DBRS Comments on Molson Coors Litigation Settlement Announcement

DBRS notes that as detailed in the joint announcement by Molson Coors Brewing Company (Molson Coors or the Company; rated BBB with a Stable trend by DBRS) and SABMiller plc (SAB Miller) issued on October 10, 2014, they have amicably settled their litigation in Canada rising from the License Agreement for the Miller trademark brands in Canada (the Settlement). As a result of the Settlement, the rights to distribute Miller trademark brands in Canada will revert to SABMiller on April 1, 2015.

On August 15, 2014, DBRS confirmed the ratings of Molson Coors based on its stable operating performance and improving financial profile. Despite the fact that the Settlement generated significant headlines, particularly in Canada, DBRS does not believe that losing the rights to distribute Miller trademark brands in Canada will have any material impact on the credit risk profile of the Company. A modest negative impact on the Canadian business from the loss of the distribution of Miller trademark brands in Canada is tempered by such brands representing less than 1% of worldwide volume and a mid-single-digit percentage of Molson Coors Canada’s sales to retailers.

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 continues to believe 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 low-growth mature core markets (i.e., Canada, the United States and the United Kingdom). 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 timing differences 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 (from approximately $1.4 billion in the last 12 months ended Q2 2014, as calculated by DBRS).

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 capital expenditures 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 2.5 times). Over the longer term, DBRS believes the Company will use free cash flow generated to invest in growth, likely in the form of acquisitions (or investments) in new higher growth markets and/or to increase returns to shareholders.

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

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.

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