DBRS Confirms McCain Foods Limited at A (low) and R-1 (low) with Stable Trends

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 and Senior Unsecured Debentures rating of McCain Finance (Canada) Ltd. at R-1 (low) and A (low), respectively. All trends remain Stable. DBRS’s confirmation reflects the continuing recovery in operating income and credit metrics following weak operating performance and debt financed acquisitions in F2013. McCain’s ratings acknowledge the commodity nature of the potato processing industry and the Company’s heavy revenue concentration on potato products. The ratings continue to be supported by McCain’s position as one of the leading providers of frozen potato products and its large-scale and efficient operations. The Stable trends reflect DBRS’s expectation that leverage will continue to decrease over the near to medium term to a level more appropriate for the A (low) rating category.

Revenue increased by 4.2% in F2013, based primarily on volume growth. Costs increased at a significantly higher rate due to one of the worst potato crop seasons on record in the U.K. This led McCain to purchase a larger percentage of its potatoes on the more expensive open market and also resulted in higher production costs due to lower-quality potatoes. McCain also incurred additional costs associated with the One McCain initiative (global technology platform integration, including Systems, Applications and Products in Data Processing implementation) in F2013. As a result, EBITDA declined by 14.4% from F2012. In H1 F2014, revenue increased by 15.5% year over year (YOY), driven primarily by acquisitions, but also due to pricing and volume growth. H1 F2014 EBITDA increased by 19.0% YOY as crop conditions normalized and margins recovered to F2012 levels.

Free cash flow before changes in working capital declined significantly (but remained positive) in F2013 due to decreased operating income and higher capital expenditures. However, debt increased materially to finance three acquisitions and higher working capital requirements during F2013. In the first half of F2014, improved free cash flow levels and a reversal of funds tied in working capital allowed McCain to repay a portion of the increase in debt. While McCain’s key credit metrics have improved since the end of F2013, they remain at the weaker end of the current rating category (i.e., lease adjusted debt-to-EBITDAR 1.70x in the last 12 months ended Q2 F2014 versus 2.25x in F2013 and 1.25x in F2012).

DBRS expects McCain’s earnings profile will continue to be supported by its position as the leading provider of frozen potato products and benefit from its improving product and geographic diversification. Revenue is expected to increase in the high-single digits in F2014 based mainly on previously completed acquisitions, as well as higher pricing and organic volume growth. Going forward, DBRS expects revenue growth in the mid-single digits due mainly to pricing but also some volume growth, as European and emerging market growth more than offset slight volume declines in its mature markets. EBITDA margins are expected to benefit modestly from efficiency improvements related to the One McCain initiative and a more normalized input cost environment. As such, EBITDA should increase by approximately 20% YOY in H2 F2014 and should continue to track revenue growth over the medium term.

In terms of financial profile, DBRS anticipates McCain will generate healthy levels of free cash flow, which DBRS expects will be applied to debt reduction over the next 12 months to 18 months. The decrease in debt, combined with continued growth in operating income, should result in an improvement in key credit metrics to levels more appropriate for the current rating category. Should lease-adjusted debt-to-EBITDAR not decline below 1.5x over this time frame, the Company’s credit ratings could come under pressure.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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