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Major Expose Part 3 of the Future house built on sand – Obscene executive greed & Mark Slater’s financial virtue signalling

By Tom Winnifrith | Wednesday 29 January 2020


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Britain's tiop fund manager, my pal Mark Slater, has said that he will vote down annual reports where he sees unacceptable executive greed yet his largest holding is Future (FUTR) which not only has major fundamental “funnies” but is a case study in obscene executive greed.

I sent my old friend Mark a link to the first part of this series which showed that this was not a growth stock at all as supporters like he claimed. Haughtily, Mark said I should call the company as my facts were wrong. But the facts, the numbers in the piece, all came from the company! 

Yesterday I moved from revenue to an EBITDA slight of hand.  In part 3 I, briefly, step away from the underlying financials of Future’s business and take a look at the thumping pay packets that Future’s management receive and how the criteria to achieve these sacks of cash changes with the wind to suit the board.

Future’s shareholders may be convinced that Future is a growth stock despite its own figures seeming to contradict this at an organic level. However, here’s some more enlightenment from Future and strong words from its 5th largest shareholder, Mr Slater.

In a recent letter on Directors’ remuneration, which we revealed here on ShareProphets, Mark Slater writes to numerous companies, setting out “our dissatisfaction with the framework of Directors’ remuneration in most public companies.”

Mark Slater goes on to ask “Is a good salary not enough to get Directors out of bed in the morning and to diligently work their allotted hours?” And expands to say that “Remuneration has run wild and needs to be hacked back to its essentials.”

Slater’s letter cites the Remuneration Report of Carillion as an example of Directors’ remuneration running wild, highlighting that Carillion’s Remuneration Report ran to 17 pages and the word “bonus” appeared 87 times across its Annual Report.

Well, Future PLC’s 2019 remuneration report runs to 26 (TWENTY SIX) pages accounting for 27% of the report before the reader gets to the mandatory audit and financial statements. When it comes to the word “bonus” it gets a mention 98 times! “Salary” gets a mention a whopping 112 times in the 2019 report. Combined “salary” and “bonus” are mentioned 210 times. “Shareholders” are only warranted 138 mentions.

As Future’s fifth largest shareholder will Mark Slater be voting against Future’s remuneration report? He said he would if any remuneration report ran beyond two pages, let alone 26! Or will his letter be seen as little more than financial virtue signalling? Regardless, the fact is that the horse has already bolted. Future’s management flogged £43.7 million in stock in November 2019, not even a month after it went cap in hand to its shareholders, Slater included, for another £104 million in cash to fund yet another acquisition. At this stage, any finger wagging seems pretty pointless.

Which way is the wind blowing?

Future’s executive compensation scheme seems to change each year.

For example, the basis of Future’s Performance Share Plan (PSP) was set in 2005, where Future states:

 

“The PSP has been in operation since 2005 and is designed to reward performance over a three-year period in the context of performance targets which are designed to align the interests of the executive Directors with those of the shareholders.”

In 2016, the group sets out the targets for its PSP award and further states:

“The maximum amount of an award in any financial year is normally 100% of basic annual salary. However, in exceptional circumstances, where it is felt necessary to provide further incentive to the executive Directors, awards of up to 200% of basic annual salary may be approved. Awards under this scheme are granted to executive Directors and key senior executive management.”

As if the exceptional 200% of the executive Directors’ growing basic salaries wasn’t enough, by 2017 this pillar of the PSP had been doubled. In 2017, the group sets out new targets for its PSP award and states:

“The maximum amount of an award in any financial year is normally 100% of basic annual salary. However, in exceptional circumstances, where it is felt necessary to provide further incentive to the executive Directors, awards of up to 400% of basic annual salary may be approved.”

Then by 2018, the maximum “unexceptional” circumstances amount doubles and the exceptional amount is maintained at 400%. The group states:

“The maximum amount of an award in any financial year is normally 200% of basic annual salary (increased from 100% in 2018). However, in exceptional circumstances, where it is felt necessary to provide further incentive to the executive Directors, awards of up to 400% of basic annual salary may be approved.”   

Suits you Madam

The 2016 criteria

In 2016, the qualifying criteria for the PSP award was as follows:

Earnings Per Share (50% of award) – adjusted EPS naturally! Set at 1.2p per share for a 25% vesting and full vesting at 1.5p per share.

Net Cash Flow (50% of award) – set as low as at least (£0.25 million) for 25% vesting for this part of the award, with full vesting at £0.75 million. Just £0.75 million for full vesting.

