Bluescope Steel (BSL) 2015 AGM Voting Intentions

Company/ASX Code : BlueScope Steel Limited (BSL)
Registry : Link Market Services
Poll/Show of Hands : Poll on all items
Webcast : No
Venue :
2pm Wesley Conference Centre,
220 Pitt Street
Sydney, New South Wales
Monitor : Mr Rod McKenzie
AGM Details / NoM : Thursday 19th November, 2015
ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

BlueScope Steel (BSL) is undergoing several key changes including the retirement of the inaugural Chairman Graeme Kraehe, the recent retirement of long serving director Ron McNeilly and the issues associated with oversupply of steel, particularly from lower cost centres such as China. There is an ongoing "strategic review" of steelmaking in Australia and New Zealand.

In FY2015, the company returned their best profit performance since the impact of the global financial crisis on the steel sector.  Net profit after tax (NPAT) was $136.3 million - up from the reported $82.4 million loss in FY2014.  Sales from continuing operations rose by 8% to $8.5 billion due mainly to higher export volumes in Australian Steel Products and domestic volumes in Buildings North America. 

Full year underlying earnings before interest & tax (EBIT) was $301.8 million - 14% higher than for FY2014. The previous year’s results were impacted by a number of write-downs of impaired assets, adjustments due to the Steel Transformation Plan and restructuring / redundancy costs.

Earnings per share (EPS) has risen from a loss of 14.8cps in FY2014 to 24.3cps this FY. The company has declared a fully franked final dividend of 3c bringing the total dividend to 6c for the year.

Steelmaking in Australia and New Zealand remains a drag on the business.  The company is presently focussed on improving the cost competitiveness of these two segments.  Closing the steel plant at Port Kembla would make economic sense but this would have a huge impact on the Illawarra community and result in high site rehabilitation costs.  The company's preference is to reduce costs at the plant through negotiations with the unionised workforce to improve productivity and with the NSW government to reduce payroll taxes and WorkCover charges.  BlueScope is targeting $200 million annual permanent cost savings by FY2017.

The New Zealand operations reported an underlying EBIT loss of $33.2 million due to weaker iron sand and steel pricing and lower iron sand despatch volumes. Work to improve the productivity of the NZ business is underway with the aim of NZ$50 million in annual permanent cost savings by FY2017.

Elsewhere in the business, strong returns in the building products segment were achieved through higher volumes and increased margins.

The strong focus on cost management and restructuring of the Australian and NZ businesses should see on-going sustainability of BlueScope whilst maintaining a competitive domestic steel industry in both countries.

ASA Position
Item 2: Adoption of Remuneration Report

The Remuneration Report is relatively concise and easy to read.  The Managing Director and CEO and other KMP executives receive a mix of fixed pay, short term incentives (STIs) and long term incentives (LTIs). There were no "retention awards" made during FY2015.

Over the past 6 years, executive remuneration has been constrained due to challenging circumstances facing the industry - these include over-supply of steel products, high cost structure at the Port Kembla and NZ steel operations and certain government policies that added to the company's cost base (eg carbon tax).  Restructuring of the business has seen improved outcomes and an increase in company profitability.

There was a fixed pay increase of 3% awarded in September 2014, FY2015 STI payments were 48.6% of target for the MD & CEO and the FY2012 LTI awards vested in full.  The MD & CEO did not participate in the 2012 LTI award.

The company includes an "actual" remuneration table in their Annual Report. 

Overall, fixed salaries appear reasonable. BlueScope bases their fixed pay scales on a comparable peer group of companies at around the 60th percentile level.

STI awards are based on a variety of performance measures including underlying NPAT, cash flow from operations, financial and operation excellence, safety and new initiatives.  For the MD & CEO, the actual STI awards range from 80% of base pay for "Target" performance up to 120% of base pay for "Maximum" performance.  However, the actual hurdles are not clearly defined.

The LTI awards are based on a 3 year time frame measure of total shareholder return (TSR) relative to the ASX 100. If awards do not vest, there is a single re-test at the end of the 4th year. The LTI award amounts to 155% of the MD & CEO's base pay if all awards vest. It is noted that 40% of the awards vest at the 51st percentile of achievement and 100% vest at 75% and above. 

Whilst the company is endeavouring to restructure the business and to get it back onto a sound financial footing, the increase in fixed pay (3%) is seen as unnecessary at a time when the company is trying to reduce costs at the Australian and NZ steel mills.  Further, the actual hurdles are considered weak and poorly defined.  Whilst the MD & CEO did not participate in the 2012 LTI award, the other KMP did participate. The company did not pay a dividend during the period July 2011 to June 2014 and the share price had fallen considerably since 2011. 

It is noted that director fees are high for a company of this size and in the company’s circumstances. The Chairman receives a total payment of $500,000 and most other directors receive approximately $200,000. Whilst there was no increase in directors fees this year, the committee fees did rise.  Directors fees are almost double those of Ansell - which is considered to be a comparable company in terms of business size and complexity.

For these reasons, we will vote against the Remuneration Report. 

