Fitch Ratings has affirmed Pilgrim's Pride Corporation's (PPC) Long-Term Issuer Default Rating (IDR) and senior unsecured notes at 'BBB-'.
Fitch has also affirmed PPC's U.S. secured credit facilities (term loan and revolving credit facilities) at 'BBB' with wholly owned subsidiaries, To-Ricos, Ltd and To-Ricos Distribution, Ltd, registered in Bermuda as co-borrowers and guarantors. The secured loans are secured by accounts receivable, inventories and substantially all of the company's U.S. assets.
The Rating Outlook is Stable.
The affirmation reflects PPC's resilient operating performance, low net leverage and strong liquidity position.
Key Rating Drivers
Standing Alone Credit Profile and Parent Linkage: Fitch believes PPC's business and standalone credit profile is in line with its 'BBB-' ratings. PPC's ratings are viewed on a standalone basis despite its credit linkage with JBS S.A. (BBB-/Stable). Fitch views PPC as highly strategic for JBS due to overall profitability contribution, growth perspective and diversification. JBS also owns 80% of PPC and influences its business and financial strategies. Fitch estimates that PPC represented about 20% of JBS's consolidated EBITDA in 2021.
The credit linkage with JBS also considers moderate ring-fencing or medium legal incentives under Fitch's criteria, as PPC has minority shareholders represented by independent board members governed by U.S. law, due to its listing on Nasdaq. In addition, no cross-default, acceleration clauses or upstream guarantees exist between PPC and its parent.
Conservative Leverage: Fitch forecasts PPC's net debt/EBITDA to remain below 2x at YE 2022 (from 2.2x at YE 2021), due to EBITDA growth and positive FCF. Fitch expects PPC to generate close to USD 1.7 billion of EBITDA, up from USD1.3 billion in 2021, based on strong U.S. performance, driven by demand from the foodservice and strength of the retail, paired with strong performance in Mexico. EBITDA rose to USD502 million in 1Q22, a 98% yoy increase, due to higher chicken prices in the U.S. and the aforementioned strength of its Mexican operations' performance. The company continues to face feed cost inflation, a tight labor market in the USA, and poor pork market pricing in Europe.
Resilient Business Profile: PPC's ratings are supported by its resilient business profile as one of the world's largest chicken processors, with a presence in the U.S., Europe, and Mexico, its diversified product portfolio, and its vertically integrated operations. Approximately half of PPC's sales go to food retailers, while the other half go to the foodservice segment, predominately quick-service restaurants (QSRs).
U.S. sales represented about 62% of group sales as of YE 2021. The company's product types include fresh chicken products, prepared chicken products, and value-added export chicken products. Fresh chicken accounted for 80%, 29%, and 88% of total U.S., U.K. and Europe, and Mexico chicken sales in 2021, while prepared foods represented about 22% of sales.
Acquisition Appetite: PPC's record of debt-financed acquisitions tempers the ratings, as Fitch expects the company to continue to pursue acquisitions that will add more added-value products. On Sept. 24, 2021, the company acquired 100% of the equity of the specialty meats and ready meals businesses of Kerry Group plc for USD954 million. This followed the acquisition of Tulip Limited in 2019 for USD354 million in cash.
Tulip is a leading integrated prepared pork supplier headquartered in Warwick, U.K., and operates 14 fresh and value-added facilities. PPC also acquired Moy Park, a leading poultry and prepared foods supplier with operations in the U.K. and continental Europe, in 2017 for USD1 billion, in addition to GNP, a provider of premium branded chicken products in the upper Midwest, in an all-cash USD350 million transaction.
Protein Outlook: The U.S. chicken sector is expected to benefit from the reopening of outdoor dining activities, strong poultry prices, and is expected to maintain broadly stable production in 2022, according to the U.S. Department of Agriculture. Among significant industry risks are downturns in the economy or consumer demand, imposition of increased tariffs, environmental and sanitary risks, higher labor and feed costs, as well as potential litigation fines as the industry is under increased scrutiny by public authorities.
Derivation Summary
PPC's business profile is in line with the 'BBB-' rating category due to its size, profitability, geographical diversification and leverage. The company operates in the U.S., Mexico and Europe, with PPC's U.S. operations representing about 62% of sales as of fiscal year-end (FYE) 2021.
PPC is smaller than other U.S. peers such as Tyson Foods, Inc. (BBB/Stable) and Cargill Incorporated (A/Stable), which receive synergistic benefits from their scale. PPC has a less diversified product portfolio than both its parent company, JBS, and Tyson Foods, which exposes the company to higher industry risks.
The company is subject to various legal proceedings and claims which arise in the ordinary course of business. In late October 2020, PPC settled for USD107 million with the U.S. Department of Justice (DOJ) for restraint of competition that affected three contracts for the sale of chicken products to one U.S. customer. PPC also settled with the direct purchaser's lawsuit class action for USD75 million in early 2021. In 2021, the company incurred USD556 million on expenses related to litigation settlements.
No country-ceiling or operating environment aspects impact the rating.
Key Assumptions
EBITDA of about $1.7 billion in 2022;
Capex of about $480 million in 2022;
A certain amount of share buybacks in 2022;
Total net debt/EBITDA below 2x in 2022.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of JBS's ratings could lead to an upgrade for PPC;
Strong FCF.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Significant debt-financed acquisitions and/or excessive shareholder distributions that would lead to a significant deterioration of the standalone credit profile;
A downgrade of JBS could impact the rating of PPC.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity: Fitch views PPC's liquidity as ample, supported by adequate cash on hand, revolver availability, strong cash flow generation, and a comfortable amortization profile. As of March 27, 2022, PPC had approximately USD725 million of cash and USD36 million of short-term debt. The company's main debt is comprised of senior unsecured bonds and a term loan due in 2026.
Issuer Profile
PPC is one of the largest chicken producers in the world, with operations in the U.S., the U.K., Mexico, France, Puerto Rico, Republic of Ireland and the Netherlands. PPC is a vertically integrated company controlled by Brazil-based JBS S.A. through an indirect ownership of common stock.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
PPC has an ESG Relevance Score of '4' for Governance Structure due to parent JBS S.A.'s control of the company. The shareholders' strong influence upon management could result in decisions that are detrimental to the company's creditors, which would have a negative impact on the credit profile and is highly relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
PILGRIM'S PRIDE CORPORATION 
