Tasty Baking Company Reports Third Quarter 2008 Results

Philadelphia, Oct. 31 - Tasty Baking Company today reported net sales of $42.8 million for its third quarter ended September 27, 2008, a 0.7% increase from the $42.5 million reported for the third quarter last year.

The company reported a net loss of $1.4 million in the third quarter of 2008 compared to net income of $0.2 million in the third quarter of 2007. The results from the third quarter 2008 included $1.0 million in estimated after-tax severance costs associated with the planned transition to the company’s new manufacturing facility at the Philadelphia Navy Yard beginning in late 2009. Net income in the third quarter of 2008 and 2007 also included $0.8 million and $0.9 million, respectively, of accelerated after-tax depreciation expense due to a change in useful lives of assets at the Philadelphia bakery related to the company’s plan to complete the move from its present Philadelphia facilities in 2010.

Charles P. Pizzi, president and chief executive officer of Tasty Baking Company, said, “We are pleased with our overall operating performance for the third quarter of 2008, especially in light of the fact that the company had to absorb $2.3 million in higher ingredient and packaging costs compared to the third quarter of last year. Route net sales had positive growth and our continued focus on cost containment and improved operating efficiency has yielded favorable results.”

Mr. Pizzi continued, “Construction of the new bakery project is proceeding well and we remain on time and within budget. While we are mindful of the need to manage the day-to-day requirements of the business, we are excited about the cost savings the new manufacturing facility will offer as well as the increased production flexibility from the new state-of-the-art equipment. Each day that passes brings us closer to realizing the new manufacturing strategy we laid out well over a year ago.”

RESULTS OF OPERATIONS

Total gross and net sales increased 0.1% and 0.7%, respectively, in the third quarter of 2008 compared to the same period in 2007, driven primarily by strength in Route sales. Route sales benefitted from continued strength in Single Serve product sales, combined with the impact of increased selling prices for both Family Pack and Single Serve products. Non-Route net sales declined 1.2% in the third quarter of 2008 as compared to the same period a year ago due to planned product rationalization in the direct sales channel. For the thirty-nine weeks ended September 27, 2008, total gross sales increased 0.6%, while net sales declined 0.3% versus the comparable period in 2007.

Cost of sales, excluding depreciation, rose 3.3% on a unit volume decline of 4.2% in the third quarter of 2008 as compared to the prior year period. This rise was driven by a $2.3 million increase in ingredient and packaging costs, primarily resulting from higher oil, grain, and egg prices. Fixed manufacturing expenses declined 6.6%, or $0.5 million, in the third quarter of 2008 versus the third quarter of 2007, due primarily to lower employee related expenses, despite the $0.6 million prior year benefit from a change in the company’s vacation policies. Cost of sales, excluding depreciation, for year-to-date 2008 was up 4.7% on a 4.0% decline in unit volume versus the same period in 2007.

Gross margin in the third quarter of 2008 declined 3.1 percentage points to 25.6% of net sales as compared to the third quarter of 2007. This decline was primarily attributable to the increase in ingredient and packaging costs as well as higher depreciation expense. Partially offsetting this was the $1.1 million net benefit from increased product selling prices as well as the reduction in fixed manufacturing costs. Year-to-date 2008 gross margin declined 5.3 percentage points to 26.3% of net sales versus the comparable period in 2007.

Selling, general and administrative expense in the third quarter of 2008 declined 4.9%, or $0.6 million, versus the comparable period in 2007, despite the $0.6 million prior year benefit from a change in the company’s vacation policies. This decrease was primarily due to lower employee related costs, which were only partially offset by higher marketing and transportation expenses. For the thirty-nine weeks ended September 27, 2008, selling, general and administrative expenses declined 7.3% versus the same period last year.

Paul D. Ridder, senior vice president and chief financial officer, said, “We were pleased with the increase in sales during the third quarter and will continue to evaluate the proper balance between product pricing and promotion as we work to offset the impact of higher input costs and the effects of the difficult economic environment.”

Mr. Ridder continued, “While the new bakery is expected to dramatically reduce costs once fully operational, we remain committed to our cost containment and efficiency improvement programs, which, when combined with implemented selling price increases, have allowed us to offset the majority of increased ingredient and packaging costs.”