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Executives

Chad Ramsey - Vice President - Financial Planning and IR

Charles Pizzi - President and CEO

Paul Ridder - Senior Vice President and CFO

Autumn Bayles - Senior Vice President - Strategic Operations

Analysts

Mitchell Pinheiro - Janney Montgomery Scott Llc

Scott Blumenthal - Emerald Advisers

Douglas Thomas - JET Investment Research

Tasty Baking Company (TSTY) Q2 2008 Earnings Call August 1, 2008 11:00 AM ET

Operator

Welcome to Tasty Baking Company’s second quarter 2008 conference call. (Operator Instructions) Now, I would like to introduce your host for today's conference Chad Ramsey, Vice President of Financial Planning and Investor Relations for Tasty Baking Company.

Chad Ramsey

Thank you for joining us for Tasty Baking Company's conference call to discuss second quarter 2008 results. You should receive the copy of this morning's release. However, if for some reason you have not received the copy, please call 215-221-8538 and request a copy which will be faxed to you immediately. Today's call is also being broadcast over the internet at www.tastykake.com in the Investor Section under the Webcast and Presentation 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 provide 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 introductory comments from management, we will open the call for your questions. Go ahead, Mr. Pizzi.

Charles Pizzi

We appreciate your continued interest in Tasty Baking Company. Today we will be discussing our second quarter results for 2008. As with past quarters, there are several important issues affecting our company. We will walk through various elements so that you will better understand the drivers of our year-over-year performance. In the second quarter of '08, the company reported net income of $0.01 per fully diluted share. These results include approximately $0.10 per fully diluted share of accelerated depreciation expense due to the reduction in the useful lives of the assets at the Philadelphia bakery.

Total company gross sales increased 3.1% driven by 5.2% growth in root growth sales. Root growth sales benefited from a continued growth in single serve volumes, product pricing and a shift of the Easter Holiday to the first quarter of '08 from its traditional occurrence in the second quarter of the year. The shift and timing of the holiday pushed the seasonal slowdown in sales volumes typically associated with Easter to the first quarter of '08 from the second quarter of the year.

Root net sales grew 2.2% versus the second quarter of '07 and were negatively impacted by an increase rate of product returns preliminarily within the grocery channel. Non root net sales grew 0.6% as compared to the same period a year ago due primarily to growth in vending and third party distribution particularly in our expansion territories. Total net sales for the company grew 1.8% in the second quarter of '08 compared to the same period a year ago.

Like other companies in the industry, Tasty Baking had to confront increasingly high commodity cost in the second quarter of '08 that led to a 13% increase in variable manufacturing cost per case. The reason for the increase was $2.4 million more in ingredient and packaging expense when compared to the same period last year. For Tasty Baking Company, $2.4 million pretax represents approximately $0.19 in earnings per share. The year-over-year commodity increase was most prominent in grains, oils and eggs.

Our efforts to combat these increases are being executed through a multifaceted approach that include product price increases, changes to promotional strategy, improved operational efficiencies and a continued emphasis on cost containment. Our cost containment efforts have yielded favorable results thus far. In the second quarter of '08, we were able to lower selling, general and administration expenses by over $1 million when compared to last year and for the first half of '08, we reduced selling, general and administrative cost compared to the prior year by $2.2 million or 8.4%.

In addition to SG&A reductions, we have achieved significant operational efficiencies in our plants during the second quarter of '08. These efficiencies take place in different parts of the operation but result in reduced overtime and lower manufacturing variances which helped offset the impact of increased ingredient and packaging cost. Another important component of our efforts to mitigate the impact of higher input costs are the benefits we realized from increased sales prices and changes to our promotional pricing strategy.

In terms of list price increases, our family packs were up approximately 5% and single-serve products were up approximately 8% year-over-year in the second quarter of '08. When combined with year-over-year savings from our cost containment programs, these benefit from pricing almost fully offset the impact of higher commodity cost in the second quarter of '08. Looking forward, we will continue to evaluate the proper pricing and trade promotion strategy in our records to offset the effect of higher commodity cost on the profitability.

To that end in the third quarter of '08, we announced list price increases of approximately 3% on most family pack product categories. We are mindful, however, of the impact of higher prices on our consumers and we will balance the expected benefits from pricing against the current market dynamics and operational efficiencies. One of the levers we rely on to help drive sales and combat the impact of higher commodity prices is product innovation. We are pleased with the continued success of our single-serve products and the limited edition varieties as year-over-year volumes continue to grow in the second quarter of '08.

