Treasury Wine Estates (TWE) 2015 AGM Voting Intentions

Company/ASX Code : Treasury Wine Estates Limited (TWE)
Registry : Computershare Services
Poll/Show of Hands : Poll on all items
Webcast : Yes
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
ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

After a number of years of substantial underperformance, with falling earnings, inventory write-offs and material write-downs of intangible assets, Treasury Wines seems to have finally turned the corner. While the 2015 result still contained some material items, including restructuring and redundancy costs, the statutory result improved significantly from a net loss of $101 million in 2014 to a net profit of $78 million in 2015. Underlying earnings before interest and tax rebounded materially, up 25%, reflecting strong results in the Australia and New Zealand and Asian businesses as well as stabilisation of the troubled US business. In Australian dollars the US result represented a strong increase due to the strength of the US dollar against the Australian dollar. Europe, Middle East and Africa earnings declined significantly due to continued weakness in the UK due to the highly competitive market. The improvement in earnings resulted in a modest increase in dividends, with the full year dividend up one cent to 13 cents per share, unfranked.

The turnaround seems to validate the strategies put in place by new CEO Michael Clarke (joined in March 2014). The key strategies revolve around refocusing the business from a price taking, capital intensive, agricultural business to a brand-led, marketing organisation. This involves reducing the number of brands, particularly the lower value commercial brands, and increasing the focus on high value premium product. The 2015 turnaround was achieved despite the distractions of two private equity bids for the company. These bids were rebuffed with the Board expressing a view that the proposals undervalued the company. The Board appeared to be supported by major shareholders.

Since balance date TWE has announced the acquisition of the key US and UK wine assets of UK based Diageo for US$600 million to be funded by a A$486 million pro-rata accelerated renounceable entitlement offer with tradeable retail entitlements (PAITREO). This equity raising method is consistent with ASA guidelines. The balance of the acquisition price will be funded by debt, with TWE maintaining prudent debt levels. The US assets appear to be consistent with the strategy of increasing the focus on premium brands, although the UK assets are essentially commercial wine brands.

When announcing the acquisition, TWE also provided guidance for 2016 EBITS* to be in the range of $270 million to $290 million before the impact of the acquisition, well up on the $225 million achieved in 2015 and reinforcing the benefits of its turnaround strategies. Additionally, the Diageo acquisition is expected to deliver low double digit percent EPS accretion in the first full year (2017) following acquisition.

*EBITS = Earnings before interest, tax and SGARA (self-generating and regenerating assets). The SGARA item represents the change in the value of agricultural assets such as grape vines.

ASA Position
Item 2(a): Re-election of Mr Ed Chan as a Director

Mr Chan joined the board in September 2012. He is not a member of any board committees. He brings agribusiness, food, retail and distribution experience to the board. He was previously President and CEO of Wal-Mart China and also held senior positions with Dairy Farm. Mr Chan holds 19,752 ($142,000) shares in the company. He is an independent Director.

ASA Position
Item 2(b): Re-election of Mr Michael Cheek as a Director

Mr Cheek joined the board in September 2012 and is a member of the Human Resources Committee. He brings extensive experience in the alcohol beverages industry in senior executive positions, including 14 years leadership in the US wine industry. He holds 32,142 ($231,000) shares in the company which exceeds the expectations of ASA shareholding guidelines. He is an independent Director.

ASA Position
Item 2(c): Re-election of Mr Gary Hounsell as a Director

Mr Hounsell joined the board in September 2012 and is Chairman of the Audit and Risk Committee and a member of the Nomination Committee. He brings strong accounting and finance skills to the board as well as skills as a professional company director. He is currently a director of Dulux Group Limited and Spotless Group Holdings Limited. Mr Hounsell holds 40,000 ($288,000) shares in the company which exceeds the expectations of ASA shareholding guidelines. He is an independent Director.