ASA Position
Item 3a: Election of Mr Daniel Grollo as a Director

Mr Grollo is executive chairman of Grocon Pty Ltd - Australia's largest privately owned development and construction company.  Mr Grollo has been a director of BlueScope since 2006. He brings extensive knowledge of the building and construction industry to the Board.  He is also non-executive director of UBS Grocon Real Estate and a Member of the Prime Minister's Business Advisory Council.

Following the retirement of Mr Kraehe at the 2015 AGM, Mr Grollo will be the longest serving director on the board.  

The ASA supports the re-election of Mr Grollo as a non executive director.

ASA Position
Item 3b: Re-election of Mr Ken Dean as a Director

Mr Dean has been a director of BlueScope since April 2009. He is a director of Santos, Energy Australia Holdings Ltd and Mission Australia. Mr Dean has spent more than 30 years in senior management roles with Shell in Australia and in the United Kingdom.  During his last 5 years with Shell, Mr Dean was CEO of Shell Finance Services based in London.

Mr Dean was CFO of Alumina from 2005 to 2009.  He brings extensive international and financial experience to the board.  

The ASA supports the re-election of Mr Dean as a non-executive director.

ASA Position
Items 4 & 5: Grant of share rights to Managing Director/CEO Paul O'Malley under the STI and LTI Plans

A strategic review of steelmaking in Australia and New Zealand is presently underway. As a result, the company is proposing a number of special arrangements to maximise alignment of the remuneration of executives with the interests of shareholders. These new reward arrangements have shifted the performance emphasis to strategic outcomes over the next 2 years. 

For the MD & CEO, there will be no fixed pay increases for FY2016 & FY2017.

The FY2016 & FY2017 STIs will be merged into a single incentive and will be delivered entirely as share rights (equity). These will be awarded up-front and subject to performance conditions assessed over 2 years.

The STI awards for Mr O'Malley will entitle him to 1,305,685 shares for maximum outcome against all targets set by the board.  This equates to 120% of fixed pay x 2 years divided by the volume weighted average price (VWAP) for the 90 day period to 31 August 2015.  It is noted that the actual hurdles defining Threshold, Target and Maximum are not disclosed by BlueScope. The company will disclose the actual outcome against each performance condition in the FY2017 annual report.  The Financial Measures performance condition is based on targets for NPAT and free cash flow.  The company does not provide earnings guidance and the details of the relevant financial hurdles will not be disclosed in advance.

The FY2017 LTI plan will be brought forward to coincide with the FY2016 award. The FY2016 plan will have a 3 year term whilst the FY2017 plan has an effective 4 year term (to 31 August 2019). 

The LTI plan will be amended to introduce a second performance condition - 50% will be based on TSR and the other 50% will be based on EPS growth.  The TSR component will be subject to retesting in the 4th year (for FY2016 awards) and in the 5th year (for FY2017 awards).

The LTI awards entitle Mr O'Malley to 843,255 shares for each of FY2016 and FY2017. The actual number of rights equates with 155% of base salary divided by the VWAP as above. 50% of the award will be based on TSR performance and 50% will be based on EPS performance.  The unvested LTI awards (for TSR) are subject to re-testing as outlined above.

No TSR rights vest until the relative TSR performance reaches 51st percentile. At the 75th percentile, 100% of the TSR rights vest. 

Vesting of the EPS portion of the LTI awards is based on growth in underlying earnings over the relevant performance period.  At threshold, 40% of the EPS rights vest whilst at the maximum level, 100% of the rights vest.  The board has not disclosed the threshold and maximum levels to be applied for these awards.  The specific underlying EPS compound annual growth rate targets will be set to require a significant uplift in earnings and will take account of the long term business plans, financial projections, market practice and consensus forecasts.

The lack of specific targets and lack of defined hurdles for both the STI and the LTI awards is a concern  It is understood that the business is about to be restructured however, in the interests of transparency, declaration of performance hurdles for share based awards are a definitive metric that can be reviewed by shareholders. 

This, coupled with bringing forward of the FY2017 awards to this year, has added a new level of complexity to BlueScope's Remuneration Report. We are also of the view that the granting of two years’ awards based on the VWAP of $3.41, which is seen as a low point in the cycle, has resulted in a higher number of share rights being awarded to the CEO over the two year period.

For the reasons above, the ASA does not support Items 4 & 5.

ASA Position
Item 6: Approval of potential termination benefits

Item 6 relates to approval for the company to allow share rights to vest upon termination or death or disability of an employee.  A similar resolution was passed at the 2010 AGM.  This item seeks to update the approvals effective for a period of 3 years now that changes have been made to the incentive plans.  Approval of this item gives the board discretion to determine the most appropriate termination package in accordance with the relevant employment agreement and the share incentive plan rules and overcomes restrictions on the termination benefits provisions of the Corporations Act.

Whilst we have reservations about components of the incentives schemes and the actual quantum of executive remuneration as outlined above, we acknowledge that the approval relates primarily to benefits provided in accordance with contractual arrangements. Accordingly, we will support the resolution. 

The individual involved in the preparation of this voting intention does not have a shareholding in this company.

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