New Tastykake bakery needs work

Production problems at Tastykake's new $78 million, partly state-financed bakery at the old Navy Yard in South Philadelphia left the company unable to fill $1.3 million in orders during the three months ended June 30, and the company has had to hire outside consultants to get its new baking machines to work properly.

"The limitations from the new bakery, really coming from the consistency of the equipment, caused us not to be able to fill about $1.3 million of orders during the quarter," chief financial officer Paul D. Ridder told investors on a conference call last Monday. Tastykake had been expected to boost quarterly sales 4%, to $49 million, bduring the quarter, but instead sales fell 7%, to $43.5 million, Janney Capital Markets analyst Mitchell Pinheiro told clients in a report.

Besides problems on the line, the company blamed lower sales to Wal-Mart and other markets, higher production costs at the company's Hunting Park plant before its closing, and lower sales during the late June heat wave, among other factors. Pressed by Pinheiro to say how much Tastykake is spending on fixing the production problems, Ridder said "we would expect it to be less than" $1 million.

"This was a challenging quarter and certainly disappointing for myself and shareholders," chief executive Charles P. Pizzi told shareholders. Still, he said the company expected it would meet production targets by the end of the year: "This has been a long and complex project... We are putting all appropriate and needed resources in place."

Noting that Tastykake's board voted to cut executive bonuses by $1.5 million because it wasn't meeting its own targets, investor Nicholas Kovich, a veteran of the former Conshohocken investment firm Miller Anderson Sherrerd who now runs his own firm, asked Pizzi to explain "what's going to happen in the next 60 days that's magically going to result" in meeting the company's targets for saving more than $13 million a year from the new plant.

"To me it seems like you hit some speed bumps that are way out to left field," Kovich added. "Why should shareholders have confidence" that problems will get fixed soon?

"There is nothing magical about the fix," Pizzi answered. "These speed bumps happen all the time when you bring up a very complex operation." Janney's Pinheiro accepted the company's argument; he cut his estimates for 2010 and 2011 profits, but said he expects the new plant to be saving money on target by this fall.