Tasty Baking Company Q4 2009 Earnings Call Transcript

Mar. 9.10 | About: Flowers Foods, (FLO)

Tasty Baking Company (TSTY) Q4 2009 Earnings Call March 9, 2010 11:00 AM ET

Executives

Chad Ramsey – VP, Financial Planning and IR

Charles Pizzi – President and CEO

Paul Ridder – SVP and CFO

Autumn Bayles – SVP, Strategic Operations

Analysts

Mitch Pinheiro – Janney Montgomery

Tom Graves – Standard & Poor's

Nick Kovich – Kovich Capital Management

Operator

Good day, ladies and gentlemen, and welcome to the Tasty Baking Company’s fourth quarter 2009 financial results conference call. (Operator instructions) As a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to your host, Mr Chad Ramsey, Vice President of Financial Planning and Investor Relations. Please go ahead.

Chad Ramsey

Good morning everyone. Thank you for joining us for Tasty Baking Company’s conference call to discuss fourth 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 Investors 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 Web site 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 to your questions.

Go ahead Mr Pizzi.

Charles Pizzi

Thank you Chad and good morning. In the fourth quarter of 2009, the company reported a gross sales increase of 4.3% to $73.6 million on a volume increase of 0.9% versus prior year period. In terms of net sales, the company reported growth of 0.3%, which was driven by a 2.2% increase in route net sales versus prior year. During the quarter, within our route markets, the category grew by 2.8% and 3% over the prior year period in terms of sales dollars and unit respectively with TASTYKAKE outpacing the category on both fronts.

For our fiscal year 2009, TASTYKAKE also outpaced the category both in terms of sales dollars and unit volume versus prior year. In connection with the transition to the new bakery, in the fourth quarter of 2009, we recorded $4.5 million in accelerated depreciation compared to $1.3 million in the fourth quarter of 2008. The year-over-year increase reflects the acceleration of project timing and changes to the useful lives of certain assets that will no longer be utilized when the transition is expected to be completed in the spring of 2010.

During the fourth quarter, the new bakery and distribution centre lease also commenced and we began recording rental expense on a straight-line basis. Total lease expense for the Navy Yard bakery and corporate office during the fourth quarter of 2009 was approximately $1.8 million with $1.5 million of this in the form of a non-cash rental expense.

In addition, in the fourth quarter of 2009, the cost of the acceleration of the expected completion date of the project, the company recorded a $1.4 million reserve related to spare parts that are no longer expected to be utilized at the Hunting Park manufacturing facility. During the fourth quarter of 2009, we began the commissioning and production transition process. We incurred approximately $1.5 million in net transition costs related to the overall project.

The combined effects of these events along with the 5.6% decline in non-route net sales, which were partially offset by a 2.2 percentage increase in route net sales during the fourth quarter of 2009 contributed to our net loss of $5.1 million, or $0.64 per share compared to the loss of $4.6 million or $0.57 per share in the fourth quarter of 2008.

With regard to our new lead registered bakery and distribution centre, the transition to the Philadelphia Navy Yard is progressing well and we still expect to complete the transition of production in the spring of 2010. As of early March 2010, four out of the seven new production lines slated for the new bakery have been commissioned including those making pies, cookie bars, KRIMPETS, and certain cup cake varieties. In addition, we recently relocated our distribution centre to the Philadelphia Navy Yard.

As expected there is a period of time following commission of each line during which the speed and overall performance of the line must be optimized. As a result, the company expects that during the first and second quarters of 2010, when the commissioning and transitioning process is at its peak that we will experience significant transitioning cost that will negatively impact overall financial performance. Our existing Hunting Park bakery will continue to run some product varieties while we complete the transition to the Navy Yard and actively market the property.

Overall, we feel that we are making good progress towards integrating operations into the new facility. We have dedicated and talented people working to ensure our success and we feel confident in our ability to ultimately reach our objective. However, as with any project of this magnitude, for a company of our size, we have experienced some challenges that have impacted our operations.

