ALS Ltd (ALQ) 2014 Voting Intentions

Company/ASX Code : ALS Limited (ALQ)
Registry : Boardroom Pty Ltd
Poll/Show of Hands : Poll on all items
Webcast : No
Venue :
Brisbane, Queensland
Monitor : Mrs Sally Mellick
AGM Details / NoM : Tuesday 29th July, 2014
ASA Position
Not Applicable
Item 1: Presentation by Chair and CEO

ALS made further significant progress toward its long-term strategy of building businesses around testing, and diversifying into other market sectors and geographies, most notably with the acquisition of oil and gas services provider Reservoir Group, a global provider of technical services to the oil & gas industry. ALS also acquired 3 smaller companies that provide consumer product testing in Asia, lubricant analysis in Australia, and industrial asset care in the US. The acquisitions were funded by a rights issue that raised $241 million and by a US$322 million long-term debt issue.

Alongside the expansionary acquisitions, ALS achieved a sound financial performance in difficult economic conditions. Clients were buffeted by a stubbornly strong Australian dollar and falling commodity prices. Revenue increased marginally but operating margins contracted slightly. The 28% downturn in net profit for the year disappoints but ALS has performed better than almost all of its peers in the testing and inspection market.

Debt has increased substantially over the past four years and is just over its highest level reached in 2009. The acquisition of Reservoir Group will move the company away from reliance on mining and facilitate diversification into the oil & gas sector. Although the debt/equity has increased substantially over the past three years (now at 61.2%) interest is covered (7.2x) by net profit after tax. Shareholders equity increased. ROE dropped by nearly 50% but still exceeded ROC by about 30%.

ALS realised its strategic goal of creating a significant Oil & Gas business and also made a small foray into consumer products testing. The Life Sciences division became a larger relative proportion of the business compared to previous years.

The company continues to evolve and has progressed toward repositioning its businesses from a focus on testing toward taking a more holistic view of data management and packaging a more complete set of technical services to better meet the future needs and operating models of its customers.

ALQ’s share price ranged between $10.64 - $7.05 still well short of the $13.98 high reached in the 2012 financial year. The price jumped on the back of the FY14 results. Dividend total for the year was 39c (franked 50%), down from 48c the previous year.

The Board of Directors is pleased with the company’s progression and is positive about its prospects in the medium and longer term.

ASA Position
Item 2(i) Re-election of Grant Murdoch

Grant Murdoch joined the board in 2011 having been a partner at Ernst & Young and is Chairman of the ALQ Audit and Compliance Committee. Mr Murdoch is also a director of OzForex Ltd, Cardno Ltd, Queensland Investment Corporation and UQ Holdings Ltd. He is Chairman of the Endeavour Foundation, a senator of the University of Queensland, an Adjunct Professor at UQ School of Business and a member of the Queensland Council of the Australian Institute of Company Directors. His 37 years of chartered accountancy experience specialising in mergers, acquisitions, takeovers, corporate restructures and share issues are no doubt of value to ALQ. However, his heavy external work load breaches ASA workload requirements which limit NEDs to 5 board seats. ASA will engage with Mr Murdoch at the AGM before determining our final voting position.

ASA Position
Item 2(ii) Re-election of John Mulcahy

Mr Mulcahy joined the board in 2012 and is a member of the Remuneration Committee. His prior roles include CEO of Suncorp Metway and a number of senior executive roles at CBA and Lend Lease. Mr Mulcahy currently chairs both Coffey International and Mirvac and serves as a director of Brisbane-based GWA Group and the Future Fund. ASA generally supports any director who chairs two public companies and sits on one additional board. In this case Mr Mulcahy chairs two companies and sits on two boards in addition to his commitments at the Future Fund. His heavy workload therefore breaches ASA workload requirements which limit NEDs to five board seats, where a chairmanship counts for two. We are concerned his workload could prevent him from devoting sufficient energies to any one entity with which he is engaged.

