Tatts Group (TTS) 2015 AGM Voting Intentions

Company/ASX Code : Tatts Group Limited (TTS)
Registry : Computershare Services
Poll/Show of Hands : Proposed poll on all items
Webcast : Yes
Venue :
2pm Ithaca Auditorium
Level 2, Brisbane City Hall
Brisbane, Queensland
Monitor : Mr Malcolm Badgery
AGM Details / NoM : Friday 30th October, 2015
ASA Position
Not Applicable
Consideration of accounts and reports

Tatts is a blue-chip, defensive company that owns or operates a number of appealing assets generally under long-term license agreements with state governments. 

Focussing on the comparable results from continuing operations, Tatts has reported a 12.1% rise in before tax profit (PBT), up $39.5 million to $366.1 million.  It is noteworthy that $33.7 million of this was in savings in net finance costs due to lower prevailing rates, and the receipt of $540 million from the Victorian Pokies Claim.  EBIT from Lotteries was up $16 million, but Wagering was down $8.2 million.  Thus EBIT was only up 1.4%.  EBIT per share (by my calculations) was DOWN 1.53%.

Annual dividend is up 22.2% to 16.5 cents, which is a payout of 93.7% of continuing profits, but in 2013, the dividend was 15.5 cents and in 2012 it was 23 cents, so the group is still on the road to recovery after the loss of the Victorian Pokies Licence.

The results have been affected by investment in the wagering division, including launch of the UBET brand, development of new apps and website, rollout of new “next generation” retail sites, etc., which if the strategy pays off, ought to produce improved returns in years to come.

This was flagged at last year’s AGM.  Unfortunately, a weaker economic climate in regional Queensland led to lower revenue from retail, which was not the case for Tabcorp with its operation in NSW and Victoria.  On the other hand, Lotteries performed particularly well.

We discussed with the company the threats the company faced in terms of disruptive technologies which were referred to obliquely in the Directors’ Report.  CEO Robbie Cooke is ex-CEO of Ltd and understands the power of the internet to transform large sectors of the economy.  Betfair is a system which is a sort of peer to peer tote.  It has failed to gain traction in the wagering community.  The online space has created an environment for corporate bookmakers to gain market share, but this is a space in which Tatts is retaining an increasing share of the migration from retail to digital.  Having said that, the company expects that retail, in which Tatts has exclusivity, will stabilise at 60 % of the market.  It was noted that as Governments are the biggest financial beneficiaries of the lottery space, their legislative power creates an insurmountable moat for cyber lotteries to breach.  The Government response to Uber is political; the response to cyber lotteries is likely to be bi-partisan and extreme.  Cooke also noted that there is cultural pushback against the mega on-line lotteries which have emerged in Europe.  The company keeps an eye on start-ups in the space, and has invested in a few that look interesting.

Highlights for the year:

•    Debt reduction of $520 million making a total of $820 million in the last two years.

•    Doubling bookmaking resources in fixed price space

•    Instant Scratch-Its in Victoria

•    Launch/reconfiguration of Lucky Lotteries and “Set for Life”

•    Expansion of full lotteries offering in convenience fuel outlets

ASA Position
Resolution 1: Approval of Remuneration Report

The remuneration report is relatively easy to understand, and remuneration governance, policy and framework stand to reason given the nature of the company’s undertakings.  It is complicated by the runoff of previous schemes.

Having regard to the quality of management, and the positive outlook derived from new initiatives, the overall remuneration levels do not appear excessive compared with listed companies of this size (market cap $5.7 bill)

Total remuneration for the Managing Director/Chief Executive Officer was $2,841,516. This amount includes an incentive payment of $825,000 (half in performance rights), $29,433 in long service leave accrual (!), $18,783 in super, and amortised cost for his unvested rights of $438,750. His fixed remuneration in 2014-15 was $1.56 million, but in addition he received 450,000 restricted shares over three years as part of his initial incentive package. His contract has been extended for another three years, to 31 August 2018 with a fixed annual remuneration of $2 million, and an “at risk” annual performance incentive up to a maximum of 100%.  Rights are granted at the VWAP for the ten trading days prior to the committee’s recommendation that they be awarded, and are exercisable into restricted shares 12 months after grant (subject to continued employment) and placed under a trading lock for a further 2 years.  These are not part of an LTI Plan, and a three year lock seems reasonable.

The annual incentive plan has been continued this year. More than 1,400 permanent employees in Australia participate in this plan which recognises their capacity to influence the annual operating and financial results and their contribution to other special achievements. 

The allocation of the incentive pool between executives and non-executives is determined each year.

We estimate the incentive pool is approximately $10.5 million which is 2.9% of PBT. The improvement in net finance costs was excluded in calculating the amount of the pool.

Approximately three quarters of the incentive pool in the current year has been allocated to the non-executive members of the incentive plan. For certain executives and senior managers, a mixture of cash and rights is provided in order to ensure long term alignment with shareholder interests. This year, $590,000 of the Key Management Personnel incentive, excluding the Managing Director/Chief Executive Officer, will be cash payments and $470,000 will be in performance rights.

This year, the performance hurdles are less prescriptive but not verifiable, namely:

• Annual financial benchmarks that are linked to NPAT outcomes, providing direct alignment with desired shareholder outcomes. 

• Margin improvement (at an EBITDA level) and EPS improvement to reinforce cost control and capital management respectively.

Fixed annual remuneration for executives are benchmarked at the 50th percentile of its ASX peer group.

ASA Position
Resolution 2(a): Re-election of Harry Boon as a Director

Board member since 2005.  Mr Boon was Chief Executive Officer and Managing Director of ASX listed company Ansell Limited until he retired in 2004, a position which capped a career spanning some 28 years with the Ansell Group. Harry has lived, and worked in senior positions, in Australia, Europe, the US and Canada, and has broad based experience in global marketing and sales, manufacturing, and product development.  He holds a Bachelor of Laws (Honours) and a Bachelor of Commerce from the University of Melbourne.  He is currently Chairman of ASX-listed Asaleo Care Limited (Director since May 2014).  

Within the last 3 years, he was Chairman of PaperlinX and a non-executive director of Hastie Group Ltd. Prior to that he was CEO and Managing Director of Ansell Ltd, Chairman of Gale Pacific Ltd and was a director of Funtastic Ltd.  We note his association with problematic companies PaperlinX, Hastie and Funtastic.  We are however reasonably comfortable with his contributions with Tatts. We note that he has been on the board for 10 years and we intend to ask him about the Board's succession plans.

He holds 150,000 shares which are worth some $570,000 which is in excess of his annual remuneration of $460,000.

ASA Position
Resolution 2(b: Re-election of Lyndsey Cattermole as a Director

Board member since 2005.  Mrs Cattermole holds a Bachelor of Science from the University of Melbourne and is a Fellow of the Australian Computer Society. Non-executive director ASX-listed Treasury Wine Estates (since May 2011) and PACT Group Holdings (since November 2013), former listed public company directorships in last 3 years: PaperlinX Limited (December 2010 to September 2012).

She holds 182,663 shares which are worth nearly $700,000 which is well in excess of her annual remuneration of $190,000.

ASA Position
Resolution 3: Grant of rights to CEO Robbie Cooke

Cooke’s package includes a performance-based incentive entitlement of up to 70% of Fixed Annual Remuneration (currently 1.56 million).  The board has granted him $825,000 half of which is taken in cash, and half in performance rights with an effective lock of three years. This resolution seeks the issue of 103,383 rights which equates to $3.99 per share.  If the resolution is not carried, the balance of the incentive entitlement will be paid in cash.

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

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