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

DBRS has today confirmed the Issuer Rating and Senior Debt Obligations rating of McCain Foods Limited (McCain or the Company) at A (low) and the Commercial Paper rating of McCain Finance (Canada) Limited at R-1 (low). The trends remain Stable. The confirmation of the ratings is based on McCain’s stable earnings and improved financial profile, while taking into consideration the execution and operating risks associated with the Company’s recent initiatives to further diversify its geographic reach and expand its complementary product offerings. The A (low) ratings continue to be supported by McCain’s leading position in frozen potato products and its well diversified and large-scale operations. The ratings also reflect the commodity nature of the potato processing industry and McCain’s heavy concentration on potato products as the main source of revenue.

In recent years, McCain’s revenue growth has been limited and was largely a result of price increases and acquisitions rather than substantial organic volume growth. The decline in volume growth in McCain’s mature markets has been offset by stronger growth in the emerging markets, leading to flat overall volumes. That said, emerging markets currently represent only 20% of McCain’s total volume and less than 10% of total operating income. Despite fluctuations in input costs and the shifting geographic mix, McCain has been reasonably effective at preserving overall operating margins through price increases and efficiency improvements. In terms of financial profile, McCain continues to possess relatively strong free cash flow generating capacity, which in recent years, has been largely used toward debt reduction (aside from a one-time special dividend in F2011). As such, McCain’s key credit metric (i.e., gross debt-to-EBITDA) has improved within the current rating category.

Going forward, McCain’s strong market share, initiatives in geographic and product diversification and continued focus on operational efficiency should help the Company maintain a relatively stable earnings profile. Revenue is expected to increase in the mid-to-high single digits in the near term, driven largely by acquisitions and price increases rather than substantial volume growth as any volume declines that may persist in mature markets should continue to be offset by growth in emerging markets. Although DBRS recognizes the potential benefits of McCain’s growth strategies in the long term, DBRS does not expect the Company’s EBITDA to grow at the same pace as revenue in the near term due to the currently lower-margin nature and size of the emerging market business.

In terms of financial profile, DBRS expects McCain to continue to generate healthy levels of free cash flow as capex and dividends are expected to remain steady. DBRS believes that the majority of the free cash flow, along with additional balance sheet debt, will be used to undertake strategic investments and acquisitions in both potato processing plants as well as to expand its complementary product portfolio. As such, DBRS expects that financial leverage may increase modestly in the near term, although still within the range acceptable for the current rating category. That said, the current ratings could come under pressure should McCain be more aggressive than expected in terms of the nature, magnitude and timing of any debt-financed acquisitions or investments.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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