ASA Position
Item 3: Adoption of Remuneration Report

The TWE remuneration plan is designed to align with shareholder interests by incentivising management to deliver long-term returns and is broadly consistent with ASA guidelines. KMP receive fixed remuneration, a short-term performance reward payment (STIP) and a long-term performance reward (LTIP). Given the turnaround in underlying EBITS in 2015, key management personnel (KMP) were well-rewarded with STIP payments but there was no vesting of previously awarded LTIP performance rights given the performance targets were not met for the 2013 LTIP. These rights, valued at $1.2 million lapsed. Performance rights with a value of $6 million were awarded in 2015.

Award of the STIP is based on a number of published metrics including a range of financial, operational and behavioural measures. Two-thirds is paid in cash with the remaining one-third deferred into equity for two years. For 2016, the deferral period will change such that half the restricted shares will be deferred for one year and the other half will continue to be deferred for two years. Payment of a portion of the STIP into deferred equity helps align the plan to security holder interests, however ASA guidelines call for a 50/50 mix between cash and deferred shares with a minimum two-year holding lock. We discussed this with Paul Conroy, Company Secretary and Fiona Last, Assistant Company Secretary in our meeting with the company, and acknowledge their comments that the STIP structure is designed to attract the right KMP in overseas markets that have different remuneration practices. 

The LTIP sees KMP rewarded with performance rights that are deferred and tested after three years. ASA guidelines call for a four year performance period and we will continue to discuss this with the company. The maximum value offered is based on a percentage of fixed remuneration which is 200% for the CEO and 150% for other KMP. Vesting at the end of the performance period is subject to two equally weighted measures, relative TSR and compound EPS growth. The EPS measure is to be replaced by a return on capital employed (ROCE) growth measure in 2016. TSR rights only vest at the 50th percentile with 35% vesting at the 50th percentile and then progressive pro rata vesting up to the 75th percentile and 100% at or above the 75th percentile. 

The new ROCE measure means that rights tied to this measure do not vest unless ROCE grows by at least 0.6%. At 0.6% ROCE growth 35% vests with progressive pro rata vesting up to 1.2% ROCE growth. At 1.2% ROCE growth 100% vests. While the starting point of 6.8% ROCE is likely below the company’s cost of capital, we believe the ROCE measure appears to be appropriate as management is only rewarded if it improves the ROCE. The board reserves the right to adjust the ROCE base to reflect acquisitions and disposals to ensure KMP are not penalised or benefit from a windfall. It is unclear at this stage what adjustments are likely to be made for the Diageo acquisition but we will continue to discuss with the company.

The remuneration report contains a table showing actual pay and incentives crystallised in 2015, consistent with ASA guidelines. Overall, the actual cash remuneration received by the CEO and KMP was considered reasonable for a company the size of TWE and was less than total pay shown in the statutory remuneration table which includes an amortisation value for a portion of the outstanding performance rights under the LTIP. The potential STI and LTI opportunity available to executives do appear generous, however they do seem to be genuinely "at risk" as evidenced by the non-payment of STIs and LTIs as shown above.

With the exception of Ed Chan, all directors hold shares in TWE valued in excess of one year’s fees. Mr Chan’s holding is not significantly below his 2015 fees.

ASA Position
Item 4: Approval of Share Cellar Plan

In 2015, TWE introduced the Share Cellar Plan which is designed to encourage all employees to become long-term shareholders in the group. Under the plan, employees can buy up to a maximum (currently $3,000) of TWE shares with the company providing one matched share for each two purchased shares. This seems like a good plan to align staff interests with shareholder interests. The plan is being put as a resolution at the AGM due to a requirement by Californian securities laws given the participation of Californian staff. The overall cost of the plan is likely to be small in the context of TWE’s total cost base.

ASA Position
Item 5: Approval of proposed equity grant to CEO

As part of his 2016 remuneration, CEO Michael Clarke will be granted a maximum number performance rights of 639,506. The rights have been based on his maximum LTI opportunity of $3.4 million, which is two times his fixed remuneration. The notional market price of $5.3166 is well below the current price of $7.20, but this reflects the subsequent market rerating of the stock including the positive reaction to the Diageo acquisition. The terms of the performance rights are consistent with the company’s LTI arrangements. 

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

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