Molson Coors continues to look for capital-efficient opportunities internationally

Business Strategy & Outlook

Molson Coors has long been a mainstay of the global beer industry, with North American staples like Coors and Miller and leading European brands such as Carling. However, these trademarks that were once strengths are now largely declining in relevance and volume. Moreover, while they are starting to see improvements, the firm’s legacy brands have proved difficult to parlay into higher-end categories with more propitious growth prospects, as innovation efforts in this regard have seen mixed success. With the firm’s dominance largely in secularly challenged segments of the malt category, this positioning reaps advantages sufficient for a moat. Management announced a plan in the fourth quarter of 2019 to realign the business. Though it was long overdue, CEO Gavin Hattersley’s plan was strategically prudent. It entails materially higher levels of manufacturing, innovation, and marketing investment across the portfolio, particularly in the above-premium segment where Molson Coors has lagged. Funded mostly by expected savings from business restructuring, the firm also looks to extract efficiencies by making its infrastructure and commercial functions more technologically adept.

Molson Coors’ competitive positioning is not entirely bleak, and its growth trajectory has been irreparably impaired. The company continues to look for capital-efficient opportunities internationally; for example, it has transitioned to licensing arrangements in markets like Mexico. It has also assembled an impressive portfolio of seltzers, which should allow it to capture some growth from exposure to an adjacent category. Roughly one third of volume in Europe is in the above-premium category, where the company either owns or licenses healthy brands like Blue Moon, Staropramen, and Peroni. Ultimately, however, establishing a more meaningful position in competitively advantaged malt and other alcohol segments will be tremendously difficult, as the firm will be beleaguered by competition while its legacy business continues to falter.

Financial Strengths

Molson Coors is in reasonable financial health. The company took on material debt in relation to the MillerCoors transaction, but management has done a good job reducing leverage at the cadence that was committed to when the deal was consummated. The firm closed 2021 with net debt/adjusted EBITDA of 3.5 times, putting it on track to reach management’s target of under 3 times by the end of 2022. Molson Coors has historically generated healthy free cash flow to equity, clocking in at an average of $1.3 billion annually over the past five years (a low-double-digit proportion of sales). Cash flow was adversely affected in 2020 by pandemic disruption, and it will remain depressed in the medium term due to incremental investment stemming from management’s revitalization plan and one-time restructuring charges associated with workforce severance and technology implementation. Still, levels will average $1.2 billion over the next five years, with steady improvement longer-term driven by improving margins, capital-efficient international expansion, and prudent working capital management. Management’s guiding principle as it relates to leverage is to maintain its investment-grade credit rating. This implies that it will continue to pay down debt, as well as confine its activities on the merger and acquisition front to strategic tuck-ins. The dividend, raised in 2019 after being frozen for three years, was suspended in May 2020 to shore up the liquidity profile amid COVID-19. In July 2021, the board reinstated the dividend at a payout roughly 40% below the antecedent, which it believes illuminates not only the firm’s financial prudence, but also its commitment to the hefty investments that will be required to resuscitate the brewer’s competitiveness. Liquidity should not be a concern as the firm continues to navigate the pandemic, as it had $525 million in cash plus $1.5 billion available under its revolving credit facility as of June 2022.

Bulls Say

If management is able to strike gold with meaningful innovation, it has the distribution to scale its offerings more broadly and efficiently than smaller competitors.
Management’s recent decision to decommission a slew of secularly challenged brands in the economy segment should free up resources (distribution space, administrative focus, manufacturing capacity) to divert toward more fruitful categories.
Technology-enabled transformation of infrastructure and commercial functions should present low-hanging fruit from which to extract cost savings.

Company Description

Molson Coors is the fifth-largest beer producer globally, boasting top-two positioning in the U.S., Canada, and United Kingdom. It brews and markets a slew of company-owned brands including Blue Moon, Coors, Miller, Vizzy, and Staropramen. It also sells various partner brands in certain locales such as Topo Chico (licensed from Coca-Cola), Amstel and Dos Equis in Canada (through an exclusive import/license arrangement with Heineken), and Corona in Central Europe (through an agreement with Anheuser-Busch InBev). The firm’s go-to market approach differs by geography as well, primarily using independent distributors in the U.S. but deploying hybrid models in Canada and Europe.

(Source: Morningstar)

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