Public

Woolworths (WOW) 2015 AGM Voting Intentions

Company/ASX Code : Woolworths Limited (WOW)
Registry : Computershare Services
Poll/Show of Hands : Poll on all items
Webcast : Yes
Venue :
1pm Wesley Centre
220 Pitt St
Sydney, New South Wales
Monitor : Mr Allan Goldin
AGM Details / NoM : Thursday 26th November, 2015

This company is monitored by Mr Allan Goldin and Ms Kerrie Tarrant. 

Item 1: Consideration of accounts and reports

The year to date has seen a number of senior executives departing; profit downgrade after profit downgrade; a slew of negative stories: Big W’s new inventory system leading to problems with supply; speculation over whether Masters will be sold; the CEO announcing his departure; the Chairman responding to the chorus of criticism by leaving; shortly followed by the departure of two independent directors who have some retail experience.

At the end of October, the share price had dropped from $34.70 (in February) to $24.20; the CEO, who is filling the role until a replacement is found, announced that nothing had improved in the first quarter and that profits could be as much as 35% lower for the first half of FY16.

Amidst all this is the media speculation that Woolworths is a takeover target, which it could be of course, but it would be a huge ask. This company is undoubtedly having huge problems, but it still generates more than $60 billion of revenue, and even after taking off all the redundancy, business transformation costs etc, has an EBIT of $3.3 billion, and despite the steep fall the market cap, is still $30.6 billion.

So where is Woolworths going? Outside of regular media leaks, the company doesn’t really say much, but we do know it is not looking to sell Big W — at least not yet, as in its current state it is not an attractive purchase. The transformation is starting to gain some traction: a shopping basket of goods is considerably cheaper; prices appear to be competitive with Coles; New Zealand supermarkets are improving; and liquor still makes such good profits it won’t tell anyone what they are. The company has taken a bold step and cut its ties with Qantas to launch a brand new loyalty scheme. The prospective CEO may not be a retailer, but if not he/she will likely be someone with experience in dealing with retailers, not the CEO of a manufacturing concern. 

What we are waiting to hear: last year the buzz from the company was digital, with online revenue of $1.2 billion. Now it’s quiet, online growth obviously has slowed, and what does this mean for future directions? Last year, the company earned $637 million from property sales, but there is no word on likely sales this year. Will the company sell Masters? There are still a few, including the ASA monitor, who think that with the right strategy, Masters has a bright future; many more think otherwise; and the new Chairman is not letting on. Hopefully, after a very short period, the new CEO will stamp his/her mark on the future of this costly move. 

The biggest question of all is when will Woolworths’ supermarket market share increase and continue on an upward trend?


ASA Position
For
Item 2a: Election of Mr Gordon Cairns as a Director

Mr Cairns has extensive Australian and international experience as a senior executive. He was CEO of Lion Nathan Limited, and has held senior management positions in marketing, operations and finance with PepsiCo, Cadbury Limited and Nestle. Mr Cairns is Chairman of Origin Energy and a non-executive director of Macquarie Group.

Mr Cairns joined the board as Chairman, which is unusual and also speaks to other issues that the company has. He has a very heavy workload, as Origin is also a company with a number or serious problems, so we have to hope if there are any workload concerns, that we will quickly see the Macquarie directorship disappear.  ASA will be voting undirected proxies in his favour.


ASA Position
For
Item 2b: Re-election of Mr Michael Ulmer as a Director

Mr Ulmer has extensive experience in the accounting and banking sectors. He was the Deputy Group Chief Executive at National Australia Bank (NAB) from October 2007 until he stepped down from the Bank in August 2011. He is a director of Lend Lease and sits on the boards of the National Gallery of Victoria and the Melbourne Symphony Orchestra.

Mr Ulmer has been a non-executive director since 2012, so was there when the company started to lose direction and he wasn’t thought to have the retail expertise to become Chairman. Interestingly, he is one of the at least 3 NEDs on the board to have a maths major. As a corporate memory of what was done wrong is important, ASA will cast its undirected proxies in his favour.


ASA Position
For
Item 3: Adoption of Remuneration Report

In line with the comparatively poor financial results, the decision to pay no short term bonus clearly aligns with shareholders who have watched their investment plunge in value. For this reason, Mr O’Brien, in his last full year with the company, received $2,670,166 in actual total remuneration.

The STI criteria is acceptable and will be better when the suggested changes are made, however it is all paid in cash. ASA guidelines, and the vast majority of ASX 200 companies, have a percentage of STI awarded in equity, often with a holding period. If that had been the case here, maybe senior executives would have more personally understood the pain we shareholders are enduring.

Woolworths’ LTI used to be tested over a five-year period, then as an increasing number of others are extending their plans to four and five-year terms, they moved back to three years with the claim that it ties in with the length of their business strategy. As many claim, the problem with Masters was the lack of a long-term plan, maybe the company should go back to thinking long term.

One of the LTI hurdles is cumulative EPS, however for each for the last four years when the performance rights are issued the hurdle has decreased. If you are continually reducing a hurdle it is not a meaningful target.

On the second LTI hurdle, TSR, even though Woolworths is a top 10 company, it measures itself against the ASX 100 and then pays out half of this bonus when it just edges above being average.

ASA is concerned about the lack of transparency resulting from Woolworth’s use of so-called “fair value”. For example, the number of bonus rights the CEO received is said to be 67.5% of his fixed salary. However, instead of dividing the dollar amount of the salary by the actual share price, the use of this discounting method means that Mr Obrien received 67,514 performance rights, whereas if this calculation was based on the actual share price on 30 June 2014, he would have received 41,233 rights — which means it was not 67% of his salary, but 110% of it. Very happily, the company has informed us that this will be clearly spelt out in the Annual Report next year so shareholders will know what is happening.

All of the above means that normally, we would have followed our vote of last year and also vote against this year’s report. However, as the Chairman Gordon Cairns has assured us, the Board is prepared to undertake a complete review of their remuneration strategy. In particular, the Board will review STI, and the balance between cash and equity that vests, change the comparator group that they measure themselves against from the ASX 100 to a more closely aligned group, and will be transparent on how share rights are awarded. For this reason, we will vote our undirected proxies in favour.



The individuals involved in the preparation of this voting intention have a shareholding in this company. 


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