Tasty Baking Company Reports Fourth Quarter 2008 Results

Philadelphia, Mar. 6 - Tasty Baking Company today reported net sales of $43.7 million for its fourth quarter ended December 27, 2008, an increase of 11.4% from the $39.3 million reported for the fourth quarter last year.

The company reported a net loss of $4.6 million in the fourth quarter of 2008 compared to net income of $0.1 million in the fourth quarter of 2007. The results from the fourth quarter 2008 included $7.8 million in additional after-tax pension expense in connection with the company’s method of immediately recognizing gains and losses that fall outside its pension corridor. In addition, the company recorded $4.8 million in after-tax income in the fourth quarter of 2008 related to changes in the company’s retiree medical benefit plan.

Charles P. Pizzi, president and chief executive officer of Tasty Baking Company, said, “We had healthy growth in the fourth quarter of 2008 as both the Route and Non-Route components of our business reported solid sales increases compared to the same period last year. This strong growth helped drive expanded market share as quarterly sales in our core markets outpaced that of the category. While we generated robust top-line growth, ingredient and packaging costs remained a drag on earnings as commodity prices were significantly above the prior year. During the quarter our continued focus on risk management, cost containment, and improved operating efficiency yielded favorable results and we will continue to actively pursue these programs.”

Mr. Pizzi continued, “We are pleased with the progress of the new bakery and the project remains on time and within budget. While the successful transition into the new facility is expected to yield significant financial and operational benefits, we remain focused on managing the current day-to-day needs of the business as well as the benefits we can generate now through our ongoing cost containment and efficiency improvement programs.”

RESULTS OF OPERATIONS

Total gross and net sales increased 12.3% and 11.4%, respectively, in the fourth quarter of 2008 compared to the same period in 2007, driven by growth in both Route and Non-Route sales. Route sales benefitted from continued strength in Single Serve product sales and solid sales growth in Family Pack products as well as from increased selling prices as compared to the same period a year ago. Non-Route net sales increased 31.6% in the fourth quarter of 2008 as compared to the fourth quarter of 2007 due primarily to increased product distribution and greater promotional activity in the direct sales channel as well as growth within the third-party distributor market.

Total cost of sales, excluding depreciation, rose 26.9%, or $7.0 million, on a unit volume increase of 8.8% in the fourth quarter of 2008 as compared to the same period a year ago. This rise was primarily driven by a $1.7 million increase in ingredient and packaging costs and a $3.7 million increase in fixed manufacturing costs. Approximately $2.9 million of the increase in fixed manufacturing costs was attributable to $7.6 million of pension corridor expense net of a $4.7 million benefit associated with a change in the company’s retiree medical benefit plan. Higher sales volumes accounted for the remaining change in the total cost of sales compared to the fourth quarter of 2007.

Gross margin in the fourth quarter of 2008 declined 9.0 percentage points to 17.4% of net sales as compared to the fourth quarter of 2007. The decline was driven by the increase in fixed manufacturing costs and depreciation, which accounted for 9.2 percentage points of margin decline. The $1.7 million in increased ingredient and packaging costs was, however, more than offset by the benefits of higher selling prices on increased volumes.

Selling, general and administrative expense in the fourth quarter of 2008 increased 37.7%, or $3.9 million, versus the comparable period in 2007. Approximately $1.9 million of this increase was driven by $5.0 million of pension corridor expense net of a $3.1 million benefit associated with a change in the company’s retiree medical benefit plan. Portions of the pension corridor expense and the benefit from the retiree medical benefit plan change are also recorded in fixed manufacturing costs as described above. Another $1.2 million of the increase in selling, general and administrative expense was attributable to the benefit the company received in the fourth quarter of 2007 for the sale of certain tax credits and a change in the company’s vacation policy, both of which did not re-occur in the fourth quarter of 2008. Also contributing to the increase compared to the same period a year ago were higher transportation costs associated with increased sales volumes, as well as an increase in marketing activities.

Paul D. Ridder, senior vice president and chief financial officer, said, “Striking the proper balance between product pricing and promotion yielded favorable results as evidenced by the strong sales growth in the period. While commodity costs moderated during the fourth quarter of 2008, they remained well above prior year levels.”

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