In terms of operations, we have had an oven fire at the aging Honey Park facility in early February 2010, which critically damaged one of our cup cake lines rendering it unusable and causing operations at the plant to temporarily seize while the fire was being controlled. Thankfully, there were no injuries. And due to a quick reaction of our highly trained employees as well as of the Philadelphia Fire Department, the fire did not spread to other areas of the facility.

In terms of the impact from the fire, our production teams were able to expedite the transition of the cup cake processing equipment to our new plant as well as to retrofit other cup cake lines at the Hunting Park facility to get back into limited cup cake production. Due to the plant outage, the company has had lower order fulfillment rates in the first quarter of 2010. However, these issues were somewhat mitigated in the weeks following the fire once the new cup cake line are in full production at the new plant and the company should be back to full capacity.

Historically, we have been able to manage through incidents like this at our outdated Hunting Park facility with relatively little topline impact. However, with the combined effect of the fire on the production capabilities, the transition of the production to the new plant, the relocation of our distribution centre, the severe weather in January and February, there was a significant impact on our ability to fully service the market during this period.

While weather is not typically a factor we discussed, the record breaking amounts of snow in the first quarter of 2010 and the travel restrictions imposed by local authorities during these severe storms created many logistically challenges for a VSD [ph] company dependent on having fresh cake delivered to about 16,000 stops weekly.

During the first quarter of 2010, our operations at Oxford were also impacted by the transition. As part of the overall project, we expanded our Oxford, Pennsylvania operations by moving the production of all TASTYKAKE donut products to that facility. Because of the short shelf life of these products, during the period of time when the production line was being transitioned as planned, we had limited varieties of donuts for sale in the marketplace. We do expect to be back in the market with all varieties by the end of the first quarter of 2010.

Despite these temporary challenges, we remain focused on and excited about successfully completing the transition to our new manufacturing facility, which remains on budget and ahead of our original schedule. We continue to expect pretax cash savings of approximately $13 million to $15 million annually, net of lease expense but before debt service. Once we are fully up and running and have optimized our production lines during the second-half of 2010, we are eager to begin generating these savings and leveraging the new facility to help build the brand and drive topline.

In that regard, we recently reorganized our sales group with the promotion of Bob Brown to Senior Vice President of Sales and the appointment of Brenden O'Malley, formerly our CIO to the role of Vice President of Sales. We are currently moving our sales team to a more process driven organization with the goal of generating higher growth while ensuring we maximize our profit potential as we push topline. Further, we appointed Director of New Products in our hiring of Brad Doyle. These changes reaffirm our ongoing commitment to remain relevant in the marketplace as well as growing sales in a meaningful and profitable way.

Our goal is to further improve our strategic and day-to-day operations by empowering dynamic, creative, and thought-borne individuals in positions of company leadership. I have the utmost confidence in our people and I look forward to a tremendous contribution that each will bring in their positions.

Now, Paul will comment on some specifics regarding the fourth quarter financial results.

Paul Ridder

Thank you Charlie. This quarter we grew route net sales by 2.2% versus the fourth quarter of 2008, and increased market share in our route territories in both the fourth quarter of 2009 and for the full fiscal year. The growth in route net sales in the fourth quarter of 2009 was driven by higher sales volumes, particularly for the company’s family pack products and higher selling prices, which were partially offset by higher product returns and promotion expense as compared to the same period a year ago.

During the fourth quarter of 2009, non-route net sales declined 5.6% versus the fourth quarter of 2008, primarily due to higher promotional expense with third-party distributors combined with lower sales volumes within the vending channel. Gross profit declined by approximately $900,000 in the fourth quarter of 2009 as compared to the prior year period. This decline was primarily driven by a $3.3 million increase in depreciation expense resulting almost entirely from accelerated depreciation related to the company’s transition to the new manufacturing and distribution facility. Partially offsetting this increase was a $2.3 million reduction in cost of sales driven by $800,000 decline in the cost of key ingredients and packaging in combination with a $1.5 million decline in fixed manufacturing expenses?

