Fitch revises Tyson's outlook
Tyson has navigated through 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, announced the rating agency.
However, 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 has created the ground for the new rating.
According to the report, the margin outlook is mixed and while 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, other categories will perform less than expected.
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 the 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 the 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, said the auditors. The beef and pork segments have materially less food service exposure. Chicken and prepared food 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.
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