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Tasty Baking in a financial squeeze with debt

The design of Tasty Baking Co.'s unadorned yet imposing $78 million bakery at the Philadelphia Navy Yard has a dual mission:

The design of Tasty Baking Co.'s unadorned yet imposing $78 million bakery at the Philadelphia Navy Yard has a dual mission:

Continue to churn out the galaxy of baked goods that capture the Philadelphia taste buds and leave locals waxing nostalgic, and lift the company from a decades-long, slow-growth financial rut.

Right now, the design is only half working, and that's not nearly good enough.

The $100 million debt used to build and move into the new plant, coupled with a failure to gain all expected cost savings from the facility, has put Tasty into a financial squeeze that could force a sale of the firm - identified with Philadelphia like few others - three years from its 100th anniversary.

Tasty said Wednesday that it had skipped a debt payment due Jan. 1 and had until Jan. 14 to work out a deal with its banks, led by Citizens Bank of Pennsylvania, for additional relief. Otherwise, it will be in default.

The company also hired Philadelphia's Janney Montgomery Scott L.L.C. to explore the possibilities of refinancing debt due in 2012, raising money from investors, or selling the company - a wholly unpalatable option to the locally dominated board in the late 1990s, when the idea was last seriously explored.

Whatever happens, experts expect the bakery, paid for with the help of $31 million in publicly subsidized financing, to continue operating - even if it has a new owner.

Tasty's creditors - Bank of America, Sovereign Bank, and M&T Bank in addition to Citizens - play a key role in the future of the company, which took on a huge amount of debt in 2007, just before the economy tanked. The financing meant that everything needed to go right for Tastykake to be able to pay it back, given the thin profit from its business. That hasn't happened.

"We all agree Tasty Baking is an iconic Philadelphia brand. The bank group is in discussion with the company to review their proposals," Citizens spokeswoman Sylvia T. Bronner said.

Charles P. Pizzi, who was hired as Tasty's chief executive officer in 2002 after a career in government and 13 years as CEO of the Philadelphia Chamber of Commerce, declined to be interviewed. In a statement, he said: "There is no question in my mind that in order for Tasty Baking to thrive, the steps we took were the right ones."

Philip J. Baur Jr., son of a Tasty Baking cofounder and a former chairman, said he had great confidence in Pizzi and agreed that it had been imperative to move from the inefficient, cluttered, six-story bakery in Philadelphia's Nicetown neighborhood that Tasty had occupied since 1922.

"We had to get out of that building on Hunting Park Avenue. Paul Kaiser tried to find a way to do it. Nelson Harris and I tried to do it. Charlie Pizzi is the one who achieved it," said Baur, referring to earlier CEOs.

The challenge for Tasty was always that the two-week shelf life for its products meant that, to keep customers supplied, it had to have two plants running at once during a relocation, Baur said. "Charlie, with his contacts, his knowledge, figured out how to do that."

Doing that quadrupled Tasty's debt, but that was not its only problem, said Gerald B. Shreiber, chairman and chief executive of J&J Snack Foods Corp., a Pennsauken company known for SuperPretzels and other baked goods.

"I think Tasty has been hit by a combination of factors, which includes the economy, perhaps the plant coming on a little bit late, difficulty getting the efficiencies they expected, and certainly has to include the rapid-rising commodity costs," Shreiber said.

"It may not be a perfect storm, but it's a lot of headwind. It's a lot of rain."

In the last six to nine months, the cost of flour has risen 50 percent, Shreiber said. Sugar and cocoa prices are also significantly higher. Tasty said it had spent $1.8 million more in the third quarter on key ingredients and packaging than in the same quarter a year earlier.

Bakery experts have described Tasty's new plant as the best money can buy, and all of its anticipated benefits could still materialize. But in the first year, it has failed to deliver the aggressive goal of $13 million to $15 million in savings.

Production problems at the plant have even held back sales - $4 million worth in the third quarter, when the company unexpectedly lost $4.5 million.

As of Nov. 1, Tasty had still expected annualized savings to be $13 million, but because of "unanticipated operational challenges" in December, the figure is now expected to be $10 million, Tasty officials said.

What is going wrong? Adjusting to ultrafast, computerized baking lines has been harder than expected, people familiar with the operations said.

For example, at the old plant, operators starting a production run might have had to throw away 1,000 cupcakes that had not come out right. Because the new lines run so much faster, they might have to throw away 3,000 cupcakes now before they are prepared correctly. That eats into the savings.

The anticipated savings were supposed to allow Tasty to spend more money on expanding into markets beyond the Mid-Atlantic concentration.

"Tastykake has been stuck in this corridor for years," said Robert Costello of Costello Asset Management in Huntingdon Valley.

"They tried to go to California. It didn't work. They sent a tractor-trailer to Florida every evening. That's good, but it passes all these states where people don't get Tastykakes. They're eating pecan pies from Flowers," said Costello, referring to Flowers Foods Inc., a larger Georgia competitor that is often named as a potential buyer.

Bimbo Bakeries USA, based in Horsham, also is mentioned as a possible buyer for Tasty.

The new plant was designed to make it easier to produce a wider range of products and bring new products to market quickly. The old plant made it hard to evolve with consumer tastes. Past efforts at new products, such as full-size cakes and pies and sugar-free snack cakes, have either been quickly abandoned or failed to make a big impact.

In a March interview at the new bakery, where a larger-than-life, 1920s image of a little girl eating a Tastykake hangs outside, Pizzi said leaving the old bakery had been "like moving from a 1946 pickup truck to a Maserati."

Investors reacted Wednesday as if the Maserati were up on concrete blocks, sending Tasty shares down 37 percent, or $2.38, to $4.05.