DBRS Confirms McCain Foods Limited at A (low) and McCain Finance (Canada) 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) and the Senior Unsecured Debentures and Commercial Paper ratings of McCain Finance (Canada) Limited at A (low) and R-1 (low), respectively. All trends are Stable. The confirmations are based on the Company’s stable earnings in H1 F2019 and consistent financial management. McCain’s ratings continue to reflect its position as a leading producer of frozen potato products globally, supported by its large-scale and efficient operations. The ratings also acknowledge the Company’s material revenue concentration to potato products, as well as the commodity nature of the potato processing industry.

McCain’s earnings profile is expected to remain at a level commensurate with its current A (low) rating, as the Company continues to benefit from its leading market position and operational efficiency, which is expected to more than offset input cost volatility. Revenue is forecast to increase in the low single digits in F2019 and F2020, on the back of strong volume growth in developing markets and stable volume growth in developed markets, driven by McCain’s ongoing capital investment program. However, pricing increases may be difficult to implement due to new capacity being added to the industry. DBRS believes that McCain’s EBITDA and margins could be pressured in F2019, as a challenging potato planting and growing season resulted in lower than average yields and quality issues in most of the regions that the Company operates in, which had a knock-on effect on potato costs. The higher potato costs are expected to more than offset cost savings from the Company’s Sustainable Cost Advantage initiative. A modest improvement in earnings is expected in F2020, as increased revenue from the high-margin appetizer business, coupled with benefits from the Company’s ongoing drive to further improve operational efficiencies, are expected to more than offset inflationary price increases.

McCain’s F2019 free cash flows after dividends are forecast to be lower than the prior financial year, due to forecast earnings contraction and elevated capital expenditure (capex), while dividends are expected to remain flat. Capex is expected to remain high in F2020, as the Company continues with the upgrade to and expansion of its existing plant network. DBRS believes that McCain’s free cash flows after dividends will increase in F2020 as earnings rebound. McCain is expected to continue to pursue acquisitions that would further enhance its product portfolio, which could be debt funded. DBRS forecasts the Company’s credit metrics to remain strong for its current A (low) rating (i.e., lease-adjusted debt-to-EBITDAR below 1.50 times (x)). If leverage increases above 1.50x for a sustained period of time as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured. A positive rating action could result if McCain’s earnings and financial profile improve to levels consistent with a AA rating.

Notes:
The principal methodologies are Rating Companies in the Consumer Products Industry (August 2018), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on dbrs.com under Methodologies & Criteria.

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.

DBRS Ratings Limited previously endorsed the ratings of McCain Foods Limited and McCain Finance (Canada) Limited, for EUR denominated debt. As of April 24, 2019, McCain Foods Limited and McCain Finance (Canada) Limited have requested that this endorsement be discontinued, as there is no intention of issuing EUR denominated notes.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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