It is important to note that in the fourth quarter of 2008, the company recorded a $4.8 million net impact of a pension quarter charge and post-retirement medical insurance plan termination benefit that did not reoccur in the fourth quarter of 2009. $2.9 million of this net impact was recorded in fixed manufacturing expenses while the remaining $1.9 million of net impact was recorded as a component of selling, general and administrative cost during the fourth quarter of 2008.

In terms of commodity costs, we have recently experienced significant volatility for certain ingredients including sugar and cocoa. We have a risk management program in place to help protect the company against supply disruption and cost volatility. In that regard during the first quarter of 2010, we entered into a long-term pricing agreement for sugar at rates payable to the current market but still above prior-year rates. As a result, we currently expect commodity cost to become a head win for the second-half of 2010.

Selling, general and administrative cost declined by approximately $800,000 in the fourth quarter of 2009 versus the comparable prior year period. The decrease was mainly attributable to the $1.9 million net impact of the pension quarter charge and post retirement medical insurance plan termination benefit in the fourth quarter of 2008 that did not reoccur in the fourth quarter of 2009. This benefit was partially offset by incremental investments in marketing and brand building and a $300,000 increase in rental cost associated with our corporate offices, as well as $500,000 in higher salary related expenses including the correction of an error related to the capitalization of certain internal labour costs incurred in connection with the transition of the company’s bakery operation to the Philadelphia Navy Yard.

During the fourth quarter of 2009, we recorded a $1.4 million reserve for spare parts; due primarily to the acceleration of the timing of the new bakery project is no longer expected to be utilized at the company’s Hunting Park facility. This reserve was reported as a component of other expense. In addition, during the fourth quarter of 2009, the company incurred approximately $1.5 million of costs related to the transition of operations to the Navy Yard.

While we have not given specific guidance with respect to 2010, we have indicated that we expect these types of costs to continue to (inaudible) reminder of the project. We currently expect that the largest impact of the company’s financial results from transition costs, including those associated with the relocation of our distribution centre in February of 2010, will occur as we complete the transition during the first half of 2010.

While we are excited about the continued progress we are making on the transition of production to the new bakery, we are also acutely focused in lowering costs and enhancing efficiency throughout the business as well as on profitable topline growth.

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

Charles Pizzi

Thanks Paul. In closing, I would like to reiterate our commitment to improving long-term shareholder value by identifying ways to grow our business profitably through a combination of topline performance, increased brand support, product innovation, and continuous improvement of our operating efficiencies.

We have almost fully re-engineered the infrastructure of the company and we believe, despite our short-term hurdles that we can bring excitement not only to our company but to the entire category.

Finally, we look forward to completing the transition to the new manufacturing and distribution facility on budget and ahead of our original schedule so that we can begin leveraging this important new asset.

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

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Mitch Pinheiro of Janney Montgomery. Please go ahead.

Mitch Pinheiro – Janney Montgomery

Good morning.

Charles Pizzi

Good morning Mitch.

Paul Ridder

Good morning Mitch.

Mitch Pinheiro – Janney Montgomery

First to the quarter, I missed this but non-route sales were up 2.2%, what was the – you had mentioned that –

Charles Pizzi

Mitch, it was route sales that were up 2.2%.

Mitch Pinheiro – Janney Montgomery

I mean route sales, okay and then you said that you outperformed the category in both sales and units but I think you said the sales were up 2.8% and units up 3%. So I was just trying to – did I hear, where is the difference?

Charles Pizzi

You did hear correctly, Mitch. The Nielsen [ph] or IRR data depending on which data you use does not have a perfect overlap within our route area or does not always pick up all the data. So there can be some inconsistencies between the two and used as a general measure. The numbers reported to us are physical cases, when a Nielsen typically reports volume in saleable units and that can cause some differences as well. So they do not always perfectly align, we had those same relative inconsistencies in the past although directionally the information is meaningful.

