Fitch Ratings has affirmed the Rating Outlook of Tyson Foods, Inc. and the Hillshire Brands Co from negative to stable.
This reflects the material improvement in Tyson’s credit profile supported by greater than expected earnings, driven by strong operating performance in the beef segment combined with debt repayment, a Rating Action Commentary said.
According to Fitch Ratings, Fitch affirmed Tyson’s long-term issuer default rating (IDR) at “BBB” and its short-term IDR at “F2.” Fitch also affirmed Hillshire’s “BBB” long-term IDR rating. Tyson’s ‘BBB’ ratings balance its significant scale, product diversification with leading market share positions in beef, chicken, pork and prepared foods, operating efficiency and consistent financial policy with its exposure to the low-margin volatile commodity protein business.
The margin outlook is mixed, the report said. Fitch’s margin assumptions for beef are expected to remain very strong in FY21, approaching 12% with good underlying fundamentals supported by a stable cattle supply and strong global demand.
Prepared foods margins are expected to be modestly lower than FY20, reflecting higher cost inflation.
Fitch expects pork margins materially lower than FY20 and lower than first half of 2021 margins of 6.3% given operational inefficiencies, elevated labor costs and hog costs.
Chicken margins are expected to remain materially below historical levels and in the low-single digits due to higher feed ingredient costs, grow-out expenses, outside meat purchases, production inefficiencies and coronavirus expenses, the report said.
Fitch anticipates the beef segment should generate roughly two-thirds of Tyson’s operating income in fiscal year 2021 (FY21) which compares to slightly more than one-third in FY19. In FY22, Fitch expects beef margins will moderate from FY21 levels while margins in the other three segments improve as operating conditions normalize.
Tyson’s exposure to the foodservice channel is roughly 40% in prepared foods and slightly higher in chicken, the commentary said. The beef and pork segments have materially less foodservice exposure. Chicken and the prepared foods segments were most adversely affected with adjusted operating margins of 1.1% and 9% respectively in FY20 compared to 4.9% and 10.7% in FY19.
Within the beef and pork segments, volume and cost pressures were offset by increased cut-out processing margins. Beef and pork segment adjusted margins were 10.1% and 11.1% in FY20 respectively compared to 6.8% and 5.4% in FY19.
“Tyson experienced significant business disruption to processing operations from the COVID-19 pandemic due to reduced foodservice demand, lower production volumes including some temporary closures, increased operating costs including additional payments to frontline workers, unfavorable price/mix and plant inefficiencies,” the commentary noted.
Incremental expenses related to the pandemic totaling approximately $540 million for Tyson in FY20.
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