As you may recall, we also grew year-over-year single-serve volumes in the first quarter of '08. We are focused on continually bringing new and exciting products, labors and packaging that will keep consumers engaged. We also continue to support the business through advertising, consumer promotions and associations with key regional institutions. For example, in May of this year, we announced the multiyear alliance with the Philadelphia Eagles that will include co branded products, radio, print, television and online advertising. This agreement is in addition to our partnerships with Sports Radio 610 WIP, the leading sport's radio station in our core market, also Philadelphia second baseman Chase Utley and the Baltimore right fielder Nick Markakis.

Our goal with these partnerships is the continued Tastykake's strategic approach of reaching its targeted consumers in a myriad of ways notably through professional sports. Keeping brand top-of-mind with our consumers is important and we will continue to invest resources in this area. In terms of long term strategies for the company, the new bakery project is a pivotal and important component. Construction of the building is proceeding on time and the project is within budget. The steel has been completed for the building and the pre cast concrete walls are currently being placed in this 345,000 square-foot facility.

Almost all of the necessary key equipments to operate the bakery have been ordered and the process engineering is nearing completion. In the next several months, the project will focus on monitoring the construction process and managing the equipment engineering. In addition, we are planning for the upcoming equipment installation and the start of the equipment commissioning process as well as training of personnel. This new facility represents a transformational event for Tasty Baking Company. The savings generated from the project and the operational synergies from the new state-of-the-art equipment will help increase our competitive position and at the same time, provide flexibility for increased growth opportunities.

In the inner room however, we are intently focused on managing the business and confronting the challenges presented by the current economy and commodity prices. We recognize that we must tackle today's challenges while still planning for tomorrow.

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

Paul Ridder

Charlie has already reviewed many of the important themes and performance metrics for the quarter. However, I would like to discuss a couple of additional points that are relevant to explaining our performance. In the second quarter of 2008, gross margin declined 5 percentage points to 27.7% of net sales. The biggest drivers of the change in margins were commodity cost and depreciation which were partially offset by selling price increases.

During the second quarter of 2008 ingredient and packaging cost increased by $2.4 million which accounted for 5.5 percentage points to the overall decline with approximately 90% of that change attributable to higher grain, oil and egg costs. As we mentioned last quarter where we can appropriately mitigate risk by entering into longer term supply arrangements, we will do so as we have done with sugar which is one of our largest ingredients. During the second quarter of 2008, gross margin was negatively impacted by almost 1.5% points due in increasing depreciation as compared with the prior year. During the quarter, we recorded approximately $1.3 million in accelerated depreciation related to a change in useful lives of assets at our Philadelphia bakery related to our plan to move more present Philadelphia facilities in 2010.

In the prior year however, only $700,000 of accelerated depreciation was recorded in the second quarter as the decision to move was made partway through that quarter. The last major component of gross margin change was the benefit associated with selling price increases. During the second quarter, total family pack list selling prices were up about 5% year-over-year and single-serve list prices were up about 8% on average year-over-year. In addition to the list price changes, we made changes which increased our average commodity price point for all family pack products.

Due to market dynamics as well as the lag effect, the impact to the price increases, net of any valuable asset fees was to improve gross margin by 2.7% points or by half of the commodity cost impact. To further offset the impact of commodities, we have announced additional list price increases of approximately 3% on those daily pack product categories. While ingredient impact in cost had a significant impact on our financial results in the second quarter and negatively impacted our gross margin percentages. We remain committed to offset these higher expenses through our focused and multi-tiered effort.

Our results for the second quarter are a good example of this. The benefits in increased product prices changes to a promotional pricing strategy, improved operational efficiency and cost containment efforts on an absolute dollar basis to be able to combine benefit which will offset the impact of higher commodity cost in the second quarter. While we may not be able to achieve those results every quarter, we are working to maximize the benefits from pricing and promotion while at the same time seeking an opportunity for continued cost savings.

In the second quarter of 2008, we generated $3.4 million in EBITDA as compared to $3.9 million in EBITDA in the second quarter of 2007. The reduction in EBITDA was almost entirely attributable to the fact that the benefit associated with changes we made to our benefit plans in 2007 did not recur in 2008. Asset, we effectively offset the impact not only of the $2.4 million increase in commodity costs but the impact of higher product returns as well. Our debt position as of June 28, 2008 was approximately $40 million. Total capital expenditures at the second quarter were approximately $4.4 million including $3.2 million of payments for equipment related to the new manufacturing facility.