Mitch Pinheiro – Janney Montgomery

Okay. So, if your route sales – obviously Nielsen does not record or does not pick up convenient stores –

Charles Pizzi

Or cash stops.

Mitch Pinheiro – Janney Montgomery

Right. So the plus 2.2, so it sounds like convenient stores relative to the IRI number would have been a drag on their performance.

Paul Ridder

I think Mitch that you have seen generally, anecdotally they were soft as they can be in store market in 2009 mostly due to lower store traffic.

Mitch Pinheiro – Janney Montgomery

Okay, that is helpful. Did you break out – I mean, I heard something about 0.9% volume; I was not sure what that was referring to. Is that overall volume –

Charles Pizzi

Gross volume.

Mitch Pinheiro – Janney Montgomery

Gross volume?

Paul Ridder

That was overall volume Mitch.

Mitch Pinheiro – Janney Montgomery

And volume on the routes itself were 2.2%.

Paul Ridder

Net sales were up 2.2%, Mitch. We did not break out the volume between used as a route or the non-route business. Overall, we were up a little longer, 1%.

Mitch Pinheiro – Janney Montgomery

Okay. What is the reason behind the higher sell rate?

Charles Pizzi

Mitch, I think there are a couple of things, it was the normal. During the fourth quarter, we had more holidays incurred in between Halloween, Thanksgiving, and Christmas and Jewish holidays, and then with the transitioning to the new bakery, I think we could have been better focused than we were.

Mitch Pinheiro – Janney Montgomery

Okay, but the holidays are typically – they are there in the fourth quarter of both years. So you are basically the (inaudible) year-over-year would be just to the latter point, would that be fair?

Charles Pizzi

Yes, I think it would. I think there is another element to consider as well and that is in the category there was a lot of promotion going on during that period of time in the fourth quarter.

Mitch Pinheiro – Janney Montgomery

Do you guys still, during lines transitions, do you still build excess inventory as a contingency, does that play into it?

Charles Pizzi

Not as much. We do build inventories where we can but we are a fresh product and we deliver it daily and I think the big element that Autumn has brought to the company is making sure our inventories are very low, so we get the freshest product out into the marketplace.

Mitch Pinheiro – Janney Montgomery

In terms of costs related to the optimizations of the lines specifically, are we talking labor, is that what that is?

Charles Pizzi

Yes, and I think there are a couple of different categories we want to talk about here and that is transition and optimization because they are two distinct elements. On the transition, we are transitioning to the lines, then once we transition, we then try to optimize the lines. So, Autumn, why don’t you expand for that?

Autumn Bayles

Yes, I mean you are headed down the right path there where there is obviously additional labor, some additional overtime that has incurred or some scrap, waste, redundant transportation and redundant utility costs, things like that.

Charles Pizzi

Not to mention training and transportation costs, right?

Autumn Bayles

Right, and as Charlie pointed out, there is the transition side and then there is the optimization side.

Mitch Pinheiro – Janney Montgomery

Right. So, the $13 million to $15 million of pretax, pre-interest and lease savings that is a full optimization kind of run rate, is that correct?

Paul Ridder

That is correct Mitch that run rate is when we will begin once the project is fully complete not just once the transition is complete. We will have a period of optimization we have said all along we expect that transition to be complete in the spring, each line will have its own optimization period following when it is transitioned, and once all the lines are transitioned, we will pick up full run rate, we will be at some rate below that as each line is fully optimized.

Mitch Pinheiro – Janney Montgomery

So you are still going to have some lines or lines running at Hunting Park I guess through most of 2010?

Autumn Bayles

Mitch, basically we use Hunting Park during the transition period. Once everything is transitioned we would shut Hunting Park down and then some lines will still be in an optimization mode.

Charles Pizzi

We expect that to happen Mitch in the spring of 2010.

Mitch Pinheiro – Janney Montgomery

Okay, so transition cost which were, am looking through my notes, $1.5 million in the fourth quarter?

Charles Pizzi

Yes.

