DBRS Confirms Molson Coors at BBB (high) and R-2 (high), Trends Stable

DBRS has today confirmed the long- and short-term ratings of Molson Coors Brewing Company (Molson Coors or the Company) and its related entities at BBB (high) and R-2 (high), respectively. The trends are Stable. Molson Coors displayed healthy margins and stable profitability in 2010 and continues to benefit from well-known brands, innovative new products and increasingly efficient operations. Revenues in 2010 rose by nearly 7.5% from the previous year to $3.25 billion, on the strength of increased pricing, favourable mix and beneficial net foreign exchange rates, partially offset by a 1.7% decrease in volumes. The MillerCoors joint venture (owned 42% by Molson Coors) contributed $456.1 million of equity income to the Company, a 20% increase year-over-year. Revenues from Canada and the United Kingdom increased in 2010, benefiting from improved foreign exchange rates and pricing, respectively. Molson Coors operating margins (excluding MillerCoors) increased moderately in 2010 as a result of cost-reduction initiatives, efficiency increases and the successful implementation of a value over volume initiative in the United Kingdom.

In terms of financial profile, Molson Coors continued to generate steady free cash flow despite rising capex and ever-increasing dividends. Despite generating positive free cash flow, total debt increased by 14.5% as the Company refinanced maturing obligations with incremental debt and preferred not to suffer the tax consequences of repatriating cash. As such, gross debt-to-EBITDA, including equity income from MillerCoors, remained stable at 1.8 times.

Going forward, DBRS expects Molson Coors’ operating performance to benefit from a stabilizing economy, improving unemployment rates among target consumers and moderate industry volume growth in core markets. DBRS expects revenue growth in the mid-single-digit range in 2011 based on higher prices and more favourable mix, resulting from an increasing focus on the craft and cask beer markets, as well as continued exposure to emerging markets such as China. Margins will, however, come under significant pressure in 2011 as commodity and fuel prices experience considerable inflation. Molson Coors should be able to at least partially offset the effects of such input cost increases by passing along higher prices to consumers and investing in cost-saving initiatives.

DBRS forecasts that the Company will generate EBIT of approximately $875 million to $900 million (including MillerCoors) in 2011. Stable operating cash flow, increasing capex and a consistent dividend policy should result in positive free cash flow prior to changes in working capital of $525 million to $575 million in 2011. It is expected that free cash flow will be used toward potential strategic international growth acquisitions and/or to strengthen the balance sheet. Despite relatively strong credit metrics, the rating continues to reflect the challenges associated with achieving profitable growth given the mature nature of Molson Coors’ core markets.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Consumer Products, which can be found on our website under Methodologies.