CHICAGO--()--Fitch Ratings has affirmed the credit ratings of Tyson Foods, Inc. (Tyson; NYSE: TSN) as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Unsecured bank facility at 'BBB';
--Senior unsecured notes at 'BBB';
--Short-term IDR at 'F3'
The Rating Outlook is revised to Positive from Stable.
At the fiscal first quarter ended Dec. 29, 2012, Tyson had $2.4 billion of total reported debt.
The Positive Outlook is due to Fitch's expectation of material additional debt reduction and improvement in margins during fiscal 2014. Should Tyson pay off its $458 million 3.25% convertible notes when they become due on Oct. 15, 2013, as currently planned, maintains debt near the $2 billion level, and meets Fitch's forecasts of operating earnings and cash flow improvement in 2014 ratings could be upgraded to 'BBB+'.
Fitch views management's total debt-to-EBITDA target of 1.3x or less as achievable in most years and as acceptable for a commodity protein company with a 'BBB+' rating. Although leverage could be slightly higher than targeted in fiscal 2013, Fitch anticipates it falling to below 1.3x in fiscal 2014.
The reduction in leverage will be driven by the above mentioned debt reduction, better margins in beef after further opening of the Japanese market, and the potential for less cost pressure in chicken. Tyson expects about $600 million of incremental feed costs for its chicken segment in 2013. The firm plans to partially offset this cost with pricing and $100 million of operating efficiencies which Fitch views as attainable.
Tyson's ratings reflect the firm's low financial leverage, improved operating efficiency, prudent risk management, significant scale, and good diversification. Tyson generated $33.3 billion of annualized sales during fiscal 2012 with 34% from chicken, 40% from beef, 16% from pork, and 10% from prepared foods. With each protein subject to different production cycles and varying supply/demand dynamics, weakness in one or more proteins can be offset by strength in others.
Ratings incorporate the low margin and volatile nature of the commodity protein industry. However, maintaining lower debt, engaging in fewer fix-priced customer contracts, and being a more efficient operator are helping Tyson mitigate the negative effects of unstable grain and livestock prices on its operating earnings.
Over the next three years, Tyson plans to accelerate growth in higher margin value-added and prepared food products and faster growing emerging markets. The company is targeting 6% - 8% sales growth for value-added products and 12% - 16% growth for international in-country production on an annual basis. Increased exposure to higher-margin value-added/prepared food products and faster growing emerging markets would be viewed positively.
Tyson has generated good FCF (cash flow from operations less capital expenditures and dividends) in 10 out of the 12 past years, despite periods of volatility in its operating cash flow. Fitch believes the company's annual FCF can equal or exceed the firm's 12-year average of approximately $300 million over the long-term given improvement in its operations and lower annual interest expense. Tyson expects net interest expense to approximate $140 million in fiscal 2013, down from an average of about $300 million annually since 2009, due to lower debt and the refinancing of higher coupon debt in fiscal 2012.
Sensitivity/Key Rating Drivers:
Conservative Financial Strategy
As previously mentioned, Tyson's financial strategy is to maintain total debt-to-EBITDA in the 1.3x range or less as accomplished since 2010. The firm targets liquidity, inclusive of cash and revolver availability, in the $1.2 billion - $1.5 billion range but has exceeded this level in recent years.
Tyson has increased share repurchases with timing dependent on working capital needs, market conditions, liquidity, and debt obligations. Dividend requirements are viewed as manageable.
Operational Efficiency and Prudent Risk Management
Tyson has been able to maintain favorable operating spreads to the industry by benchmarking against peers and improving yields, mix, and other plant level operations. The firm has achieved nearly $1 billion of operating efficiencies in chicken since 2008, closed inefficient beef plants, and has processing plants strategically located near its supplier base to ensure adequate supply while reducing transportation costs. Fitch views Tyson's stated normalized operating margins of 6-8% in pork, 5-7% in chicken, 4-6% in prepared foods, and 2.5-4.5% in beef as achievable due to the above mentioned operating improvements.
Recent Operating Performance:
During the first quarter ended Dec. 29, 2012, consolidated sales grew 0.9% to $8.4 billion due to 4.7% pricing being offset by a 3.3% decline in volumes. Operating income increased 7.9% to $300 million due mainly to better year-over-year performance in chicken and beef. Cash flow from operations declined to $190 million from $338 million due to higher inventory-related working capital.
Segment level performance was mainly positive. The firm's operating margin in chicken increased to 3.6% from 1.2% last year. Pricing in chicken increased 8.2% on average and volumes declined a modest 1.1%. Tyson's operating margin in beef improved to 1.3% from 0.9% last year with pricing increasing 11.7% but volumes falling 10%. The pork segment's margin remained strong at 9.2% as increased industry hog supply resulted in lower livestock cost. Lastly, Tyson's operating margin in prepared foods declined to 3.9% from 5.9% due to lower pricing, as raw material costs declined, and investments in the firm's lunchmeat operations.
During the latest 12 month (LTM) period ended Dec. 29, 2012, total debt-to-operating EBITDA was approximately 1.4x and operating EBITDA-to-gross interest expense was about 5.0x. LTM FCF was about $280 million. Fitch is currently projecting total debt-to-operating EBITDA in the 1.5x range for fiscal 2013, due to modestly lower operating income and stable debt levels, and about 1.0x in fiscal 2014 due to lower debt levels and operating earnings and cash flow growth.
Liquidity, Upcoming Maturities, and Significant Debt Terms:
Tyson's liquidity totaled approximately $1.9 billion at Dec. 29, 2012 and consisted of $951 million of cash and an undrawn $1 billion unsecured revolver. Significant upcoming maturities over the next three years are limited to $458 million 3.25% convertible notes due Oct. 15, 2013 which, as previously mentioned, the firm intends to pay off with cash on hand.
Tyson's revolving facility expires Aug. 9, 2017. The facility is guaranteed by Tyson and its Tyson Fresh Meats (TFM) subsidiary as long as TFM guarantees the $638 million 2016 and $1 billion 2022 notes. The facility has a ratings-based collateral trigger or springing lien should Tyson's corporate credit rating falls below a 'BB+' or equivalent level. Tyson's $458 million convertible notes due 2013, $120 million 7% notes due 2018, and $18 million 7% notes 2028 notes do not benefit from a TFM guarantee. Fitch does not delineate ratings based on these guarantees due to Tyson's solid investment grade profile and low probability of default.
Financial maintenance covenants in Tyson credit facility include maximum adjusted debt-to-capitalization ratio of .50 to 1.0 and minimum EBITDA-to-interest expense of 3.75x. The agreement also has a maximum total debt covenant of $3.64 billion prior to Oct. 31, 2013 and $3.5 billion after Oct. 31, 2013. Tyson has considerable room under these covenants as maximum debt-to-capitalization was approximately 30% and total reported debt was $2.4 billion at Dec. 29, 2012.
What Could Trigger a Rating Action
Future developments that may, individually or collectively, lead to a positive rating action within the 'BBB' category include:
--Total debt-to-operating EBITDA in line with the firm's goal of 1.3x or less due to meaningful additional debt reduction and stable to improving operating performance.
Future developments that may, individually or collectively, lead to a negative rating action include:
--A substantial increase in leverage which is sustained above 3.0x due to a more aggressive financial strategy associated with large debt-financed acquisitions, share repurchases, and/or a severe downturn in operating results.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'2013 Outlook: U.S. Commodity Protein, Produce, and Dairy; Structural Changes to Continue as Costs Remain High and Europe Will Be A Challenge' (Dec. 13, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
2013 Outlook: U.S. Commodity Protein, Produce, and Dairy