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

DBRS Limited (DBRS) has confirmed the Issuer Rating of McCain Foods Limited (McCain or the Company) at A (low) and the Commercial Paper and Senior Unsecured Debentures ratings of McCain Finance (Canada) Ltd. at R-1 (low) and A (low), respectively. All trends remain Stable. DBRS’s confirmation reflects the 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 the leading provider of frozen potato products and its large-scale and efficient operations.

Revenue increased by 15% in F2014, driven by acquisitions, volume growth and higher pricing. Excluding acquisitions and adjusting for currency fluctuations, revenue increased by 4.3% and volumes increased by 2.5%. EBITDA margins declined modestly despite significant improvements in Canada and Europe, due to pressure in the Company’s U.S. potato products business, where deteriorating potato quality led to poor plant performance and the need to rework and repackage products. Overall, strong top-line performance led to EBITDA growth of 14% in F2014 when compared to F2013. In H1 F2015, revenue remained relatively flat year over year (YOY); however, EBITDA increased 23% due to margin improvement resulting from a weakening Canadian dollar, strong plant performance, profit improvement at Day & Ross, a reduction in freight costs in Canada, and lower commodity prices in the U.K. and Europe.

McCain’s free cash flow before changes in working capital increased substantially during F2014, primarily driven by earnings growth and lower capex during the year. During F2014, the Company used free cash flow as well as a reversal of funds tied in working capital to repay approximately $200 million of debt. In H1 F2015, strong growth in operating income and stable debt levels have resulted in key credit metrics to improve further, to levels more appropriate for the current rating category (lease-adjusted debt to EBITDAR near 1.5 times (x)).

DBRS expects McCain’s earnings profile will continue to be supported by the Company’s leading market position in frozen potato products, efficient operations and improving geographic diversification. Revenue is expected to increase in the low single digits based on price increases rather than volume growth, as emerging market growth is offset by volume declines in mature markets. EBITDA margins should continue to benefit from improvements in efficiency resulting from the Sustainable Cost Advantage initiative and price increases. As such, DBRS expects that EBITDA will slightly outpace revenue growth in the near to 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 strategic capital investments and/or acquisitions to expand into new markets and enhance the Company’s product portfolio. The Company has $150 million of debt that matures in June 2015, which could be repaid with cash on hand. As such, the combination of increasing operating income and modest debt reduction should result in improved key credit metrics that are well-suited for the current rating category (i.e., lease-adjusted debt-to-EBITDAR below 1.5x).

DBRS has also discontinued the Senior Debt Obligations rating of McCain Foods Limited, as there is currently no debt outstanding at this entity.

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.