Mitch Pinheiro – Janney Montgomery

Is that a run rate, is that a good quarterly run rate to think about or does it get lower here or how do I model that?

Paul Ridder

I think that that the best way to look at it, and we have not given specific guidance on the number itself is that, we do expect here the first half of 2010 to be the peak period of commissioning and transition, and would have the peak cost. Some of that timing depending on how it falls between the first and second quarter could be dependent on how the lines come up or expectation is that the first quarter is going to be the period of the most activity in terms of commissioning, transitioning the distribution centre and we would think would be a peak from the activities, we cannot be assured that it will wind that way exactly on cost. We are comfortable that the first half of 2010 will be the largest component of cost that we see.

Mitch Pinheiro – Janney Montgomery

Regarding the first quarter of the items that you mentioned, we looked at IRI and this is on a national basis but we saw February sales down at a low double-digit rate, so that is a measured channel excluding C store, etc, what kind of – it is going to be hard without getting some sort of guidance from you guys what impact the fire would have had, what impact limited varieties that donuts have at Oxford, is there any way you can give some sort of guidance for that because I have no way of knowing – I will just have to get a dark word out otherwise.

Paul Ridder

I think Mitch, we are not yet prepared to present guidance for a portion of the business as we said before. We will re-evaluate that as we move forward throughout the project. I think the best metric, and I would point to January when you look at IRR and Nielsen, in terms of Nielsen data for January, I think you can see the category was down about 7% in sales dollars and almost 5% on unit volumes that we did manage to outperform the category and grow market share but January was challenging for the category, and as you said you have the IRR data which shows the relative impact year-over-year and versus the competition for TASTY in February, which I think is probably a good metric to use in terms of (inaudible) of the overall impact of both the fire and the weather events, both of which were by themselves things that we have effectively managed through before, but when taken in tandem and combined with the move of the distribution centre, and the transition to production was significant, and that is why you have seen the impact on IRR data that you saw.

Mitch Pinheiro – Janney Montgomery

Okay, I could probably figure this out but as far as fire that had the impact of about how many days, was it two or three days?

Paul Ridder

I think Mitch, we feel we were back to some limited production relatively quickly but we are still in the process because one of them was rendered unusable, but until we have all of our cup cake lines up in the new facility, we will not be back to full production. So, there is a period of kind of full impact and then a tail of limited impact to go through, which is why you really saw it over the whole month of February as opposed to just for a couple of days, which is why you see such an impact on the IRR data which you quoted.

Mitch Pinheiro – Janney Montgomery

Okay and then also when it comes to the – so the result is you have out of stocks in certain cup cakes is that what it is?

Autumn Bayles

Yes Mitch, this is Autumn, during the time when we were down the line which we still are but before we had some of these mitigating factors in place, we were out of certain varieties of cup cakes, and then as Paul said, we have managed to get back some of our capacity but we are not at full capacity until the new line is running down at the Navy yard.

Mitch Pinheiro – Janney Montgomery

Okay, thank you, and then as far as documenting ingredient costs, you locked in a long-term contract which you think is favorable but higher than last year, so is this something where it is favorable meaning it fits within your margin guidelines or are you going to need to raise prices in the back half of 2010 to protect margins.

Paul Ridder

We will not comment on future pricing acts since Mitch when we talk about it being favorable, we talk about it that is a comment that the pricing we have under our arrangement is favorable to current market pricing. Again it was still above where we were in the prior year. I think that you may recall on some of our prior earnings calls we have talked of the fact that we had sugar locked under our long-term arrangement, which came to an end, and we entered into a new arrangement, which is still favorable to the current market pricing. We continually look at our cost structure both ingredient packaging as well as labor and others with respect to our pricing, and we will continue to look at those and make decisions as are appropriate to protect the margin.

Mitch Pinheiro – Janney Montgomery

Okay, so when you look at the aggregate of ingredient cost, I mean, sugar obviously is higher, cocoa is going to be higher, I would suspect flour and the oils to be favorable a touch in 2010?

Charles Pizzi

Yes.

