Aurizon Holdings (AZJ) 2015 AGM Voting Intentions

Company/ASX Code : Aurizon Holdings Limited (AZJ)
Registry : Computershare Services
Poll/Show of Hands : Poll on all items
Webcast : No
Venue :
10am Sofitel Hotel
249 Turbot Street,
Brisbane, Queensland
Monitor : Mr Michael Waterhouse
AGM Details / NoM : Thursday 12th November, 2015
ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

Aurizon is the largest vertically integrated heavy-haul rail freight operator in Australia with an extensive fleet of locomotives and rolling stock. The company also manages and operates the largest regulated below-rail coal network (CQCN) in Australia. The Regulated CQCN business provides approximately 30% of total revenue from continuing operations and 50% of earnings before tax (EBIT) from continuing operations. 

The company’s outlook sees earnings growth from growing volumes of export commodities from Asia’s ongoing demand for coal and iron ore. The company expects to haul around 210mt–220mt of coal, around 24mt of iron ore and 45mt of freight in FY2016.

Aurizon is targeting gross annual savings from operational and improved efficiencies in the order of AUD $350 million by fiscal year 2018.

Aurizon’s rail freight infrastructure operation and haulage services reflects a long term, large capital requirement operation with many years investment cycle between investment to financial return.

At the end of FY2015, Aurizon’s $11.34 billion total assets had risen from$10.95 billion in 2014. Total assets included $9.9 billion (87%) of Property, Plant and Equipment (PPE) and intangibles ($9.4 billion in 2014). Long term borrowings totalled $2.9 billion at the end of 2015 ($2.8 billion, 2014), while net assets rose to $6.5 billion ($6.4 billion, 2014).

Total revenue for 2015 was flat at $3.78 billion ($3.82 billion; 2014). Net cash generated from operations totalled $1.52 billion ($1.19 billion, 2014). Earnings before interest and taxes (EBIT) improved to $0.97 billion ($0.85 billion; 2014), while net profit after tax (NPAT) rose to $0.60 billion ($0.52 billion; 2014). Earnings per Share (EPS) improved to 28.4 cents (24.5 cents; 2014). The dividend per share was 24cps (up from 16.5cps in 2014).

On 11 November 2014, Aurizon announced on-market share buy-back of up to 5% of its issued share capital, to a maximum of 107 million shares. 15.3 million shares were bought back at a total cost of $69 million.

Future growth

Aurizon’s short term growth in volumes is seen to be flat with increased earnings coming from operational efficiency improvements. Long term growth will come from a number of capital investment programs to increase rail infrastructure and transport efficiencies.

To support an additional 27 million tonnes per annum (mtpa) of coal for export, the first stage of Gladstone’s Wiggins Island Coal Export Terminal Rail Project was substantially completed in the second half of FY2015.

Aurizon’s joint venture with partner Qube Holdings, received Federal Government development approval for the Moorebank freight facility in south western Sydney, with the first stage opening expected in 2017. The Moorebank facility will become the largest integrated warehouse rail terminal precinct in Australia.

Aurizon is continuing initial technical and commercial feasibility assessments to build and operate a multi-user, Pilbara region, iron ore export rail and port infrastructure in Western Australia (with project partners Baosteel Resources, POSCO and AMCI). A final investment decision is expected by December 2016.

Board renewal

ASA recognises the significant leadership contribution of the Board and executives during the initial 5 years as a public company. In this short period, the Board and executives have significantly commenced transformed the company from a government enterprise to a top ASX50 “blue-chip,” transparent, public company. The inaugural Chairman, John Prescott, will be succeeded by Tim Poole following the AGM. 

ASA Position
Item 2a: Re-election of Mr John Cooper as a Director

Mr Cooper became a director in April 2012. He is a non-executive director of NRW Holdings and UGL. He brings more than 35 years’ experience in the construction and engineering sector in Australia and overseas.

