Yesterday Al Lord, the CEO of SLM Corporation (Sallie Mae) held a conference call to reintroduce himself to the analyst community (He had previously served as SLM’s CEO and CFO). The purported purpose of the call was to bring some transparency to his role as CEO and to talk about some broad issues and goals for SLM. He certainly brought transparency to his role as CEO. What the Street saw was an executive who was by turns vague, defensive, arrogant and profane. Investors’ reactions were what you might expect – the stock traded down 20%, the worst one-day drop in the company’s history. As this is an example that we can all learn from, I thought I would dissect the call in more detail for our edification.
There were many issues that needed to be addressed on the call – a failed buyout bid and ensuing litigation, lowered credit ratings and the need to shore up capital at the company, the CEO’s recent sale of 1.2 million shares and steps needed to return the company to a growth mode following the nine months the failed buyout bid was pending. To the CEO’s credit, he raised all the issues in his prepared remarks. Unfortunately, he didn’t clearly explain any of the issues or set out concrete steps to achieve his goals. Then he acted surprised and defensive when during the Q & A session analysts tried to get a bit more specificity out of him.
Take for example, the issue of shoring up capital. According to the transcript, Al Lord said: “My goal, first goal, probably my first goal and second goal, is to strengthen our balance sheet. The deal, the unfinished deal, cost us a single-A rating. We're now BBB. First objective is to solidify that BBB, next goal is to improve it from BBB to single-A. It is very much my first priority. In order to do that, obviously, we're going to add capital …” There was nothing said about how capital was going to be added. Predictably, the first question during the Q & A session was about how the capital was going to be raised. Here’s a portion of the exchange:
Analyst: “I wanted to ask -- you're going to shore up the balance sheet. Does that mean you're going to be selling equity?”
Al Lord: “The most preferred type of equity is common equity. At this point, I'm not going to get very precise with you. The idea is to strengthen the equity, the capital count with financing somewhere beneath the long-term credit line.”
Analyst: “Do you think you would need to raise to get back to the credit rating you would like? And what are your thoughts about the dividend?”
Al Lord: “This is the last question I answer that's more than one part. We will look at the dividend in the second half of the year.”
Analyst: “Okay. And you didn't mention how much equity you were going to need to get back up to the single-A rating.”
Al Lord: “You're talking to the wrong guy. I don't know that answer.”
This exchange is a microcosm of what went wrong with the call. The first answer is vague and indirect. A simple yes would have sufficed, as the answer seems to imply that SLM will be selling equity and would prefer to sell common equity. The answer to the last question is simply a stunner in its arrogance. Here the CEO has stated that his first (and second) priority is to add capital, yet he can’t be bothered with the details. This guy used to be the CFO, so it’s not as if he came out of sales and marketing and doesn’t know his way around a balance sheet. This is not the way to inspire confidence in the market place. There are lots of ways to answer that question without giving specifics, such as “We’ve just started studying the issue, so we’re not prepared to comment on exact amounts yet”, or “There as so many variables that can come into play as we work to improve our capital structure that it would be premature to comment on amounts of equity required just yet.”
I could go on, as there are plenty of other examples of what not to do in a conference call, from failed humor to profanity, but it’s a bit like shooting ducks in a barrel – it’s way too easy, and besides, this post would be too long. The fact that the market removed $3 billion from SLM’s market cap probably says more than I can.
So, it makes for great theater, but what can we learn from the call? Here are a few thoughts:
1. Broad, rambling statements of goals don’t cut it with an audience of equity analysts. These are people whose job is to parse the details to construct models of future earnings. General statements coupled with a refusal to go into specifics will drive them nuts. If you can’t be clear and concise, it’s better not to say anything at all.
2. Tone, attitude and preparation matter. Al Lord clearly did not want to answer questions from pesky analysts and wasn’t prepared. This sends a message that he doesn’t care about his investors and is a shoot from the hip sort of executive.
3. Never, ever, use an expletive on a conference call. Before this, Jeff Skilling of Enron fame held the award for dumbest thing ever said on a conference call when he called an analyst a particular body part. Al Lord has clearly taken the award from Skilling, by ending his conference call with “let’s get the [expletive] out of here.”
On that note, I will get the heck out of here.