DBRS Confirms Molson Coors Brewing Company, BBB, R-2 (Middle), Stable Trends

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debt rating of Molson Coors Brewing Company (Molson Coors or the Company) at BBB, and the Company’s Commercial Paper rating at R-2 (middle). DBRS has also confirmed the Senior Notes rating of Molson Coors Capital Finance ULC and the Senior Unsecured Notes rating of Molson Coors International LP, both at BBB. The trends on all ratings are Stable. The confirmation of the ratings is based on the Company’s improving operating performance, recent debt repayments and the expectation of continued deleveraging. The Company’s ratings continue to be supported by its strong brands and solid market positions in core markets, as well as improved geographic diversification. The ratings also reflect the intense competition from other brewers, shifting consumer preferences toward wine and spirits, the mature nature of Molson Coors’ core markets and sensitivity to input cost volatility and economic cycles.

Molson Coors’ earnings profile remained relatively stable in 2013 and H1 2014 as net sales increased primarily because of the inclusion of Central Europe (for H1 2013), higher volume in the United Kingdom and positive pricing in Europe, which offset lower volumes in Canada and the United States. EBITDA margins (excluding MillerCoors) improved somewhat in H1 2014 versus 2013 primarily because of cost reduction initiatives and temporary delays in marketing expenditures in certain regions, partially offset by a shift in mix to higher-cost products. As such, Molson Coors’ EBITDA (including MillerCoors) increased to approximately $1.4 billion for the last 12 months (LTM) ended Q2 2014 versus nearly $1.3 billion in 2013 and $1.22 billion in 2012.

Molson Coors’ financial profile improved toward the level considered appropriate for the current rating category in 2013 and H1 2014 based on expected deleveraging efforts subsequent to the acquisition of StarBev LP (StarBev) in June 2012. Growth in operating cash flow combined with a decline in capex, partially offset by an increase in dividends, resulted in a significant increase in free cash flow (before changes in working capital) to $775 million for the LTM ended Q2 2014 versus $514 million in 2012. Molson Coors used free cash flow generated and cash on hand to repay convertible debt. As a result, balance-sheet debt declined nearly $910 million to approximately $3.66 billion at Q2 2014 versus approximately $4.57 billion at Q2 2013 and pro forma $5.1 billion when the acquisition of StarBev was completed in Q2 2012. Combined with growth in earnings, Molson Coors’ credit metrics improved considerably through the end of Q2 2014 (i.e., lease-adjusted debt-to-EBITDAR of 2.66 times (x) and lease-adjusted EBIT coverage of 7.41x for the LTM ended Q2 2014 versus 3.01x and 5.05x, respectively, for 2013.)

Going forward, DBRS expects Molson Coors’ earnings profile to remain relatively stable over the medium term, as the Company continues to invest in its portfolio of brands and focus on improving efficiency. DBRS believes that Molson Coors’ net sales will increase in the low single digits in the medium term, based on a modest improvement in volume, partially offset by pricing pressure in core markets. Equity income from MillerCoors is expected to continue to increase in the low- to mid-single-digit range. EBITDA margins (excluding MillerCoors) should remain relatively stable, returning toward normal levels in H2 2014 as marketing expenditures increase after temporary delays in H1 2014. Over the medium term, EBITDA margins should continue to be pressured by competitive pricing, changes in mix toward higher-cost products and possible input cost inflation, which may be at least partially offset by cost-reduction initiatives, improving efficiency and possible operating leverage if volumes grow. As such, EBITDA is expected to grow toward the $1.5 billion level over the medium term.

Molson Coors’ financial profile is expected to continue to improve to a level considered appropriate for the current rating category in the near term, as the Company remains focused on deleveraging subsequent to the StarBev acquisition. Cash flow from operations should continue to track operating income, while capex should increase moderately in H2 2014 and remain at elevated levels in the near to medium term. Cash outlay related to dividends is expected to remain stable in the near term after the per-share dividend increased in Q1 2014. As a result, free cash flow before changes in working capital should remain in the $700 million to $800 million range in the near to medium term. DBRS expects that Molson Coors will use excess cash on hand and free cash flow generated to repay indebtedness, as the Company aims to improve credit metrics toward levels considered appropriate for the current rating category (i.e., lease-adjusted debt-to-EBITDAR below 2.5x). Over the longer term, DBRS believes the Company will use free cash flow generated to invest in growth and/or increase returns to shareholders.

DBRS has also discontinued the Senior Unsecured Notes rating of Coors Brewing Company, as the Notes have been repaid in full.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Consumer Products Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.