Rating Action: Moody's affirms Tyson Food's Baa2 rating; outlook stableGlobal Credit Research - 24 Aug 2022New York, August 24, 2022 -- Moody's Investors Service ("Moody's") today affirmed Tyson Foods, Inc.'s ("Tyson Foods" and "Tyson") existing ratings, including its Baa2 senior unsecured ratings and Prime-2 commercial paper rating. The rating outlook is stable.The affirmation reflects Tyson Foods' large scale and good segment diversity which creates some earnings stability in an otherwise volatile protein sector. Although operating performance has been strong year-to-date, with the company reporting double digit growth in revenue and operating income, beef and pork margins are likely to decline from current levels. Tyson's beef segment has been a driver of its outperformance over the past few quarters. However, Moody's expects Tyson Foods' beef operating margins to decline from current levels as lower expected cattle supplies are likely to drive higher cattle costs and softer consumer demand for premium cuts of beef results in lower average beef prices. In pork, Moody's expects Tyson's operating margins to also decline from current levels, as limited hog supplies result in higher costs and average sales prices decline because of weaker export and consumer demand. Moody's expects operating margins in Tyson's prepared food segment to be stable over the next 12 to 18 months, as the company is able to partially pass through higher input costs through higher average sales prices, albeit with a potential decline in volumes due to price elasticity. Lastly, Moody's expects Tyson's chicken segment operating profits to improve as consumers trade down to chicken and the company continues to exhibit operational improvement in this segment.The rating affirmation also reflects Moody's expectation that Tyson will maintain a conservative financial policy and strong liquidity to manage the volatility in protein markets. Moody's projects debt-to-EBITDA leverage to rise to a 2x range over the next 12-to-18 months from a very low 1.3x (Moody's adjusted) as of July 2022 because profitability in the beef business will retreat from a cyclical high. The projected leverage is more in line with Moody's expectations for the Baa2 rating given the company's operating profile.The following ratings/assessments are affected by today's action:Ratings Affirmed:..Issuer: Tyson Foods, Inc.....Senior Unsecured Commercial Paper, Affirmed P-2....Senior Unsecured Bank Credit Facility, Affirmed Baa2....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2 Outlook Actions: ..Issuer: Tyson Foods, Inc. ....Outlook, Remains Stable RATINGS RATIONALE Tyson Foods' Baa2 senior unsecured rating reflects the company's large scale and good segmental diversity. In addition, the rating also reflects Tyson's reasonably good earnings stability, owing largely to its diversification amongst proteins (beef, chicken, & pork) as well as its prepared food business. By having exposure to beef, chicken, and pork, Tyson has diversification against the inherent earnings volatility of the company's individual protein businesses. In fiscal 2021, Tyson's three protein operating segments – chicken, pork, and beef – represented about 81% of sales while prepared foods represented about 19%. Tyson's financial strategy is currently balanced. The company maintains a steady pace of dividend growth and share repurchase activity. However, Tyson balances this activity by curtailing share buybacks when needed in support of its goal to maintain an investment grade credit profile. Weaknesses in internal controls, mounting lawsuits, and high CEO turnover contribute to governance concerns that contribute to the G-3 governance score though the company's conservative financial policy provides good financial flexibility to manage these risks and protein business volatility. Tyson targets a conservative net debt-to-EBITDA leverage of less than 2x (based on the company's calculation; 1.2x as of July 2022). Free cash flow has been strong in recent years; however, Moody's is projecting free cash flow to be negative in fiscal September 2023 as a result of Moody's expectations of higher capital spending to support automation and efficiency, particularly in the chicken operations, and elevated working capital needs.Tyson has good liquidity supported by an undrawn $2.25 billion revolving bank credit facility expiring in September 2026, solid operating cash flows and $1.1 billion of cash as of July 2, 2022. Moody's expect that Tyson will incur a free cash flow deficit of approximately $300 million in the next 18 months, assuming capital expenditures of $4 billion and dividends of about $1 billion. The company has a $1.5 billion commercial paper program that is backstopped by the $2.25 billion revolving credit facility. As of July 2, 2022, there were no commercial paper or revolver borrowings.