Year-to-date, the company has about $13.3 million on capital expenditures with $10.9 million going towards the new bakery project primarily for equipment. In 2008, we expect to spend approximately $26 million related to the new facility and $6 million related to our existing operations with the majority going toward expansion and efficiency improvements at our Oxford facility. In 2009 and 2010, we expect to spend approximately $43 million on the new facility. We recognized the continued volatility in commodity prices and an uncertain economic environment present distinct challenges for our business and for others in the industry.

However, we believe that our multi-tiered strategy in focusing on pricing, promotion and cost containment were working to mitigate risks where possible and will yield positive results for the company.

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

Charles Pizzi

Despite the impact on us from the volatile commodity environment, the important takeaway from our strategy is that we are confronting to these challenges and addressing the risk presented to us by the current economic environment with meaningful initiatives at every level of the organization throughout our operations. That being said, we look forward to a time when our new manufacturing facility is fully functional as it will give us increased financial flexibility. Until that time comes however, we recognize that we must not lose focus on what we can accomplish today to improve the company's financial performance.

Now, we will open the call to your questions.

Question-and-Answer Section

Operator

(Operator Instruction) Your first question comes from Mitch Pinheiro - Janney Montgomery.

Mitchell Pinheiro - Janney Montgomery Scott Llc

I am hearing from some other snack food competitors that key star businesses traffics down but yet you guys can still drive single serve. Why is that do you think?

Charles Pizzi

Mitch, I think innovation is first. We introduced a lot of new products on a single serve side. I think merchandising is the second reason. I think we have been executing some new merchandising within the channel. I also think the expansion in some of specific customers within that channel has been very positive in expanding our volumes within certain change. Certainly, our marketing has focused on radio and for single serve. So, it is wide array of initiatives that we have taken and I also think finally that we brought more focus to the single serve this year as part of our overall plan for '08.

Mitchell Pinheiro - Janney Montgomery Scott Llc

So, did you quantify the single serve volume?

Paul Ridder

We did not, Mitch. We intentionally do not break that apart for competitive reasons. Obviously we have said there is some disparity to what we are achieving at some of our competitors so we are sensitive to that. As Charlie said, we really hit it with a multi-pronged approach that will be very successful this year.

Mitchell Pinheiro - Janney Montgomery Scott Llc

So, with your price increases up 8% but obviously the overall volume as single serve price increase, I presume there was some volume decline in single serve, is that there?

Paul Ridder

We actually said on the call that the single serve volumes were up.

Mitchell Pinheiro - Janney Montgomery Scott Llc

Oh, they were, okay.

Paul Ridder

It is quite the fact that we raised prices, Mitch.

Mitchell Pinheiro - Janney Montgomery Scott Llc

That leads then to the family pack. Obviously it seems more sensitive to pricing and promotion than the impulse category so volumes were obviously down there. Have you been successful in raising your promoted prices in the family pack or have you backed away from that a little bit being sensitive to what is happening in the broader market?

Paul Ridder

I think the way to answer that Mitch is I mean when you look at the impact that we had from pricing, we were successful in putting to the price increases that we attempted to. One of the thing that we have said is we are proactive and also reacting to market challenges and we look at what that requires both from commodities, risk management, price and cost containment so I would not say that we will either move forward back and away from that. We are making sure we are evaluating the situations with respect to pricing very carefully and taking those actions that benefit values in the company.

Mitchell Pinheiro - Janney Montgomery Scott Llc

So, how do you explain the higher returns in family pack? What is driving that?

Charles Pizzi

Well, I think the dynamics that are going on within the grocery channel right now. I think it has been really in the press about the fewer trips to the supermarket and so there is the dynamics of that which we see within the grocery channel on our products.

Paul Ridder

I think it is important to note that just as like we do in the plant everyday and measure the inventory. An important component of mitigating that rough setting is making sure there is appropriate inventory management to show. So, we are putting initiatives into place to offset that, just like we do with the other challenges that we have seen.

Mitchell Pinheiro - Janney Montgomery Scott Llc

But returns in the C-store in single serve, let us say, I think you see serving single serve are normal or close to normal or however you want to..?

