LONDON (Alliance News) - FirstGroup PLC's suffered an expected backlash from investors at its annual general meeting in Aberdeen Wednesday as a quarter of shareholders voted against the company's remuneration report.
In a statement following the bus and rail operator's annual general meeting Wednesday, FirstGroup said 25.5% of shareholders voted against the directors' annual report on remuneration for the year to March 31, and 11% of shareholders voted against the directors' remuneration policy.
In June, activist shareholder Sandell Asset Management warned FirstGroup Chairman John McFarlane in an open letter that the bus and rail operator would face a backlash from investors over its annual remuneration report over concerns regarding corporate governance practices, poor sector expertise, and CEO pay.
Sandell, which holds a 3.1% stake in the FTSE 250 company, noted that FirstGroup CEO Tim O'Toole's remuneration package has more than tripled over the past five years and that he is now the highest paid CEO amongst his peers. However, during this five-year period FirstGroup shares are the worst performing shares in its peer group, having returned negative 8% compared to positive 231% for its peers, said Sandell.
Ahead of the AGM Wednesday there was little indication that Sandell had gathered widespread support from other shareholders. However, the outcome of voting activity at the meeting show that a little over a quarter of shareholders agree with the asset manager and subsequently voted against the report.
FirstGroup pledged earlier this year to turnaround its under-performing businesses, after rebuffing demands by Sandell to break itself up by spinning off its US operations. Sandell said a company breakup would improve shareholder returns, a claim disputed by FirstGroup, even though it currently isn't paying a dividend as it puts money into its turnaround plan.
According to an article in The Financial Times on Sunday, McFarlane again reiterated that the company will not break up its businesses, as Sandell's demands lacked "financial logic". The investor had called for FirstGroup to sell its Greyhound intercity US coach service and spin off its US school bus and transit businesses.
McFarlane told The Financial Times at the weekend: "If they want to get the value out of this, it?s going to take time and there is no alternative...Just get used to it; settle down.?
Sandell Chief Executive Officer Tom Sandell said last month: "We are strong believers in pay for performance. We simply do not believe that a 94% rise in remuneration package is deserved for Mr. O'Toole's 2013/14 performance."
"In fact, the Executive Annual Bonus Plan appears to have been subverted by deficient targets, and has allowed the executive directors to earn a bonus every year despite significant under-performance. The fact that these targets are not fully disclosed to shareholders only increases our concern regarding the lack of transparency," Sandell said.
At the time of the letter, the asset manager acknowledged FirstGroup's recent board reshuffle, though said that "if sector expertise had been available on the board, we believe a number of poor strategic decisions taken over the past few years could have been avoided," and that it remains concerned over sector expertise, specifically relating to the First Student and First Transit divisions.
In response to the shareholder vote on Wednesday, FirstGroup noted that last year the vote against its remuneration report was higher at 29.9% and that remuneration was only the subject of a couple of questions at its AGM.
The FTSE 250-listed transport group said in a statement after the market close Wednesday: "At our AGM today, our shareholders overwhelmingly backed the composition and structure of the board, led by Chairman John McFarlane, and our plans to take the business forward. Across the group we are confident that we have the right programmes underway to build on our market-leading positions and improve performance to create sustainable value."
FirstGroup added that Imelda Walsh, its newly appointed Remuneration Committee chair, will "engage with investors to seek their views and ensure ongoing support for the group's remuneration policy and practices."
In its first quarter results last week, the company said trading in its fiscal first quarter has been in line with its expectations, and the steps being taking to turn around businesses such as the UK bus, US Greyhound coach and First Student operations are delivering improvements.
The company has accelerated its programme to address issues with its contract portfolio pricing at its US First Student educational transport business, making sure it achieves an "appropriate" level of return on contracts it wins or retains.
"Our results to date in this year's bidding season, which we are currently two thirds of the way through, are at the upper end of our planning range. We have achieved average price increases of 4%, with many instances of significantly greater rises,"the company said last week. The company also reported an 88% contract retention rate
In the first fiscal quarter, the group said it is achieving further costs savings at the First Student business and is targeting further savings of USD50 million annually over the medium-term, having delivered USD11 million since the start of the current financial year. It is still expecting First Student's full-year revenue to come in towards the upper end of its own planning assumptions, and for the unit's operating margin to be above 7.5%.
In the Greyhound business, FirstGroup said like-for-like revenue grew 3.4% on the year, driven by demand for long-distance services and like-for-like revenue growth of 6.9% at Greyhound Express. "We expect to see Greyhound's performance continue to improve throughout the year as we work towards our medium term target of a 12% margin," it had said.
UK Bus operations also recorded growth with passenger revenue growth of 2.7% in the quarter, as the company continued improving its commercial offering, driving up volume growth and regaining pricing competitiveness. FirstGroup said it is aiming to restore double digit margins to the UK Bus division by 2017.
Looking ahead, the company said that its programme of "significant network changes" is now nearing completion, "though our management structure is now locally focused to ensure that commercial opportunities continue to be developed," it added.
Its better-performing businesses continue to fare well, with the US First Transit business delivering a "solid" performance in its first quarter after it won new business in paratransit, fixed route and vehicle maintenance. It said it expects to deliver "good" margins with relatively modest capital investment.
UK rail, its largest unit by revenue, posted 6.6% growth in like-for-like passenger revenue during the quarter.
The division suffered a big blow in late May when it lost out on a new giant new rail franchise covering a swathe of southeast England to rival Go-Ahead Group PLC. The deal meant it also will lose its Thameslink franchise, which is being incorporated into the new super-franchise, from September.
It is currently shortlisted for two other UK rail franchise competitions in the current financial year, is in talks with the UK government about extending its First TransPennine Express franchise until
February 2016, and is also in talks with the government about a potential longer direct award for First Great Western during the period when a substantial programme of works will take place on the network.
FirstGroup reiterated last week that it expects a cash outflow of about GBP70 million due to the end of the Thameslink contract. Added to that, it also expects an outflow because contract retention at First Student is at the upper end of its forecasts. It said it currently expects a total cash outflow of GBP100 million for the current financial year.
FirstGroup shares closed up 3.2% at 132.34 pence per share Wednesday, the tenth biggest riser in the FTSE 250 index.
By Alice Attwood; aliceattwood@alliancenews.com; @AliceAtAlliance
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