Morningstar DBRS Confirms Molson Coors Beverage Company at BBB and R-2 (middle), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Molson Coors Beverage Company's (Molson Coors or the Company) Issuer Rating and Senior Unsecured Debt rating at BBB, and Commercial Paper rating at R-2 (middle). In addition, Morningstar DBRS confirmed its rating on Molson Coors International LP's Senior Unsecured Notes at BBB. All ratings carry Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The rating confirmations reflect Molson Coors' relatively steady operating performance during the last twelve months ended September 30, 2024 (LTM Q3 2024), and the Company's strong key credit metrics and free cash flow generating capacity. The Stable trends reflect Morningstar DBRS' view that the Company is well positioned in the current BBB category to navigate an operating environment that remains challenging, at least in the near term.

On November 20, 2023, Morningstar DBRS upgraded Molson Coors' credit ratings to BBB from BBB (low) and R-2 from R-2 (low), acknowledging persistent deleveraging and a material improvement in the Company's key credits metrics, which was driven by stronger-than-expected operating performance during 2023, as well as further debt reduction. The rating actions were further supported by Morningstar DBRS' view that Molson Coors will be able to sustain key credit metrics at those levels going forward, consistent with the Company's publicly stated net-leverage threshold of 2.5 times (x).

Since then, Molson Coors reported results for the nine months ended September 30, 2024 (9M 2024), and operating performance has been broadly in line with Morningstar DBRS' expectations. Although sales declined marginally during this period, driven by material volume decline in the U.S. market, especially during the third quarter, EBITDA margins continued to improve and were stronger than expected, particularly considering sustained input cost inflationary pressures. With EBITDA margins improving to 21.6% during 9M 2024 compared with 20.8% during 9M 2023 and relatively flat sales, EBITDA dollars improved to approximately $2.5 billion for LTM Q3 2024, compared with $2.4 billion in 2023. Molson Coors used its strong free cash flows primarily toward share repurchases and increase in cash balances, such that gross debt remained relatively flat year over year. Consequently, debt-to-EBITDA improved to approximately 2.6x at the end of Q3 2024 from 2.7x at the end of Q3 2023.

CREDIT RATING DRIVERS
A positive rating action could occur if Molson Coors' earnings profile continued to strengthen, and debt-to-EBITDA improved to levels below 2.5x on a normalized and sustainable basis. Conversely, a deterioration in key credit metrics, such as debt-to-EBITDA increasing above 3.5x on a sustained basis, because of weaker-than-expected operating performance and/or more aggressive financial management, could result in a negative rating action.

EARNINGS OUTLOOK
Looking ahead, Morningstar DBRS believes that Molson Coors' operating performance will benefit from low single-digit topline growth and relatively stable EBITDA margins, as near-term volume and cost pressures are offset by growth in the "beyond the beer" product categories and favourable product-price-mix due to portfolio premiumization. Morningstar DBRS expects sales to increase to approximately $11.8 billion in 2025 and $12.0 billion in 2026 from approximately $11.6 billion forecast for the full-year 2024. Morningstar DBRS believes that the Company will be able to sustain EBITDA margins broadly at existing levels during the forecast period, as near- term input cost pressures continue to be offset by gross margin improvement and effective cost-reduction strategies. As such, Morningstar DBRS forecasts EBITDA to increase gradually toward $2.5 billion in 2025 and above $2.5 billion in 2026, from around $2.4 billion forecast for the full-year 2024.

FINANCIAL OUTLOOK
Morningstar DBRS expects Molson Coors' financial profile to remain strong for the rating category, supported by its strong free cash flow generating capacity and sustainable key credit metrics, at levels considered comfortable for the rating category. Morningstar DBRS expects cash flow from operations to be around $1.9 billion in 2025 and 2026 and to continue to be more than sufficient to cover elevated capital expenditure levels of $750 million annually and dividend outflow of approximately $380 million and $400 million in 2025 and 2026, respectively. Morningstar DBRS therefore estimates free cash flow (after dividends but before changes in working capital) to be in the $750 million to $800 million range in the near term and likely to be used primarily for share buybacks and/or bolt-on acquisitions (if any). With relatively stable debt levels and modest increase in EBITDA, debt-to-EBITDA is expected to remain relatively stable during the forecast period.

CREDIT RATING RATIONALE
Molson Coors' ratings remain supported by its strong brands and solid market positions; free cash flow-generating capacity; and geographic diversification while taking into consideration intense competition, exposure to mature beer markets, and commodity price volatility.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Molson Coors Beverage Company, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Molson Coors Beverage Company, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Molson Coors Beverage Company, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Consumer Products Industry (August 14, 2024)
https://dbrs.morningstar.com/research/437890

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024) https://dbrs.morningstar.com/research/431186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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.

Morningstar DBRS 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.

These credit ratings are 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 credit 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, "Global Methodology for Rating Companies in the Consumer Products Industry" (August 14, 2024) was the primary rating methodology applied to determine the ratings assigned to Molson Coors. "Morningstar DBRS Global Corporate Criteria" (April 15, 2024) was applied to assess the corporate structure of Molson Coors, to determine the rating on the Senior Unsecured Notes issued by subsidiary Molson Coors International LP, as well as, to ensure that the provided liquidity that supports the Commercial Paper rating was consistent with the Morningstar DBRS criteria.

The last rating action on this transaction took place on November 20, 2023, when Morningstar DBRS upgraded the Company's ratings to BBB from BBB (low) and R-2 from R-2 (low).

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

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Vikas Munjal, Vice President
Rating Committee Chair: Scott Rattee, Senior Vice President, Sector Lead
Initial Rating Date: March 21, 2005

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

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