Sachem Head Sends Letter to US Foods Stockholders
Believes Change is Needed in the Boardroom in
Visit www.makeUSFDdeliver.com for Additional Information and Resources, Including New Investor Presentation
Encourages Stockholders to Vote on the GOLD Card to Elect Sachem Head’s Five Highly Qualified Nominees
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Image 1 (Graphic: Business Wire)
Sachem Head also released a new investor presentation, which is available at www.makeUSFDdeliver.com.
The full text of the letter is below:
Dear Fellow US Foods Stockholders:
We beneficially own approximately 8.7% of
USFD has underperformed since its IPO
The Company’s underperformance relative to its peers and the broader market with respect to total stockholder return is evident over nearly every relevant time period.
Relative Cumulative Total Shareholder Return as of |
||||
Time Period |
USFD |
SYY |
PFGC |
S&P 500 |
1 Year |
(3%) |
10% |
(6%) |
5% |
3 Year |
9% |
36% |
30% |
54% |
5 Year |
39% |
93% |
117% |
98% |
Since IPO |
66% |
112% |
109% |
127% |
Note: Total shareholder return with dividends re-invested in security. Source: Bloomberg |
This disappointing performance cannot be explained away by blaming COVID-19. Ever since the Company missed its guidance in
The Company is trying to mislead and distract stockholders by cherry-picking time spans that show a favorable 1-year total shareholder return. We think stockholders are tired of the Company trying to hide the facts. The reality of being a long-term
The Company has lower margins than Sysco – and continues to lose ground
At its analyst day in 2018,
Since our public engagement with the Company began, management has departed from its previous frankness regarding this topic and will no longer address the margin gap with Sysco in public. To us, this suggests that the current management team lacks the operational confidence in its ability to narrow the margin gap and would prefer it if the topic simply went away.
Any incremental improvements in the Company’s margins over time have been met or exceeded by Sysco. Without a significant cultural change at the Company, there is no reason to expect that the future will be different than the past – market consensus estimates expect the margin gap to widen from calendar year 2019 to calendar year 2023.
Although we are focused on the Company’s network inefficiencies, we understand and agree that the customer experience is a vital aspect of the Company’s business and can’t be ignored. Based on customer feedback, we believe the most important drivers of customer satisfaction are receiving everything they ordered, on time, and at a reasonable price. Anecdotally, our research suggests that the Company’s supply chain issues drive weak relative fill rates and on-time deliveries for customers. We believe that better leadership on distribution efficiency will result in happier customers and enhanced profitability.
We believe that with proper oversight from a refreshed Board with the right expertise, the Company can succeed in closing a significant portion of the addressable margin gap, leading to a clear path to achieving over
Oversight failures
Ultimately, we believe that the Company’s failure to achieve its potential is the result of a Board that has not held management accountable.
Supply chain turnover
One clear area where leadership has come up short is in creating a culture that effectively balances operational and supply chain excellence and an effective sales organization. The most glaring consequence is that since its initial public offering in 2016, the Company has had four different Chief Supply Chain Officers, including a year-long period during the depths of the COVID-19 pandemic when there was no full-time supply chain executive serving in this critical role.
Based on our research, we believe that much of the turnover in the Company’s supply chain organization has been driven by management’s unwillingness to give the supply chain team the authority to implement best practices in response to pushback from the sales organization. We believe this leads to frustration within the executive ranks and explains the frequent departures in this position.
Capital allocation missteps
The Smart Foodservice deal, announced in
History of missed expectations and weak relative performance exiting COVID
Management has chronically reduced and missed guidance – which we believe has destroyed the Company’s credibility with the investment community.
In
In order to determine relative operational execution as we exit the impact of COVID, it is important to look at calendar 2022 performance. Based on comparing calendar 2022 estimates vs. 2019 PF EBITDA, US Foods’ is expected to underperform Sysco by ~20%. It is important to understand that both of the Company’s public peers will surpass their pre-COVID performance in 2022 and are talking about the lessons learned and efficiencies put in place over the past few years.
Bad-faith engagement has further demonstrated the need for change
Sachem Head has consistently sought to reach a constructive resolution with
As the Company recently noted, it is true that we have proposed a variety of potential settlement structures in the seven months we have been engaging with them. We don’t think this is “erratic” – our numerous offers reflect our attempt to be open-minded, adapt to a dynamic situation and potentially reach a settlement that works for all parties – always with the best interests of USFD stockholders in mind. A negotiation is supposed to be built on both sides trying to find ways to reach common ground. In contrast, the US Foods Board has effectively made only one offer throughout all of our discussions, two directors on a twelve-person Board with a “multi-year” standstill. To us, this is not good-faith negotiation and demonstrates a failure to understand the frustration that stockholders have felt for some time.
