Csx Corporation · NASDAQ:CSX
Csx — Proxy Contest (April 2017)
42 slides from Csx's proxy contest presentation, Apr 27, 2017
Slide 1: 2017 CSX Annual Meeting: Vote FOR the Item 5 Advisory Resolution
2017 CSX Annual Meeting Vote FOR the Item 5 Advisory Resolution in Order to Retain Hunter Harrison as CEO April 27, 2017 For additional information regarding the reimbursement resolution and Mantle Ridge’s recommendation please visit www.CSXAdvisoryVote2017.com
Slide 2: Agenda
Agenda To Retain Hunter Harrison, Vote FOR the Advisory Resolution on Reimbursement 1 1 Appendix: Timeline 31 2 Appendix: Preview of 2018: Thoughts on Harrison's Compensation Package 33 3
Slide 3: Vote for Hunter Harrison to Remain CEO
Vote for Hunter Harrison to Remain CEO Mantle Ridge encourages shareholders to vote the GOLD PROXY CARD FOR the Advisory Resolution providing for Reimbursement so that Hunter Harrison will remain CEO of CSX To Retain Hunter Harrison, Vote FOR the Advisory Resolution on Reimbursement
Slide 4: Vote for Hunter Harrison to Remain CEO: Not a Contested Situation
Vote for Hunter Harrison to Remain CEO This is NOT a contested situation. The CSX Board is seeking input and is not arguing for or against. The Board understands that Mantle Ridge is making the case for why shareholders should vote in favor. To Retain Hunter Harrison, Vote FOR the Advisory Resolutio
Slide 5: Shareholders Have a Choice
Shareholders Have a Choice CSX pays $84MM (plus any associated excess taxes) to reimburse Harrison’s extraction costs Harrison remains CEO Harrison proceeds to transform the Company Harrison resigns in order to preserve the contingent protection of Mantle Ridge To Retain Hunter Harrison, Vote FOR th
Slide 6: Share Price Reaction Since January 18 Evidences Shareholder Expectations
Shareholders’ Expectations of Mr. Harrison’s Impact Are Evidenced by the Share Price Reaction Since January 18 Source: Bloomberg January 18, 2017: Announcement of Mr. Harrison’s retirement from CP on terms that allow him to join CSX Next day reaction: CSX shares jump 23.4%, or $8.63 / share This add
Slide 7: Research Analysts Believe the Company Under Harrison Is Worth 55% More
21 of 21 covering research analysts raised their share price targets for CSX since Mr. Harrison became available. The average of their price targets increased 55% from $37 to $58. This increase corresponds to approximately $19BN of shareholder value. Source: Analysis of available target prices on Bl
Slide 8: On the Job Six Weeks, Harrison Has Already Had an Impact
On the Job for Just Six Weeks, Hunter Harrison Has Already Had an Impact on the Company “And so it begins... with a month of operations under his belt, CSX’s new CEO Hunter Harrison appears to be wasting no time in delivering tangible change. Purported terminal closures, lower headcount and admitted
Slide 9: Reimbursing $84MM Costs Less than 1% of Market Cap Increase
From the date it was revealed(1) that Mr. Harrison resigned from CP with a waiver of his non-compete and may seek a position with the Company, to the date CSX hired him as CEO, CSX shares gained $12.91 per share. This represents a 35% increase. Keeping him will cost <$0.12 per share, or <1% of that
Slide 10: CSX Could Not Have Hired Harrison Without Incurring This Cost
CP required full and fair value for releasing Mr. Harrison from his non-compete Through first-hand experience, the CP Board fully understood the value Mr. Harrison would bring to another railroad, and expected to be fairly compensated for narrowing his non-compete Mr. Harrison effectively prepaid hi
Slide 11: $55MM of the $84MM Settles a Contingent Payment Made by Mantle Ridge
$55MM of the $84MM reimbursement settles a contingent payment made by Mantle Ridge in January Mantle Ridge’s limited partners authorized Mantle Ridge to protect Mr. Harrison from $84MM of extraction costs but only under the contingency that he did not end up working at CSX In January 2017, Mantle Ri
Slide 12: What the Reimbursement Is NOT
The Reimbursement in Question is NOT (1) As of April 25, 2017, Mantle Ridge was the fifth largest shareholder of CSX NOT compensation for Mr. Harrison NOT a reward for past services, or incentive to motivate and align future services NOT a signing bonus, “make-whole”, or other windfall Simply reimbu
Slide 13: NOT Compensation for Mr. Harrison
The Reimbursement in question should not be thought of as a “signing bonus”, “make whole for unvested compensation”, or compensation of any other kind. In order to free himself to work at the Company, Mr. Harrison forfeited more than $90MM in value of vested and about-to-vest compensation and benefi
Slide 14: NOT Compensation for Mr. Harrison (continued)
Compensation Remunerates for work already done Properly incentivizes for future work NOT Compensation for Mr. Harrison (continued) Reimbursement Cash transfer to employee for costs incurred for benefit of the Company This does not remunerate for work done at CP or CSX CP already fully remunerated Mr