ASA Position
Item 3: Remuneration Report

The ALS remuneration report is a comparatively clear, concise and readable document informing shareholders well, especially with regard to maximum potential eligibility for STI & LTI awards, LTIP hurdles, and TSR Comparator performances. Remuneration of NEDs and KMP aligns with ASA policy in most respects.

In light of the company’s less than usually-stellar performance in the past couple of years fixed remuneration for executives and fees for directors were both unchanged. Maximum STIs were not awarded because hurdles were not cleared.

STI for executives is paid as a cash bonus. ASA is broadly opposed to cash based STIs and prefers at least 50% of STI to be share-based and subject to a two year holding lock. LTIs are awarded over a three year performance period. ASA prefers a four year performance period to more closely align KMP’s interests to those of long term shareholders. We would like the remuneration plan to more closely align with these policies in the future.

We applaud the fact that performance hurdles under the LTI plans for 2011 through 2013 are increasing. For example KMP once received 25% of the LTI grant where TSR was at the 50th percentile. Most recently KMP will only receive 12.5% of the LTI grant for such performance. ASA’s preferred position is 30% vesting at the 50.1 percentile, rising with a sliding scale of 2% vesting for each additional percentile such that only exceeding the 85th percentile will result in 100% of the potential award. ASA encourages all companies to move toward this ideal.

The Rem Report also mentions an upcoming review and adjustments of the Remuneration scheme for the 2014-15 year. A key change is likely to be a decoupling of the link between achieving STI payments and LTI awards. The number of LTI performance rights has in the past been linked to the amount of STI bonus earned. This had the effect of linking the STI to long-term performance. The more a KMP earned in STI, the more connected he became to the long-term performance of the company. For more on this issue, see the discussion under Item 3 below.

Overall, we compliment ALQ on the clarity of its report and support most of the remuneration measures contained in it.

ASA Position
Item 4: Grant of performance rights to CEO

Although only mentioned as ‘likely’ in the ‘Outlook for 2014-15’ section of the Rem Report, the Explanatory Notes to the Notice of this AGM reveal that the board has already decided to decouple the link between STI and LTI. For 2013-14 the board has awarded each KMP 100% of his/her potential LTI despite one KMP achieving as low as 30% of his target (one KMP achieved 100%, most achieved 50%). We preferred the linkage between STI payments and LTI awards as it served to more closely connect executives to the long-term performance of the company. This resolution seeks to give the board authority to grant these LTI performance rights to the Managing Director. The rights will vest in three years subject to the clearance of performance hurdles tied to EPS growth, comparative EBITDA, and comparative TSR. Given the excellent long-term performance of the company under Mr Kilmister’s reign we approve of the grant noting however that we would prefer the vesting period to be four years instead of three and that we would prefer STI payments to be more equity based.

ASA Position
Item 5: Approval of prospective termination payments

As a general rule, the ASA opposes pre-approval of termination benefits. However, the termination benefits for which approval is sought here are appropriate. This resolution is not asking shareholders to approve any increase or variation in remuneration outlined in the Rem Report. The ALQ STIP and LTIP describe KMPs’ entitlements to payments to be made in case of cessation of employment. Without the advance shareholder approval sought here, the board couldn’t comply with those STIP & LTIP contractual obligations unless it first received shareholder approval, which is a lengthy and costly process. We intend to vote FOR this resolution in order to allow the board to meet its existing obligations under STIP & LTIP.

ASA Position
Item 6: Adoption of new constitution

The ALS constitution has not been significantly amended since 2001 during which time various changes to the Corporations Act, ASX Listing Rules and general corporate governance practice have occurred. The new constitution brings the company’s governance into line with current legislation and with governance and commercial practices. The main differences concern:

• the issue and transfer of shares,

• meetings, proxy appointments and direct voting,

• directors’ election, remuneration and interest,

• dividend payment methods, and

• indemnity of officers of the company.

As the new constitution does not materially change the rights of shareholders ASA intends to vote FOR the adoption of the New Constitution.

ASA Position
Not Applicable
Item 7: Adoption of the accounts

This is item 1 at most public company AGMs. It would be preferable if shareholders could go straight into general questions about the accounts and the business after the formal addresses.

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