Mitch Pinheiro – Janney Montgomery

Berry [ph] is probably going higher.

Charles Pizzi

It fluctuates, there is fluctuation and it is a spot buy.

Mitch Pinheiro – Janney Montgomery

So year over year commodity cost in the second half will be higher than the second half of 2009, is that correct?

Paul Ridder

That is our current expectation Mitch, I think I would point out in – as you recall we’ve significant commodity cost escalation in 2007 and 2008 where we saw commodity costs increase by a little more than $8 million, and while we were favorable in 2009 it was only down as we said about $2.2 million. So, those reduction did not get us the whole way back to where we were. We do expect it to be a bit of a headwind in the second half of the year. And as you said, it is primarily as a result of the significant increase as it happened in the market for both sugar and cocoa. There are some items that are favorable and I would say even a significant number of items that are favorable, some of our larger components we do expect to be unfavorable in the second half of the year, which will impact the business some.

Mitch Pinheiro – Janney Montgomery

Okay, last two questions, one fixed manufacturing expenses in the fourth quarter were down $1.5 million, if I heard you correctly, what is that comprised of?

Paul Ridder

I think that the biggest thing when there are a couple of components, you may recall that we had a pension quarter charge last year and we had a benefit from the termination of one of our post retirement medical plans that impacted fixed costs by about $2.9 million on a net basis in the fourth quarter of 2008. We did not have that recur in the fourth quarter of 2009. So we started with that benefit coming through and then that was offset primarily by the incremental non-cash rentals of $1.5 million associated with the new bake release.

Mitch Pinheiro – Janney Montgomery

Okay.

Paul Ridder

And that really explains a majority of it.

Mitch Pinheiro – Janney Montgomery

Yes, that’s helpful. And then finally, just so I understand, back to the fourth quarter again, the non-route sales, which were down, you had mentioned vending any other meaningful driver of that revenue line?

Paul Ridder

I think that Charlie touched on a little bit. We did see in the fourth quarter of 2009, we saw more promotional activity in the competitive market place. We saw more significantly in our non-route territories. So really it was the combination of higher promotional costs as well as some softness within the vending channel that led to that reduction.

Charles Pizzi

And, I think you have been covering us for long time, and we had the opportunity when we first got here to sort of go take a piece of the organization at a time, so we first re-organized finance, then we built a new technology platform, then we hit the supply chain. Now we are focusing on a new sales organization too. So, I do believe that the ongoing work that we are doing in the sales organization becoming a more – from a relationship to a process driven organization would benefit our sales not only in routes, but non-routes as well as we progress.

Mitch Pinheiro – Janney Montgomery

Charlie, I just have one final question, sort of, more intermediate term in scope, but as you sit here today, knowing what you know about what happened in the first quarter some of the sales issues, weather, fire, and things like that, as you sit here looking knowing you have four of your seven lines complete, knowing what you know about your cost inputs, if you were – where are you on the maybe confidence scale that you still – the cost savings look like they are coming through as you originally projected that the sales organization is in the right shape, the cost picture is in line with where you thought it would be. And then, your general outlook for tasty baking, as you enter this – as you leave this transition process, how do you feel about it? How confident are you? Has anything changed from where you were maybe three or six months ago?

Charles Pizzi

Well, I think that’s a very legitimate and the right question to ask. I think we are pretty close to the goal line here. The goal line that we sort of drew up many years ago, and I don’t like the – and we’re just about ready to put the ball over the goal line. We had some things happen to us which really when you sat back and say, fire, that’s why we had to make the decisions we did back in ‘07, to have a new facility. I really do believe that the people in this organization are bored, who provide a necessary oversight – are really growing all in the same direction, and we feel as though we are about ready to scale the summit of the mountain that we started to climb so many years ago.

