August 21, 2017 / 4:26 PM / a month ago

Fitch Rates Tyson's Senior Notes Offering 'BBB'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, August 21 (Fitch) Fitch Ratings has assigned a 'BBB' rating to Tyson Foods, Inc.'s (Tyson; NYSE: TSN) aggregate issuance of up to $900 million senior unsecured notes. The Rating Outlook is Stable. A full list of ratings follows at the end of this press release. Net proceeds from the senior notes offering will be used to repay amounts outstanding under the company's term loan due June 2020 and/or certain other debt. At July 1, 2017, Tyson had approximately $10.8 billion of debt, consisting mainly of senior unsecured notes maturing 2018 through 2047 and $2.5 billion of senior unsecured term loans due 2019 and 2020, of which $1.455 billion was outstanding and due June 2020. Total debt-to-EBITDA pro forma for the acquisition of AdvancePierre Foods Holdings, Inc. (AdvancePierre or APFH) in June 2017 is 2.7x. KEY RATING DRIVERS Acquisition of AdvancePierre: In June 2017, Tyson acquired AdvancePierre for approximately $4.2 billion, including debt. Fitch views the acquisition as complementary with minimal integration risk. The purchase price represented 14x AdvancePierre's $300 million of EBITDA and 2.6x its $1.6 billion of sales for 2016. However, Tyson is targeting a $200 million run rate of annual synergies within three years of transaction closing. A consolidated manufacturing footprint, procurement efficiencies, distribution network consolidation, and the elimination of redundant sales and marketing functions and duplicative corporate overhead will create cost savings. Fitch also views the acquisition as consistent with Tyson's strategy of transitioning from a commodity meat and poultry processor to a higher margin protein-packed foods firm and as complementary given Tyson's limited exposure to value-added lunch/dinner protein sandwich products for which AdvancePierre is a leader. Synergies are viewed as achievable given Tyson's track record with the 2014 purchase of The Hillshire Brands Co., which was more than two times the size of AdvancePierre based on sales. Significant Scale and Diversification: Tyson's ratings benefit from its significant scale with LTM (July) sales of $37.3 billion and EBITDA of $3.7 billion (excluding stock-option compensation expense and acquisition and integration costs related to AdvancePierre), leading position in U.S. protein, and product diversification that includes a growing portfolio of branded packaged food and value-added products. Tyson is one of the world's leading food companies with No. 1 and No. 2 share in large and growing protein categories such as frozen breakfast and smoked sausage under the Jimmy Dean and Hillshire brands. For the year ended Oct. 1, 2016, segment contribution to sales and operating earnings was as follows: Chicken (29% and 46%), Beef (38% and 12%), Pork (13% and 19%), Prepared Foods (19% and 26%), and Other which consists mainly of foreign operations (1% and negative 3%). Fitch expects the acquisition of AdvancePierre to increase the Prepared Foods segment's contribution to sales and operating earnings to nearly 25% and 30% respectively. Structural Changes, Prepared Foods Volume Trends: Structural changes have enhanced Tyson's margins and are providing increased earnings stability. Changes implemented over the past several years include improved operating efficiency and closure of inefficient processing facilities. Moreover, Tyson has de-risked its operations by utilizing more short-term and fewer fixed-price customer contracts and by instituting a more disciplined risk management strategy. Tyson has also increased its percentage of value-added and prepared food products, which offer higher margins and more stable cash flow than commodity proteins due to less price volatility. However, value-added and branded packaged foods are susceptible to volume pressures as consumer preferences change. Prepared foods volume was up 1.1% for the nine-month period ended July 1, 2017, due to improved demand for retail products and a partial quarter of incremental volumes from the AdvancePierre acquisition being partially offset by declines in foodservice, after declining 2.8% in fiscal 2016. The decline in fiscal 2016 was due in part to an extra week in 2015, a voluntary volume reduction in lower margin categories at retail, and slower than planned price reduction on retail shelves. Core volume growth at AdvancePierre was 2.3% in the year ended Dec. 31, 2016. Fitch views 1% to 2% volume growth as realistic over the long term assuming ongoing innovation and marketing support. Favorable Operating Outlook: Fitch expects Tyson's operating performance to remain strong through the remainder of fiscal 2017 and in fiscal 2018 due to the continuation of favorable industry fundamentals including low grain costs, ample livestock supply, steady global demand, and effective margin management in non-vertically integrated beef and pork operations. Results will also continue to benefit from the realization of a targeted $700 million of annual synergies related to the Hillshire acquisition by fiscal 2018. Synergies, from operational improvements, manufacturing, procurement, logistics, and organizational duplication, have approximated $657 million through 3Q17, and should be sustainable over the long term. As mentioned previously, Tyson is targeting $200 million of annualized synergies from AdvancePierre by 2020. Normalized Margins, Modest Volatility: Tyson's sales and earnings are subject to periodic volatility caused by changes in input costs and protein prices due to supply/demand dynamics of commodity products. However, risk is partially mitigated by the company's operating efficiency and diversification in chicken, beef, pork, and prepared foods products. Tyson views normalized operating margins for its segments to be as follows: Prepared Foods (10% to 