Notice of Exempt Solicitation. Definitive Material. (px14a6g)
December 16 2020 - 3:16PM
Edgar (US Regulatory)
December 15, 2020
RE: Please Vote Against
“Say-on-Pay” and the proposed Amendment to the 2020 Equity Incentive Plan at
United Natural Foods, Inc (NYSE: UNFI) on Jan. 12, 2021.
Dear Fellow UNFI Shareholder:
Despite last year’s backlash
against executive pay, which saw UNFI’s Say-on-Pay proposal received 27 percent
opposition and the Company’s proposed equity compensation plan nearly defeated,
UNFI persists with troubling pay practices. Accordingly, we again urge fellow
investors to oppose the Advisory Vote on Executive Compensation (Item 3) as
well as the Company’s request for additional shares under the 2020 Equity
Incentive Plan (Item 4).
Since last year’s vote, UNFI, like other food distributors, has seen a
significant boost to its business from the pandemic. However, even this bounce,
which appears temporary given a 14 percent drop in stock price following the Company’s
first quarter earnings report, has failed to compensate for the billions of
dollars in value destroyed by this management team, particularly since the challenged
acquisition of SUPERVALU. UNFI’s shares are not only down 61 percent since the
deal’s announcement in July 2018, but the company has been forced to write-off
almost all of the goodwill associated with the transaction over the past two
years.1
To put the misstep in the starkest terms, UNFI paid $1.3 billion in cash plus
$1.6 billion in assumed liabilities to see its market capitalization shrink
from $2.2 billion to one less than a billion dollars today. Even with UNFI’s pandemic-driven
stock rebound, shares are still down 58 percent over the past five years,
significantly trailing the Company’s food distribution peers and the Russell
3000 more broadly.2
It is against this performance
backdrop that we find the following pay developments in FY2020 particularly
concerning:
·
Lowballed
performance target generated a 140 percent annual incentive payout: The FY2020 EBITDA target used in
the annual plan was not only set below both the target and actual EBITDA
performance for the FY2019 plan, but was set substantially lower than the
FY2020 EBITDA target established for the 2019-2020 PSU award. While these
earlier awards failed to pay out anywhere close to
their target, the lower EBITDA target in this year’s annual incentive award
generated a 140 percent payout, or more than $2.5 million for CEO Spinner.
Shareholders, in short, appear to be paying up for diminished performance
expectations.
This is NOT a solicitation to vote your proxies. Please DO NOT send us your proxy as it will
not be voted.
1
1
The company recorded a $293 million write-down in goodwill associated with the
transaction in FY2019, shortly after the deal closed. In FY2020, the company
recorded a further $425 million in goodwill impairment, including against its
SUPERVALU purchase.
2
For the 5-year period ending Dec. 9, 2020: Russell 3000, +81%; US Foods, +35%
(since IPO in May 2016); Sysco Foods, +86%; Performance Food Group, +108%;
Spartan Nash -14%.
·
CEO Spinner
set to retire with an $8.5 million cash payout: Despite announcing his intention
to voluntarily retire at the end of the fiscal year, CEO Spinner is eligible to
receive severance equal to two times his base salary and annual bonus. In
addition, his outstanding time-vesting equity awards qualify for accelerated
vesting.3
Considering that since Spinner took the helm in 2008, UNFI’s annualized total
return to shareholders is - 3 percent, this appears a textbook case of a
pay-for-failure exit package.
·
New
equity plan share reserve further dilutes shareholders: Despite the highly dilutive 2020
Equity Incentive Plan receiving 47 percent opposition last year, the company is
requesting an additional 3.6 million shares be reserved under the plan,
bringing total basic dilution to over 21 percent. Critically, the company
granted equity awards covering over 6 million shares last year, representing
more than 11 percent of the weighted outstanding share count.
In our letter
to investors ahead of last year’s shareholder meeting, we highlighted numerous
ways in which the board had insulated CEO Spinner and other executives from the
Company’s disastrous performance.4
While we recognize the company has made some changes to its pay practices in
light of last year’s poor Say-on-Pay vote (detailed on page 24 of the Proxy
Statement), the fact remains that the company continues to run a costly
compensation program that is out of synch with performance and which fails to
hold management accountable for the Company’s long-run performance failures.
Accordingly, we urge investors
to vote against both the Advisory Vote on Executive Compensation (Item 3) and
the Company’s proposed amendment to the 2020 Equity Incentive Plan (Item 4).
The Teamsters and its affiliated
pension and benefit funds have more than a $100 billion invested in the capital
markets and have substantial holdings in UNFI.
Lowballed performance target
generated a 140 percent annual incentive payout
Leaving aside the question of
whether it is appropriate for executives to benefit personally from a
pandemic-related surge in their underlying business, it still remains highly
questionable that UNFI’s FY2020 performance merited a 140 percent payout under
the annual incentive plan given the original EBITDA target underlying the
award.
We note that CEO Spinner received
$2.5 million under the annual incentive plan, based on EBITDA of $673 million. However,
and critically, this was based on an FY2020 EBITDA target of $580 million,
which was not only below the $658 million targeted in the prior year’s award,
but was lower than the actual $589 million figure reported for the FY2019
incentive award, which qualified for a 43 percent payout.
This is NOT a solicitation to vote your proxies. Please DO NOT send us your proxy as it will
not be voted.
2
3
CEO Spinner’s outstanding PSUs will continue to vest based on actual
performance.