I do believe that we have the resolve at this point in time to handle any issues that should come along within the remaining part of this year recognizing we hit sort of a perfect storm. As Paul pointed out, I think it’s important we have managed through these areas, building a new plant, transitioning, we did that. We worked through weather issues, and you know we never talk about weather as an excuse; we never have on our calls before. And then we have had, this is our third fire in the last 19 months, last two years. But when you put them altogether, it was really a challenge, but the best part of it is, we are on the other side of that now. We still delivered product to our shelves, all of our shelves were still filled, and we didn’t have a – I think all of our customers were in line with what we had to do.

So, we are really focused and excited about Tasty's future. I like to say when I talk about in our staff meetings is this is a new company now with a completely new infrastructure and now a new sales organization to leverage our new assets. And so I feel very confident, and I feel very good that you will see Tasty on shelf as a new company, a lead certified company doing all the right things, and whether it's the latest version of technology or the latest version of our packaging, if you saw our pie packaging innovation.

I also believe that as I mentioned with the hiring of a new Director of New Products, the creation of a new position for the first time at Tasty, we are going to continue to be relevant in the marketplace and meet the criteria of our consumers in 2010 and beyond. So not only do we fix up internally over the past number of years the infrastructure, now we are focused on externally, and I think we have all the bullets that we need to make sure that we hit our targets.

Mitch Pinheiro – Janney Montgomery

When you cross the goal line, Charlie, are you going to spike the ball, throw it into the stands or just hand it to the official?

Charles Pizzi

I may do a little dance.

Mitch Pinheiro – Janney Montgomery

Okay. Well, thanks for your time. I appreciate it.

Charles Pizzi

Thank you.

Operator

Our next question comes from Tom Graves of Standard & Poor's. Please go ahead.

Tom Graves – Standard & Poor's

Yeah, good morning. Thanks for the opportunity; I am an equity analyst here at S&P. I thought Mitch asked a lot of good questions, I got a couple more. One is on the accelerated deprecation, which obviously picked up in the fourth quarter, perhaps because of the change in the timing of the transition and the project. Can we look for the accelerated depreciation that go back to kind of a weight that it has been added in the last year or year and half of around 1.3 million per quarter for the first two quarters of 2010?

Paul Ridder

This is Paul, Tom. What we did is, and you are exactly right, because the timeframe for certain of the production lines and certain of the assets to be used in the old facility shortened. We had to shorten up the period over which we were going to depreciate those assets, as well as add the incremental charge that would then result in some incremental deprecation being recorded in future periods. Although the amount of time over which we will have to record the depreciation is not as long. And so, I think the message is the total amount of depreciation that we are recording over the whole life of the project is not changing, just we saw a little more get pushed into the fourth quarter, and you will probably see more get pushed in the first quarter and then it would begin to tail down as some of the lines or take it offline at our Hunting Park facility.

Tom Graves – Standard & Poor's

I thought the guidance had been basically that the accelerated deprecation was going to end with the second quarter of 2010. So I am little confused here, if the amount is basically staying the same, if you accelerated some of it into the fourth quarter that would imply to me that there will be less than what was previously anticipated in the first half of 2010.

Paul Ridder

That's correct, Tom. That is what I am saying, you will continue to see a higher rate in the first quarter but you would see it begin to drop off earlier in the second quarter. You have to remember what you’re also seeing is not just the accelerated component of the depreciation but the base component of the depreciation as well, which has been well [ph] into the P&L and which would affect the P&L. So, as I said, you will see a higher rate in the first quarter but you will see it begin to tail off earlier in the second quarter than it otherwise would have.

Tom Graves – Standard & Poor's

Okay, and a couple of other things, one, I want to check with you, are you in compliance with your loan covenants now based on your results you just reported?

Paul Ridder

Yes.

Tom Graves – Standard & Poor's

Okay, and the last question, your change in your sales organization, does that imply or suggest any change in your sales strategy going forward and in connection with that once you’ve optimized your new facilities which you look to be able to drive sales growth more from sales to existing customers or would you think you might be shifting towards more of an emphasis towards geographic expansion and basically changing the customer mix and trying to increase it?