Paul Ridder

We see movements every month and every week up, down, sideways depending on the volume to that week. The most notable changes in returns were really in the grocery channel.

Mitchell Pinheiro - Janney Montgomery Scott Llc

Okay, so what do you do to combat that end returns?

Charles Pizzi

I think we have taken a series of actions at store level and throughout the organization but I would not want to really discuss it further from a competitive perspective.

Mitchell Pinheiro - Janney Montgomery Scott Llc

Speaking of competitors and competitive dynamics, what are you seeing in your core markets as far as how competitors are acting on price and promotion?

Charles Pizzi

Mitch, we do not really like the respond on, to talk about the competitive perspective.

Paul Ridder

I think that is not to imply that we do not look at it. We monitor it closely but that is not something that we want to get into on our calls probably talk about what our competition is doing.

Mitchell Pinheiro - Janney Montgomery Scott Llc

Is the fact that family pack volume is down? I mean, was there any, or was someone else is gaining share on you or is the whole category down? Is everybody down equally? Can you color that a little bit?

Paul Ridder

Once again, we will be careful commenting. The category had seen some decline in the past 13-week period. You have to take into account looking at volume changes, promotional dynamics over a certain period of time and a lot that goes with it. So, I do not think we want to comment really on the competitive stuff, Mitch.

Well, in fact a natural ebb and flow depending on the level of promotion that any individual competitor has in the period of time in which you are looking at. So it is tough to say without quantifying the period of time.

Mitchell Pinheiro - Janney Montgomery Scott Llc

Yes. Well, I guess that is what I was getting at, are you seeing, I mean are your competitors giving away the product making it a tougher time for you or is everybody, I mean have you loss a lot of share in family pack over the 13 weeks?

Charles Pizzi

Yes, Mitch the way I would answer it is, we monitor this information and we carefully use it from a marketing and sales perspective and it is not to say that we are not seeing anything that is drastically different from what we have seen so it is just an ongoing phenomenon that we are always looking at.

Mitch Pinheiro - Janney Montgomery Scott

I guess the last question on that is, so did you grow in excess or below the category? I do not get [IRI] in your core markets, where you see measured data?

Paul Ridder

For the information that we have always talked about, Mitch really has been for the last year not for any period other than that and we have for the past period had grown at or above the marketplace.

Charles Pizzi

It is above.

Paul Ridder

Yes and Charles said above the marketplace for the category.

Mitchell Pinheiro - Janney Montgomery Scott Llc

The next question is on pricing, 3% price increase intended here on August on, I guess, most family pack items. Is that going to be enough in your view to offset the commodity cost picture as you see it at this point?

Paul Ridder

I think we were looking a step back as we are really taking that multi facets approach to offset in commodities. As you just said, we are announcing price increases in the third quarter. We are focusing on managing the risks associated with commodities to try it off in that way. We are also focused on cost containment operational efficiency. Our goal, as we have always said in the long term, is to fully offset any impact of commodities. It is a volatile environment so it is difficult to say at any distinct point in time whether our certain pricing action was enough or was not enough but our goal in the long term is to fully offset the impact of commodities.

Mitchell Pinheiro - Janney Montgomery Scott Llc

I mean obviously commodities fluctuate but why not take a 30% increase? Why 3? I mean, why? What is the view? I mean are you going to need to take another price increase in February '09 or is this enough for now based on the current view of the commodities?

Paul Ridder

Obviously we will not talk about February but I think the best way to respond to that is that, as we said, if you look at the gross margin that, in fact, about 5.5% points of gross margin decline was due to commodities and we impacted that pricing in our netable assets see that sales were at 2.7% benefit. So, you can look at the gap we have between commodities and pricing during the second quarter alone and look at what the shortfall was just in the second quarter. We are looking forward up to February. We will make the decision as we go month by month looking at the commodities markets and the economic situation but you can see the shortfall we had in the second quarter.

Mitchell Pinheiro - Janney Montgomery Scott Llc

So, then if I look at commodity prices, I mean, let me ask you one thing, are you changing the way you are approaching your commodity purchases at all? I mean have you bought forward more, I mean I know you are covered in sugar but you are doing anything different to help your visibility on the commodity front?