4
https://www.sec.gov/Archives/edgar/data/919788/000091978819000012/unfiltr.htm
Even more striking, however, is
that the $580 million target in the FY2020 annual incentive award was 24
percent lower than the EBITDA target for FY2020 used in the 2019-2020 PSU
grant, a two-year vesting award that was weighted equally between FY 2020
EBITDA and FY 2020 ROIC performance. In fact, the reduction in performance
expectations is even starker when it is considered that the 2019-2020 PSU
awards excluded EBITDA from the Company’s retail segment, which was expected to
be sold but has subsequently remained at the company, and the results of which
were included in this year’s annual incentive plan performance.
In other words, the FY2020 EBITDA
target used in the annual bonus was the product of a dramatic ratcheting down
of expectations. This makes it exceedingly difficult to agree with the company
when it says: “The [annual incentive] payout amounts reflect performance in
fiscal 2020 that significantly exceeded the established performance objective,
demonstrating the effectiveness of our pay-for-performance incentive plan.”
This statement is also entirely silent on the role the pandemic played in
exceeding those performance objectives and any discussions the Compensation
Committee had over the appropriateness of paying out for a clearly
unanticipated boon to the business. (In fact, the only discussion of COVID-19’s
impact on compensation concerns the decision to award an additional $500,000
PSU to the Chief Legal Officer.)
CEO Spinner appears set to
retire with an $8.5 million cash payout
Simply put, voluntary retirement
should not occasion severance. Still, pursuant to the terms of CEO Spinner’s
amended 2020 employment contract, and as disclosed on page 47 of the Proxy
Statement, Spinner is eligible to receive severance equal to two times his
annual base salary and target bonus when he retires as CEO next July.
Pursuant to the February 2020
amendment to his employment agreement, we note that CEO Spinner agreed to stay
on for another seventeen months, or such earlier date as a successor is
appointed, at which point he will become eligible to receive the severance
payout, as well as vesting of outstanding equity even while staying on as
Executive Chair.
A similarly generous agreement
was entered into with COO Sean Griffin. Griffin, who announced his intention
to retire in July 2020, was deemed eligible to receive a severance payout (equal
to his annual base salary plus annual bonus) if he performed three months of
on-demand consulting, to not exceed eight hours a week. Like Spinner, all
outstanding time-vesting equity awards will be accelerated.
Considering that the compensation
of both individuals, which had grown significantly in target value as a result
of the SUPERVALU transaction, was a key concern driving last year’s shareholder
pay revolt, it is galling to see further generosities extended to these outgoing
executives. Even more so when you consider that CEO Spinner’s twelve-year
tenure has been little short of a disaster for investors, with UNFI’s stock
down 31 percent over this period.
Proposed equity plan share
reserve further dilutes shareholders’ equity
Although the highly dilutive 2020
equity plan barely gained approval last year, receiving just 53 percent
support, the company is already back asking for an additional 3.6 million
shares. This request betrays the fact that the company
burned through nearly all the shares requested at last year’s shareholder
meeting, in just 12 months.
This is NOT a solicitation to vote your proxies. Please DO NOT send us your proxy as it will
not be voted.
3
Recalling that last year’s share
reserve of 7.2 million, along with the shares available for grant under the Company’s
prior plan, represented a basic dilution figure of nearly 26 percent, this rate
of usage is remarkably costly to shareholders. We calculate the Company’s
burn-rate for 2020 at over 11 percent – even higher (nearly 17 percent) if you
attach a 1.5 multiple to full value awards5
– and the resulting three-year average at over five percent (or nearly eight
percent using the aforementioned multiple for full value awards). Not
surprising, UNFI’s one-year and three-year burn rates are far in excess of
industry averages, based on ISS’s 2020 burn rate benchmarks.6
Including the 3.6 million
proposed increase in the share reserve, we calculate that UNFI’s basic dilution
exceeds 21 percent. Interestingly, the company attempts to justify such
elevated dilution by arguing that the low stock price at the time of the
December 2019 grants necessitated the granting of significantly more shares
than normal. However, this reasoning is specious: it appears to absolve
management for the depressed stock price in the first place – a performance
that hardly warranted the pay opportunities being afforded them – and the board
for its decision to go ahead with such dilutive grants. Moreover, considering
the stock’s volatility and the continued challenges facing the company, the
board could well find itself in a similar predicament going forward.
UNFI’s pay-for-performance
failures continue
While there is no question that
UNFI’s performance has picked up over the past year due to the pandemic, the Company’s
compensation practices fail to hold management accountable for the challenges
facing the company. With a dire record of destroying shareholder value, it is
entirely unclear why such concessions, whether it is a lowballed performance
hurdle or a golden goodbye, support the interests of shareholders. Accordingly,
we urge investors to vote against both the Say-on-Pay (Item 3), and the
proposed increase in the share reserve under the 2020 Equity Incentive Plan
(Item 4).
For more information, please
contact Michael Pryce-Jones. Teamsters Capital Strategies at:
mpryce-jones@teamster.org or by phone at: 202-624-8990.
Sincerely,
Ken Hall
General Secretary-Treasurer
KH/cz
This is NOT a solicitation to vote your proxies. Please DO NOT send us your proxy as it will
not be voted.
4
5
This methodology follows the counting of full value awards by ISS and is based
on an annualized 3-year average stock volatility in excess of 50 percent.
6
https://www.issgovernance.com/file/policy/latest/americas/US-Equity-Compensation-Plans-FAQ.pdf
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