Thomasville / GA. (fr) Fitch Ratings has affirmed the ratings of Flowers Foods Inc. as follows: Issuer Default Rating (IDR) at «BBB»; 500 million USD revolving credit facility at «BBB»; 108 million USD term loan A at «BBB». The Rating Outlook is Stable. At the quarter ended April 23, 2011, Flowers had approximately 109 million USD 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 eleven million USD).
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 or less in each of the past five years. Interest coverage has been considerable with funds flow from operations (FFO) interest coverage over 25 times during the same time frame. Flowers generated over 100 million USD 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 percent of the U.S. population by 2016 with annual revenue growth targets in the five percent – ten percent range. Acquisitions are expected to account for approximately half of the growth and began with the 165 million USD 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 USD. The new revolver which matures in May 2016 slightly relaxes the leverage covenant to 3,5 times versus the previous 3,25 times and allows up to 200 million USD in securitizations. Moderating the higher leverage target is additional discipline for larger acquisitions: If Flowers paid 325 million USD 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 3,25 times and did not revert below this level in a twelve 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 3,25 times leverage mentioned previously, correlates to unadjusted leverage (debt/EBITDA) of approximately 2 times. 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 0,9 percent paced by net pricing/mix of 2,1 percent but which was partially offset by volume losses of 1,2 percent. FFO interest coverage at the latest twelve months (LTM) was ample at 32 times with free cash flow of 132 million USD. 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 1,7 times. Near-term maturities over the next three years are modest and range from 19 million USD to 51 million USD. The 500 million USD revolver provides additional liquidity. Availability is likely to be less than 500 million USD as Fitch expects that a portion would have been used to finance the Tasty acquisition.
