DBRS Confirms McCain Foods at A (low), Stable Trend

DBRS has today confirmed the rating of McCain Foods Limited’s (McCain or the Company) Senior Debt Obligations at A (low) and McCain Finance (Canada) Limited’s Commercial Paper rating at R-1 (low). The trends remain Stable. The ratings continue to be supported by McCain’s strong market share, geographic diversification and efficient operations.

Operating earnings remained relatively stable in F2008 as improved price/mix and operational cost savings helped offset the effects of lower volumes, cost inflation and foreign exchange. Excluding the effects of divestitures, McCain’s total food volumes decreased by 1.4% in F2008 (compared to a 0.2% increase prior year) as strong gains in developing regions were offset by increased softness in the Company’s developed markets. Volumes in developed markets are being affected by lower Quick Service Restaurant and food service volumes (North America), reduced consumer demand (Europe) and operational/supply issues (Australia/New Zealand).

DBRS expects McCain’s operating margins/earnings to be lower in F2009 as the effects of softer volumes (due to the global recession) and decreased incremental operating efficiencies outpace pricing/mix improvements. While DBRS forecasts that McCain’s net earnings will decrease in F2009, this will not result in any pressure on the ratings. Beyond F2009, DBRS expects earnings to return to more normal levels as cyclical pressures ease and global demand begins to improve.

McCain’s cash flow from operations was stable year-over-year in F2008, but net free cash flow was slightly negative, due mainly to higher capex (expected) and a large jump in working capital. Despite realizing negative net free cash flow, the Company continued to reduce debt using cash on hand, which led to a slight improvement in leverage metrics for the year.

Given the expectation of reduced profitability in F2009, DBRS forecasts that net free cash flow will be slightly negative again or break-even at best, assuming no major acquisitions. However, DBRS believes the Company will again use cash balances to maintain/reduce debt to be in line with fiscal year-end 2008 levels, thus keeping credit metrics well within the parameters of the current rating category.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Consumer Products, which can be found on our website under Methodologies.

This is a Corporate rating.