Treasury Wine Estates (TWE) 2015 AGM Report

Company/ASX Code : Treasury Wine Estates Limited (TWE)
Venue :
10am National Wine Centre of Australia (Hickinbotham Hall)
Corner of Botanic and Hackney Roads
Adelaide, South Australia
Monitor : Mr Peter Rae
AGM Details / NoM : Thursday 12th November, 2015
# of Attendees : 74 shareholders/proxyholders and 27 visitors
# Holdings represented by ASA : 455
Value of Proxies : $6.2 million
# Shares Represented by ASA : 730,000
Market Capitalisation : $5.6 billion

Transformation agenda and Diageo acquisition drive improved outlook

Chairman Paul Rayner outlined how the company’s transformation agenda drove a significant improvement in financial performance in 2015. This success was achieved despite the distractions of two failed private equity bids for the company. The Chairman commented that the improvement in performance make it clear that the decisions to rebuff the private equity bids were correct.

The improved performance has been driven by a renewed strategic focus taken under the leadership of new CEO Michael Clarke. Actions taken as part of the renewal include overhead reductions, supply chain optimisation, a separate focus on commercial brands versus premium brands, greater investment in the focus brands and reduction in inventories. While the new strategies have delivered improved results, the transformation is not complete and the Board is focused on a five year plan to significantly improve financial performance and returns to shareholders.

CEO Michael Clarke spoke about a number of the improvement initiatives already in place including supply chain optimisation initiatives that will deliver $80 million in savings by 2020 and cost reductions that will save $55 million in overheads by 2016. He outlined how some of the costs savings will be used to step up marketing investment, mainly in the top 15 brands. Mr Clarke expressed confidence that the strategies to improve the business will help lift the earnings before interest, tax and SGARA margin from the current 12 percent to the high-teens by 2020. Mr Clarke provided some detail on the recent acquisition of the Diageo wine operations and how this will make a significant positive change to TWE’s US business. He highlighted the attractiveness of the acquisition by reiterating the double-digit EPS accretion once merger synergies are realised.

ASA asked a number of questions in relation to board composition, the Diageo acquisition and the remuneration report. With just one female director, the Chairman said that the board focus had been on getting the balance right in relation to skills and geographic location of directors. It is very aware of the limited female representation and will try to address with future appointments.  Three shareholders each asked a question in consideration of reports.

With the company refocusing the business on its premium brands, ASA questioned the acquisition of the Diageo UK commercial wine business. The Chairman responded that the acquisition will improve the overall outlook for the commercial business with the acquired Blossom Hill brand improving the quality of the commercial assets globally.

ASA voted in favour of all resolutions which were overwhelmingly supported by shareholders. However, we raised some issues in relation to the remuneration report including watering down of the deferral component of the short-term incentive plan (STI) and the continued use of three years as a performance measure for long-term incentives (LTI), as opposed to the ASA’s guideline of four years. The board considered the reduction in the deferral period for a portion of the STI was necessary to make the company’s remuneration policy sufficiently competitive to attract the right people globally. The Chairman acknowledged the differences in relation to the LTI performance period but said the Board still considered three years to be appropriate.

ASA spoke about the proposed change to one of the metrics used to measure performance for the LTI with the EPS measure to be replaced by a return on capital employed (ROCE) metric. There will be no vesting of performance rights based on this measure unless there is at least a 0.6% lift in ROCE. While noting that management would still be rewarded for achieving ROCE below the cost of capital, we acknowledged that the new measure now provides incentive for management to lift returns from historically poor levels. The Chairman provided assurances that management will not be penalised or receive a free kick from acquisitions and divestments.

This company is monitored by Mr Peter Rae. Mr Bob Ritchie attended the AGM on behalf of the ASA in Adelaide.