Charles Pizzi

I think all of the above. I think with the new organization there will be new opportunities not because of new organization but because of our new facilities both not only here in Philadelphia but in Oxford Pennsylvania, and I think about it in terms of new channels, new products, new geography.

Tom Graves – Standard & Poor's

Okay. Thank you very much.

Charles Pizzi

Appreciate your time. Thank you, Tom.

Operator

Thank you. Our next question comes from Nick Kovich of Kovich Capital Management. Please go ahead.

Nick Kovich – Kovich Capital Management

Good morning. Congratulations on a positive move to complete your transition.

Charles Pizzi

So far so good, thank you. We’ll call you when we have our little tip of the hat.

Nick Kovich – Kovich Capital Management

Charlie, I am interested in your comments and view, you talk about getting across the finish line and about scaling new mountains, and you have totally re-engineered the company with a new infrastructure and a new sales force, and I am trying to understand as a long-term investor what are reasonable financial return metrics by which you communicated to your Board of Directors investing a large amount of capital for a company your size. You have thrown out consistently this $13 million to $15 million of savings, and I am trying to understand what is the earnings power of the company because prior to 2001 there were many, many years where Tasty earned anywhere from $0.90 to $1.25, and that equates to, I do not know, 4%, 5%, 6% after tax return on sales, what would you say to investors today what are reasonable financial return metrics for the company either return on invested capital, return on sales, return on equity, a Du Pont type of financial analysis what should we expect once this transition is completed and as we look out two to three years as a long-term investor?

Paul Ridder

Nick, it’s Paul. Let me hit there; I think you had a number of questions and I will try and hit them. I think the first one to start out with is while we have a number of discussions with our Board surrounding returns and targets and metrics, we don’t discuss the content of conversations we have with the Board. Kind of stepping forward into some of the others, we have not spoken publicly about financial metrics or guides for 2010, although we have said that we do expect $13 million to $15 million in pretax cash savings, that’s after the lease expense but for debt service. And I think we’ve gone on the record a number of times to talk about, that’s a cost containment elimination opportunity. We have said that the new production facility provides us with enhanced flexibility to produce new products, and as Charlie mentioned, we have reorganized and restructured our sales force to allow us to further leverage that asset. And I think that there are a number of publicly available metrics by which the company could be measured for competitive and other reasons, I don’t think that’s a discussion that we want to go into on this call though.

Nick Kovich – Kovich Capital Management

Well, is it reasonable to assume that you should have a return on sales higher than you had in 2001, which was 4.5% on a very inferior asset base?

Paul Ridder

Well, Nick, I don’t think we want to go through and comment on how you should evaluate the business. We have a number of internal metrics that we do evaluate the company against but we have not provided those publicly, so we cannot comment on those at this point.

Nick Kovich – Kovich Capital Management

Okay. In 2010 and 2011, what do you expect capital spending to be for the company and what do you expect depreciation and amortization to be for those two items in 2009, 2010, 2011? Because in the press release those numbers I did not see them in there. Depreciation number was in there but not capital spending.

Paul Ridder

Deprecation, as you have said, in terms of 2010, 2011 that you’ve talked about, we have not provided guidance in terms of capital spending, we do have threshold maximum requirements that are laid out within our bank credit facilities of approximately $6.5 million for 2009 and $6.75 million for 2010. So we do have those restrictions in terms of what I call normal capital expenditures, and then we will have the completion of the project, the project to move the facility in the bakery and distribution center down in the new bakery. We have not provided nor will we at this point provide guidance in terms of the other income statement metrics or beyond that. As we have said, we will reevaluate that as we get through the transitioning and optimization period associated with the new bakery but we do not want to prematurely provide that information.

Nick Kovich – Kovich Capital Management

Okay, thank you very much. Good luck.

Paul Ridder

Thank you.

Autumn Bayles

Thank you.

Operator

And now we are showing no further questions.

Charles Pizzi

Okay, thank you very much. I hope everybody had a productive day.

Operator

Ladies and gentlemen, that does conclude today’s conference. You may now disconnect and have a wonderful day.

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