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

DBRS Limited (DBRS Morningstar) changed the trend on McCain Foods Limited's (McCain or the Company) Issuer Rating to Stable from Negative and confirmed the rating at A (low). DBRS Morningstar also changed the trend on McCain Finance (Canada) Limited's Commercial Paper and Senior Unsecured Debentures ratings to Stable from Negative and confirmed the ratings at R-1 (low) and A (low), respectively. The trend changes reflect McCain's stronger-than-expected operating results in the last 12 months (LTM) ended March 31, 2021 (Q3 F2021), and DBRS Morningstar's view that, while there are still uncertainties relating to the pace of the global distribution of Coronavirus Disease (COVID-19) vaccines, the relaxation of virus-containment measures, and the related macroeconomic aftereffects, the Company is now well placed to navigate the current environment within the A (low) rating category without the need for materially stringent capital-conserving measures. 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 continue to acknowledge the Company's material concentration to potato products, as well as the commodity-like nature of the potato-processing industry.

On July 24, 2020, DBRS Morningstar confirmed McCain's and McCain Finance (Canada) Limited's ratings at A (low) and R-1 (low) with Negative trends, based on concerns that the pandemic and its macroeconomic aftereffects could result in a deterioration in the Company's earnings profile beyond the level considered acceptable for the current rating category. At that time, DBRS Morningstar commented that changing the trends to Stable would be more influenced by stabilization and recovery in operating income than by debt reduction.

McCain's earnings in the LTM ended Q3 F2021 were negatively affected by volume contraction in the food-service and fast-food channels, and inflationary pressure, partially offset and moderated by retail sales volume growth, strong operating performance by the transportation segment, and the Company's cost-saving and Sustainable Cost Advantage (SCA) productivity-improving initiatives. McCain's operating income stabilized over this period and was materially stronger than DBRS Morningstar expected. Debt-to-EBITDA improved to 1.86 times (x) in the LTM ended Q3 F2021, from 1.96x in F2020, as the Company repaid debt. While relatively high for the current rating category, debt-to-EBITDA was lower than DBRS Morningstar's forecasts, primarily on account of stronger-than-expected operating income.

The ongoing impact of the coronavirus pandemic and related containment measures, coupled with the global availability of vaccines, will continue to influence McCain's near-term earnings trajectory. DBRS Morningstar expects earnings to improve toward pre-pandemic levels in F2022, driven by the combined impact of (1) volume growth as food-service and fast-food volumes recover and grow in line with population mobility, and retail volumes continue to benefit from pandemic-related behavioural shifts, including increased at-home cooking, and (2) margin accretion stemming from the anticipated shift in channel mix, potential pricing actions to mitigate against inflationary pressure, and the SCA initiative. In the medium term, DBRS Morningstar believes that EBITDA will increase above pre-pandemic levels as the impact of the pandemic on volumes and mix normalizes, coupled with benefits from the Company's ongoing drive to further improve operational efficiencies. Contributions from new, small-scale acquisitions should further bolster earnings.

DBRS Morningstar believes that McCain's debt-to-EBITDA metric will improve to a level more appropriate for the A (low) rating category in the near to medium term through its operating performance and financial management. In F2022, DBRS Morningstar forecasts that free cash flow (FCF) after dividends and before changes in working capital will decline from levels at the LTM ended Q3 F2021, as operating cash flows trend upward as earnings rebound, capital expenditure increases as McCain continues with the enhancement to and expansion of its existing plant network, and the Company grows its dividend outlay. DBRS Morningstar anticipates that McCain will use its FCF and available liquidity to continue to pursue acquisitions that enhance its product portfolio and to make mandatory debt repayments. Consequently, DBRS Morningstar forecasts debt-to-EBITDA to improve from current highs toward and below 1.50x in the near to medium term, based primarily on the expected growth in operating income. Should debt-to-EBITDA remain above 1.50x for an extended period of time as a result of weaker-than-expected operating performance and/or more aggressive financial management, the ratings will be pressured. DBRS Morningstar notes that the low debt-to-EBITDA threshold that McCain is required to maintain for the current rating category is attributable to the commodity-like nature and related volatility of the potato-processing industry. Although unlikely, a positive rating action could be influenced by a material reduction in debt-to-EBITDA below 1.0x on a normalized and sustainable basis, based primarily on growth in operating income.

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 methodologies are Rating Companies in the Consumer Products Industry (July 30, 2020; https://www.dbrsmorningstar.com/research/364690), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), 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).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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