Public

Woolworths (WOW) 2016 AGM Voting Intentions

Company/ASX Code : Woolworths Limited (WOW)
Registry : Computershare Services
Poll/Show of Hands : Poll on all items
Webcast : Yes
Venue :
2pm Wesley Conference Centre
220 Pitt Street
Sydney, New South Wales
Monitor : Ms Kerrie Tarrant
AGM Details / NoM : Thursday 24th November, 2016

Woolworths focuses on customers, a hopeful first step to profitability

This company is monitored by Kerrie Tarrant, assisted by Allan Goldin. The monitors had a pre-AGM meeting with Chairman Gordon Cairns, Director Holly Kramer and Investor Relations.

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

Financials

The 2016 financial year was a year of transition, with the first steps in the three-to-five year transformation from a complacent culture to an engaged and listening culture. Woolworths reported a loss of $1,234.8 million, the first one in over two decades. Group sales down 1.2% to $58,086 million and the EBIT margin at 4.4%, was down from 6.75% in 2015, primarily due to lower prices in the move to be regain competitiveness.

Dividends decreased by 44.5% from 2015, with the payout ratio of 79.46%.

Woolworths will not be providing full year profit guidance at this stage. 

Summary



Key events

End of cash burn with the closure of Home Improvement

Five years after the ill-fated entry into the $45 billion home improvement market, and after sinking over $3 billion into it, Woolworths decided to exit it in January 2016 after Lowe’s served notice to exercise its put option in the joint venture. The sale of Masters was finalised in September after Lowe’s had applied to the Federal Court in a dispute over the valuation of its share of assets, among other matters, and in which the Court ruled that the disagreement should be settled by arbitration. The sale to Home Investment Consortium is subject to Lowe’s consent, however the estimated gross cash proceeds for the business will be in the region of $1.5 billion, and $500 million after wind-down costs, and before Lowe’s share of proceeds.

The Home Timber and Hardware business was sold to Metcash in August for $165 million. 

Food and liquor — new operating model

Supermarkets: At the 2015 AGM, Chairman Gordon Cairns said that Woolworths needed to become a listening culture, as opposed to a knowing culture remote from the coalface and customers. To implement this part of the culture change, 1000 staff from group support positions moved into the businesses, and new support staff are required to spend a week in store. Even directors spend a day doing shelf stacking and other jobs to familiarise themselves with the operations.

The new bonus criteria for store managers are voice of the customer, team engagement, sales per square metre, return on funds employed and safety.

Most recent 1Q2017 results show that store customer satisfaction has risen to 79% from 75% in 1Q2016.

In the past year, around $1 billion has been invested in lowering prices. Woolworths closed the gap on a basket of products with Coles in late 2016, and are now working with suppliers on refining categories. 

The focus has recently turned from investment in prices to refurbishing existing stores, with around 80 planned in FY17, while underperforming stores will close.

Home brands have been overhauled, with the introduction of Essentials, a new medium-price brand for food, and Woolworths, to replace Select and Homebrand which were declining in the face of cheaper home brands from Aldi and Coles with perceived better quality.

In 1Q2017 food sales rose 1.7% on the same period the previous year, resulting in a comparable sales growth of 0.7%. 

The CEO has said Woolworths target is to increase food and liquor sales by 4% and volumes by 2%.

The integration of SAP is reported to have been largely completed at the end of FY’16, but with full efficiencies still to be realised.

Woolworths has stated that it wants to improve relationships with suppliers. The recent Federal Court case brought by the Australian Competition and Consumer Commission (ACCC) for making unreasonable demands in its ‘Mind the Gap’ scheme in 2014 was strongly defended by Woolworths as normal behaviour and has attracted negative media. Woolworths has told the ASA that this kind of scheme is not considered normal now, nor would it be practised. The question is, why defend a policy that would not be defended now, particularly in view of the resulting bad media?

Drinks. In 1Q2017 sales for Endeavour Drinks were up 3.8% on the same period the previous year, and comparable sales were up 1.8%. EBIT increased 3% in FY16.

Online sales. There is a general statement in the Annual Report about growth in the online business with respect to the liquor business, but no detail on future strategies. They are strong, but stagnant at $1.5 billion.

Non-core businesses, now ‘portfolio’ businesses with separate operating models

The other businesses have been separated from food and liquor, and have their own boards, CEOs and operating models to pursue their own strategies.

While sales for Hotels and New Zealand food were up, EBIT for both was down in FY16.

EziBuy, the New Zealand online business, is being prepared for sale, and the petrol business received a conditional proposal from Caltex in October to acquire the business. Both businesses performed poorly. 

BigW has been involved in sorting out inventory, and its new CEO has been undertaking a restructure. It reported a 2.8% decrease in sales in 2016, with 1Q2017 showing a further decrease of 5.5% compared with the same period in 2016. It is taking longer to show signs of a turnaround.

There are relocation benefits in the Annual Report for $469,111 for the company secretary, to relocate from Melbourne to Sydney, in addition to $42,725 in 2015, which was explained to ASA as normal relocation expenses.

Key Board and senior management changes

The new Chairman’s five month search for a new CEO culminated in the internal appointment in late February of Mr Brad Banducci, head of supermarkets and formerly head of the liquor business. Mr Banducci took over from Mr Grant O’Brien as Managing Director and CEO.

