Fitch affirms Flowers Foods's IDR, US$500M revolving credit facility and US$108M term loan A at BBB; outlook stable

Graziela Medina Shepnick

NEW YORK , July 1, 2011 (press release) – Fitch Ratings has affirmed the ratings of Flowers Foods Inc. (Flowers; NYSE: FLO) as follows:

--Issuer Default Rating (IDR) at 'BBB';

--$500 million revolving credit facility at 'BBB';

--$108 million term loan A at 'BBB'.

The Rating Outlook is Stable.

At the quarter ended April 23, 2011, Flowers had approximately $109 million of rated debt in the form of a term loan A priced approximately at Libor + 100 basis points (excluding capital leases and other notes payable of approximately $11 million).

Rating Rationale:

Flowers' ratings reflect its leading 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 has had consistent and considerable credit protection measures. Leverage (debt/EBITDAR) has been 2.3 times (x) or less in each of the past five years. Interest coverage has been considerable with funds flow from operations (FFO) interest coverage over 25x during the same time frame. Flowers generated over $100 million of free cash flow over the past two fiscal years. However, there is likely to be some pressure on margins due to increased commodity costs resulting in moderately lower free cash flow this year.

Potential Rating Pressure:

There is currently significant cushion within the rating but it could dissipate. Flowers will be accelerating its growth strategy to serve 75% of the U.S. population by 2016 with annual revenue growth targets in the 5% - 10% range. Acquisitions are expected to account for approximately half of the growth and began with the $165 million Tasty Baking Company (Tasty) acquisition in May 2011. Debt levels are expected to increase to fund acquisitions. Flowers filed a shelf registration and recently doubled the size of its revolver to $500 million. The new revolver which matures in May 2016 slightly relaxes the leverage covenant to 3.5x versus the previous 3.25x and allows up to $200 million in securitizations. Moderating the higher leverage target is additional discipline for larger acquisitions: If Flowers paid $325 million or more for an acquisition (Significant Acquisition) it would need to demonstrate pro forma compliance with its leverage and interest coverage covenants as if the acquisition had been consummated four quarters previously.

There would be downward pressure on the rating if leverage (debt/EBITDAR) exceeded 3.25x and did not revert below this level in a 12 to 18 month time-frame. Rental expense is meaningful given Flowers numerous and growing bakery investments and the company's ongoing strategy of leasing property plant and equipment. As a result, Fitch is focused on the adjusted leverage including rents. The 3.25x leverage mentioned previously, correlates to unadjusted leverage (debt/EBITDA) of approximately 2x. Fitch notes that management is committed to maintaining an investment grade rating and should remain prudent in balancing growth opportunities against credit protection measures.

Financial Performance:

For the first quarter ending April 23, 2011, revenues increased .9% paced by net pricing/mix of 2.1% but which was partially offset by volume losses of 1.2%. FFO interest coverage at the latest 12 months (LTM) was ample at 32x with free cash flow of $132 million. Fitch expects there to be ample liquidity to fund on-going operations from internally generated cash flow.

Flowers is relatively un-levered with LTM debt/EBITDAR of 1.7X. Near-term maturities over the next three years are modest and range from $19 million to $51 million. The $500 million revolver provides additional liquidity. Availability is likely to be less than $500 million as Fitch expects that a portion would have been used to finance the Tasty acquisition.

Additional information is available at ' www.fitchratings.com '.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug .16, 2010;

--'Rating Packaged Food Companies', May 12, 2010;

--'U.S. Packaged Food: Commodity Cost Conundrum Prompts Risky Pricing Decisions', April 4, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Rating Packaged Food Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=526525

U.S. Packaged Food: Commodity Cost Conundrum Prompts Risky Pricing Decisions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614665

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