Tasty Baking Co. Q3 2009 Earnings Call Transcript

Nov. 2.09 | About: Flowers Foods, (FLO)

Tasty Baking Co. (TSTY) Q3 2009 Earnings Call November 2, 2009 11:00 AM ET

Executives

Charles Pizzi - President & Chief Executive Officer

Paul Ridder - Senior Vice President & Chief Financial Officer

Autumn Bayles - Senior Vice President, Strategic Operations

Chad Ramsey - Vice President, Financial Planning & Investor Relations

Analysts

Mitchell Pinheiro - Janney Montgomery Scott

Operator

Welcome to the Tasty Baking Company’s third quarter 2009 conference call. (Operator instructions) Now for opening remarks and introductions I will turn the call over to the Vice President of Financial Planning and Investor Relations, Mr. Chad Ramsey. Please go ahead sir.

Chad Ramsey

Good morning everyone. Thank you for joining us for Tasty Baking Company’s conference call to discuss third quarter 2009 results. You should have received a copy of this morning’s release; however, if for some reason you have not received a copy, please call 215-221-8538 and request a copy, which will be faxed to you immediately. Today’s call is also being broadcasted over the internet at www.tastykake.com in the investor section under the webcast and presentations subheading.

This conference call may contain statements that are forward-looking, within the meaning of the applicable federal securities laws, and are based on Tasty Baking Company’s current expectations and assumptions, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause actual results to differ from those anticipated are detailed in the company’s press release, annual report to shareholders, and Securities and Exchange Commission filings. The company assumes no obligation to publicly update or revise any forward-looking statements.

This discussion also includes certain non-GAAP measures as defined by SEC rules. We have provided a reconciliation of those measures to the most directly comparable measures. This is available in our press release which is on our website as well.

With us today from Tasty Baking Company, are Charles Pizzi, President and Chief Executive Officer; Paul Ridder, Senior Vice President and Chief Financial Officer and Autumn Bayles, Senior Vice President, Strategic Operations. Following the introductory comments from the management, we will open the call for your questions.

Go ahead Mr. Pizzi.

Charles Pizzi

Thank you Chad and good morning. In the third quarter of 2009 the company reported a gross sales increase of 7.1% to $74.1 million on a volume increase of 2.3% compared to the prior year period. In terms of net sales, the company reported growth of 1.8% which is the sixth consecutive quarter of net sales growth. The top line performance in the third quarter of 2009 was primarily fueled by growth in our route markets. Within these markets net sales grew 3.1% versus the prior year period, driven mainly by increased sales volumes particularly from family pack products combined with the net benefits of higher selling prices.

During the quarter within our group markets the category grew by 2.3% and 3.5% over the prior year period in terms of sales dollars and units respectively. Tasty continued to execute on its goal of growing its market share profitably as it outpaced the category both in terms of sales dollars and unit growth during the third quarter of 2009.

Operationally we are pleased with our performance this quarter. We generated overall volume and net sales growth which when combined with lower prices for key ingredients and packaging helped us to increase gross profit by $0.5 million or more than 4% versus the prior year period. For the third quarter of 2009 Tasty Baking reported a net loss of approximately $45 million or $0.07 per share compared to a net loss of approximately $1.4 million or $0.17 per share in the third quarter of 2008.

The results in the third quarter of 2009 and 2008 included approximately $0.4 million in after-tax benefit and $1 million in after-tax expense respectively associated with accrued post employment costs. In addition, for the third quarters of both 2009 and 2008 we recorded approximately $0.8 million in after-tax acceleration depreciation resulting from the change in useful lives of assets that will not be reallocated to the new manufacturing and distribution facility at the Philadelphia Naval Yard.

With regards to our new bakery and distribution center, I am pleased to report that the progress is progressing well and remains within budget and on or ahead of schedule. We have recently passed some significant project milestones. First, the building construction was substantially completed and the lease commenced on October 1st, two weeks ahead of our original schedule. We have also completed facility testing and all utility systems are operational. We are fully engaged in equipment startup and commissioning activities across the plant.

We just completed and commissioning process for our first production line and began commercial production of pies, I should say delicious pies. While the full commissioning process for the remaining six production lines will continue into the second quarter of 2010, this marks a significant achievement in the transformational project. Now Paul will comment on some specifics regarding the third quarter financial results.

Paul Ridder

Thank you Charlie. We had good sales performance this quarter with growth in net sales increasing 7.1% and 1.8% respectively versus the third quarter of 2008 driven by strength within our route markets. Growth in the route markets was driven by higher sales volumes particularly for the company’s family pack products and the benefits of higher selling prices.

These increases, however, were negatively impacted by higher product return costs as compared to the prior year which adversely affected net sales realization. In the non-route markets net sales declined 2.2% compared to the prior year period. This decline primarily resulted from lower sales within the vending channel which has been affected negatively by the overall challenges in the economy.