Autumn Bayles

I mean as we said, we would like to, if we see a favorable price point, we would like to cover that and mitigate that risk as much as we can. The tricky part is with the market seems so volatile sometimes they will not let us cover as far as they have in the past so we sort of look at that and whatever risk we can mitigate and lock in, we do.

Charles Pizzi

I do not think from strategy or approach perspective; we are very comfortable with the risk mitigation approach that we are taking. There are small cores correction increases, as Autumn said all the time but the overall strategy we believe remained sound and we are focused on that.

Mitchell Pinheiro - Janney Montgomery Scott Llc

I guess much of what you say you withdrew your guidance or the detail but you still provided expectations for this year which was in that net loss range of 1.7 to 3.2, this is the reasoning behind sort of withdrawing the operating details is, what is the rationale behind that?

Paul Ridder

As you know you have seen I mean really with the challenging commodity and economic environment, we were still able to deliver bottom line earnings in line with expectations but the composition of that earnings was a lot different than we expected, really as a result of the responses that we had to take in response to this challenges. So, because we anticipate continued volatility, earnings are going to reflect not only that volatility, not only the impact to those challenges but also our response to them. So as a result, we felt comfortable giving a bottom line but we know there is going to be changes in composition of earnings more expectations as we react to the marketplace. So, as a result, we felt it was more appropriate to no longer provide that detail on operating outlook but to still provide the net income outlook that we have.

Mitchell Pinheiro - Janney Montgomery Scott Llc

The other thing I wanted to ask was on non route sales which were up $0.06 or 1% in the quarter. What drove the non-route business? Is that your private label business or is it expansion markets?

Charles Pizzi

It is really in the expansion markets that we were getting favorable results and also in vending but in those new market areas. We are happy with the real, as you know from covering the company for so long, it was a real change in the way this company went about its non-route sales. We called it the bolt-on strategy where we move from our core market area and do it in a very methodical way, not giving, we certainly do not have the amount of marketing dollars we want to support those territories at this time but we are doing it methodically through mostly grow the marketing. So, we are happy with the way. We moved in to New York City and New England and Florida. We went into Georgia and just recently, we moved into North and South Carolina. So, our goal was always to become an East Coast company. We now have the fit footprint for that. We have to do a lot more work on the ground and we are doing that everyday in these markets and from a very limited effort at this time, we are pleased with the response that we are getting.

Mitchell Pinheiro - Janney Montgomery Scott Llc

So, if some of your expansion markets are growing, does that mean that like the Wal-Mart business is still year-over-year declining.

Paul Ridder

I mean we do not deal with the past. We do not comment on any individual customers with the economic environment there had been pluses or minuses. The non-route business to the expansion territories, some of these expansion territories does not represent a larger percentage of the non-route business so even though you may have growth that pleases you, it may not move a needle on an overall basis for the growth side of the business.

Mitchell Pinheiro - Janney Montgomery Scott Llc

So, okay but I just need to get a sense. I remember about a year ago Wal-Mart who is obviously a large customer of yours, changed their inventory practices with regard to your product and as well as prior change price points and promoted price points. I thought we would be laughing that about now where has there been up further changes in that and it continued to ramp it down a bit. Is that still happening or with that visibility, what kind of expansion market sales do you have that is hard to tell?

Paul Ridder

We really Mitch do not want to comment on individual customers and we did say in the first quarter that we have seen a reduction in the year-over-year sale due to some lower promotional activity as well as some planned actual relation to products. I do not think we want to go beyond that.

Mitchell Pinheiro - Janney Montgomery Scott Llc

So, next question is on Autumn in the new bakery. So, it is on time. It is on budget. I guess my question is so right now, when do you plan to, when is the bakery ready for the first line to be installed? When does that start?

Autumn Bayles

Mitch, our target is late in 2009.

Mitchell Pinheiro - Janney Montgomery Scott Llc

So, late, the fourth quarter is that what you are saying or..?

Autumn Bayles

Yes, if the building will not be completed or turned over to us until in the fourth quarter.

Mitchell Pinheiro - Janney Montgomery Scott Llc

Okay but it sounds like things are moving along pretty well. I mean the walls are going up.

Autumn Bayles

Yes, we are very pleased with the construction progress. The field is finished this week and they are putting up the walls and we will start doing some installation work several months from now and we have purchased almost all of the machinery and equipment that we need at this time.

Mitchell Pinheiro - Janney Montgomery Scott Llc

Charlie you have mentioned that the process engineering is almost complete. What is process engineering?