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody's expectation that Tyson will continue to maintain a balanced financial policy that allows it to successfully manage through inherent earnings and cash flow volatility. Moody's assume in the stable outlook that there is potential for earnings to weaken as the company cycles strong performance of the beef and pork sector over the last year.Ratings could be upgraded if Tyson Foods exhibits further improvements to earnings and cash flow stability, debt to EBITDA leverage is sustained below 2.0x, and cash and committed multi-year external liquidity sources are maintained at or above $1.5 billion.Ratings could be downgraded if Tyson Foods' operating margins sustainably deteriorate, market share declines meaningfully, debt to EBITDA is sustained above 2.75x, or cash and committed multi-year external liquidity sources fall below $1.0 billion.Tyson Food's ESG Credit Impact score is moderately negative (CIS-3), reflecting its moderately negative governance risk and a conservative financial policy that helps to partially mitigate its highly negative exposure to environmental and social risks. The main environmental risks for Tyson Foods stems from its reliance on live animals and the impact that its operations have on natural capital, water management, and carbon transition. The company's main social risks stem from its responsible production requirements in order to prevent contamination and adhere to food safety requirements. Tyson Food's conservative financial policies, low leverage, and good liquidity provide financial flexibility to manage the business through commodity cycles as well as mitigate highly negative environmental and social risks.Credit exposure to environmental risks is highly negative (E-4). Carbon transition, water management and natural capital are the key risks for the company, which is similar to other protein processors. The company owns and operates hog and chicken farms and also purchases proteins from suppliers. The wholly-owned operations have more direct exposure to environmental risks. Tyson has to feed and nurture live animals on its wholly-owned farms, which necessitates the use of agriculture-based feed, the consumption of a lot of water, and investment and management to minimize the environmental effects of animal waste. Tyson's diversity among chicken, pork and beef allows the company to shift production based on both consumer demand and cost considerations, including environmental factors. This along with the company's large and diverse facilities footprint provides greater flexibility to manage the overall environmental risk exposure – particularly physical climate risks – than producers that are more focused on a single protein. In order to manage its environmental risks, Tyson Foods has implemented a number of goals, such as reducing greenhouse gases (GHG) by 30% by 2030 and setting contextual water targets at its facilities.Tyson Foods' credit exposure to social considerations is highly negative (S-4), driven by responsible production. The company must actively manage a large and complex supply chain for live animals, purchased proteins, and feedstocks to ensure animal health and safety as well as sufficient volume and quality of materials used in its end products. As a processor of beef, chicken, and pork, Tyson Foods has food safety and quality measures that it must adhere to in order to prevent recalls or contamination. A meaningful portion of Tyson's products are supplied wholesale, but such inputs to end consumer products and the company's own focus on packaged meats creates moderately negative customer relations risk associated with branding and product quality. Presence in beef, chicken and pork reduces demographics and societal trend risks – viewed as neutral to low for Tyson - since the protein diversity provides greater protection against adverse changes in consumer preferences related to any one protein.Credit exposure to governance considerations is moderately negative (G-3). Tyson Foods' financial policies are conservative. However, management credibility and track record is moderately negative given historic weakness in internal controls, lawsuits related to the coronavirus and price fixing that led to settlements and fines, and high senior management turnover. The company disclosed in 2020 ineffective internal controls and procedures stemming from misstatements of purchased cattle inventory, and the issues led to a restatement of its 2020 10-K. In addition, the Tyson Limited Partnership's ("TLP") controlling ownership stake is a governance weakness because it concentrates decision making through a dual class voting structure. TLP holds just under 20% of the common stock but has roughly 70% of the voting rights through ownership of nearly all of the Class B common stock, which has 10 votes per share while the Class A common stock has one vote per share. The conservative financial policies lead to neutral to low financial strategy and risk management risk and good financial flexibility to partially mitigate the other governance risks.The principal methodology used in these ratings was Protein and Agriculture published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356422. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Tyson Foods, Inc. ("Tyson") is among the world's largest animal protein processors, with operations in beef, chicken, and pork. Tyson is also one of the nation's ten largest packaged food manufacturers with over $8 billion in annual Prepared Foods segment sales. The Tyson Limited Partnership ("TLP") holds just under 20% of the common stock but has roughly 70% of the voting rights through ownership of nearly all of the Class B common stock that has 10 votes per share. Total sales for the publicly-traded company (NYSE: "TSN") in the fiscal year ended October 2021 totaled $47 billion.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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