Tasty Baking Company Reports Net Sales and Volume Growth in the Q2 2009

Philadelphia, Aug. 3 - Tasty Baking Company today reported net sales of $47.0 million for its second quarter ended June 27, 2009, a 5.3% increase from the $44.6 million reported for the second quarter last year.

The increase in net sales compared to the prior year was driven by volume growth in both the Route and Non-Route components as well as higher net product prices as compared to the prior year period. For the second quarter of 2009, the company reported net income of $2.3 million compared to net income of $0.1 million in the second quarter of 2008. The results from the second quarter 2009 included $2.1 million in after-tax income related to the termination of the company’s postretirement life insurance plan. Net income for both the second quarter of 2009 and 2008 included after tax accelerated depreciation of $0.8 million.

Charles P. Pizzi, president and chief executive officer of Tasty Baking Company, said, “This is the third consecutive quarter in which we drove sales growth in both the Route and Non-Route components of our business. We continued to expand market share in our core markets and generated favorable margin improvements compared to the prior year period. While commodity costs remain at relatively high levels, we were pleased to see some improvement in key ingredients and packaging costs in the second quarter of 2009 versus the second quarter of last year.”

Mr. Pizzi concluded, “With regards to the new bakery project, we are ahead of schedule and within budget. We expect to begin our methodical line-by-line production transition in the fourth quarter of 2009 and remain excited about the anticipated start of production. We recognize, however, that we must continue to focus on successfully growing the business and building the brand while at the same time planning the transition to the new facility.”

RESULTS OF OPERATIONS

Net sales in the second quarter of 2009 increased 5.3% versus the comparable period in 2008 driven by a 4.9% increase in Non-Route net sales and a 5.4% increase in Route net sales. Route net sales benefitted from higher selling prices and increased sales volumes, particularly for the company’s Family Pack products. Non-Route net sales increased due to higher sales volumes with direct retail customers and the impact of higher selling prices in the second quarter of 2009 as compared to the same period of the prior year.

Total cost of sales, excluding depreciation, declined 6.0%, or $1.7 million, on a unit volume increase of 3.0% in the second quarter of 2009 as compared to the same period a year ago. The decrease in the cost of sales was driven by $2.2 million of benefit related to the termination of the company’s postretirement life insurance plan in the second quarter of 2009 as well as a $0.8 million decline in costs for key ingredients and packaging as compared to the second quarter of the prior year. These benefits were partially offset by the costs associated with the increase in sales volumes combined with increased employee related costs, including pension expense, as compared to the prior year period.

Gross profit increased 31.2%, or $3.9 million, in the second quarter of 2009 as compared to the same period a year ago. This increase was driven by $2.2 million of benefit related to the postretirement life insurance plan termination and lower ingredient and packaging costs, as well as a $1.7 million benefit resulting from higher volumes and increased product selling prices. Partially offsetting these benefits were increased depreciation expense and employee related costs when compared to the prior year period.

Selling, general, and administrative expense in the second quarter of 2009 increased $0.4 million versus the comparable period in 2008. This increase was mainly attributable to $1.0 million in higher employee related costs resulting from increases in accrued incentive compensation, equity based compensation, and pension related expenses. Other drivers of the increase were $0.3 million in non-cash rental expense associated with the new corporate office space at the Philadelphia Navy Yard and a $0.3 million increase in bad debt expense as compared to the prior year period. These higher costs were partially offset by approximately $1.5 million in benefit associated with the termination of the company’s postretirement life insurance plan in the second quarter of 2009. Portions of the benefit from the postretirement life insurance plan termination are also recorded in cost of sales, as described above. When measured as a percentage of net sales, selling, general, and administrative expenses declined to 26.4% of net sales in the second quarter of 2009 compared to 26.9% in the second quarter of 2008. Additionally, in the second quarter of 2009, the company favorably settled a state tax matter that resulted in discrete tax benefits of approximately $450 thousand, which reduced the company’s effective tax rate for the period.

Paul D. Ridder, senior vice president and chief financial officer, said, “We are pleased with the balanced performance of our operations this quarter. We not only grew net sales for both the Route and Non-Route components of our business compared to the second quarter of 2008, but were able to achieve a healthy balance between volume growth and product pricing benefit. This strong top-line performance, along with the benefits from lower ingredient and packaging costs, translated into significant improvements in gross profit as compared to the prior year.”

Mr. Ridder added, “We continue to identify opportunities for profitable growth in all components of our business while at the same time seeking to manage risk, contain costs, and improve operational efficiency. We are focused on balancing the day-to-day needs of the business while preparing the organization for a transformation that we believe will ultimately increase long-term shareholder value.”

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