of the pandemic, in the last crisis of 2008/9, it refused to make any prediction, triggering complaints from regulators and legal disputes.

In the upcoming weeks, it will be interesting when and how firms start revising their outlooks and strategy – especially those that currently focus on scraping cash to wait until they have better visibility.


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