Fitch Affirms Smithfield's IDR at 'BB' and Withdraws Ratings
Fitch Ratings has taken the following final rating actions on Smithfield Foods, Inc. (Smithfield).
Fitch has affirmed and withdrawn the following ratings:
--Long-term Issuer Default Rating (IDR) at 'BB';
--$925 million asset-based inventory revolver at 'BB+';
--Rabobank Term Loan at 'BB';
--Guaranteed senior unsecured debt at 'BB'.
The following rating has been upgraded and withdrawn:
--$1 billion 6.625% notes due 2022 to 'BB' from 'BB-'.
The Rating Outlook is Stable. At July 29, 2012, Smithfield had approximately $2 billion of total debt.
The upgrade of Smithfield's 6.625% notes reflects the fact that none of the company's public notes are guaranteed following the August 2012 refinancing of its 10% secured notes due July 15, 2014. Fitch upgraded Smithfield's IDR and guaranteed unsecured notes to 'BB' on July 19, 2012 because the refinancing improved the company's overall credit profile by reducing interest cost, eliminating an early maturity trigger on the firm's inventory revolver, and extending maturities. Credit protection for unsecured bond holders has been strengthened by the release of encumbrances on the firm's real estate and other fixed assets.
Smithfield's ratings incorporate the firm's balanced financial policies, periodic earnings volatility, mid-single-digit EBITDA margin, and single-protein concentration. Ratings consider the company's risk management capabilities and its sizeable branded packaged meats operation which provides a more stable source of cash flow than commodity fresh pork products.
Smithfield aims to maintain net debt to adjusted EBITDA at or below 3.0x with a ceiling of 4.0x, net debt to capitalization of less than 40%, and liquidity of $500 million to $1 billion. Smithfield's EBITDA margin has averaged approximately 6% ranging from under 2% to nearly 10% over the past 10 years due to supply/demand imbalances in pork and volatile grain costs.
Operational improvements in pork processing and hog production are resulting in cost savings but earnings have declined from fiscal 2011 record levels due to higher hog raising costs and significantly lower profitability in Hog Production. During fiscal 2012, Hog Production represented 20% of Smithfield's $833 million of operating profit, excluding corporate expenses, while the Pork segment contributed 75% and international represented the remaining 5%. Packaged meats were 54% of pork segment sales while fresh pork and by-products was 46%.
Packaged meat sales approximated $6 billion or 46% of Smithfield's $13.1 billion of revenue in the fiscal year ended April 29, 2012. Brands include Smithfield, Farmland, Armour, Eckrich, John Morrell, and Cooks. The firm's strategy is to grow packaged meats both organically and with acquisitions.
Fitch believes Smithfield's outlook for a marginal loss or profit in hog production is reasonable, given hedge positions in place prior to the sharp run-up in corn prices. Fitch also views the firm's upward revision of its normalized profit range for packaged meats positively. Smithfield believes its packaged meats business can generate 12 cents - 17 cents per pound in most years and expects profit to be at the high end of this range with 2%-3% volume growth in fiscal 2013. Packaged meats has benefited from lower live prices and cut-out values in fresh pork. During fiscal 2012, Smithfield's Pork segment sold approximately 2.7 billion pounds of packaged meats product.
For the latest 12 month (LTM) period ended July 29, 2012, total debt-to-operating EBITDA was 2.2x, up from 1.8x at the year ended May 1, 2011. Operating EBITDA-to-gross interest expense was 4.7x, up from 4.5x, and funds from operation (FFO) fixed charge coverage 4.3x, up from 3.9x. During the LTM period, Smithfield generated $412.6 million of FCF. Fitch expects total debt-to-operating EBITDA to approximate 3.0x for fiscal 2013 and believes the company is capable of generating over $100 million of FCF annually, despite volatility caused by commodity prices and swings in working capital requirements.
At July 29, 2012, Smithfield had $1.3 billion of liquidity consisting of $208.1 million of cash and $1.1 billion of availability under its revolver, securitization, and international facilities. The firm's $925 million inventory revolver and its $275 million securitization facility expire on June 9, 2016 and June 9, 2014, respectively. The revolver limits Smithfield's consolidated leverage (defined as consolidated funded debt less cash in excess of $75 million to consolidated capitalization) or adjusted net debt-to-capitalization to 50% and adjusted consolidated interest coverage to at least 2.50x. At July 29, 2012, Smithfield reported that its net debt-to-capitalization was in the mid 30% range. Smithfield's most significant upcoming maturity over the next three fiscal years is its $400 million 4% convertible notes due June 30, 2013.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'High Yield Food, Beverage, Restaurant and Consumer Products Handbook' (Sept. 19, 2012);
--'Fitch Upgrades Smithfield's IDR to 'BB' & Rates $1B Debt Issuance 'BB-'; Outlook Stable' (July 19, 2012);
--'Corn Belt Troubles Trigger Protein Pricing Concerns' (July 13, 2012);
--'2012 Outlook: U.S. Commodity Protein, Produce, and Dairy; Structural Changes to Continue as Costs Remain High and Europe Will Be A Challenge' (Dec. 14, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
High Yield Food, Beverage, and Restaurants: Cross-Company Liquidity, Debt and Covenant Analysis
2012 Outlook: U.S. Commodity Protein, Produce, and Dairy
Carla Norfleet Taylor, CFA, +1-312-368-3195
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie, II CPA, +1-312-368-3186
Mark A. Oline, +1-312-368-2073
Brian Bertsch, New York, +1-212-908-0549