Believes Significant Board and Leadership
Change Is Necessary to Improve Performance
Absent Meaningful Board and Leadership Change,
Lamb Weston Should Launch a Formal Review of Strategic Alternatives
to Maximize Value for Shareholders
JANA Partners (“JANA”), which together with its strategic and
operating partners owns more than 5% of Lamb Weston Holdings, Inc.
(NYSE: LW) (“Lamb Weston” or the “Company”) and is one of the
Company’s largest shareholders, today sent a letter to the
Company’s Board of Directors reiterating its belief that
significant Board and leadership change is needed at Lamb Weston,
and that in its absence the Company should pursue a formal review
of strategic alternatives, including a sale, in order to maximize
value for shareholders.
The full text of the letter is as follows:
December 16, 2024
Board of Directors Lamb Weston Holdings, Inc. 599 S. Rivershore
Lane Eagle, ID 83616
Board of Directors,
JANA Partners (“JANA,” “we” or “us”) together with our strategic
and operating partners beneficially own more than 5% of the
outstanding shares of Lamb Weston Holdings, Inc. (“Lamb Weston” or
the “Company”), making us one of the Company’s largest
shareholders. Having received no response from the Board to our
months-long involvement and engagement, we are hopeful that the
Company will use the upcoming fiscal second quarter earnings
announcement to address our previously expressed view that
significant Board and leadership change is needed at Lamb Weston,
and that in its absence the Company should pursue a formal review
of strategic alternatives, including a sale.
We believe Lamb Weston’s Board and management have wasted the
chance to sustain and grow shareholder value in a high-quality
business. It is indisputable that Lamb Weston’s track record for
shareholders prior to the disclosure of our investment has been
poor, not only in a disastrous 2024 (which includes an earnings
report so ignominious that it prompted one long-tenured analyst to
declare it “one of the worst days for a larger-cap food producer in
modern history”),1 but also over the long-term with total returns
in the last five years2 dramatically trailing the S&P 500 and
performing in the bottom quartile when compared to proxy peers.
Regrettably, we believe this dismal performance record
significantly understates the
magnitude of lost opportunity at the Company. Relative to its
publicly traded packaged food peers, we believe Lamb Weston enjoys
the benefits of an attractive end market, a strong industry
position and key competitive advantages (including geographic
ones). When coupled with Lamb Weston’s long-time reputation as a
premier foodservice supplier – which took prior management many
years to build – we think these attributes should have positioned
the Company as an attractive ‘compounder’ stock and best-in-class
performer for investors.
Instead, the current Board and management have overseen a
multi-year period of uncorrelated failures across many major
elements of operating the business, in the process damaging the
Company’s reputation and leading market position. This has impaired
performance, dissolved confidence among customers, investors and
other stakeholders and caused Lamb Weston to veer off its path as a
world-class business.3
The disclosure of our involvement on October 18th led to an
approximately $1 billion increase in Lamb Weston’s market cap and
an overwhelmingly positive reception from investors and Wall Street
analysts,4 which we believe demonstrates the intense appetite from
shareholders for a change in direction. The extensive investor
feedback we have received since emerging publicly in the Company,
including proprietary survey work that has included dozens of
investors and other stakeholders, has further confirmed what was
clear from our initial due diligence: that there is urgent need –
and strong desire – for significant Board and leadership change at
Lamb Weston.5
A failure of Board oversight has permitted chronic
mis-execution, a bloated expense structure, poor capital allocation
and questionable use and disclosure practices involving the
Company’s aviation assets. Making matters worse, the Board has
supported management as Company leadership has attempted to place
primary blame for the Company’s challenges on end market softness –
rather than offering a long overdue mea culpa and acknowledging the
magnitude of damage inflicted on the business and investors from
its litany of self-inflicted missteps.6 This contradicts what we
believe to be an environment where the Company’s primary
competitors (all private companies) have enjoyed stronger
performance at Lamb Weston’s expense. This disconnect has not been
lost on the investors and other stakeholders we have spoken with or
who took part in a proprietary survey.7
Lamb Weston’s failures include:
- Significant Financial and Operating
Deficiencies: These have cost the Company (at a minimum)
nearly $400m8 in EBITDA over the past ~2.5 years and have eroded
Lamb Weston’s credibility with stakeholders across the value chain,
from growers to customers.
