Milling & Baking News - May 9, 2006 - 9

B U S I N E S S

Flowers strong operating results
merit credit ratings upgrades
CHICAGO - Strong operating results
at Flowers Foods Inc. have prompted
Fitch Ratings and Moody's Investors
Service to upgrade credit ratings at
the Thomasville, Ga.-based baker.
Fitch Ratings has upgraded several
ratings on Flowers Foods, including
raising both the company's issuer
default rating and senior unsecured
credit facility to BBB from BBB-.
As part of the Fitch ratings scale,
ratings with an investment grade of
"BBB" are considered to have
"good credit quality." BBB ratings indicate there is currently
expectation of low credit risk
and the capacity for payment of financial commitments is considered adequate. However, the ratings take into
consideration that adverse changes
in circumstances and economic conditions are more likely to impair this
capacity. BBB ratings are the lowest
investment grade category.
In addition to the ratings upgrades,
Fitch maintained its stable outlook
for the company, which had approximately $79 million of debt as of
Dec. 31, 2005.
"This rating action reflects the strength
of Flowers' balance sheet, its solid cash
flow generation, and its disciplined ex-

pansion strategy," Fitch said. "Nonetheless, Flowers' ratings are limited by its
small size and its regional focus, which
results in higher overall operating risk.
While the company's expansion plan is
contributing to sales growth, extending
its southern footprint is expected to occur only gradually."
The expansion plans in which Fitch
referred to includes Flowers Foods
February purchase of Derst Baking Co.
(See Milling & Baking News of March

14, Page 10.) The company employs
475 and operates 165 direct-store delivery routes that serve customers in
South Carolina, eastern Georgia and
north Florida with fresh bread and
rolls under the Captain John Derst's
Old Fashioned Bread and Sunbeam
brands. Flowers expects the acquisition to increase sales for 2006 by $40
million to $45 million and to be earnings neutral for the year.
Fitch also pointed out Flowers has
delivered strong operating performance amidst rationalization and
consolidation in the larger baking
category. In addition, Fitch was im-

Moody's places certain General
Mills ratings under review
NEW YORK - Moody's Investors Service has placed under review for
possible upgrade the long-term debt ratings of General Mills, Inc. and affirmed its Prime-2 short-term debt ratings.
"The ratings review reflects General Mills' successful completion of a
three-year $2 billion debt reduction program begun in 2003; improved and
stable operating performance across a diverse portfolio of food product
categories, partial recovery of share lost last year in Big G cereals; and
stronger, but flattening, credit metrics due to the resumption of large share
repurchases after a period of debt reduction," Moody's said.
The ratings agency said its affirmation of General Mills' short-term ratings was based on Moody's expectation that should its review conclude
with an upgrade, it would not exceed one notch.
Moody's said its rating review will focus on several factors, including
General Mills' ability to sustain credit metrics above the Baa2 level. In order to do so, the Minneapolis-based cereal manufacturer must be able to
deal with intensifying competition in ready-to-eat cereal, recent increases
in both dividends and share repurchases with no significant debt reduction
planned, and potential for pressure on operating margins due to high costs
and increased brand spending.
The ratings under review for possible upgrade include General Mills
senior unsecured at Baa2, senior unsecured shelf at (P)Baa2, subordinated
shelf at (P)Baa3, and preferred shelf at (P)Ba1.
The ratings service affirmed General Mills ratings on its short term at
Prime-2. MBN

10 / Milling & Baking News, May 9, 2006

pressed with the company's ability
to maintain profitability during a period of elevated fuel, packaging and
ingredient costs.
"Flowers has utilized annual operating cash flow of about $115 million
to support expanded direct-store distribution, to make small fill-in acquisitions and to increase dividends,"
Fitch said. "While the company is
more aggressively using its unsecured revolver to finance share repurchases, leverage has remained low for
its rating category."
Fitch said it expects Flowers' capital structure to consist of more debt
over time but anticipates only
gradual increases in leverage
in the near-to-intermediate
term. Flowers currently has
significant debt capacity but large
debt-financed acquisitions are not anticipated and the company is expected
to maintain discipline in regard to
share repurchases.
"A significant decline in operating fundamentals concurrent with an increase
in debt levels is likely to have negative
rating implications," Fitch said.
Moody's Investors Service has upgraded the corporate family rating
of Flowers Foods to Baa3 from Ba2.
The ratings outlook for Flowers was
pegged by Moody's as stable.
Moody's said it based the upgrade
on the continuing strong operating
performance at Flowers, the baking
company's conservative financial policies and strong debt protection measures and financial flexibility.
In a review of factors Moody's said
were affecting Flowers ratings and
outlook, the influences mostly were
favorable:
* The company's strong regional
franchise in fresh bread,
* A third-tier position in the snack
cake and pastry business,
* The "moderate pricing flexibility"
Flowers enjoys in a "commodity-like"
fresh bread business,
* Generally efficient manufacturing operations with some potential for
further improvement,
* Flowers' strong balance sheet, and
* The company's modest size
within the packaged consumer good
universe, with sale of just over $1.7
billion.
"Over time, Flowers' ratings could
be upgraded if its operating performance remains strong, it is able to
further expand its geographic reach
without encountering operating challenges, and it is able to improve its
EBITA margins to above 8% of sales,"
Moody's said. MBN
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Milling & Baking News - May 9, 2006

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