Despite the challenges in the non-route market and the contraction in route net realization, we increased gross profit and expanded gross margin when compared to the prior year period. Gross profit grew $500,000 or 4.3% in the third quarter of 2009 versus the same period a year ago while gross margin increased to 26.2% of net sales from 25.6% of net sales in the prior year period. The improvement in gross profit was driven by a $0.7 million reduction in key ingredient and packaging costs as well as by the benefit of higher sales volumes, both of which were partially offset by increased fixed manufacturing expenses as compared to the third quarter of the prior year.

The increase in fixed manufacturing costs resulted primarily from higher employee related costs including pension and accrued incentive compensation costs. Increases in selling, general and administrative costs however, more than offset the increase in gross profit. As compared to the third quarter of 2008, SG&A costs increased $1.3 million during the third quarter of 2009.

This increase was primarily due to a $0.3 million increase in non-cash rental expense related to the new corporate office space at the Navy Yard Corporate Center, increased marketing costs and $0.9 million in higher employee related costs. Partially offsetting these increases were reductions in transportation costs driven by favorable shipping rate changes.

Also affecting results during the third quarter of 2009 was a reduction in the company’s estimate for post-employment costs expected to be incurred in connection with the relocation of our Philadelphia operations. The reduction in the estimate resulted from a revision in the tenure of personnel expected to be impacted by the transition and favorably impacted financial results in the third quarter of 2009 by approximately $0.7 million or $0.4 million on an after-tax basis.

Total capital expenditures in the third quarter of 2009 were approximately $8.4 million including $7.6 million of payments for equipment related to the new manufacturing and distribution facility. With respect to the financial benefit of the new bakery, we continue to project it will continue to have a significant beneficial impact to our operations and result in $13-15 million annually of incremental pre-tax cash savings before any impact from debt service but after taking into account the facility lease.

The agreements for the facility and improvements thereto which commenced in October of 2009 have no rental payments for the first year. Because both agreements will be accounted for as an operating lease, however, we will report rental expense on a straight line basis over the entire term of the lease. While the completion of the commissioning of our first production line and the first production of pies in the new facility are exciting milestones, the ongoing startup, commissioning and transition period will likely impact ongoing operating results. During this period we may experience incremental scrap, transportation, trade and labor expenses.

That ends my financial discussion and I will now pass it back to Charlie.

Charles Pizzi

Thanks Paul. In closing I would like to thank the entire team including our associates and outside partners that have been working on this new bakery project. Their efforts and dedication have allowed us to achieve impressive results to date. Although we have much work ahead of us, we are confident in the ability of our team members and employees to execute our plan successfully.

In addition to our commitment to execute the project, we are focused as always on producing products with the highest standards of quality. We are also dedicated to improving long-term shareholder value by identifying ways to grow our business profitably through a combination of top line performance, increased brand support, product innovation and continuous improvement of operating efficiencies. We believe these plans and actions we are taking today will ultimately do that.

Now we will open the call to your questions. Operator?

Question and Answer Session

Operator

(Operator instructions) The first question comes from the line of Mitchell Pinheiro - Janney Montgomery Scott.

Mitchell Pinheiro - Janney Montgomery Scott

Why don’t we start with the pie line. It is now producing sellable product and when that product is now in the stores? Is that correct?

Autumn Bayles

Yes.

Mitchell Pinheiro - Janney Montgomery Scott

I am aware of your new tin. Is that being accompanied by additional marketing or any type of program?

Charles Pizzi

Our program is really geared to our sales distributors where we provided them with a special look as well as shelf toppers. We also have plans we have made but have not executed on those plans at this time.

Mitchell Pinheiro - Janney Montgomery Scott

Do you anticipate fourth quarter any ramp in marketing as a result in the fourth quarter or will it just be reallocated among your current spend?

Charles Pizzi

We do anticipate some additional spend on the marketing side but not to get into the area of specific competition. We do have a plan in place and we will make sure that there is execution on those plans but at this time I think that is all the information I can give you.

Mitchell Pinheiro - Janney Montgomery Scott

When you look at the pie line, is it running at what percentage of your expected sort of either run rate or efficiencies? Is there any way you can color the whole commissioning process on that line for us?

Autumn Bayles

We are really pleased with how the pie line commissioning went and we are really happy it is now in production and we will be transitioning over the next few weeks.

Mitchell Pinheiro - Janney Montgomery Scott

So we should expect obviously you have to transport those pies at the Navy Yard back to your current warehouse?

Autumn Bayles

Yes.

Charles Pizzi

To put it another way, we haven’t experienced any stumbling at this point in our process on the commissioning of the line.

Mitchell Pinheiro - Janney Montgomery Scott

Do you commission line by line? Or is every line the remaining six in some state of the commissioning process?

Charles Pizzi

We have a methodical plan in place that we developed probably at the end of 2007. So we are maintaining our approach which was a staged approach. For competitive reasons we are not going to go into the specific lines going forward.

