DBRS Morningstar Upgrades Molson Coors Beverage Company to BBB from BBB (low) and R-2 from R-2 (low), Stable Trends

DBRS Limited (DBRS Morningstar) upgraded Molson Coors Beverage Company’s (Molson Coors or the Company) Issuer Rating and Senior Unsecured Debt credit rating to BBB from BBB (low). DBRS Morningstar also upgraded Molson’s Commercial Paper credit rating to R-2 from R-2 (low). In addition, DBRS Morningstar upgraded its credit rating on Molson Coors International LP’s Senior Unsecured Notes to BBB from BBB (low). All of the credit ratings carry Stable trends. The credit rating upgrades reflect persistent deleveraging and a material improvement in the Company’s key credits metrics, driven by stronger-than-expected operating performance during year-to-date 2023, as well as further debt reduction. The rating actions are further supported by DBRS Morningstar's view that Molson Coors will be able to sustain key credit metrics at these levels going forward, which are commensurate with the BBB rating level and are consistent with the Company’s publicly stated net-leverage target. Molson Coors’ ratings remain supported by its strong brands and solid market positions; free cash flow-generating capacity; and geographic diversification despite the intense competition, exposure to mature beer markets, and commodity price volatility.

On March 3, 2023, DBRS Morningstar confirmed Molson Coors’ credit ratings at BBB (low) and noted that the credit ratings could be upgraded if lease adjusted debt-to-EBITDA moves below 3.0 times (x) on a normalized and sustainable basis because of stronger-than-expected operating performance and/or further debt reduction.

Since then, Molson Coors reported results for the nine months ended September 2023 (9M 2023) and operating performance has been much stronger than previously anticipated. Sales have increased by over 10% year-on-year (YOY) during this period, driven by positive global net pricing coupled with volume growth and market share gains in the light beer category. EBITDA margin recovery from 18.7% in F2022 to 20.8% during 9M 2023 was much stronger than expected, especially given a challenging inflationary backdrop. Molson Coors continued to use its strong free cash flows towards debt reduction and paid an additional $400 million of debt during 9M 2023, resulting in debt-to-EBITDA improving to approximately 2.73x at the end of Q3 2023, compared with 3.26x and 3.43x at the end of 2022 and 2021, respectively.

Looking ahead, DBRS Morningstar believes that Molson Coors’ operating performance will continue to benefit from low-to-mid-single-digits topline growth and relatively stable EBITDA margins, despite near-term inflationary pressures. DBRS Morningstar forecasts sales to increase to approximately $11.8 billion in 2024 and above $12.0 billion in 2025 from around $11.5 billion at the end of 2023, driven primarily by price increases, favourable product price mix, and continued momentum in other “beyond the beer” products. DBRS Morningstar believes that the Company will be able to sustain EBITDA margins above levels of 20% during the forecast period, but these margins will remain below historical levels of 22.0%, as inflationary pressures on input, labour, and transportation costs are only partially offset by cost-saving initiatives. As such, DBRS Morningstar forecasts EBITDA to increase toward the $2.3 billion to $2.4 billion range in 2024 and 2025, materially above the 2022 EBITDA of $2.0 billion.

In terms of financial profile, DBRS Morningstar believes that Molson Coors’ key credit metrics are now commensurate with the new BBB rating category and this improvement in key credit metrics is sustainable and well supported by the Company’s strong free cash flow-generating capacity. DBRS Morningstar believes that the Company will utilize its operating cash flows toward business reinvestments and shareholder returns within the $2 billion (five-year) share repurchase program authorized by the board while maintaining relatively stable debt levels, such that net leverage remains within the Company’s publicly stated threshold of 2.5x.

Looking ahead, DBRS Morningstar expects cash flow from operations to track operating income and increase towards $1.7 billion to $1.8 billion range in 2024 and 2025. Capital expenditures are expected to remain at around $650 million annually to support capital improvement programs at production facilities in the U.S., UK, and Canada, while dividend outflow is expected to grow in the mid-to-high-single digit range to approximately $380 million in 2024 and above $400 million in 2025. DBRS Morningstar therefore estimates free cash flow (after dividends but before changes in working capital) to be around $700 million in the near term and likely to be used primarily for shareholder returns and bolt-on acquisitions (if any). With relatively stable debt levels and modest increase in EBITDA, DBRS Morningstar expects lease-adjusted debt-to-EBITDA to continue to remain below 3.0x going forward, a level that is considered adequate for the BBB rating category.

Although unlikely in the near term, a positive rating action could occur if Molson Coors’ earnings profile strengthens further and debt-to-EBITDA improves toward a level below 2.5x on a normalized and sustainable basis. Conversely, a negative rating action could occur should debt-to-EBITDA rise above 3.50x on a sustained basis, as a result of weaker-than-expected operating performance and/or more aggressive financial management.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Consumer Products Industry (July 21, 2023; https://www.dbrsmorningstar.com/research/417460)

The following methodologies have also been applied:
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)

-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)

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

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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.

DBRS Morningstar 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.

This credit 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, “Global Methodology for Rating Companies in the Consumer Products Industry” (July 21, 2023) was the primary rating methodology applied to determine the ratings assigned to Molson Coors. “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (March 28, 2023) 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” (February 24, 2023) 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 3, 2023, when DBRS Morningstar confirmed all of the credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit 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, Diversified Industries
Rating Committee Chair: Tim O'Brien, Managing Director, Global Head of Diversified Industries
Initial Rating Date: March 21, 2005

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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-- Global Methodology for Rating Companies in the Consumer Products Industry (July 21, 2023) https://www.dbrsmorningstar.com/research/417460

-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023)
https://www.dbrsmorningstar.com/research/410196

-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694

-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 04, 2023)
https://www.dbrsmorningstar.com/research/416784