DBRS Morningstar Confirms METRO INC. at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of METRO INC. (Metro or the Company) at BBB, both with Stable trends. The confirmation acknowledges Metro's relatively stable earnings profile against the backdrop of an evolving Coronavirus Disease (COVID-19) pandemic environment through the fiscal year ended Sep 25, 2021 (F2021), as evidenced by solid same-store sales growth on a two-year basis and relatively stable EBITDA margins year over year. The stable trends reflect DBRS Morningstar's view that Metro’s earnings profile will remain supportive of the Company's current ratings, despite a continued moderation of volumes from elevated pandemic levels and inflation-driven pressures on operating results because of input costs and wage increases. While DBRS Morningstar acknowledges that Metro’s operating results could be hindered by inflationary pressures, depending on their degree and duration, DBRS Morningstar believes that the Company has ample room to absorb these pressures within the context of the current rating category. Metro's ratings continue to reflect its well-established brand and market position in Ontario and Québec, diversified formats and banners, and disciplined financial management. The ratings also continue to consider the intensely competitive operating environment, Metro’s geographical concentration, and the high level of union penetration.

DBRS Morningstar forecasts Metro's sales growth for F2022 to be muted given the elevated pandemic volumes experienced for much of F2021, with sales expected to grow to approximately $18.5 billion from just below $18.3 billion in F2021. In terms of EBITDA margins, DBRS Morningstar expects Metro to pass on some of the input cost and wage increases through pricing, believes that the Company will continue to execute on cost saving and efficiency improvement initiatives, and will benefit from lower coronavirus-related health and safety costs, resulting in EBITDA margins remaining relatively flat in F2022. As such, DBRS Morningstar forecasts Metro's EBITDA to grow marginally toward $1.8 billion in F2022.

DBRS Morningstar believes Metro’s financial profile will remain relatively strong for the current ratings, benefitting from the Company's free cash flow (FCF) generating capacity and relatively solid credit metrics. DBRS Morningstar expects cash flow from operations (as calculated by DBRS Morningstar) to track operating income and be approximately $1.3 billion in F2022 compared with just below $1.3 billion in F2021, while capital expenditures and dividends are forecast to increase to approximately $700 million and to above $250 million, respectively. As such, DBRS Morningstar believes FCF after dividends but before changes in working capital and net lease principal payments will be approximately $350 million. After changes in working capital and net lease principal payments, DBRS Morningstar expects the Company to primarily use its FCF for share buybacks in combination with cash on hand and possibly some incremental debt. DBRS Morningstar could take a positive rating action should Metro’s business risk profile materially strengthen and credit metrics improve, such that debt-to-EBITDA drops below 2.5 times (x) on a normalized and sustainable basis as a result of growth in operating income. Although unlikely, should credit metrics deteriorate for a sustained period (i.e., debt-to-EBITDA above 3.5x) as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Companies in the Merchandising Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382073), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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