Input costs, depreciation put Tasty in the red

by Josh Sosland
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PHILADELPHIA — Tasty Baking Co., in the first quarter ended March 29, sustained a loss of $959,000, versus net income of $876,000, equal to 11c per share on the common stock, in the first quarter last year. Net sales were $42,822,000, down 3.4% from sales of $44,325,000 in the comparable period in 2007.

Unit sales in the first quarter declined 4.3% from the year before, a reversal the company attributed in part to "the shift in the seasonal impact of the Easter holiday."

The loss in the first quarter reflected a $2 million jump in ingredient and packaging costs, resulting in a 7.5 percentage point contraction in gross margins. Also factoring into the loss was an $800,000 incremental after-tax depreciation expense against the useful life of its Philadelphia baking plant associated with the company’s pending move in 2010.

"In the first quarter of 2008, we continued to feel the impact of industry-wide commodity increases as the cost of ingredients and packaging rose by $2 million dollars compared to the same period a year ago," said Charles P. Pizzi, president and chief executive officer. "During these times we are committed to protecting profits through proper risk management, cost containment, and product pricing actions.

"Specifically, we raised list prices on single-serve and family pack cake products in the first quarter of 2008. In the second quarter of 2008, we have taken pricing actions on donuts and pies and made changes to the company’s promotional pricing strategy. In addition, the company is actively managing risk from higher ingredient and packaging prices through long-term supply arrangements for key ingredients like sugar, which is one of our largest commodities."

Expanding on the effects of the timing of Easter (which fell on the earliest date since 1913), Tasty said it "typically experiences a slow-down in sales volumes during this holiday as consumers’ normal purchasing and consumption patterns change, and they temporarily move away from baked sack goods."

Tasty attributed between 3 and 3.5 percentage points of the 4.3% volume decline to the holiday timing and said the loss would be recovered next year.

Against a 4.3% unit volume decline, an increase of 3% in the cost of sales, excluding depreciation, translated into severe pressure on margins.

"Variable manufacturing expense per case in the first quarter of 2008 increased 11.2% versus the comparable period a year ago," Tasty said. "This increase was driven by industry-wide commodity cost increases for certain key ingredients such as eggs, grains, and oils that began in 2007 and that continued in the first quarter of 2008. The increase in variable manufacturing expense was partially offset by a 4.5% reduction in fixed manufacturing expense in the first quarter of 2008 versus the first quarter of 2007, primarily due to lower employee and compensation related costs."

Partly helping offset the higher costs was a cut of $1.2 million, or 9%, in selling, general and administrative expense versus last year.

"The combination of volatile commodities prices and the status of the economy have resulted in a challenging operating environment," said Paul D. Ridder, senior vice-president and chief financial officer. "In this difficult environment, we continue to focus on managing controllable risks, including the balance between product pricing and promotion, as we attempt to cover the higher cost of ingredients and packaging."

Notwithstanding these challenges, Mr. Ridder expressed confidence that Tasty was well positioned in the snack cake marketplace going forward.

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