What the Buy-Side Wants to Hear: Risk Management & Resilience — Q3 2025 Earnings Expectations

The following is drawn from a set of structured discussion with Breakwater Capital Markets, reflecting the perspective of leading institutional investors.

Q1. As you set 2026 guidance, how should companies factor uncertainty from trade policy, tariffs, and uneven growth? What does ‘visibility’ actually mean?

A (Buy-Side): What matters to us is not whether a company can predict policy outcomes — no one can — but whether they can build a guidance framework that acknowledges uncertainty in a structured way. The best companies approach this through scenario analysis, not wishful thinking. A credible earnings call would spell out the base case — stable tariffs, modest volume growth, incremental margin expansion — alongside a defined downside case with higher tariffs and a mild contraction in demand, and an upside case with some easing or stabilization. Each of those scenarios should have a clear revenue and EBITDA outcome, margin implications, and free cash flow impact. For example, if tariffs were to rise by 200 basis points and volumes slipped 3%, I’d want to hear that management already knows the hit would be roughly $110 million to EBITDA and 120 basis points to margin, but that cash flow would remain positive thanks to cost flex. Visibility, in this context, isn’t about knowing what the world will do — it’s about being able to quantify what happens to the business under different worlds.

Q2. How granular should tariff sensitivity be?

A (Buy-Side): Very granular. When a management team tells us that a 100-basis-point move in tariffs equates to a $40–45 million increase in cost of goods sold and roughly 35 basis points of gross margin pressure, that’s real disclosure. I also want to understand what portion of that gets passed through to customers and how long that takes. If they can explain that roughly two-thirds of the impact is typically recovered within two quarters because 70 percent of their contracts have price pass-through mechanisms, then I can build that directly into my model. That level of specificity separates companies that understand their exposure from those that are just managing headlines.

Q3. How fast should a company be able to respond operationally?

A (Buy-Side): Speed matters because volatility doesn’t give you time to deliberate. I want to hear exactly how quickly they can reprice, reset, and reroute. If they can adjust pricing on 60 percent of their volume within 45 days and on 85 percent within 90 days, they’re operating with real agility. If they can shift 40 percent of their sourcing to alternative geographies inside six months, that tells me they have credible playbooks in place, not just vague aspirations. These kinds of response times tell me whether a company can control its destiny or will simply be at the mercy of the next policy headline.

Q4. What does a credible vulnerability statement look like?

A (Buy-Side): The worst thing a company can do is dodge this question. The best companies lay out their weak spots in plain language and back it with numbers. If 18 percent of their cost base flows through East Asian ports and a 10 percent rise in freight costs adds $25 million to expenses, I want them to say that explicitly. Then I want to hear how they’re mitigating it — maybe dual-port contracts, backup suppliers, or hedging bunker surcharges. That’s not a negative; it’s actually confidence-building. If management can name the exposure and quantify its consequences, they probably have the tools to manage it.

Q5. How should companies talk about a demand downside?

A (Buy-Side): When demand weakens, the question isn’t whether margins will contract — they will — but whether the company has the flexibility to absorb the shock without blowing up earnings power. I expect management to describe its cost structure clearly: what’s variable, what’s fixed, and what can be flexed. For instance, if 62 percent of the cost base is variable and a 5 percent volume decline automatically reduces costs by $115 million, that tells me they have some built-in shock absorbers. If they can then layer on SG&A reductions or capex deferrals to protect EBITDA margins, I can trust their floor. If they can’t articulate that clearly, it usually means the floor is softer than they want to admit.

Q6. What early-warning signals matter?

A (Buy-Side): I’m looking for companies that know which operational dials tell them trouble is coming before it hits the P&L. That might be order cancellation rates, port dwell times, or input-cost inflation. If they can say, “When cancellations rise above 8 percent, historically our EBITDA margin falls 70 basis points the next quarter, and that’s when we pull the first cost lever,” that’s sophisticated management. It’s not the signal itself that matters — it’s whether they’ve translated it into an action plan with timing and magnitude.

Q7. How much resilience should be structural versus discretionary?

A (Buy-Side): The companies that navigate uncertainty best are the ones that don’t rely entirely on short-term cost-cutting when things get rough. If two-thirds of their resilience comes from structural elements — flexible sourcing, indexed pricing, variable compensation — they can absorb shocks without scrambling. The remaining third can come from discretionary measures like SG&A throttling or capex pacing. When that mix is flipped, the risk profile is a lot higher, because it means resilience depends on management making the right call under pressure rather than the business model doing the heavy lifting.

Q8. What’s an adequate balance-sheet stress depiction?

A (Buy-Side): In a volatile macro environment, I expect companies to show me how the balance sheet holds up under a stress case, not just say they’re “strong.” If they can walk through a scenario with a 4 percent revenue decline and a 150-basis-point tariff headwind and show they’d still generate $280 million in free cash, keep net leverage under 2.5×, and maintain more than $1 billion in liquidity, that’s credible. It’s the difference between a company that hopes to stay liquid and one that already knows it can.

