Brambles (BXB) 2015 AGM Voting Intentions

Company/ASX Code : Brambles Limited (BXB)
Registry : Link Market Services
Poll/Show of Hands : Poll on all items
Webcast : Yes
Venue :
2pm Wesley Conference Centre (Wesley Theatre)
220 Pitt St
Sydney, New South Wales
Monitor : Ms Mary Curran
AGM Details / NoM : Thursday 12th November, 2015
ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

Brambles is a supply chain logistics company operating in approximately 60 countries with 14,000 employees, best known for its CHEP (blue) pallets.  The company also supplies reusable plastic containers for use in the fruit and vegetable sector and its focus is on the outsourced management of these some 500 million returnable pallets, crates and containers.  Brambles has a network advantage because of the integral role it plays in the customer’s supply chain.  By its focus on “Everything begins with the customer”, it has long term goal of creating value for shareholders, and a moat around its business by shoring up its market dominance. 

Brambles market cap is in excess of $16 billion. At constant currency, sales revenue was US$5,465 million up 8% (1% actual) and operating profit was US$939 million up 8% (1% actual). Underlying profit (based on earnings before interest and tax) was US$986 million, up 10% (including acquisitions representing 2% points of both sales and profit) but actual (earnings after interest and tax) was US$584.4 million down from US$1,267.7 million.  Note during the 2014 year this represented US$683.2 million for the sale of Recall. 

Total shareholder return (TSR) for the year a positive 18% compared with 6% for ASX 200, but return on capital invested (ROCI) was down 0.6%. This reflected increased capital invested from acquisitions.  Target for return on capital invested has been set at an optimistic 20% by FY19.

Dividends increased marginally and the 30% franking is more likely to decrease than increase given the additional international revenue.  

The company completed two acquisitions during the year, the £320 million takeover of Fergusons, an oil and gas container group, operating out of Aberdeen, Scotland.  This is a long term growth acquisition for Brambles which they are confident will be successful, despite the fall in oil and gas prices.  The opportunity is for Brambles to open a new supply chain and complement its existing operations and create value through their experience in equipment pooling experience. The other acquisition was Rentapack, a privately-owned Chilean provider of RPC’s to major Chilean retailers.  Brambles’ goal is to increase market share in South America. 

New is the research and development space is an investment in ‘intelligent pallets’.  There is a pilot program in the US of 12,000 pallets, the idea being feedback from the pallet itself.  Approximate cost of a “dumb” pallet is $18 and Brambles works on a 10 year life span.  

The company is very safety conscious but despite a zero harm policy there was sadly a fatality off-site during the year.  Brambles Annual Report contains a wealth of interesting information, graphs and a comprehensive five year Financial Performance Summary.

ASA Position
Item 2: Adoption of Remuneration Report

Long term is still designated as three years (ASA prefers a minimum of four). Long term incentive (LTI) awards are based on two measures, each comprising 50% of the total awards. Half of the awards are based on TSR and half are based on sales revenue growth coupled with “Brambles Value Added”.

The TSR LTI awards are considered to be too high and vest too quickly, ie 50% vesting if the TSR equals the median ranked ASX100 and 100% by 25% over-performance.  This is up on the previous year, when vesting was 40% at the median.  Additionally, should absolute TSR be negative, LTIs are still payable if the performance hurdle is met. 

It is noted that Brambles uses the ASX100 as the base measure/hurdle for its TSR comparison. The TSR is measured over the same three year period as the LTI awards and is calculated over the three months prior to the start of the three year period, and over the three months prior to the end of the three year period. This is a complex process however the actual numbers and the calculation process used were not reported.

The performance condition for the other 50% of the LTI awards is based on the achievement of sales revenue targets with three performance hurdles set on a compound annual growth rate (CAGR) basis. The sales revenue growth elements are underpinned by Brambles Value Added (BVA) hurdles to ensure quality of earnings is maintained at a strong level. BVA represents the value generated by a business over and above the cost of capital used to generate that value for each financial year.

A complex performance matrix is used to define awards, however the actual CAGR and BVA values used for the various performance periods are not reported.  

The total LTI awards are the sum of the 2 individual parts: the TSR component + the CAGR/BVA component. 

The actual magnitude of the combined short term incentive (STI) and LTI awards is deemed excessive. On top of the quite generous base salaries, the potential STIs total almost 200% of base salary whilst the potential LTI awards add a further 130%.  However, the valuation of grants is based upon market value, which is good.

The maximum opportunity for the CEO is 410% of fixed remuneration, with 190% in cash.  The actual pay for the year was $6,971,000.

The company has a policy for NED shareholdings being 100% of fees after three years, however this does not appear to be strictly enforced, as seen by former director Doug Duncan who retired during the year and did not acquire any shares at all during his three year term. Harvard University studies show shareholding by directors is a key driver in company performance.

The remuneration report of some 15 pages has extensive disclosures but the complexity of the different incentive plans make it difficult for a retail shareholder to comprehend.  The Chairman responds that Brambles is a global company and thus, its remuneration report, like its business is complex. 

ASA Position
Item 3: Election of Mr Scott Perkins as a Director

Mr Perkins was appointed in May 2015 and is a non-executive director of Woolworths and Origin Energy.  He has held senior executive leadership roles at Deutsche Bank including as Managing Director and Head of Corporate Finance for Australia & New Zealand. 

ASA Position
Item 4: Re-election of Ms Carolyn Kay as a Director

Ms Key joined Brambles as a non-executive director in June 2006.  She holds various non-executive positions and is a guardian of the Future Fund.  She has more than 30 years experience in the finance sector and worked as an executive in finance at Morgan Stanley, and JP Morgan. She holds Bachelor of Law and Arts Degree and a Graduate Diploma in Management.  She has a Centenary Medal for services to Australian Society in business leadership.  This is the last term that we would consider her election to be considered as an independent director due to length of tenure (which would exceed 12 years).

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

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