DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of McCain Foods Limited (McCain or the Company) at A (low), and the ratings on the Senior Unsecured Debentures and Commercial Paper of McCain Finance (Canada) Limited at A (low) and R-1 (low), respectively. All trends are Stable. The rating confirmations and Stable trends reflect DBRS Morningstar's expectation that McCain's operating income should benefit from more aggressive pricing actions in response to persistent inflationary pressure. The projected increase in operating cash flow (OCF) as a result thereof should enable the Company to continue to self-finance expansionary capital expenditure (capex) initiatives and thus catalyze further operating income and OCF growth in the near to medium term. The Company's inherently strong free cash flow (FCF) generating capacity, coupled with its prudent financial management, should strengthen its financial profile within the current rating category. McCain's ratings continue to reflect its position as the 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 on potato products and the commodity-like nature of the potato processing industry.
On June 9, 2022, DBRS Morningstar confirmed the ratings on McCain at A (low) and those on McCain Finance (Canada) Limited at A (low) and R-1 (low), all with Stable trends, as it believed that the Company had sufficient headroom within the current rating category to partially absorb the effect of spiking commodity prices and input costs through ongoing pricing actions and prudent financial management. At that time, DBRS Morningstar commented that, should debt-to-EBITDA remain above the 1.50 times (x) level considered appropriate for the current rating category through the course of F2023, the ratings would be pressured. Since DBRS Morningstar's last rating action, McCain reported its full-year F2022 results as well as the results for its F2023 first quarter, which ended September 30, 2022 (Q1 F2023). F2022 EBITDA was modestly better than DBRS Morningstar's forecast, underpinned by volume recovery and growth, which more than offset the negative effects of spiking commodity prices, soaring inflation, and supply chain disruptions on gross profit margins. In Q1 F2023, pricing actions in response to surging inflation contributed to robust topline, margin, and EBITDA growth year-over-year (YOY). Consequently, in the last 12 months ended Q1 F2023, debt-to-EBITDA was 1.50x compared with just over 1.50x in F2022.
Looking ahead, DBRS Morningstar forecasts revenue to grow in the low teens YOY in F2023, primarily attributable to more aggressive pricing actions in both the food and transportation segments. However, the Company could be pressured to pass through cost increases without affecting volumes, particularly in the foodservice channel, as consumers could shift to Quick Service Restaurants and retail channels in response. Notwithstanding the margin pressure stemming from the anticipated change in channel mix, as well as a change in product mix as consumers shift from branded to private-label products in the retail channel, along with persistent inflationary cost pressure, DBRS Morningstar expects EBITDA margins to recover toward pre-pandemic levels in F2023, primarily attributable to pricing actions, improving operating leverage, and the Company's Sustainable Cost Advantage (SCA) efficiency-improving and cost-saving initiatives. Consequently, DBRS Morningstar projects F2023 EBITDA to grow significantly from F2022 levels. In the medium term, EBITDA should continue to benefit from pricing actions, improving operating leverage, and the Company's SCA initiatives, as well as contributions from new, small-scale acquisitions. While the uncertainty surrounding the macroeconomic outlook presents a significant downside risk to DBRS Morningstar's forecasts, DBRS Morningstar believes that McCain will continue to have sufficient headroom to partially absorb any effects thereof within the current A (low) rating category.
In terms of the financial profile, DBRS Morningstar forecasts F2023 FCF after dividends and before changes in working capital to grow beyond F2022 levels, as OCF continues to trend upward in line with earnings growth, capex increases as McCain continues with the enhancement and expansion of its existing plant network, and the Company maintains its cash 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 well below 1.50x in F2023, based primarily on the expected growth in EBITDA, and to subsequently stabilize at around these levels in the medium term. A protracted economic downturn could pressure McCain's financial performance and cash flow generation. While this could moderate the Company’s credit metrics below DBRS Morningstar's forecasts, DBRS Morningstar believes that the Company will have sufficient headroom within the current rating category to partially absorb such downward pressure. Should debt-to-EBITDA remain above 1.50x for an extended period as a result of weaker-than-expected operating performance and/or more aggressive financial management, the ratings would 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.
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 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Global Methodology for Rating Companies in the Consumer Products Industry (September 2, 2022; https://www.dbrsmorningstar.com/research/402329), DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022; https://www.dbrsmorningstar.com/research/404248), 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.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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