Q9. What do decisive cost-action triggers look like?

A (Buy-Side): Good operators don’t just monitor—they act when pre-defined thresholds are crossed. If a company says, “If our gross margin deteriorates by 300 basis points or if forward revenue visibility drops by 10 percent, we take $75–90 million out of SG&A within 90 days,” that’s discipline. It tells me they’ve already rehearsed their response rather than trying to invent one mid-crisis.

Q10. How should capital returns flex under pressure?

A (Buy-Side): What gives me confidence isn’t a promise to “stay disciplined,” it’s a clear formula. For example, if EBITDA is at or above $1 billion, they might target returning 45 percent of free cash to shareholders. If EBITDA dips below $900 million, they automatically trim buybacks but maintain the dividend. That’s a management team that won’t mortgage the balance sheet just to protect optics.

Q11. What liquidity profile signals resilience?

A (Buy-Side): When things get bumpy, access to liquidity is what separates companies that can ride out volatility from those that get squeezed. I’m looking for a clean debt maturity profile with no major cliffs in the next few years, ample revolver capacity, and a track record of generating operating cash even in soft markets. If a company can say they’ve got $1.5 billion in unused revolver, no big maturities until 2028, and $200–250 million of operating cash flow per quarter, I can underwrite that.

Q12. How specific should FX framing be?

A (Buy-Side): Vague statements about “managing currency volatility” don’t cut it anymore. I want the math. If a 5 percent euro depreciation means a $32 million EBIT headwind but that’s reduced to $12 million after hedging, and if 60 percent of exposure is hedged for six months, that’s enough for me to model. What matters is clarity on timing and scale.

Q13. What counts as credible working-capital flexibility?

A (Buy-Side): If a company tells me they can release $250 million of working capital over two quarters through inventory reductions and modest payable extensions without damaging supplier relationships, that’s meaningful. Working capital isn’t magic, but it’s often a hidden buffer. The best operators know exactly how much liquidity they can unlock, how fast, and with what trade-offs.

Q14. How do you view footprint flexibility?

A (Buy-Side): In an environment where supply chains are constantly being rerouted, I want to know what percentage of the production footprint can be shifted regionally and how long that takes. If a company says that 45 percent of its capacity is modular and can be relocated in six to nine months, I view that as a competitive advantage. It doesn’t just reduce risk; it creates strategic options.

Q15. What about capital-return guardrails in stress?

A (Buy-Side): In a stress scenario, discipline is everything. If management tells me they will pause buybacks if net leverage rises above 2.75× or if their free cash flow yield falls below 6 percent, I believe they’ve built a rational capital structure. If they can’t define those thresholds, it usually means capital allocation decisions will be reactive, not principled.

Q16. How should concentration risk be disclosed?

A (Buy-Side): I don’t need a novel, I need numbers. If a 10 percent drop in their largest segment would reduce consolidated revenue by 2.8 percent and operating margins by 55 basis points, and if they can offset half of that through cost flexibility, that’s a straightforward bridge I can incorporate into my model. It also signals they’ve thought seriously about the concentration risk instead of hand-waving it away.

Q17. How do you judge whether downside actions protect the long term?

A (Buy-Side): One of the clearest signals of strategic maturity is how cost levers are sequenced. The best management teams have a ladder: efficiency actions first, discretionary spending second, structural cuts last. When they make it clear that they won’t touch R&D or core digital investments until much later in the process, it tells me they understand the difference between protecting this year’s earnings and preserving long-term value creation.

Q18. How often should scenario work be refreshed now?

A (Buy-Side): Quarterly. Anything less feels complacent in this environment. I want to know that their sensitivity work on tariffs, volumes, FX, and input costs is updated every three months, not just once a year. That cadence is what allows management to act quickly instead of getting caught behind the curve.

Q19. What’s the right way to communicate post-guide deterioration?

A (Buy-Side): Transparency is everything. If conditions deteriorate, I’d rather see a company come out with a clear sensitivity table that shows what different volume and tariff scenarios mean for revenue, EBITDA, and cash flow than try to finesse the messaging. When companies give me that math — for example, plus or minus 5 percent volume and plus or minus 200 basis points of tariffs — I can adjust my model rationally. When they don’t, I have to assume the worst.

Q20. How do you personally define ‘resilience’ in 2026 terms?

A (Buy-Side): For me, resilience isn’t about avoiding impact altogether; it’s about being able to absorb shocks without losing the investment case. If a company can withstand a 3 percent volume drop, a 200-basis-point tariff increase, and a modest FX headwind and still generate positive free cash flow, keep margins within 150 basis points of plan, and protect the dividend, that’s resilience. It tells me their operating model bends, but it doesn’t break. Those are the companies we overweight.