Morningstar DBRS Confirms Credit Ratings on McCain Foods Limited at A (low) and McCain Finance (Canada) Limited at A (low) and R-1 (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating on McCain Foods Limited (McCain or the Company) at A (low) and the credit ratings on McCain Finance (Canada) Limited's Senior Unsecured Debentures and Commercial Paper at A (low) and R-1 (low), respectively. All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations acknowledge that McCain's operating performance exceeded Morningstar DBRS' expectations, primarily because of pricing initiatives and modest volume growth in the Food segment in a particularly challenging macroeconomic environment that pressured consumer purchasing power. The Stable trends reflect Morningstar DBRS' expectation that the Food segment will drive further operating income growth in the near to medium term. The projected increase in operating cash flow as a result thereof should enable the Company to continue to self-finance expansionary capital expenditure (capex) initiatives and thus catalyze further earnings growth in the near to medium term. Combined with its prudent financial management, this should further strengthen McCain's credit risk profile within the current credit rating category.

CREDIT RATING DRIVERS
Should key credit metrics deteriorate, i.e., debt-to-EBITDA increase above 1.5 times for an extended period because of weaker-than-expected operating performance and/or more aggressive financial management, a negative credit rating action could result. Conversely, Morningstar DBRS could take a positive credit rating action should McCain's business risk profile meaningfully strengthen, without necessarily requiring an improvement in key credit metrics to do so.

EARNINGS OUTLOOK
Morningstar DBRS projects revenue to grow in the low- to mid-single-digit range in F2025 and F2026, attributable to volume growth and an improvement in mix in the Food segment, coupled with the contributions from small-scale acquisitions, which should more than offset volume declines in the Transportation segment. EBITDA margins in F2025 and F2026 are expected to be better than in F2024, benefitting from the improvement in mix, moderating input costs, operating leverage gains, and the cost-saving and efficiency-improving benefits of McCain's Sustainable Cost Advantage initiative. Consequently, Morningstar DBRS forecasts EBITDA to grow in the mid-single-digit range in F2025 compared with F2024, and subsequently grow in the high-single-digit range year over year in F2026.

FINANCIAL OUTLOOK
Operating cash flow should trend in line with earnings growth in F2025 and F2026. Morningstar DBRS believes that McCain could increase capex as it continues to expand and enhance its existing plant network to meet longer demand, and expects the Company to self-finance these capex initiatives with operating cash flow. Combined with a modestly higher cash dividend outlay, however, this could result in a deficit in free cash flow (FCF) (before changes in working capital and principle lease payments). Morningstar DBRS anticipates that McCain could finance these potential FCF deficits with available liquidity while maintaining relatively stable debt levels in F2025 and F2026. Combined with the projected growth in EBITDA, debt-to-EBITDA should therefore improve modestly in F2025, and subsequently stabilize around the F2025 level thereafter.

CREDIT RATING RATIONALE
McCain's credit ratings reflect its position as the leading producer of frozen potato products globally, supported by its large-scale and efficient operations. The credit ratings also acknowledge the Company's material concentration on potato products, its capital-intensive operations, and the effects of changing market demand.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) factors
Morningstar DBRS considers Climate and Weather Risks to have a Relevant negative environmental effect on the credit analysis. Adverse weather events, including droughts, floods, and frost, could result in reduced yields and/or potato quality, thus adversely affecting the potato processing industry. Such events could negatively affect McCain's operating performance as reduced yields could affect the Company's ability to meet demand, while lower potato quality could affect McCain's ability to pass through price increases, ultimately affecting the Company's margins.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of McCain, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of McCain, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of McCain, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodologies:

-- Global Methodology for Rating Companies in the Consumer Products Industry (August 14, 2024), https://dbrs.morningstar.com/research/437890

-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186

The following methodology has also been applied:

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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