Autumn Bayles

Mitch that is just a detail of all the, we purchased all these equipment so for example we have a bulk ingredient handling system then you have to sort of sit down and detail where all the pipes run on the walls. There is a lot of very intricate detail on how you connect the oven, the mixers and all the equipment together so it is sort of this engineering work with the integrating of all of that equipment and it is fairly substantial.

Mitchell Pinheiro - Janney Montgomery Scott Llc

Okay so that is basically, you said, almost complete. Is that right?

Autumn Bayles

Yes.

Mitchell Pinheiro - Janney Montgomery Scott Llc

Okay and is everything going, are the processes as expected or anything unusual there?

Autumn Bayles

No, I mean I think that it is the normal detailed work that we have to do. It is getting all of our partners to work together and then we sort of integrated into the building construction at the same time. So, it is just work that has to be done but we are very pleased with how it is going.

Charles Pizzi

And we are really pleased with our organizational effort in this area led by Autumn but the bottom line is right now, we are on time, within budget. So, the project is on time, within budget and as Autumn stated, we have done a considerable amount of work in the purchasing, procurement of all the state-of-the-art equipment after a lot of detailed analysis and so we are methodically moving through to our original timeline and knowing that we have more work in front of us but the opportunity of this new facility for this, not only the product flexibility but the financial flexibility. We know the importance of that too to our investors.

Autumn Bayles

It is an exciting project, Mitch.

Mitchell Pinheiro - Janney Montgomery Scott Llc

I am sure it is. I like to watch the website video but well I just have to drive down there and visit it in person.

Paul Ridder

It is now substantial when you fly in or out of Philadelphia. You can actually see both the manufacturing facility and another from a productivity standpoint will be our new offices where we will no longer be separated by a warehouse. Our offices are now separated by floors and a warehouse so we are also looking forward to working in a much more collaborative way as well. And that will happen hopefully in the second quarter of '09.

Operator

Your next question comes from Scott Blumenthal - Emerald Advisers.

Scott Blumenthal - Emerald Advisers

Charlie, can you give us some idea as to the type of feedback you are getting from some of the route people on their ability to operate in the current environment especially since there are large field consumers?

Charles Pizzi

Yes, actually I can give it to you almost firsthand because I go to roundtable discussions with all 36 districts. So we hear firsthand and provide feedback. It is a time that we are engaging in a partnership with them. So where we can be most efficient in this kind of market dynamic times where you have price increases. We are working with them to make sure that as you heard our single serve is up so we are making sure we provide lots of product innovation. What we are hearing back from them is really based on first and foremost-how can they become more efficient from an operating standpoint given the current levels of gasoline prices and that is where we rolled out our new handheld software equipment which we are in the process now, everything has been rolled out. We are working through some bugs in the software but that is going to add real value to our partners, our independent sales distributors.

We are working on that and we are really providing the support from our key account folks to drive the best relationships with our customer chain so that they can get in and get out as quickly as they can and conserve their energy cost. So, overall I would say that this is a, although it is a challenging time, we are all facing on a real partnership basis. We continue to have very constructive discussions. There is full understanding of where management is going in the future and what we are doing now in the short term through product innovation and where we are going and there is good overall communication and that helps us with the changing market dynamics that are going on. The less counts in the supermarket stores and things at that nature but we really benefit from the firsthand work and it helps us with the research that we are in the process of doing as well.

Scott Blumenthal - Emerald Advisers

Have they tried or had there been any discussions from them with help and kind of planning and optimizing their route structures? Is that something that you do for them anyway or I mean, if I am an independent sales distributor, I know I have a number of customers and I guess I can go up in the morning and drive to anyone at anytime but there is, from fuel efficiency perspective, the optimal route I guess and have you helped them with that? Is that something they do on their own?

Paul Ridder

Scott, it is something that they do on their own. We keep in mind that they are independent distributors at the end of the day, they make the decision as to what they are going to do in terms of the route, how they are going to service the route but we do provide assistance. We have many number of areas whether it be on optimal efficiency, how they could service the customer better. We will provide them as much assistance as we can that is something that if not new today, we do that each and everyday. They had been doing that and plan to continue to do that. So, at the end of the day, they make the decision of sale. It is their own business and they are independent.

Scott Blumenthal - Emerald Advisers

Of course, your success depends upon them being successful.

