Aristocrat Leisure (ALL) 2016 AGM Voting Intentions

Company/ASX Code : Aristocrat Leisure Limited (ALL)
Registry : Boardroom Pty Ltd
Poll/Show of Hands : Poll on all items
Webcast : Yes
Venue :
11am Aristocrat Head Office, Building A, Pinnacle Office Park
85 Epping Road, North Ryde
Sydney, New South Wales
Monitor : Ms Carol Limmer
AGM Details / NoM : Wednesday 24th February, 2016
Item 1: Consideration of financial accounts and reports

Aristocrat Leisure is involved in the design, development and distribution of gaming content, platforms and systems as well as on-line social gaming and real money wager markets. It is essentially a technology company.

Financial performance over the past 12 months has been very sound. NPAT is up 47.1% at $186.4m, NPATA (NPAT before amortisation of acquired intangibles) is up 78.9%, operating cash flow is up 175.6%, Revenue is up 88.6% and total dividends have increased from 16c to 17c per share. The share price has increased from $5.84 to $8.61 and EPS is up 32%. Over 3 years to September 2015, Aristocrat was the fifth top performing stock in ASX100 based on share value appreciation. 

Aristocrat is reaping the cash flow benefits from their VGT acquisition and the continuing implementation of their 5 year plan. There has been strong growth in their North American business with a $156.8m improvement in post-tax profit due to quite an extent to inclusion of VGT. Australia delivered significant share gains across key markets with Digital also delivering strong earnings growth due to continued success of Facebook and the launch and growth of ‘Heart of Vegas’ on mobile.  Asia Pacific performance has improved. They have at last divested their loss-making Japan business. Their Annual Report well articulates business strategies and prospects for future financial years.

Aristocrat has a Board renewal program.

ASA Position
Item 2: Re-election of Dr Ian Blackburne as a Director

Dr Blackburne was appointed to the Board in September 2010 and appointed Chairman in December 2010 and is a member of each Board committee. He is also Chairman of Recall Holdings and has been a director of various public companies for over 15 years including Teekay Corp (listed on NYSE), CSR (including as Chairman), Suncorp-Metway and Symbion Health. He was also previously Chairman of the Australian Nuclear Science and Technology Organisation and the Royal Botanic Gardens. Dr Blackburne has had more than 25 years’ experience in the petroleum industry, including as MD of Caltex Australia. He has extensive international commercial, strategic and technical experience. He holds 137,851 shares in the company.

ASA Position
Item 3: Re-election of Mr Stephen Morro as a Director

Mr Morro was appointed to the Board in December 2010 and is a member of the Human Resources & Remuneration Committee and the Regulatory & Compliance Committee. He is also the company’s Lead US Director. 

Mr Morro has over 25 years’ experience in the gaming industry, including 20 years in various roles at International Game technology (IGT). His senior roles there involved him in global operations including development and execution of strategic plans for products, technology, marketing, manufacturing and distribution. He was also previously employed by Harrah’s Entertainment and the New Jersey Casino Control Commission. He holds 35,000 shares in the company.

ASA Position
Item 4: Increase in non-executive directors’ fee cap

The current cap of $2 million was established at the 2013 AGM and the company is seeking approval to increase it from $2 million to $2.75 million. The company emphasises that it does not mean that fees will be necessarily increased to the limit being sought. The reasons given for this request are:

•    For flexibility to increase the number of NEDs and have membership diversity on the Board (currently have 6 NEDs including 2 females, plus the CEO).

•    Increasing time and responsibilities of NEDs.

•    To assist orderly succession planning.

•    CPI increases.

We compared the proposed NED fee cap with other publicly listed companies and whilst it is towards the top end of companies with similar market cap, we propose to support the proposed increase.

ASA Position
Item 5: Grant of performance share rights (PSRs) to the CEO/MD JR Odell

Aristocrat has changed their calculation methodology for determining the number of performance rights to be granted from fair value to face value of shares. An allocation of 282,592 performance rights is being sought for MD & CEO Jamie Odell. The actual value is about $2.43 million. His fixed remuneration is $1.63 million. Mr Odell currently holds 1.1m (vested) shares in the company. During the reporting period his total target remuneration increased from $4.3m to $5.7m and is pay mix has been changed from 38 Fixed/38 STI/24 LTI to 29/29/42. This change primarily reflects the move from the use of fair value to face value, which is a more transparent way to disclosure the executive’s target remuneration. The proposed allocation of PSRs is supported.

ASA Position
Item 6: Adoption of Remuneration Report

The total remuneration for CEO and senior executives appears reasonable.

Following acquisition of VGT in October 2014, a majority of the ALL’s revenue is now generated within USA and a majority of its senior leadership team is based there. ALL has therefore conducted a review of executive remuneration practices in both Australia and USA.

With STIs, there is a 85% target as gateway, payments are capped at 200% of fixed remuneration. Where the target is met, 50% of award is in shares which are subject to up to two years’ deferral.  The Annual Report includes comprehensive detail about basis on which STI payments are made. There are forfeiture and clawback provisions.

The LTI plan has 3 performance hurdles viz TSR, Achievement of Strategic Objectives and EPS. With TSR hurdle performance hurdle there is 50% vesting at 50th percentile and as per ASA guidelines we would prefer it to be subject to a more robust vesting scale ie 50% of TSR proportion vesting at a lower percentile say 30th. However, admittedly TSR makes up only 30% of the whole allocation with the other two performance hurdles accounting for 70%. The LTI has a 3 year Performance Period. ALL believes that three years is a long period for a technology company. A face value approach has been introduced for calculation of LTI grants. There is no retesting.

Whilst there is not a formal policy for NEDs and KMPs to have minimum equity holdings, the company has said that this is actively encouraged. 

Parts of the Remuneration Report appear somewhat confusing (partly due to change in year-end reporting arrangements) and the company has said that this report will be revamped for next year’s reporting. 

The 3 year performance period and TSR vesting scale will be raised at the AGM. 

On balance, and especially because of the change to face value on LTIs, a FOR vote is proposed.

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