DBRS Morningstar Changes Trend on Molson Coors Beverage Company to Stable from Negative, Confirms Ratings at BBB (low) and R-2 (low)

DBRS Limited (DBRS Morningstar) changed the trends on Molson Coors Beverage Company’s (Molson Coors or the Company) Issuer Rating, Senior Unsecured Debt rating, and Commercial Paper rating to Stable from Negative and also changed the trend on the Senior Unsecured Notes from subsidiary Molson Coors International LP, which are guaranteed by Molson Coors, to Stable from Negative. Concurrently, DBRS Morningstar confirmed Molson Coors’ Issuer Rating and Senior Unsecured Debt rating at BBB (low) and Commercial Paper rating at R-2 (low) and confirmed Molson Coors International LP’s Senior Unsecured Notes at BBB (low). The trend changes reflect stabilization of volume and operating income as economies move toward a post-pandemic normal, combined with the more than sufficient debt reduction required to defend the BBB (low) rating category. DBRS Morningstar believes that the Company is now well positioned in the BBB (low) rating category to navigate the current operating environment, which is challenged by inflationary pressure and supply chain disruptions.

On May 6, 2020, DBRS Morningstar changed the trend on the ratings to Negative from Stable amid concerns that the pandemic and its macroeconomic aftereffects, combined with an already challenging operating environment, would have a material negative impact on Molson Coors’ earnings profile and could delay its deleveraging plan. The Negative trend was maintained during the last review in March 2021, as DBRS Morningstar noted that while global vaccine rollouts and economies reopening could lead to a sequential improvement in the Company’s earnings in 2021, there was still considerable uncertainty around the pace and magnitude of economic reopenings and the Company’s operating performance during this period.

Since then, Molson Coors’ revenue started to trend upward from the second quarter of 2021, led by the reopening of the on-premise channel and the lower impact of pandemic-related restrictions. On a full-year basis, revenues for 2021 increased by 6.5% year over year to approximately $10.3 billion, driven by strong pricing growth and favourable brand and channel mix resulting from portfolio premiumization but partially offset by a marginal decline in volumes on a full-year basis. That said, EBITDA margins continued to remain pressured because of input cost inflation, higher transportation costs, and higher marketing expense and fell to 20.2% in 2021 from approximately 22% in previous years. As such, EBITDA remained relatively flat at approximately $2.1 billion in 2021 over 2020, but still below $2.3 billion in 2019. Dividend payouts were reinstated only in July 2021 after they were suspended in the second quarter of 2020 to preserve liquidity; therefore, dividend outflow remained low in 2021 as compared with historical levels. Lower capital expenditure and dividends outflow resulted in free cash flow (before changes in working capital) increasing to approximately $940 million from $890 million in 2019. The Company applied its cash on hand and internally generated cash flows toward another $1 billion of debt reduction in 2021. As a result of relatively flat EBITDA and material debt repayment, lease-adjusted debt-to-EBITDA improved to 3.5 times (x) in 2021 from 3.9x at the end of 2020.

DBRS Morningstar believes that Molson Coors’ earnings profile should remain sufficient to support the current BBB (low) Issuer Rating, despite volume pressure for the beer segment and near-term inflationary pressures that are partially offset by price increases of 3% to 5% effected at the beginning of 2022 and ongoing cost-saving initiatives. Net sales are expected to increase in the low- to mid-single digits to approximately $10.7 billion in F2022, based primarily on price increases, premiumization, and continued momentum in hard seltzer and other beyond-the-beer products, while absolute volume growth continues to remain challenging. DBRS Morningstar expects that EBITDA margins will remain pressured by input cost increases and commodity price fluctuations in the near term but believes these headwinds should be partially offset by cost-saving initiatives, increased product pricing, and existing hedging arrangements. As such, DBRS Morningstar expects EBITDA to increase modestly to the $2.1 billion to $2.2 billion range over the near term, primarily driven by growth in revenues, and to increase toward $2.3 billion over the medium term.

Molson Coors’ financial profile has improved materially toward a level considered sound for the current BBB (low) ratings as credit metrics primarily benefitted from material debt reduction. DBRS Morningstar expects cash flow from operations to track operating income and move to the $1.7 billion to $1.8 billion range over the near to medium term. At the same time, DBRS Morningstar expects capital expenditure and dividend payouts to return to historical levels. Capital expenditure is expected to increase toward $650 million in F2022 and F2023 to support new production capabilities in the U.S., UK, and Canada, and dividends are expected to increase materially to approximately $350 million, in line with the Company’s recent announcement of a 12% increase, as well as a full-year payout in F2022. DBRS Morningstar therefore estimates that free cash flow (after dividends but before changes in working capital) should be around $600 million in 2022 and increase toward $700 million in 2023. DBRS Morningstar notes that as long as earnings remain at least relatively stable in the near term, further debt reduction is not required to maintain the current rating category. However, should Molson Coors experience a material deterioration in earnings because of new coronavirus variants or substantial cost inflation, DBRS Morningstar expects the Company to return to a more balanced approach to capital allocation, including the potential for further debt repayment to maintain the current leverage metrics. As such, DBRS Morningstar expects lease-adjusted debt-to-EBITDA to remain below 3.5x over the near to medium term, levels that are considered comfortable for the current rating category.

DBRS Morningstar could take a further positive rating action should Molson Coors’ business risk profile meaningfully strengthen and/or should leverage reduce further toward the 3.0x level. Conversely, if the debt-to-EBITDA ratio rises above 4.0x on a sustained basis as a result of weaker-than-expected operating performance and/or more aggressive financial management, the ratings will be pressured.

ESG CONSIDERATIONS
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/373262.

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

The principal methodologies are Rating Companies in the Consumer Products Industry (July 26, 2021; https://www.dbrsmorningstar.com/research/382072), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, “Rating Companies in the Consumer Products Industry” (July 26, 2021) was the primary rating methodology applied to determine the ratings assigned to Molson Coors. “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (May 31, 2021) was applied to assess the corporate structure of Molson Coors and to determine the rating on the Senior Unsecured Notes issued by subsidiary Molson Coors International LP. “DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers” (March 1, 2022) was applied to ensure that the provided liquidity that supports the Commercial Paper rating was consistent with the DBRS Morningstar criteria.

The last rating action on this transaction took place on March 31, 2021, when DBRS Morningstar confirmed all ratings but maintained the Negative trend.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Vikas Munjal, Vice President, Global Corporates
Rating Committee Chair: Anil Passi, Managing Director, Global Corporates
Initial Rating Date: March 21, 2005

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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-- Rating Companies in the Consumer Products Industry (July 26, 2021) https://www.dbrsmorningstar.com/research/382072
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022) https://www.dbrsmorningstar.com/research/393065
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021) https://www.dbrsmorningstar.com/research/379424
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021)
https://www.dbrsmorningstar.com/research/373262