12%), Chicken (9% to 11%), Pork (6% to 8%), and Beef (1.5% to 3%). During the quarter, ended April 1, 2017, the Prepared Foods and Chicken segments both performed within the normalized range, despite higher marketing, advertising, and promotional spending along with other integration, acquisition-related costs due to volume growth and higher average prices. The operating margin for the Prepared Foods segment was 9% and for the Chicken segment was 10.2%. Margins in the Pork and Beef segments were above their normalized range at 10.3% and 3.7%, respectively. Tyson's reported consolidated operating margin remained strong at 7.1% but was down from 8.2% in the comparable quarter last year. Disciplined Financial and Acquisition Strategy: Tyson maintains a conservative financial strategy, targeting net debt-to-EBITDA of 1.5x to 2.0x over time (which approximates gross debt-to-EBITDA in the high-1x to low-2x range assuming cash of $200 million to $300 million). The company also strives to maintain overall liquidity of at least $1 billion. For LTM ended July 1, 2017, total debt-to-EBITDA was 2.9x, due to incremental debt issued to fund the AdvancePierre acquisition and a partial quarter of AdvancePierre results. As seen by the acquisition of AdvancePierre, Tyson has remained open to strategic M&A, particularly of companies with value-added and branded protein-related products, even though organic growth continues to be an important driver of sales and operating earnings. Moreover, the company remains committed to maintaining a strong balance sheet by using cash flow to deleverage following debt-financed deals. Following the acquisition of AdvancePierre, Tyson expects to pull back on share repurchases and use FCF and divestiture proceeds to return leverage back to its targeted 1.5x-2.0x as quickly as possible. Fitch views this as possible within two years of acquisition closing. DERIVATION SUMMARY Tyson's 'BBB' rating balances its moderate leverage and exposure to the potentially volatile commodity protein industry with its significant scale, diversification, and operating efficiency. Ratings are similar to Smithfield Foods, Inc ('BBB'/Stable), which benefits from a one-notch upgrade from its stand-alone credit profile as it is 100% owned by WH Group, Inc. ('BBB+'/Stable). Tyson's ratings relative to Fitch publicly-rated investment-grade packaged food companies such as General Mills, Inc. ('BBB+'/Negative), The Kellogg Co. ('BBB'/Stable), and Mondelez International ('BBB'/Stable), Kraft Heinz Co. ('BBB-'/Stable), and ConAgra Brands, Inc. ('BBB-'/Positive), consider relative profitability, earnings volatility, leverage, and size. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Tyson's fiscal years include: --Consolidated revenue increases at a low single-digit rate in 2017 and a mid-single-digit rate 2018 reflecting the acquisition of APFH; --Operating margins for each of Tyson's business segments are at or above the normalized range in 2017 and 2018 reflecting continued strong demand and low or manageable commodity input prices; --Consolidated EBITDA of nearly $4 billion in 2017 and above $4 billion in 2018 reflecting the acquisition of APFH and continued strong operating fundamentals; --FCF averaging $1 billion in 2017 and 2018, with the majority deployed towards debt reduction in 2018; --Total debt-to-EBITDA of approximately 2.6x in 2017 and 2.1x in 2018. RATING SENSITIVITIES Positive Triggers: Continued progress transitioning towards a protein-centric packaged foods company as exhibited by reduced volatility in operating earnings and better than expected volume trends in the Prepared Foods segment would be positive. The ability to sustain normalized consolidated EBIT margins above 6% to 7% while maintaining total debt-to-EBITDA below 2x, and a FCF margin of over 2.5% (more than $1 billion annually) would be key indicators of continued progress. Negative Triggers: A sustained period of total debt-to-EBITDA above 2.5x due to sluggish earnings growth, slower than expected debt reduction following the APFH acquisition, or a change in financial policy would result in a negative rating action. Worsening industry fundamentals caused by meaningfully higher feed costs or a prolonged protein supply/demand imbalance would be leading indicators of a potential downturn in earnings. A sustained loss of market share in branded packaged meats would be of concern. LIQUIDITY Fitch views Tyson's liquidity as ample. Good FCF generation, revolver availability, and the maintenance of a moderate cash balance support liquidity. At July 1, 2017, Tyson had approximately $1 billion of liquidity consisting of $231 million of cash, $4 million of short-term investments, and $802 million available under its $1.5 billion revolver after considering $690 million of commercial paper and $8 million in letters of credit. FULL LIST OF RATING ACTIONS Fitch currently rates Tyson and The Hillshire Brands Co. - its wholly owned subsidiary - as follows: Tyson Foods, Inc. (Parent) --Long-Term Issuer Default Rating (IDR) 'BBB'; --Unsecured bank credit facilities 'BBB'; --Senior unsecured notes 'BBB'; --Short-Term IDR 'F2'. The Hillshire Brands Co. (Operating Subsidiary) --Long-Term IDR 'BBB'; --Senior unsecured notes 'BBB'. The Rating Outlook is Stable. Contact: Primary Analyst Carla Norfleet Taylor, CFA Senior Director +1-312-368-3195 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Bill Densmore Senior Director +1-312-368-3125 Committee Chairperson Philip W. Smyth, CFA Senior Director +1-212-908-0531 Date of Relevant Rating Committee: April 25, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity are disclosed below: --Historical and projected EBITDA is adjusted to add back noncash stock-based compensation expense and one-time expenses as reported in financials. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com. 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