We believe that the choice for stockholders is clear – a vote for Sachem Head’s nominees is a vote for a refreshed Board of Directors and a cultural reset that will benefit all of the Company’s stakeholders. A vote for the Company’s nominees will reward an entrenched Board of Directors that has tolerated years of broken promises, lackluster performance, and is more concerned with keeping new perspectives out of the boardroom than serving the stockholders.
The key question for stockholders is this: Who do you believe will make
The Board recently released a new “long-range plan” that it claims is already working based on the pre-announcement of first quarter 2022 earnings on
USFD clearly thought these results would be well received by investors, as the Company rarely preannounces earnings, but the share price reaction was muted. During the two days after the pre-announcement, the Company’s share price only increased +1% and only marginally outperformed its closest peer. We believe this reflects investor skepticism in management’s ability to achieve its public targets.
As investors assess the Company’s ability to achieve its long-term plan, it’s worth considering its recent public letter, dated
In our view, we believe stockholders should ask themselves two key questions:
- Would this new plan have ever existed or seen the light of day if the Company wasn’t facing a proxy contest?
- Why should stockholders trust this Board to deliver on a new plan – which looks highly similar to its 2018 predecessor – when last time by their own admission they fell short?
If elected, our nominees will finally give stockholders a Board you cantrust. Our nominees will work collaboratively with the other Board members to enhance operational efficiency, restore credibility with the investment community and reverse the deep-seated aversion to change that has been allowed to permeate the Company’s culture.
The value opportunity: improved oversight and execution can deliver 100% upside
We see an incredible opportunity for
- A cultural reset – we believe that the Company needs to give equal weight to its distribution network and its sales organization. The head of supply chain needs a seat at the table – which clearly has not been a priority based on the level of turnover at that position. This cultural shift needs to be driven throughout the Company and led from the boardroom and by the C-suite.
- Closing the margin gap – we believe that approximately 50% of the margin gap versus Sysco can be closed with minimal disruption to the business, and that there is likely additional opportunity once basic supply chain best practices have been implemented. This can be driven by focusing on areas including improving warehouse labor productivity, better network optimization and greater private label penetration. Ultimately, better execution will improve the Company’s relationships with customers and suppliers and may even enhance revenue as operations run more smoothly. Once the core operations have been fixed, the Company could look to reinvest proceeds into revenue-generating activities and integrate tuck-in M&A into an efficient organization.
-
Restoring credibility with stockholders –
US Foods needs to regain the trust of the investment community by setting achievable and clear targets, stopping the capital allocation missteps and communicating consistently and honestly with investors. And of course, the Company needs to execute. But if these things can be achieved, we believe the credibility deficit will shrink, as will the valuation discount versus peers.
-
Reviewing management performance and setting goals for the future – our nominees would help oversee a full and fair performance review of the current management team and set challenging but achievable performance goals to ensure the status quo is not the future for
US Foods .
We believe that if our nominees are elected they can help oversee the execution of this plan and the Company can realize
We encourage stockholders to immediately vote on the GOLD proxy card for our nominees and to end the status quo at
Sincerely,
Biographies of Sachem Head’s Nominees
We believe Mr. Barber’s substantial supply chain expertise, honed as an executive over more than three decades, would be an extremely valuable addition to the US Foods Board.
We believe Mr. Ferguson’s position as a significant investor in the Company and his extensive strategic, financial, entrepreneurial and corporate governance experience make him an ideal director candidate for the US Foods Board.
We believe Ms. Finard’s food and consumer goods executive leadership experience as well as marketing and operational background would be a valuable asset to the Board.
We believe Mr. Harris’ more than three decades of experience in operational and executive roles at the world’s largest food and beverage company would be extremely additive to the US Foods Board.
We believe Mr. Toy’s extensive food industry leadership experience and multi-functional corporate and financial background make him an ideal director candidate for the US Foods Board.
About
Sachem Head is an investment manager founded in 2012 by
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The information herein contains “forward-looking statements.” Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “seeks,” “could,” “should” or the negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe our objectives, plans or goals are forward-looking. Forward-looking statements are subject to various risks and uncertainties and assumptions. There can be no assurance that any idea or assumption herein is, or will be proven, correct. If one or more of the risks or uncertainties materialize, or if Sachem Head’s underlying assumptions prove to be incorrect, the actual results may vary materially from outcomes indicated by these statements. Accordingly, forward-looking statements should not be regarded as a representation by Sachem Head that the future plans, estimates or expectations contemplated will ever be achieved.
Certain statements and information included herein have been sourced from third parties. Sachem Head does not make any representations regarding the accuracy, completeness or timeliness of such third party statements or information. Except as may be expressly set forth herein, permission to cite such statements or information has neither been sought nor obtained from such third parties. Any such statements or information should not be viewed as an indication of support from such third parties for the views expressed herein.
1 Sysco’s domestic business includes US Foodservice Operations, SYGMA and Other divisions with a corporate overhead allocation based on percent of revenue. See our recently released presentation where we quote several instances from 2017-2021 where the Company’s management has made this statement.
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Investor Contact:
(212) 750-5833
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