The Economy

Companies Brace for Impacts to Top & Bottom Lines

Most companies are quickly shifting strategies as they size up COVID-19's likely impacts on revenue and profits, PwC finds.
David McCannMarch 16, 2020
Companies Brace for Impacts to Top & Bottom Lines

CFOs are expecting the COVID-19 pandemic to him them where it hurts most: their top and bottom lines.

In a PricewaterhouseCoopers poll of 50 U.S. and Mexico finance leaders conducted March 9-11, more than half (58%) said they expect decreased revenue, profits, or both this year as a result of COVID-19.

But far more companies could suffer that fate, as 40% of the survey participants said the impact was difficult to assess at that point in time. Only 2% of those polled said they did not expect any impact to revenue or profits.

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As sobering as those numbers are, they do not reflect the impacts from the even more intensely volatile stock markets since last Wednesday or the U.S. ban on travel from most European nations that began last Friday.

If any companies are not reassessing their near-term priorities, they should be, said Tim Ryan, PwC’s U.S. chair, during a media briefing on Monday.

“We don’t think it’s a time for companies, or others, to hold onto original plans for 2020,” Ryan said. “It’s clear that the virus will change the plans of almost every company.”

But, he added, the impact of the virus will depend on a company’s readiness: “Those that have been working very hard to control things like cost structure and liquidity will fare better, and those that weren’t will be more adversely affected.”

On the plus side, Ryan noted that the U.S. banking system is “very strong.”

“Credit is flowing, capital is very adequate, and the hard work that our banks, regulators, and other stakeholders have done over the past 10 years coming out of the financial crisis should and will serve us well as we look to deal with COVID-19,” said Ryan.

One immediate concern for many companies is investor communications, according to PwC. For example, 44% of the participants said they were considering adjustments to guidance.

As of March 6, about one-seventh of the S&P 500, totaling 71 companies, already had issued earnings guidance below expectations for the first quarter, PwC said, while 33 of the companies had issued positive guidance.

Ryan indicated that investors should have some perspective on the reality of 2020: “I hope investors and other stakeholders will not judge companies by what 2020 will now look like, but more importantly by what companies are doing to get ready for 2021 and beyond.”

And almost half (48%) of the surveyed finance leaders said they were planning changes to disclosures as a result of the pandemic.

From a more macro standpoint, the risk to the economy weighed heavily on the minds of the finance leaders. Eighty percent of them said a potential global recession was among their top three concerns related to COVID-19.

But Amity Millhiser, PwC’s U.S. vice chair and chief client officer, noted during the media briefing that 90% of the surveyed finance leaders said they thought their businesses would be back to normal in three months if the virus were contained today.

“What that means to me is that leaders are more confident in their own business’ ability to weather this storm than they are in the health of the global economy,” Millhiser said. “It speaks to … what they’ve built into their organizations over the last few years as they thought about how they’d respond to any global shock, [like] a global downturn.”

The next-greatest concerns were a decrease in consumer confidence resulting in reduced consumption (48% of respondents placed it in their top three concerns); “financial impact,” including effects on results in future periods, as well as liquidity and capital reserves (48%); effects on workforce/reduction in productivity (42%); and supply chain issues (34%).

Lesser concerns included not having enough good information to make good decisions (14%), lack of a comprehensive/tested company emergency preparedness plan (6%), difficulties with funding (4%), and impacts on tax, trade, or immigration (2%).

PwC said in its survey report that it anticipates a significant increase in the number of companies performing scenario planning and financial modeling for potential impacts as they seek to estimate the effects of the outbreak.

“We’re seeing models being revised to incorporate economic impacts of past pandemics. … The revisions underpin concerns that COVID-19 may signal a future in which pandemics are more frequent,” PwC wrote. “Some companies are also coordinating closely with strategic vendors and business partners to share information and enhance their models.”

Only 14% of the survey respondents said they were not considering any financial actions as a result of the spreading virus. A majority (62%) said they were implementing cost constraints. About a third (32%) said they were deferring or canceling planned investments, and 28% were changing company financing plans.

Only 10% said they were changing their overall M&A strategy, even though 80% reported a decreased appetite for M&A in the short term.

Again, though, the situation remains fluid. “If conditions continue to deteriorate, we expect to see a pullback in investment spending as companies shift strategies,” PwC wrote.

Despite the obvious impacts on supply chains that many companies are already confronting, only 30% of the surveyed finance leaders said they were considering changes to their supply chains.

“However, the duration of the impact is the most important factor [with respect to supply chains], and we expect that learnings from the outbreak will likely move the competitive forefront of supply chain operations toward more comprehensive, proactive modeling,” the survey report said.

Meanwhile, assuming the pandemic continues to wreak havoc on businesses, companies may be challenged to decide what to do with employees who aren’t productive because of, say, a company shutdown.

“Companies are very much into holding their employees,” said Ryan. “The question becomes at what point can you no longer do that because of a liquidity or cash issue.”

Eighty percent of the polled finance leaders work at Fortune 1000 companies. PwC plans to continue conducting the survey every other week in order to track changing sentiment and priorities. The next set of results will be released on March 30.