Why Net Cash Flow is a qualifying criteria for such an acquisitive business seems bizarre. In 2016, Future reported £2.0 million in Operating cash and an outflow of £2.8 million in Investing cash; a combined outflow of £0.8 million. If the line in the sand was drawn there, then there would have been zero cash generation related award for Future’s executive Directors. Thankfully Future raised £3.3 million in equity in 2016, which helped bring its Net Cash Flow up to £1.9 million in 2016, meaning Future’s executive Directors would have qualified for a full Net Cash Flow PSP related vesting.

For Future’s CEO and CFO, the PSP related to the Net Cash Flow criteria, vested at a value of £0.62 million, essentially 83% of the £0.75 million which was needed for full vesting from the Net Cash Flow related target.    

The 2017 criteria: The year of the big one! 

By 2017, not only had the exceptional PSP award doubled to 400% of basic salary, but the qualifying criteria had changed too.

In 2017, the qualifying criteria for the PSP award was as follows:

EBITDA Earnings Per Share (50% of award) – adjusted EBITDA naturally! Out went Earnings Per Share and in came EBITDA. 25% of the award would vest if adjusted EBITDA for the year ended 30 September 2017 was at or above target. 25% of the award would vest if adjusted EBITDA for the year ended 30 September 2018 is at or above target. Remarkably no target level is actually detailed.

Share Price Performance (50% of award) – Out went Net Cash Flow and in came Share Price Performance, pretty handy when the share price had risen 152% in the year to 30 September 2017. 25% of the award would vest if Future’s share price performance in the period from the date of the grant to 30 September 2018 is at or above target. As with EBITDA, no actual target was specified in the report at the time. The targets are revealed at a later date. 25% of the award would vest if Future’s share price performance in the period from the date of the grant to 30 September 2019 is at or above target. Again no actual target was specified at the time.

In 2017, according to the single figure remuneration disclosed, Future’s CEO and CFO received 415% and 368% of their respective basic salaries in PSP awards, suggesting a “good salary [was] not enough to get the Directors out of bed in the morning”. 2017 was a year when Future’s adjusted EBITDA fell from £18.2 million in 2016 to £13.3 million in 2017. Further, Future spent £49.1 million buying 3 companies in 2017 (Ascent Publishing and Centaur Consumer Exhibitions, Team Rock, Miura (Holdings)). Presumably if these businesses hadn’t been acquired then Future’s adjusted EBITDA would have been even lower. Yet Future’s executive Directors received a full award for meeting the undisclosed EBITDA targets.

These PSP awards vested on 23 November 2019. Future’s management wasted little time, selling £43.7 million in stock on 27 November 2019.

The 2018 criteria: All change yet again!

By 2018, the maximum “unexceptional” PSP pay-out is doubled to 200% of basic salary and the criteria are changed for the third time in three years.

In 2018, the qualifying criteria for the PSP award was as follows:

Earnings Per Share EBITDA (50% of award) – adjusted EPS naturally! An EPS target is back. 25% of this award vests if earnings are 23.0p per share, and a full vesting occurs if earnings are at 26.0p per share by 30 September 2020. As such, the full award is set at just 7% earnings growth per year, surely obtainable for a growth company like Future? In 2018, Future acquired Purch, which if acquired at the start of 2018 would have contributed £7.9 million to its PBT. This compares to Future’s adjusted 2017 PBT of £8.3 million.

Since this criteria was set, as we revealed yesterday, Future also looks to have received a handy sizeable profit uplift when it acquired Mobile Nations, despite no real operational change in the business. Presumably if the TI Media purchase goes through, then having spent £398.8 million on acquisitions since September 2018, 7% EPS growth by 2020 should be a cakewalk.

Share Price Performance (50% of award) – 25% of this part of the award would vest if Future’s share price in the period from the date of grant to 30 September 2020 is at the lower target price with full vesting at the upper target price level.

2019: The year Tolstoy writes the Remuneration Report?

In 2019, the criteria remains EPS and TSR based. This is the first time it’s remained consistent since at least 2016. The Remuneration Report grows from 14 pages in 2018 to 26 pages in 2019. The use of “Bonus” increases from 85 mentions in 2018 to 98 times in 2019. The use of the word “Salary” increases from 61 mentions in 2018 to 112 times in 2019.

Also in 2019, the CEO’s and CFO’s basic salaries are increased further, to £475,000 from £400,000, and £325,000 from £249,000, respectively. A 19% pay rise for the CEO and a 31% pay rise for the CFO. Well I suppose the group revenues are doubling thanks to all those acquisitions.

So Mr Slater are you a financial virtue signaller par excellence or will you vote down large sections of the annual report? And what is the point of your posturing when you keep on buying more shares?



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