Capital expenditure planning can be a vital engine of growth for smart, disciplined companies. Companies who are proficient at raising, deploying, and distributing capital increase future profits and return on investment for their shareholders. Consequently, capital productivity directly affects shareholder value, which makes capex planning a vital financial engine of growth.

Christine Watkins, vice president, global FP&A and business transformation for Molson Coors, recently spoke about capex planning at her company.

AFP: Common challenges to effective capex planning include the lack of a strategic framework and high level of commitment to the process, accurate metrics and measures for evaluation, and standardized processes to govern decision-making. How has Molson Coors overcome these challenges?

Watkins: Over three years ago now, we went through a significant acquisition in Central Europe with an ambition to get our debt to equity ratios back to pre-acquisition status within three years, putting significant pressure on achieving our free cash flow objectives. The organization recognized that we needed the entire company to understand this goal—not just the finance function—so we established a new way of thinking and embedded it into our culture. The Mantra was “EARN MORE, USE LESS, INVEST WISELY”, and we measured ourselves on a metric we called PACC, or profit after capital charge. Every business case that required capital investment included this metric—essentially a form of ROI but with a quoted minimum threshold based on our weighted average cost of capital.

We began to prioritize all our decisions and uses for cash through this lens, not just capital spend but all spend. We then took this concept into our capital governance committee and began to prioritize capital requests based on PACC, looking at it not just by geography or business unit as we had in the past, but prioritizing it on a global level. Introducing PACC and the governance around it was a turning point for how we looked at delivering higher shareholder returns. Because of this PACC philosophy, we not only met our goal but were able to get back to our ratios earlier than expected, freeing up our resources to continue to drive value for our shareholders.

AFP: How have these improvements affected your company?

Watkins: We incorporated PACC into a standard routine with a framework around business case reviews and provided a global policy and manual that laid out this framework. Once we established the capital monthly approval process with standardized calculations and templates, the business understood what was expected and could better adjust to what would be deemed appropriate for spend. As stated earlier, a level of standardization is critical in order to prioritize capital spend appropriately.

Prioritization then relies on value determination through quantifiable metrics, those of which determine risk and return. Obviously with capital, you will always have required spend so we categorized the spend with clear definitions between grow (innovation), maintenance, and improve (efficiency). We also set a cadence around the planning, budgeting and required execution of projects to ensure that significant projects received the right amount of executional support. In general, we have a disciplined approach to our capital spend, which has historically been between $650 million to $700 million +/- 10 percent annually. It improves our ability to better prioritize our spend and ensure it is aligned with our overall strategic priorities.

AFP: What does the capex planning process look like at Molson Coors?

Watkins: All projects requesting funding and resource authorization must provide a completed business case. No funds can be committed without a completed business case showing spending approval consistent with our capital signature authority policy. Additionally, procurement signature authority must also be followed (e.g., request to buy review and authorization). Board or any other management committee approval does not replace the business case need with the appropriate documented approvals. Determining the right projects, at the right investment level and the right time is a key component of sustainable growth. Details of the decision drivers, business cases processes, and approval procedures are laid out in our published capital procedures manual.

Once the projected capital spend is evaluated and a plan is built, finance must review and consult with the business in order to refine and build the most valuable comprehensive capital package for the organization. The capital plan is then examined, challenged, often amended, and prioritized by the capital allocation committee, ultimately concluding with approval from the board of directors. Once final approval is in place, the business units may proceed with their intended capital strategy.

This is the process of evaluating, comparing, and selecting projects to achieve the maximum return or maximum wealth for shareholders. A project is approved based on the following three items: capital spend total, scope of work and return as measured by PACC and profitability index (PI). Each year, the Molson Coors Brewing Company board of directors formally approves the annual capital plan and global capital project list. Forecasted variances to plan—budget overruns and changes to baseline components—are discussed during monthly financial review meetings and elevated to senior management as needed. Additionally, variances will be reviewed and discussed monthly by the global cash and capital steering committee that is chaired by the Global CFO. In the evolution of review and prioritization of the capital spend, the global capital allocation committee will also primarily be involved in the planning process and review.

Renita Wolf is a Colorado-based financial executive who works with businesses to define and implement business growth and operational improvement strategies. Follow her on Twitter @RenitaWolf.

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