Molson Coors Beverage Co.'s (Molson Coors) credit story continues to have several moving parts, ranging from stabilizing operating performance, revitalizing top-line growth, and deciding when and if it may restore its currently suspended dividend. In March 2020, S&P Global Ratings revised the outlook to negative from stable as the company struggled to overcome COVID-19 pandemic-related hurdles, mostly stemming from the shutdowns of bars and restaurants. Our issuer credit rating on Molson Coors is 'BBB-' with a negative outlook--a downgrade would make it a "fallen angel." Recent performance and management actions support the current rating. Here, we answer frequently asked questions about the future of Molson Coors' ratings.

Is Molson Coors' operating performance meeting expectations? What is the outlook for the company?

Although Molson Coors has significantly underperformed in countries like the U.K., top-line performance (particularly in the U.S.) has been better than expected. Moreover, the company has aggressively cut cash costs and other cash expenditures (e.g., suspending its dividend and cutting capital expenditures [capex] closer to maintenance levels) to ensure good free cash flow conversion and keep EBITDA and stable cash flow metrics. In fact, debt to EBITDA has remained below our 4x downgrade trigger since the onset of the pandemic. But, top-line pressure remains, and the company is likely to reinstate certain operating expenses to improve sales turnover and remain relevant with consumers through new product launches. Therefore, we believe EBITDA will decline in the coming quarter and leverage will temporality spike above 4x, particularly into the start of next year when the company is a seasonal working capital user. Nevertheless, we continue to expect the company to keep leverage well-below 4x by fiscal year-end 2021 to the extent its dividend remains suspended.

Although sales growth remains negative so far this year, the top line both in North America and Europe grew sequentially the past two quarters, and we continue to believe that Molson Coors has a recession-resistant portfolio. As consumers cut back their discretionary spending or trade down to more value-based products, the company's core beer products including Miller Highlife, Miller Lite, Coors Banquet, and Coors Light should do well if the U.S. economy doesn't rebound as expected. We nonetheless expect operating margins to decline as the company increases advertising and marketing (A&M) spending. The company modestly increased A&M spending in the third quarter as a percent of sales and we expect A&M spending to increase in the coming quarters as it executes new product launches including Coors Seltzer and Blue Moon Light Sky. This should lead to a mid- to high-double-digit percent year-over-year decline in EBITDA by fiscal year-end that may remain depressed into 2021. However, as long as discretionary cash flows continue to be elevated by its dividend suspension until operating performance normalizes, the company's overall credit profile should remain in line with our expectations, including leverage below 4.0x.

What are our expectations for Molson Coors' financial policies?

We believe the company remains committed to its investment-grade rating and we expect the company to continue to prudently manage its discretionary spending and cash flow generation. For example, on May 21, 2020, the company announced it would cut its quarterly dividend, which will allow it to save about $370 million and decreased its capex by about $200 million. The company's cash flow conversion is strong and on average it converts just more than half of its EBITDA to free operating cash flow, which is in line with its peers. This continues to be a positive operating characteristic that continues to afford the company discretion over how to deploy capital and stick to a financial policy target that is consistent with an investment-grade rating. In fact, we believe the additional cash flow levers the company has used in 2020 to bolster its liquidity position will allow it to generate over $700 million of discretionary cash flow in fiscal 2020, which it will likely use to repay its debt balances and offset near-term operating pressure. A deviation from its current financial policies such as reinstatement of the dividend before leverage is below its downgrade trigger of 4x could result in a more negative view of management's commitment to its rating. So far, that is not the case.

Is revitalizing negligible organic growth required for Molson Coors to remain investment grade? Would divestitures of underperforming brands improve metrics?

We had largely factored the company's below-industry average growth rate into our rating when we revised our business risk assessment for Molson Coors in August 2019. To the extent the fallout from the pandemic doesn't result in a permanent erosion in lost sales volumes, particularly in regions where the impact has been more severe, such as the U.K., we continue to believe the company's financial policy and cash flow conversion profile can support an investment-grade rating. Although its core U.S. brands are losing share to other more premium categories both in beer and in alcoholic beverages in aggregate, these brands still command significant market share and support high volumes and economies of scale at its breweries that underpin the company's strong cash flow conversion rates. Only if volumes were to materially erode by much more than its current flat- to low-single-digit volume declines, could the profitability of its breweries become pressured to the point that management would have to further consolidate brewing capacity. Although unlikely over the next two to three years, that could cause us to reassess the company's overall business strength.

We also recognize that regions like the U.K. continue to face more top-line uncertainty than the U.S. However, we continue to view the company's geographic diversification favorably, in part because those markets are associated with different brands that are largely uncorrelated with the performance of its U.S. portfolio. In addition, a broader brand portfolio provides a larger product platform to leverage into new export markets. We currently don't expect the company to significantly change its current geographic footprint and portfolio mix of businesses because we believe it remains committed to being a global beverage company and will continue to leverage new product innovation across all of the regions in which it operates. As such, any material divestiture would be an event-based circumstance that could only be assessed if it concretely materializes.

Is the company likely to become acquisitive?

We don't believe any material acquisitions are likely until the company can stabilize operating performance and sustain leverage closer to or below 3.5x, which is only likely to occur beyond 2021. Instead, we expect the company to invest in growing its core brands, new product development, and look to expand its distribution capabilities beyond its core beer offerings over the next one- to two years. The company has announced new initiatives including a new product launch with the rollout of Coors Seltzer, a five-product launch of Truss (cannabis beverage joint venture [JV] with Hexo), a 50-50 JV with Yuengling, a partnership with Coca-Cola Co. (KO), L.A. Libations, and La Colombe. The company expects the JV with Yuengling to launch in the second half of 2021. They will distribute Yuengling in new territories and it will be accounted for using the equity method and accretive to its bottom line. According to industry data, Yuengling generally commands about 2% to 3% beer dollar sales in its established markets. The partnership with KO gives Molson Coors exclusive rights to market, manufacture, and distribute Topo Chico Hard Seltzer in the U.S. starting in first half of 2021, giving Molson Coors a portfolio of three hard-seltzer brands (Vizzy, Coors, and Topo Chico). Molson Coors also announced a 10-year partnership with La Colombe coffee to expand distribution of its ready-to-drink coffee product. In addition to the non-alcoholic, cannabis-infused beverages the company launched with its JV partner Hexo Corp. in Canada and Colorado it has also partnered with L.A. Libations to create a portfolio of non-alcoholic beverages. Although some of these partnerships and JVs have yet to take affect, we believe they are in line with the revitalization plan set out in the October 2019 and could be modest growth drivers.

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Molson Coors Beverage Co. Outlook Revised To Negative From Stable; Ratings Affirmed, March 27, 2020