- A fumbled attempt to enhance its customer base by voluntarily
ceasing business with some customers (i.e. ‘firing’ them) before
the Company had secured the superior replacement volume, resulting
in lost market share and a volume shortfall that has weighed on
revenue.
- Mis-forecasting customer demand so dramatically that the
Company has been forced to write off an inordinate amount of raw
potatoes in both F2024 and F2025.9
- Executing a multi-hundred million dollar ERP project riddled
with delays (underway for almost a decade and now paused) where
implementation failed so spectacularly that it left important Lamb
Weston customers without products for a period in F3Q24, costing
the Company both customers and reputational damage.
- Failing to identify and address product quality problems for a
key customer until so late in the process that the Company incurred
~$80m in losses from product withdrawal.
- Generating little to no overhead cost leverage in the business
despite doubling revenue over the last eight years,10 with the
Company increasing its SG&A targets from 8-8.5% sales to
10.5-11% in 2023.11
- Failed Oversight of Capital
Allocation: The multi-year escalation of capital deployment
– rubber-stamped by the Board and paired with misaligned incentives
– led to elevated capex without acceptable returns, left the
Company with no margin of safety when operational missteps
surfaced, dramatically reduced free cash flow generation and eroded
investor confidence in the Company. This includes:
- An escalation in capital expenditures for new capacity so
ill-conceived and poorly risk-managed that the new capacity
subsequently necessitated the costly shuttering of existing
capacity, including closing a manufacturing plant in Connell, WA
and terminating nearly 400 employees.
- Announcing a long-term capex target of 9%12 of revenue,
substantially higher than stated maintenance capex levels of ~3%
revenue, creating confusion around these elevated levels13 and with
no clear roadmap for how the spend would generate sustainable and
acceptable returns on capital.
- Inexplicably permitting management to execute stock repurchases
shortly before large earnings misses and dramatic declines in the
Company’s share price.14
- Misaligned executive compensation targets that heavily incent
growth, have no return on capital guardrails and have allowed
management to earn the maximum amount (200%) of the target in FY24
on the operational performance component of the Long-Term Incentive
Program’s Performance Share Awards15 despite disastrous performance
for investors.
- Questionable Use and Disclosure Practices
around Aviation Assets:
- Having a corporate plane to facilitate transport of employees
between Boise, ID and key manufacturing locations is an
understandable investment of corporate resources. However, our
analysis of flight records shows that since 2019, Lamb Weston’s
plane has registered ~300 flights into or out of Omaha, NE – the
former headquarters of Conagra and what appears to be the CEO’s
primary residence – and additional flights to numerous other
destinations that raise questions regarding the legitimate business
purpose of these flights. The Company’s proxy disclosures – which
show compensation of only $14,463, $13,737 and $21,349 of value for
the CEO’s personal use of Company aircraft in the years F2022,
F2023 and F2024 and neither disclosure for any value received in
earlier periods nor indication of plane usage for business purposes
related to productivity and safety – seem to be at odds with our
flight analysis, which raises serious questions about the use and
disclosure around the Company’s aviation assets.
- In September 2023, shortly before the Company’s 2023 Investor
Day, when it created consternation and confusion among analysts and
shareholders by announcing a new long-term capex target of 9% of
revenue, Lamb Weston reserved two new tail numbers with the US
Federal Aviation Administration. FAA Registry data shows these
reservations were subsequently purged on October 18, 2024 – the day
of JANA’s 13D filing in Lamb Weston.
This track record makes clear that the status quo is no longer
tenable – and is completely unacceptable – for shareholders. JANA
has a multi-decade reputation of working constructively with Boards
to drive change and improve performance – in this spirit, our offer
stands to work with Lamb Weston, as we and our team of highly
regarded industry executives16 are prepared to join the Board
immediately and help rehabilitate the Company and drive long-term
value. However, if the Board is unwilling to make the significant
changes needed to repair Lamb Weston, then the Company should work
with its financial advisors to explore a sale and take advantage of
strategic interest in the Company to achieve the highest possible
risk-adjusted return for shareholders.
We look forward to the Board’s prompt response.
Sincerely,
Scott Ostfeld Managing Partner & Portfolio Manager
About JANA Partners
JANA Partners was founded in 2001 by Barry Rosenstein. JANA
invests in undervalued public companies and engages with management
teams and boards to unlock value for shareholders.
