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

DBRS Limited (DBRS) has today confirmed the Issuer Rating of McCain Foods Limited (McCain or the Company) at A (low) as well as the Senior Unsecured Debentures and Commercial Paper ratings of McCain Finance (Canada) Ltd. at A (low) and R-1 (low), respectively. All trends remain Stable. DBRS’s confirmation reflects stable operating performance over the last year and considers the slight increase in leverage following the acquisition of Van Geloven BV (Van Geloven). 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.

After adjusting for the divestiture of the North American pizza business and for currency fluctuations, net sales increased by 3.7% year over year (YOY) in H1 F2016, driven by volume growth of 2.5% and higher pricing (sales increased 9.9% prior to adjustments). Volume growth was the result of strong gains in developed markets, notably the U.S. and Europe, partially offset by declines in developing markets, such as Latin America and China. EBITDA margins improved modestly because of improved mix, cost savings from McCain’s Sustainable Cost Advantage initiative and much-improved plant performance in the United States. As such, EBITDA increased by 11.3% YOY in H1 F2016.

McCain’s financial profile remains supported by its cash-generating capacity. Free cash flow before dividends and changes in working capital increased substantially in H1 F2016, primarily driven by earnings growth. The Company paid a special dividend in Q1 F2016 and, as such, free cash flow after dividends was moderately negative. Growth in operating income and moderately increased debt levels have caused key credit metrics to remain relatively stable (lease-adjusted debt to EBITDAR near 1.5 times (x)).

On March 5, 2016, McCain acquired a majority stake in Van Geloven, a frozen appetizer business based in the Netherlands. Van Geloven generated sales of approximately EUR 200 million in 2015 and has shown strong growth over the recent past. Growth could be accelerated going forward with access to McCain’s network across Europe. While financial terms of the deal were not made public, DBRS expects the Company to finance the transaction with a combination of cash and debt such that pro forma lease-adjusted debt to EBTIDAR increases modestly to approximately 1.75x.

DBRS expects that McCain’s earnings profile will continue to be supported by the Company’s leading market position in frozen potato products, efficient operations and geographic diversification. Revenue is expected to increase in the low single digits based mainly on price increases rather than volume growth. DBRS believes that volume growth in emerging markets will begin to resume, 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 growth in EBITDA will slightly outpace that of revenue in the near to medium term.

In terms of financial profile, DBRS anticipates that McCain will generate healthy levels of free cash flow, which DBRS expects to be used for strategic capital investments and to reduce the increased debt resulting from the Van Geloven transaction. Over the longer term, excess free cash flow could be applied toward further acquisitions to enhance the Company’s product portfolio. The combination of increasing operating income and 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 near 1.5x).

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 methodologies are Rating Companies in the Consumer Products Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on our website under Methodologies.

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