Slide 15: NOT a Profit Opportunity for Mantle Ridge
Mantle Ridge will be treated the same as other shareholders As CEO Mr. Harrison will drive benefit to all shareholders; it makes sense therefore that all CSX shareholders should share the cost of recruiting him Post-Reimbursement, as the Company’s fifth-largest shareholder, Mantle Ridge will bear mo
Slide 16: NOT a Backdoor Tax Gross Up
The Indemnity in the Reimbursement is NOT a backdoor “tax gross up” The tax indemnity that the Company would assume serves only to insulate Mr. Harrison from any excess taxes associated with the transaction structure. The indemnity DOES NOT COVER ORDINARY-COURSE INCOME TAXES that Mr. Harrison would
Slide 17: NOT Off-Market: CP Reimbursed Analogous Costs in 2012
CP reimbursed Mr. Harrison for analogous costs he incurred in 2012 In January of 2012, Canadian National threatened to cut off ~$40MM dollars worth of Mr. Harrison’s vested compensation and benefits if he made an effort to become CEO of Canadian Pacific Mr. Harrison was unwilling to accept this cost
Slide 18: What the Reimbursement in Question Is
Reimbursement of $84MM of the costs Hunter Harrison incurred (plus any associated excess taxes) to make himself available to lead CSX, and prevent his resignation A fair and reasonable way to retain Hunter Harrison as CEO An extraordinarily attractive choice from the perspective of cost and benefit
Slide 19: Value Created by Harrison Can Disappear as Quickly as It Appeared
The Value Created by Mr. Harrison’s Joining CSX Can Disappear as Quickly as it Appeared “Nixing the $84 million would send Harrison packing and the share price tumbling.” “CSX CEO Hunter Harrison’s Pay is No Great Train Robbery” Fortune March 24, 2017 If the Company does not reimburse the $84MM, Mr.
Slide 20: No Other Executive Can Deliver as Much Value as Mr. Harrison
In Our View, No Other Executive Can Deliver Nearly as Much Value to the Company as Mr. Harrison ‘“Hunter’s 72 years old but very passionate, energetic and, of course, knows railroad operations better than anybody else,” [Asok] Chaudhuri [,Principle of Heritage Capital and former board member and 26
Slide 21: He Has Received More Top Accolades than Any Other Industry Executive
Railroader of the Year, Railway Age (2002) CEO of the Year, Globe and Mail (2007) International Executive of the Year, Canadian Chamber of Commerce (2009) Railroad Innovator Award, Progressive Railroading (2009) “Turnaround Ace,” Globe and Mail (2014) Railroader of the Year, Railway Age (2015) He Ha
Slide 22: Mr. Harrison's Record Is Extraordinary, Unparalleled and Consistent
Mr. Harrison’s Record is Extraordinary, Unparalleled and Consistent "He's demonstrated, time and again, a unique gift to run a railroad," said Sandy Pomeroy, a portfolio manager at Neuberger Berman, which owned 1.2 percent of CSX shares as of Sept. 30 and is the Company's 10th largest shareholder. "
Slide 23: Consistently Driving Industry-Best Efficiency
Hunter Harrison is a legendary railroad executive whose transformations at three Class I railroads have, in each case, driven market-leading operating and financial performance. His transformations lower operating ratio (“OR”) – the essential metric of efficiency and profitability – to record low le
Slide 24: Consistently Creates Tremendous Shareholder Value
His transformations have created enormous shareholder value, and consistently created more value than the industry average or his best peers did during the comparable periods. Mr. Harrison Consistently Creates Tremendous Shareholder Value – Outpacing the Industry Average and Next Best Peer Source: P
Slide 25: Operating Improvements Are Enduring
The Operating Improvements that Mr. Harrison Effects With Precision Scheduled Railroading are Enduring Source: Bloomberg Canadian National Operating Ratio, Annual Canadian Pacific Operating Ratio, Annual January 2003 Harrison becomes CEO of CN December 2009 Harrison retires from CN June 2012 Harriso
Slide 26: Shareholder Value Created Is Enduring
The Shareholder Value Mr. Harrison Creates Implementing Precision Scheduled Railroading is Enduring Source: Bloomberg Canadian National Share Price Canadian Pacific Share Price January 2003 Harrison becomes CEO of CN December 2009 Harrison retires from CN June 2012 Harrison becomes CEO of CP January
Slide 27: Cost-Benefit Analysis Widely Understood; Reimbursing Hunter Strongly Supported
The Cost-Benefit Analysis is Widely Understood, and Reimbursing Hunter Appears Strongly Supported “While it’s an elevated number we believe shareholders should be comfortable with CSX paying Hunter his back compensation given it represents ~10c of EPS and Mantle Ridge bringing Hunter to CSX has crea
Slide 28: Reimbursing Hunter Appears Strongly Supported (continued)