1 JP Morgan, 7/25/24.
2 Five-year period from 10/17/19 through
10/17/24, the day before JANA filed its 13D.
3 Per the summary of a recent Deutsche
Bank initiation, “Over the past year, Lamb has faced ‘repeated,
self-inflicted setbacks’ to its operations, supply chain, and
general execution on top of weakening end-market demand, resulting
in substantial charges and guidance cuts, the analyst tells
investors in a research note.” (The Fly, 12/12/24).
4 For example, “JANA’s move should be seen
as a positive in accelerating a turnaround.” (Wells Fargo,
10/21/24); “Activist investor involvement will benefit the shares.”
(TD Cowen, 10/18/24); “[W]e think JANA's presence and expertise in
the space should, over time, help LW drive change and improve some
of the company's current operating practices that resulted in a
series of recent executional flaws.” (Barclays, 10/18/24).
5 For example, one investor respondent
noted, “The board is an F,” and another said, “I mean I think to
some degree the board too has been asleep at the switch, like
really asleep at the switch. And little things are happening now,
like the restructuring plan that I think are just reactive versus
proactive… But the CEO and the team is just not a quality group of
people. You can’t have this many unforced errors and still have the
same team in place, I mean come on. Is there any evidence they can
run this company. Not that I am seeing.” (Proprietary Survey).
6 “LW’s volume weakness and capacity
utilization declines are substantially more a function of
company-specific strategic actions (including the ERP-related
setbacks in FY3Q24) than broader industry traffic softness.”
(Goldman Sachs, 6/20/24).
7 For example, one investor respondent
said, “I am so sick and tired of them blaming everything else but
looking in the mirror.” (Proprietary Survey).
8 Includes Company disclosed amounts of
$96m in write off of excess raw potatoes in F2024, $96-120m in
write off of excess raw potatoes expected in F2025 per guidance
issued at the time of the F1Q25 earnings report, $79m in losses
related to quality issues ($40m recorded in F4Q24 and $39m recorded
in F1Q25) and $95m impact to EBITDA related to its ERP
implementation in F3Q24.
9 “Up to 10 million cwt of potatoes could
be turned back to growers as part of Lamb Weston’s restructuring
plan.” (North American Potato Market News, 10/10/24).
10 When comparing SG&A % Revenue for
F2024 per F2024 Lamb Weston 10-K to F2016 per F2018 Lamb Weston
10-K.
11 10.5-11% target per 2023 Lamb Weston
Investor Day (10/11/23). The prior 8-8.5% target was referenced in
the 2Q20 earnings call (1/3/20).
12 “Beginning in fiscal 2026, we expect
capital expenditures will begin to normalize towards 9% of sales,
3% of expected sales is expected to be for maintenance of our asset
base.” (2023 Lamb Weston Investor Day, 10/11/23).
13 “[W]e believe that level of spending
[as presented at the October 2023 Investor Day] is inconsistent
with LW’s own history on both an absolute dollar and % of sales
basis (even adjusted for the EMEA acquisition).” (Goldman Sachs,
6/20/24).
14 An analyst from Jefferies asked on the
F4Q24 earnings call, “On the share repo, clearly bought some stock
back, which is great. But I'm just kind of curious kind of as you
were headed into today's print, you probably thought maybe the
stock could be down a little bit. Like why not just buy stock back
like tomorrow versus in the fourth quarter?” Another analyst
published on the topic, “Why did LW buy back so much stock during
4Q when it knew the quarter and FY25 guidance would be soft? (This
was asked on the earnings call by one of our peers – we like the
question but unfortunately no answer was provided).” (JP Morgan,
7/25/24); “We are confused by why LW is leaning much harder into
repo intraquarter, when the company can see that fundamentals are
weakening (i.e. management knows there’s a good chance the stock
will drop when earnings are reported).” (JP Morgan, 10/1/24).
15 Per Lamb Weston 2024 Definitive Proxy
Statement.
16 “The individuals named… as possible
board nominees — Tim McLevish, Joe Scalzo, Diane Dietz, etc. — are
well-respected by many investors, in our view; their inclusion
arguably adds gravitas to Jana’s efforts.” (JP Morgan,
10/18/24).
View source
version on businesswire.com: https://www.businesswire.com/news/home/20241216832356/en/
Media Jonathan Gasthalter/Nathaniel Garnick
JANA@gasthalter.com
Investors IR@janapartners.com
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