Charles Pizzi

You know, Scott, you stole my line. At every meeting, I say their success is our success. So, we have to do everything from an environment standpoint to make them as productive as possible recognizing that we do not have any direct control over them but we do work and that is why this annual meetings with each of the districts are so important. All of management is there, not all but a major part of management is there at these meetings so it becomes very collaborative and we work really hard to build its trust in this relationship and we will continue to do so.

Scott Blumenthal - Emerald Advisers

Charlie, you have mentioned on a few occasion throughout the call here product innovation and the need to keep pace with new and fresh offerings. Can you talk about, since there was not really much in the press release and in the discussions with Mitch, can you talk about what is going on with product development, new product introduction, I know you have been to our conference over the last few years and you had really exciting new products and maybe give us an idea what percentage of your sales would be from new products and whether that is a growing percentage, I do not expect you to give me the exact percentage but whether that is growing and the promise held there?

Charles Pizzi

Yes and I think this is all sort of leading up to our new facility where we will have maximum flexibility but we wanted to start the innovation long before that and so we put a new innovative, our new innovation process in place and as well as brought in third party advisers to that who are in the innovation food game. So, we had some outside thinking as well but we have a great team of people who has really responded to this and it is really led by Autumn Bayles. So, Autumn maybe you can be just be more specific.

Autumn Bayles

Scott, I think to answer your question I can tell you that we look at these different spaces that we should be playing and the indulgent space to better use of the space and etc and then we try to look at the trends and figure out what is it that consumers want and we will do that in short bursts so that is always something fresh and exciting. So for example, this summer you would have seen summer berry pies on the shelf, you would have seen strawberry shortcake juniors, you currently see orange cream swirl for juniors and then we will roll into our fall slate. Pancake Krimpets was another one that was very successful for us and it was just something different but it is in that familiar krimpet shapes, you have some of the equity that you can leverage when you are rolling out that new innovative flavor and I think that is what really generated some of the excitement.

Charles Pizzi

We have a docket in our timeline to which we already sold in for the fall, new and better four new products too. So, we are pretty excited about how we are doing that and then we just do not only, Scott, do we work on the product and plus quality is most important to us and the product cycle we have goes out 18 months but the process becomes very efficient and as we are doing innovation for the products, we are also doing major innovation to the packaging side which will culminate as we get closer to the new facility and maybe Autumn you may want to comment on that.

Autumn Bayles

I mean the new facilities we are looking at it is really the key to this flexibility because trends are going to continue to change in trends so we want the most flexible product slate that we can have and we also want the most flexible packaging that we have in the new facility. So the automation we purchased for packaging is robotics that can be easily modified and change to handle within a certain tolerance, reasonable changes in packaging and from a production perspective, we have interchangeable pans in the oven. So, within certain talents that is in reason, we built in different types of products and things that we cannot do today with portion control and single products and things to that nature so we are looking to capture that vast universe of what your consumers want and how can we play on those basis in a smart and efficient way.

Scott Blumenthal - Emerald Advisers

Okay and can you comment on what percentage of sales are coming from some of the newer products if that is a growing percentage and the fruits of your process development, packaging development efforts? Can you speak through there?

Charles Pizzi

Yes, Scott. We do not normally give percentages but I will tell you, we have been pleased with the way the processes work and the response from the consumer.

Scott Blumenthal - Emerald Advisers

Okay and is the current cost environment, Charlie, preventing you from doing any of those things? Has it kept you from doing any of those product developments, packaging development things that you may have planned? Had the commodity cycle not kind of turned away that it had?

Charles Pizzi

No and I think as you heard Paul talked about how we go against that through a multifaceted approach, it has not hindered us at all. I mean we are proceeding at the same way. We have not altered our efforts in our process, in our operation. Only we are being mindful of we want to be as efficient as we possibly we can and I think we demonstrated that through how we can continue to go and proceed from a good management standpoint while at the same time holding down and lowering our SG&A but it has not affected the initiatives. The initiatives of our organization continued to take place day in and day out and we come up with new initiatives that we come up in the plan at the beginning of the year and we work through and to your question which I think is a good one, we have not augmented from that plan even because of the volatile nature of commodity cost.