ASA Position
Item 2b: Re-election of Mrs Karen Field as a Director

Mrs Field became a director in April 2012 and is currently a non-executive director of Sipa Resources Limited. She is a director of a number of community based organisations including aged care provider Amana Living Inc and the University of Western Australia’s Centenary Trust for Women. Mrs Field and has a strong background in strategy, human resources and project management and more than three decades working in the mining industry in Australia and overseas. Mrs Field and has held directorships with the Water Corporation (Deputy Chairman), Centre for Sustainable Resource Processing, Electricity Networks Corporation (Western Power), MACA Limited and Perilya Limited.

ASA Position
Item 2c: Election of Ms Sam Lewis as a Director

Ms Lewis was appointed to the Board in February 2015. Ms Lewis is currently a non-executive director and chairman of the Audit & Compliance Committee of Orora. Ms Lewis was an Assurance & Advisory partner from 2000 to 2014 with Deloitte Australia. Ms Lewis has significant experience working with clients in the manufacturing, consumer business and energy sectors, including as a lead auditor of a number of major Australian listed entities.

ASA Position
Item 2d: Election of Mr Tim Poole as a Director

Mr Poole was appointed to the Board in July 2015 and will take over the Chairman role from Mr Prescott. He is currently non-executive Chairman of Lifestyle Communities and McMillan Shakespeare, so he exceeds the ASA guideline of not more than five directorships, with a chairman position counted as two. This is particularly as he has just assumed the Chairman role at McMillan Shakespeare and was only recently appointed to the Board at Aurizon. We do however note that he has relinquished a number of other listed directorships this year.

Mr Poole began his career with career with PricewaterhouseCoopers in 1990 and from 1995 to 2007 assisted building Hastings Fund Management and becoming Managing Director in 2005. He is a former Chairman of Asciano (2007 to 2009), and former non-executive director of Newcrest Mining (2007 to 2015) and Japara Healthcare (2014 to 2015).

We will raise our concerns about his workload at the AGM before deciding how we will vote.

ASA Position
Item 3: Grant of performance rights to MD/CEO Lance Hockridge under the LTI plan

This resolution relates to the granting of up to 374,280 performance rights to Mr Hockridge as a Long Term Incentive Award (LTIA), which is tested over a three year period. The value will equate to 100% of his fixed annual remuneration (FAR) of $1.95 million. New shares will be issued or purchased on-market.

The number of rights issued is calculated by dividing the LTIA potential remuneration by the five day VWAP at the time of the award.

The total remuneration received by the MD/CEO in 2015 was valued at $7.62 million and includes the value of incentive awards from past remuneration programs which vested during the year.

As this grant is accordance with the LTI arrangement, which we are supportive of (see item 4), we will support this resolution.

ASA Position
Item 4: Adoption of Remuneration Report

To encourage alignment with shareholder interests, Aurizon’s Board approved a minimum shareholding policy for directors and executives. We note that one of the directors up for re-election falls short of the 100% requirement but accept that the company’s policy on minimum shareholdings was only recently introduced and we look forward to all of the directors reaching the minimum level in the near future. 

The short term incentive comprises 60% of award in cash and 40% of award translated into equity and deferred for one year. For the CEO, the STI is up to 150% of FAR and 112.5% for executives. For FY15, executives received approximately 60-66% of the maximum STI. The CEO received $1.939 million in STIs for FY15 (99% of target).

The long term incentive is equity based and measured over a 3 years period, with a potential re-test at a higher hurdle in the 4th year.

While Aurizon’s 3 year performance period LTIA is below ASA’s preferred 4 years, it does include TSR peer comparison as a measure and we accept that a retest at a higher hurdle is sufficiently rigorous.

The LTI performance hurdles are TSR compared against the ASX100, return on invested capital (minimum of 10.5% required for any vesting, with 100% vesting if over 11.5%) and operating ratio (targeted to achieve below 71.5%, with 100% vesting if OR is under 70%). On the TSR, 30% of the total rights vest at the 50th percentile, with maximum vesting at the 75th percentile.

The individual involved in the preparation of this voting intention has a shareholding in this company.

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