Caltex (CTX) 2017 AGM Voting Intentions

Company/ASX Code : Caltex Australia Limited (CTX)
Registry : Computershare Services
Poll/Show of Hands : Poll
Webcast : Yes
Venue :
10am Wesley Conference Centre
220 Pitt Street
Sydney, New South Wales
Monitor : Mr Roger Ashley
AGM Details / NoM : Thursday 4th May, 2017

On track but some looming bumps in the road

This company is monitored by Roger Ashley, assisted by Pamela Murray-Jones. The monitors had a pre-AGM meeting with the Chairman Greig Gailey.

ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

Financial performance

As an essentially commodity based company, Caltex’s year on year results can be quite volatile and this is reflected in the differences between the NPAT and Underlying PAT figures shown in the Summary table below. The UPAT is calculated using “Replacement Cost of Sales Operating Profit” (RCOP). This measure applies a cost of sales based upon the current, or replacement cost of product, to revenue rather than the actual purchase price.

The reported profits over the last three years tend to show that 2016 was perhaps the return to a “new normal” following the major events in the previous year: the exit of Chevron as a major shareholder, the closure of the Kurnell refinery and sourcing ex-Singapore as well as above average margins from the Lytton refinery.

“Normality” post 2015 has met two major hurdles however in 2016-17. Firstly, following renewal of contract negotiations, the company has decided to terminate its relationship with Woolworths to supply fuel to its outlets and the ramifications of this loss of a key customer are, as yet, unquantified. It appears however that Woolworths’ relationship with its new supplier, BP, has yet to be finalised. Secondly, allegations of underpayment of staff at some franchised service stations has led to a program of audits, the full impact of which remains to be seen. Caltex has stated that its model is viable to support a realistic return to franchisees and that the company will not tolerate illegal payments by its franchisees with the result that there have been terminations of franchise agreements as a result.

In the longer term the company is aware that it is in a “sunset industry” and will have to deal with the impact of the transition from fossil fuels to electric or hybrid propulsion and a reduction in the number of road vehicles as self-driving vehicles and the Uber paradigm becomes ubiquitous. The need to find alternative strategies for growth consequently features as a component of the company’s long term incentive scheme.

Following the closure of the Kurnell refinery in Sydney, refined fuel is being imported from Singapore. To guard against any possible future charges to profits, the company has applied notional Australian tax rates to any profits generated as a result of this change.

ASA focus issues

The company’s policy for non-executive directors’ shareholdings is to require each non-executive director to accumulate shares to the value of the annual base fees within three years of the director’s appointment to the Board. Gender diversity on the Board and in senior leadership positions is company policy and there is an objective to eliminate gender-based pay differences.


For 2016, the CEO’s total actual remuneration was 94.3 times the Australian Full time Adult Average Weekly Total Earnings (based on November 2016 data from the Australian Bureau of Statistics).

ASA Position
Item 2: Re-election of Mr Greig Gailey as a Director

Mr Gailey was elected to the Board in 2007 and became Chairman in 2015.

After 34 years in the petroleum industry with BP, Mr Gailey subsequently was CEO of Fletcher Challenge Energy (New Zealand) and then Zinifex Limited. He is Chairman of the Nomination Committee and external roles include Chairman of ConnectEast and the Australian Advisory Board of Canada Steamships and Deputy Chairman of the Victorian Opera.

Mr Gailey has served on the Board for 10 years and under ASA guidelines will no longer be considered independent if he seeks a further period of re-election.

ASA Position
Item 3: Re-election of Mr Bruce Morgan as a Director

Mr Morgan was appointed to the Board in 2013.

Mr Morgan was a partner with professional services firm PricewaterhouseCoopers (PwC) for over 25 years where he practised as an audit partner with a focus on the energy and mining sectors.

He is the Chairman of Sydney Water Corporation and Redkite, and a non-executive director of Origin Energy, the University of New South Wales Foundation and the European Australian Business Council.

ASA Position
Item 4: Election of Ms Melinda Conrad as a Director

Ms Conrad was appointed to the Board in March 2017 and now seeks election.

Ms Conrad brings to the Board expertise in strategy non-executive director of ASX, OFX Group Limited, The Reject Shop Limited, the George Institute for Global Health and the Centre for Independent Studies. She is also a Member of the ASIC Director Advisory Panel and the Australian Institute of Company Directors Corporate Governance Committee.

Ms Conrad’s appointment is strategically aligned to the challenges currently being faced by Caltex in its franchising arrangements and its Freedom of Convenience strategy (fuel outlets morphing into convenience stores).  ASA questioned Ms Conrad’s workload and despite accepting the Chairman’s response will continue to monitor her performance.

The election of Ms Conrad brings the numbers of women on the Board up to 3 out of a total of 8 directors, complying with the ASA board diversity guideline of “at least 30% of the board should consist of female directors”.  

ASA Position
Item 5: Adoption of the Remuneration Report

The short-term incentive scheme (STI) and the long-term incentive scheme (LTI) is essentially unchanged from last year. Our vote last year was “against”.

Changes that will occur for the LTI commencing in 2017 are that a “strategic growth” component comprising 40% of the LTI award has now been reduced to 20%, with a further 20% now known as a “convenience retail strategic measure.” While a gateway exists for these measures, both the gateway and the targets are subject to Board discretionary amendment. On the positive side however the Board has committed to setting out “how Caltex has performed against all performance measures in the 2018 Remuneration Report including whether it has exercised discretion regarding the return on average funds employed gateway and how the profit target has been measured.”

Our major concerns with the incentive plans are that the STI is payable totally in cash upon vesting and offers a maximum opportunity of 120% of base salary. STI deferral was removed from 2016. Pleasingly there is a financial gateway to the STI, such that RCOP NPAT performance, including the cost of incentives, needs to be at least at 80% of target before any short term incentives are payable.

The LTI performance period is only three years with no holding lock. Some potential deferral applies in that 25% of any equity award under the LTI is retained until such time as the recipient holds 100% of their base salary in equity or the expiration of seven years. 60% of the LTI is based on Relative TSR for which the comparator group is the ASX 100 index, rather than specific companies, on the grounds that there are no similar listed operations in Australia. While the LTI award is converted into shares using actual, rather than fair value which we applaud, the share value is discounted for dividends that may occur between the beginning of the grant period and subsequent vesting.

An actual remuneration table is included in the annual report. Minimal increases have occurred in base pay although the average STI award for senior executives was 95% of target. Including LTI, 5 senior executives received between $1.5m and $2.5m in actual remuneration “earned for 2016”.

While there are some good aspects to the remuneration structure, there are also some aspects which are a cause for concern for us. On balance, we will again vote against the report.

ASA Position
Item 6: Grant of performance rights to the Managing Director & CEO

Mr Segal is to be granted 121,200 performance rights representing 150% of base salary. This equates to a maximum opportunity of $3.2 million at a share value discounted for dividends during the LTI period of three years. In other words, the $3.2 million will increase by both the value of dividends as well as share price fluctuations over the LTI period.

Our vote against on this resolution follows from the rejection of the remuneration report for the reasons given.

The individuals or their associates involved in the preparation of this voting intention have no shareholding in this company. 

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