Mitchell Pinheiro - Janney Montgomery Scott

When it comes down to complexity of production lines, is the pie line more, less or average in the process?

Autumn Bayles

I would say the pie line is somewhat complex. As we planned for, we are pleased with how…I am just delighted it is in production right now.

Charles Pizzi

I would tell you, as you talk about the transition, one thing that has been really top of mind and we had a really good plan we have been executing on and continuing to execute is on training. This new facility provides us the ability to develop a new culture, a new awareness, a new accountability and new ways to improve our existing products while providing the opportunity for product innovation. The quality is very important. So we have done a lot of work around the training of our folks and everybody is very excited. I think training goes hand in hand on the commissioning side. I think our folks are well prepared and they have done an excellent job thus far.

Mitchell Pinheiro - Janney Montgomery Scott

My final two questions. On the new plant, Hunting Park is the pie line now shut down or what happens there?

Autumn Bayles

Basically we will be transitioning the line over the next period or so. We are not sure of exactly when the transition will be completed but it is as it has been planned.

Mitchell Pinheiro - Janney Montgomery Scott

Are you making pies out of both facilities still?

Autumn Bayles

Yes.

Mitchell Pinheiro - Janney Montgomery Scott

So the ones in the old facility don’t have the tin do they?

Autumn Bayles

No. They are just like they were before.

Mitchell Pinheiro - Janney Montgomery Scott

Since obviously you have done a great job here getting the pie line up and running in what seems to be ahead of schedule, can you stay ahead of schedule? In other words, I think you have built in ample contingencies, etc. Because you got the first line up early is it fair to assume no other major issues? You can get the other ones up early as well?

Charles Pizzi

This is a very complicated process. We are really focused on quality. Our first is really to stay, as we have been saying all along, total completion and integration of the new facility would be in Q2 of 2010. We are sort of sticking with that. We are not trying to play beat the clock with this transition. We are really trying to make sure all the clock parts work properly as opposed to rushing. You know, there is a possibility. Certainly the first line we are very pleased with. We don’t want to get ahead of ourselves. We would rather take a very methodical approach to this because we are so interested in quality.

Mitchell Pinheiro - Janney Montgomery Scott

Getting back to the quarter, I appreciate the category performance. If sales were up 2.3 and obviously your route sales were up 3.1 you have gained a little share. Units were up 3.5 right? So your units exceeded 3.5 but then I am really confused because I thought you got higher prices is what you said, or it contributed to the sales line. So if you were better than 3.5, how does that math work?

Charles Pizzi

There are a number of things that go into it, two of which include both mix and promotional activity. That really accounts for the differential. As we said, we did outpace the category in both dollars and units. The rest boils down to the impact of mix and promotional activity.

Mitchell Pinheiro - Janney Montgomery Scott

A second question with stale, what caused the higher stale or product returns in the quarter relative to historical levels?

Charles Pizzi

I think the thing to comment on is we are taking a number of actions obviously to work to combat that and bring it back to a level that we would like. Part of it has to do with our promotional activity in some of the display and distribution. It also has to do deal with the impact of as we prepare for the new facility there are some actions we will have to take that wouldn’t be our norm. So we feel comfortable with where we are going. Although it is higher than we would liked it to have been we are comfortable that we have the plans in place to take corrective action.

Mitchell Pinheiro - Janney Montgomery Scott

So we might see higher than average stale through the whole new bakery process, is that fair?

Charles Pizzi

It is possible. We are, as I said, taking actions that we hope and expect will control that. But any time you go through a process like this; that is a possibility.

Mitchell Pinheiro - Janney Montgomery Scott

My last question, obviously you called out family pack being up. There was most recently another small DSD company, Lance, in their quarter last week they mentioned their C-store business was seeing softness. I was wondering if you could comment on that. You didn’t call that out in your commentary. How is your C-store business doing and I have a follow-up.

Charles Pizzi

Our C-store is up a bit, not of any significance but it is up. I think in talking about that channel in general I think store counts are not as good as they have been. Our overall numbers were up a bit.

Mitchell Pinheiro - Janney Montgomery Scott

You mean traffic count?

Charles Pizzi

Yes when I talk about counts I meant traffic.

Mitchell Pinheiro - Janney Montgomery Scott

So traffic count is slipping a touch you think? Generally speaking?

Charles Pizzi

This is just anecdotally. Since I am not in that business, but anecdotally I think there is a bit of softness. I also saw that report of that DSD distributor you are talking about and when I saw that I was very pleased with our performance in the channel.

Operator

We have no other questions at this time. I would like to turn the call back to management for any additional or closing comments.

Charles Pizzi

I would just like to say we are once again pleased and grateful to our associates here for the work they have done in the past quarter. We wish everyone a productive day today. Thank you very much.

Operator

That does conclude today’s call. Thank you for your participation.

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