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This is written with serious investors in mind, though sometimes they're just drafts in progress. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Tuesday, October 13, 2015

Another year, another attempt to improve exec comp at $FHCO

A few weeks ago, I submitted the following letter to the board of FHCO and its CEO / Chairman OB Parrish regarding executive compensation. Alas, I haven't been a shareholder for the last continuous 12-months, a good thing for my portfolio  since the stock is down more than 50% y/y but a bad thing for myself as shareholder since comp is a strong way to align goals, and they are prejudiced against short-term shareholders.

My effort is to comp execs on ROIC. My reasoning is that once they stopped paying shareholders a dividend to invest in the business their capital allocation decisions should have become paramount.
They haven't, and shareholders suffer.

They SHOULD invest in their business no doubt. The industry has changed - the product is no longer a monopoly - and the company has spent considerable money and efforts to broaden its consumer appeal, but without articulating or explaining the strategy and with no improvement in the goals they seek to attain.

I believe they are going about it all wrong - old fashioned ex-pharma marketing - versus just getting it on shelves, and I've suggested low cost creative and strategic partnerships to no avail. I think they are afraid to make fun of themselves and therefore try something risky (the consumer product is risque).

Whatever ... since I can't effect how they are going to spend their money at least I can try to make sure they understand that cost of money and try to ensure compliance with a return.

So while the board has discretion to consider this proposal it is unlikely hey will oblige. With an average age of 71 years and an average length of service of 14 years this is not a group that invites new ideas.

Dear Mr. Secretary

Last year I wrote a letter to the Board regarding a proposal on executive compensation that I had hoped would be addressed at the annual meeting. However, the letter was sent too late for the deadline.

I am writing a similar letter with substantially the same proposal for inclusion in the proxy materials for the 2016 shareholder meeting (see below).

In the year since I wrote the initial letter, the stock has lost 65% of its value. Concurrently, year-to-date unit sales are up 44% and year-to-date revenues and operating income have grown 33%. So management is likely to receive its bonuses even after a year of shareholder suffering and negative cash flow generation. There is clearly a misalignment.

A compensation system that incentivizes principles of good capital allocation will re-align interests between owners and managers, ensure optimal investments in the business and re-instill confidence that management is making wise, capable and thoughtful decisions that will reward shareholders over the long term. I sincerely hope the Board allows shareholders to consider this proposal at its next meeting.

Long Cast Advisers, LLC

O.B. Parrish, CEO & Chairman
Brian Bares, Institutional Shareholder


The current executive compensation system is based on unit sales and operating margin targets. It has as its greatest virtue, simplicity. It is not ideal but neither is it inappropriate for a single product company in an industry characterized as a monopoly.

However, recent issues have arisen that require exploration of a new executive compensation plan:

The industry is no longer a monopoly.
The company has cancelled its dividend.
The company is seeking to use capital once reserved for shareholders in the form of dividends for internal growth and / or acquisitions.
The company, once a great cash flow generator, is currently a cash flow user.

With these changes, especially the cancellation of the dividend and the recent cash “burn”, it is obvious that the role of management has expanded from one of maintaining market share to one of capital allocation.

I therefore propose that the board terminate the current compensation plan and adopt one based on capital allocation and cash flow. I suggest one of three options: Returns on Incremental Invested Capital (ROIIC) targets, Economic Value Add, or Cash EPS. Any of these would be better choices for a company that diverts capital from its shareholders to fund internal and acquired growth.

A compensation structure that rewards wise, capable and thoughtful capital allocation would be the best way to ensure that the owners of the company, who no longer have access to the company’s capital via dividends, are getting the greatest value for their shares.

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