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

DBRS Limited (DBRS) 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 are Stable. DBRS’s confirmation reflects strong operating performance over the last year and incorporates the increase in financial leverage following the Company’s issuance of $500 million of Senior Notes to finance upcoming plant improvements and additional capacity. 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 4.5% year over year (YOY) in H1 F2018, driven by volume growth of 1.1%. Net sales volume growth was the result of high single-digit gains in developing markets, notably China and Latin America, and flat volumes in developed markets. The continued high potato industry manufacturing capacity utilization and solid demand for frozen potato products allowed for price increases. EBITDA margins remained relatively stable in H1 F2018, as cost containment from the Sustainable Cost Advantage (SCA) initiative, pricing and mix were offset by inflation. As a result, EBITDA increased by 4.2% YOY in H1 F2018.

The Company’s cash flow from operations increased by 12% in H1 F2018 because of growth in operating income. As expected, capital expenditures remained elevated, as the Company began its plant upgrade and expansion program. The Company did not pay any special dividends in H1 F2018. As such, free cash flow after dividends and before changes in working capital was substantial in H1 2018 and was applied toward debt reduction and building the cash balance. In Q3 F2018, McCain issued $500 million of senior notes. Despite the increase in debt, credit metrics remained stable. For the last 12 months ended Q2 F2018, pro forma lease-adjusted debt-to-EBITDAR and pro forma lease-adjusted interest coverage were 1.36 times (x) and 14.4x, respectively, from 1.32x and 17.2x at the end of H1 F2017.

DBRS expects that McCain’s position as the world’s leading producer of frozen potato products, continued efforts to broaden its geographic reach and a further focus on operational efficiency should help keep its earnings profile stable. Revenue is expected to increase in the low single-digits through F2019 based on strong volume growth in developing markets and modest growth in developed markets. Pricing increases could be more difficult to implement going forward, as new capacity is being added to the industry. DBRS expects that over the medium term, the Company’s capital investment program will result in revenue growth as the new capacity is absorbed by the industry. DBRS believes that EBITDA margins will 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 for the next two to three years in the range of $100 million per year. Because of the elevated capex and dividends, DBRS does not anticipate that the Company will generate a meaningful amount of free cash flow after dividends in the near term. Any deficit is expected to be funded with proceeds from the recent notes issuance. DBRS expects McCain to continue to pursue tuck-in acquisitions that would further enhance its product portfolio. DBRS forecasts that modest growth in operating income and relatively stable debt levels will result in key credit metrics that are well suited for the current rating category (i.e., lease-adjusted debt-to-EBITDAR in the 1.5x range).

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

The principal 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 dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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