Three new non-executive directors were appointed to take the place of three retiring directors. They will be voted for at the AGM (see board election resolutions below), making this one of the few top ASX companies to have 50% of females on the board. 

The directors who resigned were Ms Christine Cross, who had extensive retail experience; Ms Carla Hydlicka, also with extensive retail experience in the airline industry; and Mr Allan Mackay, with extensive experience in consumer goods retail.


ASA Position
For
Item 2: Re-election of Ms Holly Kramer as a Director

Ms Kramer is Chair of the People & Policy Committee, Member of the Sustainability Committee and Nomination Committee. She is also a non-executive director of Nine Entertainment, AMP Limited and Australia Post, as well as a director of a regional community-owned telco and a foundation in the US. 

ASA believes that Ms Kramer’s experience in sales, marketing at Pacific Brands and Telstra, and most recently CEO of Best & Less are well aligned with the skills and experience required at Woolworths, and is voting in favour of her appointment.


ASA Position
For
Item 3: Re-election of Ms Siobhan McKenna as a Director

Ms McKenna is currently a Director of Ten Network Holdings (since 2012), Amcil Limited (since March 2016), Nova Entertainment, a former Commissioner of the Australian Productivity Commission, a former Chairman and Board Member of NBN Co Limited, and a former partner of McKinsey & Company.

ASA believes Ms McKenna’s experience and background will be an asset to Woolworths, and is voting in favour of her appointment.


ASA Position
For
Item 4: Re-election of Ms Kathee Tesija as a Director

Ms Tesija has experience in merchandising and supply chain management at Target Corporation in the US until 2016. She is also an independent director of the US telecommunications company, Verizon Communications, Inc., and is a senior advisor and consultant for Simpactful, a retail consulting agency in the US.

ASA believes Ms Tesija’s experience and background will be an asset to Woolworths, and is voting in favour of her appointment.


ASA Position
For
Item 5: Adoption of Remuneration Report

We congratulate Woolworths for considering feedback on the Annual Report, in particular the Remuneration Report, which this year is clearly structured, with a useful remuneration Q&A explaining proposed changes for the new transformation remuneration model designed to incentivise sales from 1Q2017. The new ‘transformation’ remuneration measures only relate to supermarkets and Endeavour Drinks.

As the other businesses in the group have moved to a separate portfolio structure, they have a separate remuneration program to support their own circumstances. 

There is no change to fixed remuneration positioning for what is considered the ‘median’ for the comparator group of ASX 25 companies. The MD/CEO’s fixed remuneration increased to $2.5 million as his appointment as CEO. 75% of the CEO’s remuneration is at risk, assuming maximum vesting.

Other executive KMP received increases in TFR of between 14.6% and 17.4% to align with the market, because their TFR had been below this level.

Changes to short term incentive (STI) performance measures

•    There are five measures for STI: EBIT is 20% (previously 30%); working capital is 20% (new); sales is 20% (no change) customer satisfaction is 20% (no change); and safety is 20% (new). 

•    Return on funds employed (ROFE) has moved from STI to be a long term incentive (LTI) measure.

•    The Group EBIT gateway has been removed. 

Financial measures for STI have been reduced from 80% to 60%, and non-financial measures accordingly increased to 40% from 20%.

There is no change to the CEO’s target and maximum opportunity for STI, being 100% and 125% of TFR respectively. 

There is now a deferral of 50% of the CEO’s STI for two years, payable in shares, with a deferral of 25% for other executive KMP.

ASA’s position is that any STI pay should be based on verifiable financial performance metrics, and at least 50% of any STI award should be paid in equity with a minimum two-year holding lock. The use of non-financial measures must be disclosed. 

No STIs vested in FY16 as a result of the EBIT gateway not being achieved. ASA will be interested to see the impact of removing this financial gateway in next year’s report. 

Changes to long term incentive (LTI) measures

The maximum opportunity has risen from 135% to 200% of TFR for all executive KMP. 

The awards will now be at face value, previously they were at fair value. ASA commends Woolworths for making this change, which has greater transparency.

Performance measures.

•    Relative total shareholder return (TSR) now 33.33%. The comparator group has been narrowed to the ASX30, excluding metals and mining industry companies. The gateway share price is $20.84 (10-day VWAP), meaning no vesting will occur if the share price decreases over the performance period. 

TSR ranking is Minimum at 50th percentile, Target at 60th percentile, while Stretch has been increased to the 90th percentile (more rigorous than the previous 75th percentile).

•    Sales per trading square metre, at 33.33% is a new performance measure, designed to drive sales on trading space.

•    Return on funds employed (ROFE), at 33.33%, has been moved from STI, and is designed to improve return on capital.

From FY16 onwards, performance targets for non-market LTI measures will be disclosed at the end of the performance period, meaning shareholders will have to wait until FY19 to assess whether the hurdles are sufficiently challenging. 

The vesting schedule for each of the three performance measures is:

•    Minimum – 11.66%; Target – 16.66%; Stretch and above – 33.33%

Woolworths shows no signs of returning to their earlier five-year vesting period for LTIs, with three years being considered ‘long term’, just one year longer than ‘short term’.


ASA Position
For
Item 5: Approval of FY17 LTI grant to MD/CEO Brad Banducci

The grant is for 241,220 Personal Share Rights (PSRs), being the maximum LTI component of the FY17 Remuneration package, to be determined at the end of the three-year period, and based on the LTI measures and hurdles outlined in the above Remuneration Report.



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


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