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

DBRS Limited (DBRS Morningstar) 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. McCain’s operating performance was pressured by a sharp spike in commodity prices and input costs in the nine months (9M) ended March 31, 2022 (Q3 F2022). However, DBRS Morningstar believes that the Company has headroom in the current rating category to partially absorb the effect thereof through ongoing pricing actions and prudent financial management. As such, DBRS Morningstar confirmed the ratings with Stable trends. 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.

Since DBRS Morningstar’s last rating action (refer to the press release dated June 11, 2021), McCain has reported its full-year F2021 results, as well as its results for the 9M ended Q3 F2022. (DBRS Morningstar notes that McCain’s results for the 9M ended Q3 F2022 comprises final results for the first quarter ended September 30, 2021, and the second quarter ended December 31, 2021, and preliminary results for Q3 F2022). Full-year F2021 revenue and EBITDA displayed some improvement from the pandemic lows of F2020, reflecting the beginning of the global economic reopening. In the 9M ended Q3 F2022, revenue continued to benefit from volume recovery and growth in the foodservice, quick service restaurant, and retail channels. However, EBITDA margins in the 9M ended Q3 F2022 contracted by 90 basis points compared with the 9M ended March 31, 2021 (Q3 F2021), as commodity prices and input costs spiked sharply and outpaced the benefit of selling-price increases. Consequently, EBITDA in the 9M ended Q3 F2022 remained relatively flat on the 9M ended Q3 F2021 levels.

The topline should continue to benefit from volume recovery and growth in the fourth quarter of F2022 (Q4 F2022). However, DBRS Morningstar anticipates that the Company’s operating performance will remain pressured by rapidly rising costs in Q4 F2022, and, as such, projects that full-year F2022 EBITDA will remain flat on F2021 levels. This, combined with stable capital expenditure and a modest increase in the cash dividend outlay, should result in relatively flat debt levels. As such, DBRS Morningstar forecasts debt-to-EBITDA will remain modestly above the 1.5 times (x) level considered appropriate for the current rating category in F2022. In F2023, DBRS Morningstar expects inflationary cost pressures to persist, and believes that the Company could be challenged to continue to pass through these cost pressures without affecting volumes. Should debt-to-EBITDA remain above 1.5x through the course of F2023 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 the growth in operating income.

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

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/396929.

Notes:
The principal methodologies are Rating Companies in the Consumer Products Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382072); DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683); and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065) 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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