DBRS Confirms McCain Foods at A (low) and R-1 (low), Trend Stable

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.

McCain generated solid earnings over the past fiscal year despite an environment of continuing soft demand as efficiency gains were able to offset moderately declining sales and input cost inflation. Overall volumes were down slightly, with potato volumes (roughly 90% of the Company’s total food volume) essentially flat on a year-over-year basis. Growing demand in developing markets continued to help offset single-digit declines in potato product volume in McCain’s more mature markets. McCain notably benefited from “food operations enablers”, which included strong crops and purchasing efficiencies, along with improvements related to warehousing and distribution. Cash flow from operations increased with earnings, while capex and dividends were normal in F2010. Free cash flow was used to pay down long-term obligations, reducing gross debt by 32%. As a result, gross debt-to-EBITDA decreased to 1.04 times, an exceptionally strong level for the current rating parameters.

Going forward, DBRS expects McCain’s earnings profile to remain strong and stable on the back of its solid market position, improving geographic diversification and efficient operations. Earnings may suffer a temporary moderate decline in F2011 as a result of increased input costs due to poor potato crops, the effects of which typically last about one year. Aggressive price increases have been implemented in a number of markets in an effort to offset the rising cost of inputs. In terms of volume, DBRS forecasts that McCain should grow at a slightly stronger rate in F2011 as emerging markets continue to expand and developed markets benefit marginally from a stabilizing economy. DBRS expects McCain’s operating income to be negatively affected in F2011, but will begin trending back up in F2012. Weaker operating income should lead to moderately lower cash flow from operations in F2011, while capex and dividends are expected to remain at normal levels. High levels of free cash flow should result in further reduction to net debt, which would effectively reduce already exceptionally low financial leverage. DBRS believes that this could lead McCain to consider issuing a special dividend and/or undertaking additional investments in the near future. That said, sound operations and prudent financial management are expected to keep McCain well placed 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.