DBRS Confirms McCain Foods Limited 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 strong operating performance over the last year and incorporates the increase in financial leverage expected due to the Company’s planned capital program and dividends over the next three years. McCain’s ratings continue to be supported by the Company’s position as the leading provider of frozen potato products and its large-scale and efficient operations. The ratings also acknowledge the commodity nature of the potato processing industry and the Company’s heavy revenue concentration on potato products.

After adjusting for acquisitions and for currency fluctuations, net sales increased by 3.5% year over year (YOY) in H1 F2017, driven by volume growth of 3.2%. Volume growth was the result of almost double-digit gains in developing markets and low single-digit growth in developed markets. High potato industry manufacturing capacity utilization, combined with solid demand for frozen potato products, allowed for price increases. EBITDA margins improved modestly in H1 F2017 because of costs savings from McCain’s Sustainable Cost Advantage (SCA) initiative, improved mix, operating leverage and generally lower commodity costs. As a result, EBITDA increased by 16.6% YOY in H1 F2017.

McCain’s financial profile remains supported by its free cash generating capacity and disciplined financial management. The Company’s cash flow from operations continued to track operating income, increasing by 12% in H1 F2017. Capital expenditures remained elevated, mainly because of the construction of new lines at the Leuze and Infinity plants. Despite this and a special dividend in H1 F2017, free cash flow after dividends and before changes in working capital was strong and was applied toward three tuck-in acquisitions. Increased operating income and stable debt levels resulted in an improvement to key credit metrics. For the last 12 months (LTM) ended Q2 F2017, lease-adjusted debt-to-EBITDAR and lease-adjusted interest coverage were 1.32 times (x) and 17.2x, respectively, from 1.39x and 15.5x at the end of F2016.

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 on a constant currency basis for the remainder of F2017 and through F2018 based on pricing and mix. DBRS believes that volume growth in developing markets will remain strong. Pricing increases could be more difficult to implement going forward as new capacity is being added to the industry. EBITDA margins should continue to benefit from improvements in efficiency resulting from the SCA initiative and from a greater proportion of sales coming from the higher-margin frozen appetizer business. As such, DBRS expects that growth in EBITDA will slightly outpace that of revenue in the near to medium term.

As McCain is operating near capacity, DBRS expects that capex will be elevated over the next three years due to the Company’s expansion and upgrade of certain plants. DBRS believes the Company will continue to pay special dividends, in line with its F2017 special dividend. On a cumulative basis, DBRS anticipates that the Company’s free cash flow after dividends will be negative over the next three years and that the deficit will likely by funded with additional debt. DBRS expects McCain to continue to pursue tuck-in acquisitions that would further enhance its product portfolio. Any acquisition would likely be debt financed. The increase in debt as a result of the plant expansion and potential acquisitions is expected to be managed to keep key credit metrics 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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.