DBRS Morningstar 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 (DBRS Morningstar) confirmed the Issuer Rating on McCain Foods Limited (McCain or the Company) at A (low), and the credit 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 credit rating confirmations and Stable trends reflect DBRS Morningstar's expectation that McCain's overall credit risk profile will remain strong for the current credit rating category, notwithstanding the negative impact of volume pressure and the anticipated change in channel mix on the Company's operating performance as the challenging macroeconomic environment continues to pressure consumer purchasing power. 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.

DBRS Morningstar forecasts revenue to increase in the low-double-digit range in F2024 and F2025, driven by the carry-forward of pricing actions from previous years, coupled with contributions from small-scale acquisitions. However, in the context of the current challenging macroeconomic environment, DBRS Morningstar expects the Company to be pressured to maintain and grow volumes in both the food and transportation segments. EBITDA margins are expected to persist above pre-pandemic levels, benefitting from the aforementioned pricing initiatives, operating leverage gains, and cost-savings and efficiency-improving initiatives. These measures should more than offset margin pressure stemming from the anticipated change in channel mix as consumers shift to lower-margin consumption at home from higher-margin consumption away from home. Consequently, DBRS Morningstar forecasts modest EBITDA growth in F2024 and F2025.

Notwithstanding the projected growth in earnings and consequently in operating cash flow, DBRS Morningstar forecasts free cash flow after dividends but before changes in working capital and lease principal payments to decline below F2023 levels in both F2024 and F2025. This is based on DBRS Morningstar's projection that the Company will increase its capital expenditure as it continues to expand and enhance its existing plant network to meet longer-term demand. Furthermore, DBRS Morningstar expects McCain to grow its cash dividend outlay. DBRS Morningstar anticipates that McCain will prioritize acquisitions that enhance its product portfolio while maintaining stable debt levels. As such, DBRS Morningstar forecasts key credit metrics to remain stable, with debt-to-EBITDA remaining relatively flat at the F2023 level of around 1.0 times (x) in F2024 and F2025.

Should key credit metrics deteriorate, i.e., debt-to-EBITDA increase above 1.5x for an extended period of time 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-related volatility of the potato-processing industry. Conversely, DBRS Morningstar could take a positive rating action should McCain's business risk profile meaningfully strengthen, without necessarily requiring an improvement in key credit metrics.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) factors
DBRS Morningstar 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 impact the Company’s ability to meet demand while lower potato quality could impact McCain’s ability to pass through price increases, ultimately affecting the Company’s margins. While the identification of Climate and Weather Risks as a Relevant negative factor is new and was not present in the prior credit rating disclosure, Climate and Weather risks have always been considered in DBRS Morningstar’s assessment of McCain’s overall credit risk profile.

There were no Social or 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/416784 (July 4, 2023).

Notes:
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Consumer Products Industry (https://www.dbrsmorningstar.com/research/417460; July 21, 2023)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (https://www.dbrsmorningstar.com/research/411694; March 28, 2023)

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (https://www.dbrsmorningstar.com/research/422134; October 19, 2023)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (https://www.dbrsmorningstar.com/research/410196; February 24, 2023)

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

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.

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 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.

DBRS Morningstar 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. DBRS Morningstar trends and credit ratings are under regular surveillance.

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

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