Hormel Foods Corporation -- Moody's affirms Hormel's A1 ratings; outlook stable

Rating Action: Moody's affirms Hormel's A1 ratings; outlook stableGlobal Credit Research - 15 Mar 2022New York, March 15, 2022 -- Moody's Investors Service ("Moody's") today affirmed the A1 senior unsecured debt ratings of Hormel Foods Corporation ("Hormel"). The outlook is stable.The affirmation of Hormel's A1 ratings reflects the company's diversified portfolio of protein-based food products and relative stable operating performance. Hormel's conservative financial policies and continued focus over the next few years on reducing debt and leverage following the June 2021 acquisition of the Planters snack portfolio is also a key factor in the affirmation. Moody's projects Hormel's debt-to-EBITDA will decline to 2.0x or lower in the fiscal year ended October 2022 and that the company will generate at least $350 million of free cash flow over the next 12 months. The $950 million 2024 notes are callable at par on or after June 3, 2022. Furthermore, the affirmation reflects Hormel's success in maintaining a stable operating performance during a volatile inflationary environment through price increases, improved promotional effectiveness, and product mix.Affirmations:..Issuer: Hormel Foods Corporation....$950 million 0.650% senior unsecured notes due June 2024, Affirmed A1….$750 million 1.700% senior unsecured notes due June 2028, Affirmed A1….$1 billion 1.800% senior unsecured notes due June 2030, Affirmed A1….$600 million 3.050% senior unsecured notes due June 2051, Affirmed A1Outlook Actions:..Issuer: Hormel Foods Corporation....Outlook, Remains StableRATINGS RATIONALEHormel's A1 senior unsecured ratings reflects the company's solid track record of consistent earnings growth through a diversified portfolio that is comprised of mainly protein-centric food products. The credit profile rating is supported by the company's solid market positions and strong brands in its key product categories. The credit profile also reflects Hormel's very conservative financial policy whereby the company maintains very strong credit metrics, even as it employs a steady but measured acquisition strategy to enhance its growth profile and scale. These strengths are balanced against Hormel's currently elevated 2.4x debt-to-EBITDA leverage (as of January 2022 pro forma for the Planters acquisition) following the June 2021 Planters acquisition that weakly positions the company within the rating category. Hormel's credit profile also reflects exposure to volatile commodity pork and turkey markets, the low-growth potential of some of its more mature grocery categories, rising commodity costs, and moderate execution risks related to future acquisitions.ENVIRONMENTAL SOCIAL AND GOVERNANCE CONSIDERATIONSHormel has exposure to natural capital risks as the company relies on energy, agriproducts (such as nuts), and animals (hogs, turkey, cattle, and chickens). The company also has exposure to waste and pollution risks as the company creates waste in food manufacturing, packaging, and disposal. Regulations and consumer preferences are likely to evolve to reduce packaging or improve recyclability or biodegradability of packaging, which could increase the cost of compliance in the future. To manage its environmental impact, Hormel has established various programs and has launched a new set of corporate responsibility goals, the 20 By 30 Challenge. In addition to striving to achieve reductions in energy use, solid waste sent to landfills and water use, the company has established goals to match 100 percent of its energy with renewable sourcing, to establish a science-based target for the reduction of greenhouse gas emissions by 2023, advance water stewardship efforts through initiatives in its top six priority watersheds and to support regenerative agriculture initiatives.Hormel is exposed to responsible production issues as it must cost-effectively manage a complex supply chain. Limitations on the availability of prices for key ingredients could have a negative effect on Hormel's costs and cash flow. Hormel's food and ingredient products are moderately negatively exposed to customer relations issues relating to product labeling, marketing, recalls and contamination risks including regulation and litigation. The company's focus on brands such as Hormel, SPAM, SKIPPY, and Planters, to name a few, also exposes the company to brand perception risk related to these issues. The company is susceptible to the health and safety risk of its employees as a food manufacturer, which creates moderately negative risks. Although social risk is moderately negative, human capital risk is neutral to low similar to other consumer good companies. Hormel's exposure to demographic and social trends is moderately negative as its products are vulnerable to changing consumer preferences. Hormel has established various programs and has launched a new set of comprehensive corporate responsibility goals, the 20 By 30 Challenge, which includes goals pertaining to safety, people and products.The company's conservative financial strategy is reflected by the company's commitment to low leverage (target debt/EBITDA of 1.5-2x by 2023; 2.3x as of January 2022 based on the company's calculation) and an investment-grade credit profile. The Hormel Foundation owns 47% of the outstanding shares, which is a moderately negative governance risk because it concentrates control. Management's positive track record and conservative financial policies mitigates such risks. Moody's assumes a measured pace of prudent acquisitions will enhance the company's portfolio mix of commodity-like, value-added, and premium products, by adding earnings diversity and higher margin businesses.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody's view that Hormel will sustain stable operating performance, manage cost pressures without meaningfully eroding the EBITDA margin, adhere to a conservative financial policy that will lead to debt-to-EBITDA leverage declining below 2.0x in fiscal 2022, and generate at least $350 million of free cash flow over the next year.Hormel's ratings could be upgraded if the company significantly improves its scale, geographic and product diversity, and profitability while maintaining earnings stability and a very conservative financial profile.The ratings could be downgraded if Hormel does not reduce leverage because of declining sales volumes, cost pressures, or deployment of cash in something other than debt repayment and earnings-enhancing investments.Debt-financed acquisitions or share repurchases prior to reducing leverage, or a shift in financial policy could lead to a downgrade. Specifically, ratings could be downgraded if Hormel does not reduce and sustain debt/EBITDA below 2.0x.The principal methodology used in these ratings was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Hormel Foods Corporation ("Hormel"), headquartered in Austin, Minnesota, is a leading processor of fresh and shelf-stable pork and turkey based products, as well as a variety of non-meat based food items. The company markets its products around the world under a variety of brand names including Hormel, Jennie-O, Skippy, Applegate, Justin's, SPAM, and Planters. Hormel is publicly traded with 47% of the shares owned by the Hormel Foundation. Net sales for the fiscal year ended October 2021 were approximately $11.4 billion on a reported basis and $12.1 billion pro forma for the June 2021 Planters acquisition.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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.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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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Frank Henson Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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