Fitch: affirms Flowers Foods’ ratings, outlook stable

Thomasville / GA. (bw) Fitch Ratings has affirmed the ratings of Flowers Foods Inc. as follows: issuer default rating (IDR) at BBB; revolving credit facility at BBB; term loan A at BBB. The rating outlook is stable, Fitch said in a press release. At the quarter ended April 24, 2010, Flowers Foods Inc. had approximately 198 million USD of debt.

Flowers´ ratings reflect its top five position in baked goods in the U.S. and its No. 1 market share in the southern U.S. – the primary market in which it competes. The company´s credit protection measures are very strong and liquidity is ample. Leverage as defined by Debt/Ebita has been 1,1 times or less in each of the past six years and was 0,7 times at the end of the first quarter ending April 24, 2010. Interest coverage has been considerable with Funds Flow from Operations (FFO) plus Interest/Interest at more than 23 times in each of the past six years as well. Interest coverage was 30,8 times at April 24, 2010. Free cash flow (operating cash flow less capital expenditures and dividends) has been positive in five of the past six years and was 110 million USD at the last twelve months (LTM) ending April 24, 2010. There is significant cushion within the rating but is constrained by Flowers´ size and regional focus. Fitch notes that management is financially conservative and is expected to manage acquisitions and shareholder friendly initiatives prudently.

Encompassed within the rating is Fitch´s concern about the highly promotional environment which has intensified since the beginning of 2009. Although revenues grew almost eight percent in 2009 to 2,6 billion USD, it was almost all driven by acquisitions, secondarily by late 2008 pricing initiatives which anniversaried in 2009 and the absence of the 53rd week in 2009. Quarter-over-quarter organic sales growth declined during 2009 and has been negative since the fourth quarter of 2009 (from 7,3 percent in Q1/2009 to minus 1,6 percent in Q4/2009 and minus 3,1 percent in Q1/2010). Fitch believes that based on the current negative trajectory of organic sales growth and an environment that continues to be challenging, revenue growth will be under substantial pressure. However, Fitch expects profitability to improve during 2010. Commodity prices are declining year over year, and new product roll-outs, such as Nature´s Own 100 percent whole grain breads and Sandwich Rounds, should benefit margins. Furthermore, Fitch expects Flowers to remain free cash flow positive but, due to additional expansion related capital expenditures, at modestly lower levels than the 110 million USD level seen at the LTM period ended April 24, 2010. Debt balances should decline mainly due to amortization on the term loan.

Flowers´ liquidity as of April 24, 2010 consisted of 195 million USD available under its 250 million USD five-year revolving bank facility which expires October 2012 and eight million USD of cash. Near-term maturities are limited to scheduled term loan amortization and can be comfortably managed with existing cash flow (source).