Scott Blumenthal - Emerald Advisers

Okay that is really good to hear and since we are on the commodity cost topic, Paul you mentioned the ability to enter into a long term agreement with your sugar supplier, how effective are some of the other suppliers into, I know Autumn alluded to this a little bit earlier but how receptive are they? Are they even willing to talk with you about the long-term agreements and..?

Paul Ridder

That is, it ends up becoming a case-by-case basis. I think the general thing I can say is people are less willing to give you a longer coverage as they might otherwise had been in the past. We still do find opportunities to be able to mitigate risks by taking longer term supply or longer coverage. We just, as general statement, are able to go out as far as we use to be able to. It really is a case-by-case basis depending upon the supplier, their position, how long they have previously locked in for but we are seeing some change as the time arises.

Scott Blumenthal - Emerald Advisers

Okay but they are willing to, I mean they are still willing to sit down at the table with you and discuss these things.

Paul Ridder

Absolutely.

Autumn Bayles

Yes, that is right. We have discussions all the time in side of the suppliers and they are just trying to mitigate their risks as well but we are still able to get some favorable deals out there and where they are, we go down.

Paul Ridder

I think you head in a great point where we work very hard to develop great relationships not only with our customers but also with our suppliers and we have made sure that we have maintained these relationships even as the environment has become challenging and volatile and we will continue to work in that vein.

Scott Blumenthal - Emerald Advisers

Have you had to change any suppliers?

Autumn Bayles

We do always keep multiple suppliers on our list here so that we have some competitive play and we pull that out and use it when we need to.

Scott Blumenthal - Emerald Advisers

Autumn can you talk about the systems implementation project that you had been going through over the last few years and where you are with that?

Charles Pizzi

Well, before I let Autumn…, we are currently utilizing and leveraging that system and we have a great team of people here and we are very pleased with the results on some of our SG&A and manufacturing numbers really have come because of this technology platform but maybe you want to just give some…

Autumn Bayles

I mean Charlie has been on ahead there where couple of years ago we put in a new system. We sort of spent some times to settle and get in and then since then we have been hitting targeted projects to leverage that and go after different areas where we thought we could improve our operations or efficiencies or whatever the case maybe. We did just completed an upgrade of that system just a few weeks ago so that is, we wanted to make sure that the system would be right for the new facility and so that is why we did that at that time.

Charles Pizzi

Scott, we could not be gaining the results on operational improvements and cost containment programs without this platform being in place and as Autumn said, we just upgraded it because what we are doing is working towards this transformational event of the new facility and of course we want our technology platform to match where we will be in the state-of-the-art facility.

Operator

Your last question comes from Doug Thomas - JET Investment Research.

Douglas Thomas - JET Investment Research

I was very impressed with the performance particularly with respect to what we hear from convenience stores and I guess it is more of a comment than anything else but maybe you could talk about it a little bit but what does it seem like it does not seem to be in this environment more promotional activity on the part of some of the leading convenience store operators that are seeing fewer trips and less discretionary spending and so forth. I remember in the old days, there just seem to be a little bit more promotional activity around newspapers and Tastykakes and things like that, there does not seem to be so much advertising and marketing around the product anymore in that channel.

Charles Pizzi

One thing I will tell you is, we do and half focus on the convenience channel. For example, this summer we are using, as I mentioned in my statement, Chase Utley and Markakis and we are doing it with the Eagles so we are focusing on that very important channel. I really do believe what differentiates us in that channel is our execution and our merchandising and our service to those stores. I mean we have, if you wanted to go through the major assets of this company and certainly the brand but right after that it is our distribution network through our relationship and partnership with our independent sales distributors, they understand the importance of this and because of their dedication and understand that service is king. The convenience channel is about service and that is why we really want to pay, we pay close attention to those services and I think we have great key account people on this and I think that is why we have been able to really expand in some instances with some of our C-stores chains our opportunities with them. So, if it is about servicing and merchandising as well as marketing support so that is what we are doing, I think we are doing in a lot better than when a few years ago because we are continuing to provide more resources to our marketing effort and once with our new handheld that will help but it exaggerated a lot of different efforts but it is based on a foundation of our partnership with our sales distributors and service to that channel.

Charles Pizzi

Okay, we appreciate this time that you spent with us and we will continue to work hard both on our daily basis and towards the construction of our new facility and we thank you for your continued interest in our company. On behalf of all of us at Tasty Baking Company, have a good weekend.

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Source: Tasty Baking Company Q2 2008 Earnings Call Transcript
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