Fitch Affirms Tyson's IDRs at 'BBB/F2'; Outlook Stable
KEY RATING DRIVERS
Deleveraging, Debt Reduction: Total debt-to-EBITDA for the LTM period ended June 27, 2015 was 2.7x, down from 4.2x at the fiscal year ended Sept. 27, 2014, which reflected the \\$8.3 billion acquisition of Hillshire. The decline is in line with Fitch's expectations and was driven by debt reduction, acquisition synergies, and strong results in chicken. Tyson has utilized free cash flow (FCF) and proceeds from the sale of its Brazilian operation to pay off nearly \\$1 billion of debt since the end of fiscal 2014. Subsequent to the end of the third fiscal quarter, proceeds from the sale of its Mexican operations were used to repay an additional \\$400 million of debt.
Fitch anticipates that debt reduction will moderate post-2015 as Tyson shifts from using most of its FCF for debt reduction toward returning cash to shareholders via share repurchases absent strategic tuck-in acquisitions. However, Fitch projects that total debt/EBITDA will approximate 2.3x for 2015 and 2.1x for 2016 considering redirection of FCF to shareholder returns. Tyson's leverage goals include net debt/EBITDA of approximately 2x by the end of 2015 and 1.5x - 2x longer term.
Diversification Provides Stability: Tyson's ratings benefit from its diversification in chicken, beef, pork and prepared foods. Proteins are subject to different production cycles and supply/demand dynamics; therefore, strength in one can offset weakness in others. Performance in chicken, pork and prepared foods are currently offsetting weakness in beef, which continues to be negatively impacted by low supply and high cattle prices. Fitch expects beef margins to remain challenged in the near term as cattle inventories build, while low grain prices and good demand should continue to support profitability in chicken. Low live-hog prices should also remain a tailwind for prepared foods and, to a lesser extent, pork processing.
Realizing Substantial Synergies: Tyson recently raised and refined its guidance on Hillshire acquisition synergies to \\$250 million in 2015, \\$400 million in 2016, and \\$600 million in 2017 from at least \\$225 million in 2015 and \\$500 million plus by 2017. However, the company has further indicated that it is on track to realize about \\$300 million in 2015. Savings from the integration arise from manufacturing efficiencies, procurement, logistics, and the elimination of duplicative administrative functions. Fitch views Tyson's 2015 and longer-term synergy targets as achievable. Tyson has already realized nearly \\$225 million of synergies through the third quarter ended June 27, 2015 and has a proven ability to improve operating efficiencies and take costs out of its business. Tyson realized more than \\$1 billion of operational efficiencies in chicken from 2008 through 2013 and continues to close inefficient beef processing facilities.
Higher-Margin Value-Added Products: With its purchase of Hillshire, Tyson is executing its strategy of expanding in higher-margin value-added products and growing its prepared foods business. Tyson now has No. 1 market share positions in several large and growing protein categories such as frozen breakfast and smoked sausage with the Jimmy Dean and Hillshire brands. Packaged foods provide more stable cash flow than commodity meats and leading brands are generally better positioned to take pricing to offset rising input costs. Tyson raised its normalized margin in prepared foods to 10% - 12% from 4% - 6% after acquiring Hillshire. The company's ability to achieve this level of profitability and maintain market share for its key brands is a key rating driver.
Fitch's key assumptions within the rating case for Tyson include:
--Consolidated revenue approximates \\$41.3 billion in 2015, declines slightly in fiscal 2016, due mainly to lower international sales following the divestiture of operations in Mexico and Brazil, and then grows at approximately 2% annually thereafter.
--Consolidated EBITDA and EBITDA margin approximate \\$3 billion and 7%, respectively, in 2015, up from the company's historical 5% range.
--EBITDA grows at a mid-single-digit rate in 2016, with margins expanding towards the mid-7% range in 2016 due to the accretive nature of the Hillshire acquisition and continued strong operating performance in chicken.
Assumptions related to segment level profitability, which reflect Fitch's views on industry fundamentals, operating efficiencies at Tyson, and the continued realization of synergies, are as follows:
--Chicken margins above the 7% - 9% normalized range in 2015 at 11.5% and at the high end of the range in 2016;
--Pork margins within the 6% - 8% normalized range through 2016;
--Beef operates at a slight loss in 2015 and gradually improves in 2016 but remains below Tyson's 2.5% - 4.5% normal range;
--Prepared foods margin approximates 8% in 2015, rising to the 10% - 12% normal range in 2016 as synergies continue to be realized;
--Total debt-to-EBITDA approximates 2.3x in 2015 and 2.1x in 2016;
--FCF of roughly \\$1 billion in 2015, with FCF margin-to-sales in the low 2% range thereafter;
--Total liquidity remains within Tyson's \\$1.2 billion - \\$1.5 billion target in most years.
Positive Triggers: Total debt-to-EBITDA sustained below 2x, due to greater than expected EBITDA growth or debt reduction, consolidated EBITDA margin of at least 8%, and a FCF margin of 2.5% or more yearly - the equivalent of about \\$1 billion annually - could result in a positive rating action. Positive organic growth trends in prepared foods and a proven ability to maintain leading market share position in branded packaged meats would also be factors.
Negative Triggers: A sustained period of total debt-to-EBITDA above 2.5x due to higher debt or sluggish earnings growth, and weak FCF may result in a negative rating action. An acceleration of losses in beef, which are not offset by strong performance in chicken, pork, and prepared foods, or sustained losses of market share in branded packaged meats could also be factors that drive a negative rating action.
Fitch views Tyson's liquidity as ample. Liquidity is supported by good FCF generation, a \\$1.25 billion unsecured revolver, which can be upsized by \\$500 million, and the maintenance of moderate cash balances. Moreover, Tyson has consistently met or exceeded its goal of maintaining \\$1.2 billion - \\$1.5 billion of liquidity. At June 27, 2015, Tyson had \\$1.7 billion of liquidity consisting of \\$471 million of cash and, after excluding \\$6 million of letters of credit, \\$1.244 billion available under its revolver.
Tyson's revolver matures on Sept. 25, 2019. The facility subjects the firm to a maximum debt-to-capitalization ratio of 60% and a minimum interest expense coverage ratio of 3.75x. Fitch estimates that Tyson has about \\$3.2 billion of debt capacity under its maximum leverage covenant, assuming its market capitalization remains in the current \\$17.3 billion range. After the early redemption of \\$401 million of legacy Hillshire 2.75% notes due September 2015 in July, Tyson's only sizable maturity through 2017 is \\$638 million of 6% notes due April 2016..
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
Tyson Foods, Inc.
--Long-term IDR at 'BBB';
--Unsecured bank credit facilities at 'BBB';
--Senior unsecured notes at 'BBB';
--Short-term IDR at F2.
The Hillshire Brands Co.
--Long-term IDR at BBB;
--Senior unsecured notes at 'BBB'.
Fitch has simultaneously withdrawn the following rating on Hillshire:
The Hillshire Brands Co.
--Short-term IDR 'F2'.
The Rating Outlook is Stable.