DBRS Confirms McCain at A (low) and R-1 (low), 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. The Company’s ratings continue to benefit from: (1) its global leading market position in frozen potato products, (2) its efficient operations in a relatively low-margin industry, and (3) its strong cash flow generating capacity and balance sheet. The rating also reflects the fact that the majority of McCain’s revenues depends heavily on potato processing, which is a low-margin and highly capital intensive business.

Reported revenue was flat in F2011 as volume was essentially unchanged and the benefits of price increases implemented in the second half of the year were just enough to offset the negative effects of a stronger Canadian dollar. Overall volume performance was the result of continued growth in developing markets mitigating declines in many of the Company’s mature markets. McCain’s EBITDA margin declined, but remained reasonable. This was largely due to the fact that higher input costs were not matched with corresponding price increases until late in the year. The benefit of price increases began to show in the first three months of F2012 as sales increased by 6.7% on a year-over-year basis with volume growth of only 2%. In terms of its financial profile, the Company’s cash flow from operations remained strong while capex declined by approximately 4%. During the year, McCain issued a significant one-time special dividend, which tends to occur every few years as the Company recalibrates its capital structure. This caused free cash flow to be negative at the end of F2011. As such, gross debt increased by nearly 22%, causing gross debt-to-EBITDA to increase, although still well within the comfortable range for the A (low) rating category.

Going forward, DBRS expects that McCain’s strong market share, geographic diversification and efficient operations will help maintain a stable earnings profile. Volume growth should continue to stay relatively flat in the near term and should begin to grow moderately thereafter, based primarily on accelerating growth in developing markets. In terms of price/mix, DBRS believes McCain will continue to benefit from recent price increases through F2012. We also expect input cost inflation to moderate, further contributing to EBITDA margin improvement over the course of F2012. In terms of financial profile, DBRS expects capex to remain steady and dividends to return to normal levels, thereby allowing free cash flow to return to positive territory in F2012. DBRS also believes that McCain will likely consider making additional tuck-in investments to fund growth in emerging markets in the near to medium term. Going forward, gross debt-to-EBITDA is expected to remain in the range of 1.0x to 1.5x, thus keeping credit metrics well within the parameters of the current rating category.

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