Wednesday, October 03, 2007

CEO Kisses The Hershey Company 'Bye-Bye.'

Investors—with no specific reasons for optimism—drove the share price of The Hershey Company (HSY-$45.78) down $1.63, or 3.44%, after the struggling chocolate maker announced a shakeup in senior management.

Looking for mr. Goodbar? Effective immediately, chief operating officer David West will assume the position as president and will take the CEO reigns on Dec. 1 from Richard H. Lenny. Mr. Lenny will stay on as chairman of the board through the end of the year.

Asked why Lenny decided to retire now, Hershey spokesman Kirk D. Saville declined to elaborate beyond a one-line statement: "After more than six years, Mr. Lenny feels that this is the right time for a new leader to take the company to the next level.”

The Wall Street Journal, reported Lenny had SOURZed on the Company and was frustrated with the Hershey Trust, which controls 78% of the voting rights for the candy manufacturer, though Lenny made no such claims in a company-issued statement.

Irrespective of alleged differences with the Hershey Trust, our review of the Company’s Proxy Statement suggests—from pecuniary realities—the here-and-now was a good time for Lenny to TAKE-5.

The shares have declined 12 percent in the past year and are below their closing high of $66.65 set in May 2005.

Hershey, the maker of its namesake chocolate bars and other iconic brands like Reeses and Kisses treats, has been hurt by rising ingredient costs and the loss of market share to Mars, home to M&M's candies and Snickers bars.

Summary Compensation

According to the Proxy filed on March 16, Lenny received compensation valued at about $11.4 million in fiscal 2006.

The Company paid to Lenny a base salary of $1.1 million for the fiscal year ended December 31, 2006. He also received about $7.9 million and $2.2 for option/stock awards and pension value benefits, respectively.

These figures are misleading. The $7.9 million in option/stock awards represented the dollar amount recognized as expense during fiscal 2006 for financial statement purposes—and not actual dollar compensation received by Lenny. As noted on the Option Exercises and Stock Vested table of the Proxy, Mr. Lenny did not receive cash or stock from the exercise of any option awards in 2006. In addition, the $2.2 million in pension value benefits reflects only the change in pension value and nonqualified deferred compensation earnings—and not actual cash awards.

Since Hershey’s actual corporate [financial] results fell below agreed-to financial performance metrics (3.0% - 4.0% growth in net sales, 7.0% to 9.0% share-net growth, and minimal improvement in EBIT margin), the base salary for Lenny did not change in 2007—nor did he receive a 2006 cash incentive bonus.

Fiscal 2007 incentives were similar to the aforementioned WHATCHAMACALLIT metrics established for last year.

A quick recap of 1H:07 pro forma results shows that 2007 was shaping up to be another ZERO for Lenny—with respect to both cash awards and performance stock units/options: net sales increased only about 0.6% in the first half (or 0.3% excluding Godrej Hershey in India). EBIT from operations declined 8% with EBIT margin down 150 basis points to 16.7% from 18.2 percent. And, EPS diluted from operations in the first half declined 6.5% to $0.86 per share.

A commitment by the Company to increase its spending behind its brands to reestablish ‘marketplace momentum’ (i.e. market share) lead management to lower full-year guidance, too.

Based on the plans in place in the second half, management expects sequential improvement in organic net sales that will result in full year 2007 growth in the low single-digit range. Against this backdrop of improving sales, however, remain higher dairy costs and stronger investment levels—both will pressure margins. As such, the Company expected earnings per share diluted from
operations for 2007 to decline mid single-digits.

Severance Benefits

According to his employment contract, Mr. Lenny is entitled to $2.2 million (two years salary) in wages.

Pension Benefits

Of interest, the employment agreement with Mr. Lenny contains special provisions relating to his vesting and the calculation of his benefit under the Supplemental Executive Retirement Plan (SERP). Under the employment agreement, Mr. Lenny would have forfeited his SERP benefit had had he terminated his employment without “good reason” before his 55th birthday. He became fully vested in his accrued SERP benefit on January 5, 2007. Additionally, he was effectively credited with two years of service for each year of service from his hire date through his 55th birthday.

As of December 31, 2006, the present value of his accumulated SERP was a NUTRAGEOUS $11.82 million.

Non-Qualified Deferred Compensation

As of December 31, 2006, the aggregate balance of Lenny’s non-qualified deferred compensation account was about $9.16 million.

Outstanding Equity/Option Awards

The Incentive Plan provides that all vested stock options remain exercisable for five years following termination due to retirement after age 55.

As of December 31, 2006, Lenny held 1.25 million in exercisable and 424,050 shares of unvested stock options (underlying strike prices between $32.25 – 61.70) worth an estimated $52.22 million and $19.4 million, respectively.

Do not cry for Lenny. Given the PoT of Gold he received for only 6 ½ years of employment, he will still be able to retire to expensive park-view real estate on 5th Avenue. Altogether, quite a ‘Good & PlentyPayDay for Rick Lenny.

Aside from an occasional KitKat wafer bar, editor David J. Phillips holds no financial interest in The Hershey Company. The 10Q Detective has a Full Disclosure Policy.

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