The Cost-Benefit Analysis is Widely Understood, and Reimbursing Hunter Appears Strongly Supported (continued) “If you look at the compensation package that he had to give up at CP in order to take the CSX job, that’s essentially less than 10 cents a share on what CSX will spend to get him to offset
Slide 29: Reimbursing Hunter Appears Strongly Supported (continued)
The Cost-Benefit Analysis is Widely Understood, and Reimbursing Hunter Appears Strongly Supported (continued) “Interestingly, CSX has not agreed to Hunter Harrison’s make-whole payment, choosing instead of put it up for shareholder vote at the annual general meeting, which we think should easily pas
Slide 30: Shareholders Have a Choice
Shareholders Have a Choice CSX pays $84MM (plus any associated excess taxes) to reimburse Harrison’s extraction costs Harrison remains CEO Harrison proceeds to transform the Company Harrison resigns in order to preserve the contingent protection of Mantle Ridge To Retain Hunter Harrison, Vote FOR th
Slide 31: Vote for Hunter Harrison to Remain CEO
Vote for Hunter Harrison to Remain CEO Mantle Ridge encourages shareholders to vote the GOLD PROXY CARD FOR the Advisory Resolution providing for Reimbursement so that Hunter Harrison will remain CEO of CSX To Retain Hunter Harrison, Vote FOR the Advisory Resolution on Reimbursement
Slide 32: Agenda
Agenda To Retain Hunter Harrison, Vote FOR the Advisory Resolution on Reimbursement 1 1 Appendix: Timeline 31 2 Appendix: Preview of 2018: Thoughts on Harrison's Compensation Package 33 3
Slide 33: Appendix: Timeline
Mantle Ridge and Hunter Harrison proposed that he retire from CP early with a waiver of his non-compete that would allow him to work at a number of Class I railroads including CSX CP was willing to grant the waiver, but only if Mr. Harrison incurred more than $90MM in extraction costs by forfeiting
Slide 34: Agenda
Agenda To Retain Hunter Harrison, Vote FOR the Advisory Resolution on Reimbursement 1 1 Appendix: Timeline 31 2 Appendix: Preview of 2018: Thoughts on Harrison's Compensation Package 33 3
Slide 35: Harrison's Compensation Package: $17MM Per Year for Four Years
$2.2MM in salary per year Targeted annual bonus of $2.8MM per year Option award we value at $12MM per year That’s $17MM/year x 4 years = $68MM total for four years(1) Mr. Harrison’s Compensation Package: $17MM Per Year for Four Years (1) These amounts are based on economic value as we view it and do
Slide 36: Option Grant Has Economics of an Out-of-the-Money Option
The economics of this option are best measured with reference to CSX’s share price before the announcement of Mr. Harrison’s availability to join the Company that drove shares up 23.4% in a single day (January 19, 2017) Since the strike price was based on the date-of-grant price, he will receive no
Slide 37: CSX Used a Similar Methodology for Its Most Recent Grants
(1) CSX used this value for the purposes of determining the size of its option grant and not for accounting or proxy statement summary compensation table purposes CSX valued options granted on February 22, 2017 using a similar methodology: (1) CSX Used a Similar Methodology When Characterizing its M
Slide 38: Economic Value of Option Award Is $48MM
$5.37 per option is based on a Black-Scholes valuation using: an unaffected price of $36.88 (the closing price on the last day prior to the announcement that Mr. Harrison had separated from Canadian Pacific with a waiver of his non-compete) as the prevailing price; $49.79 strike price; 6.25-year exp
Slide 39: Option Award Is Effectively Out-of-the-Money and At Risk
50% of the options are performance-vesting with robust performance goals 50% of the options are time-vesting at an elevated strike price The strike price is $49.79, or almost $13 per share over the unaffected price(1) Mr. Harrison will need to create ~$13 per share of value (a 35% increase from the
Slide 40: Components of Targeted Compensation Value of $17MM per Year
Notes Values are before discount for performance hurdles. Package consists of base salary of $2.2MM, annual incentive target of $2.8MM and 10-year stock options covering 9MM shares (50% performance-vesting and 50% time-vesting). Components of Targeted Compensation Value of $17MM per year So While $9
Slide 41: 87% Effectively Performance-Linked Targeted Compensation
Notes Values are before discount for performance hurdles. Package consists of base salary of $2.2MM, annual incentive target of $2.8MM and 10-year stock options covering 9MM shares (50% performance-vesting and 50% time-vesting). Components of Targeted Compensation Value of $17MM per year …$15MM of $
Slide 42: Notice: Presentation Disclaimer
Notice PRESENTATION DISCLAIMER This presentation contains information and other content (“Third Party Content”) relating to CSX Corporation (the “Company”) by persons not affiliated with Mantle Ridge LP (“Mantle Ridge”), including as derived from SEC filings and other reports by the Company and othe