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RBR Capital Advisors: OPEN LETTER TO THE SHAREHOLDERS OF GATEGROUP Mittwoch, 30. März 2016 - 19:35
RBR Capital Advisors / Key word(s): Miscellaneous
RBR Capital Advisors: OPEN LETTER TO THE SHAREHOLDERS OF GATEGROUP
30.03.2016 / 18:35
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RBR Capital Advisors | Cologny Advisors LLP
OPEN LETTER TO THE SHAREHOLDERS OF GATEGROUP
March 30, 2016
Dear shareholders of gategroup,
With reference to our motions regarding the board composition which have
been published in the invitation to the AGM, we recommend you vote 'No' on
agenda item 1.3 "Consultative Vote on the 2015 Compensation Report" and
agenda item 9.2 "Approval of Maximum Aggregate Amount of Compensation of
the Executive Management Board" for 2017.
We have reviewed the compensation report of the 2015 Annual Report as well
as the agenda items for the 2016 AGM and our deep-rooted concerns regarding
poor corporate governance at gategroup have been confirmed once again. The
following is an overview of our findings with regard to the compensation
report of the 2015 Annual Report and agenda item 9.2.:
- CEO compensation from 2014 to 2015 doubled if you assume year-end share
price. Adjusting for the fact that the CEO only worked nine months,
actual compensation almost tripled, despite a deterioriation in
operating results, several one-off charges and a substantial net loss
for the year. This remuneration is more than 6x the total compensation
of the CEO of the best-in-class company in the industry, which has been
growing five times faster at twice the EBITDA margin. (Note 1)
- Other members of the executive management board received a compensation
increase of more than 30% or virtually doubled their compensation if
you adjust for the fact that one member left in January 2016 and
received no share award. (Note 2)
- The shares from the 2015 ELTIP award will vest 100% in 2019 even if the
EBITDA margin falls below the lower end of the margin guidance in 2018.
(Note 3)
- Overall, management compensation in 2015 is excessive compared to the
compensation in 2014 and given the deterioriating results of the
company. (Note 4)
- The board's proposal to increase the average maximum pay per executive
management board member by almost 70% in 2017 vs. the average maximum
pay in 2016 is excessive. This proposal also corresponds to an increase
of over 70% from the excessive actual compensation in 2015, which was
again 60% higher than the actual compensation in 2014. (Note 5)
- The proposal of a CHF 17.8 million maximum aggregate amount of
compensation for the executive management board for 2017 represents an
estimated transfer of almost 20% of the expected net profit of the
company to the top five executives. (Note 6)
- No clear, transparent and ambitous targets have been set by the company
to explain what level of performance will trigger this maximum pay.
In summary, remuneration for management has increased substantially while
operating results in 2015 have deteriorated. The long-term share awards
will vest even if operating results deteriorate further. Consequently, we
fail to see any alignment between executive pay and shareholder interests.
The proposal to increase the maximum possible compensation for 2017 by 70%
is excessive. The lack of clear targets that would trigger this maximum
compensation is shocking.
Based on the information provided above, we strongly encourage you to vote
'No' on agenda item 1.3 and agenda item 9.2.
Should you have any further questions or any suggestions, please do not
hesitate to contact us. We look forward to the vote at the upcoming AGM.
Sincerely,
<pre>
RBR Capital Advisors AG Cologny Advisors LLP
Rudolf Bohli Jonathan Herbert
</pre>
NOTES
Note 1
The former CEO was awarded CHF 2.8 million in 2014 which included CHF
740,000 for his accumulated pension award. The current CEO was awarded CHF
4.4 million for nine months (CHF 5.6 million with year-end share prices) or
CHF 7.5 million on an annualized basis, even with the significantly worse
results for shareholders. Given that he is new to the job and new to the
industry, it is fair to assume that a significant part of his first nine
months was spent to know the customers, suppliers and the key employees of
the company.
For the DO&CO 2014/2015 business year, CEO Attila Dogudan and CCO Gottfried
Neumeister received a total remuneration of EUR 1.1 million and EUR
865,000, respectively. For the first three quarters of the 2015/2016
business year, the DO&CO Airline Catering segment posted top line growth of
21.3% and an EBITDA margin of 11.4%.
We simply fail to see any logic or alignment with shareholders in the
pattern for pay awards granted by the board.
Note 2
In 2014, total pay for nine executive management board members excluding
the CEO was CHF 10 million, or about CHF 1.1 million per member. In 2015,
total pay for four executive management board members excluding the CEO was
CHF 5.9 million, or about CHF 1.5 million per member. It should be noted
that David de la Torre, the former Chief Commercial Officer, left the
company in January 2016 and hence did not receive any share awards. As a
result, the remaining three executive management board members received
closer to CHF 2.0 million in 2015. This is almost as much as the former CEO
was paid in 2014, excluding the pension scheme award, and almost double
what the average executive management board members received in 2014.
Again, we fail to see any logic in the huge pay inflation.
Note 3
According to our calculation, 100% of the shares will vest in 2019 even if
the performance of the company is below the lower end of their EBITDA
margin guidance of an improvement of 25bps p.a. (cf. Figure 1 below). We
estimate that 100% of the shares will vest if the company achieves an
EBITDA margin of around 5.2% in 2018 (assuming organic revenue growth of 3%
p.a. since 2015, D&A of CHF 60 million, financial expenses incl. associates
of CHF 20 million, an effective tax rate of 22% and minority interests of
CHF 2 million). Clearly, shareholder interests and management remuneration
are not aligned.
Note 4
Management compensation at gategroup is excessive and misleading given the
performance of the company. The CEO receives a package of CHF 4.4 million
for a company that is loss making and did not show any signs of operational
improvement in 2015. Furthermore, the share grant dated 1st of May 2015
shows that the shares were granted only one month after the new CEO joined
and have nothing to do with his performance. In addition, at year-end 2015
the share grant was worth about CHF 1.3 milion more than in May. We would
argue that his actual pay was CHF 5.6 million rather than the published CHF
4.4 million. It should also be noted that this is a compensation for nine
months on the job for a first-time CEO with no industry experience and no
operational improvement of the company during the period under review.
Note 5
At the 2015 AGM, the board asked for the approval of a maximum remuneration
package for 2016 of CHF 21.2 million for ten members including the CEO. Now
the board is asking for CHF 17.8 million for only five members. The average
pay per executive board member thus increases by almost 70% from CHF 2.1
million to CHF 3.6 million. Even assuming that the five members who left
the company had a maximum pay well below the average, we fail to see what
supports such a dramatic increase.
With CHF 10.3 million of aggregate compensation for five executive board
members for 2015, actual pay per member increased by 60% to CHF 2.1 million
vs. 2014, for which CHF 12.8 million was paid for a total of ten members.
Note 6
The board is asking the shareholders to increase the maximum payout to
management to CHF 17.8 million in 2017 from an already excessive pay level
of CHF 10.3 million in 2015. Given the management's consistent low-balling
of the guidance and the failure to disclose the targets for reaching this
maximum payout, we have to assume once again that this payout will be
triggered at a very low threshold of operating performance. In any case,
CHF 17.8 million will be a substantial part of the net profit of the
company for 2017. We estimate that this could easily be 20% of the expected
net profits of the company, and it would only go to the top five
executives.
