Fitch Ratings has affirmed Elementia, S.A. de C.V.'s (Elementia) foreign and local currency Issuer Default Ratings (IDRs) at 'BB+' as well as its long-term national scale rating at 'A+(mex)'. A complete list of rating actions follows at the end of this press release.

The Rating Outlook is Stable.

Elementia's ratings reflect its strong business profile characterized by geographic and product line diversification, leading market shares in the regions where it has presence, supported by highly recognized brands and a well-developed distribution network, stable operating results and its shareholders' strength. Factors that limit Elementia's ratings are the company's history of high leverage, industry cyclicality and input cost volatility.

KEY RATING DRIVERS

Continued Business Diversification

The company's business position is supported by its diversified revenue base. For the LTM ended March, 2015 net sales and EBITDA contribution by business line was: metals division (mainly copper products) 48% and 32% respectively, building systems (including plastics division) 38% and 42% respectively, and Cement 13% and 21%, respectively. Elementia's cash flow and profitability are supported by its pricing strategy and by the contribution of its cement division, its highest margin business. In its metal segment, the company applies a cost-plus margin formula, allowing it to pass-through metal price variations to end customers.

The company's strategy will continue to focus on growing its current operations and through acquisitions. In December 2014, Elementia finalized the acquisition of the remaining 47% stake in ELC Tenedora de Cementos, S.A.P.I. de C.V., its joint venture with Financiere Lafarge S.A.S. (Lafarge), and has paid USD180 million of the USD225 million total purchase price. The purchase agreement contemplates a final payment of the USD45 million remaining in December 2015, a year after completion of the transaction.

Negative FCF during 2015-2016

During 2014, the company's free cash flow (FCF), measured as cash flow from operations after interest paid (CFFO), capex and dividends was positive MXN749 million comparing favorably to negative MXN100 million during 2013, primarily as a result of lower capex. Fitch expects Elementia's FCF to be negative in aggregate during 2015 and 2016 as a result of expansionary investments in the company's cement business. These investments will increase Elementia's cement capacity by 1.5 million tons per year to 3.5 million tons per year. Fitch's base case FCF projection incorporates CFFO of approximately MXN1.6 billion in 2015 and MXN1.9 billion in 2016, and no dividend payments.

The company plans to finance its USD250 million expansion of its Tula, Hidalgo cement plant through a combination of internal and external funding sources including an equity issuance. Management has filed documentation for an initial public offering (IPO) in the Mexican Bolsa. While Fitch has not included an equity issuance in its base case, equity proceeds used to fund the company's growth plans would be viewed positively for Elementia's credit quality as it would support deleveraging the balance sheet and help stabilize its credit metrics.

High Leverage Constrains Rating

Elementia's leverage has been historically volatile partly due to greenfield investments in the company's cement division as well as asset acquisitions and dispositions within the company's business portfolio. Just during the last eight quarters, Elementia's net leverage on a LTM basis has fluctuated between a peak of 3.4x in September 2013 to a low of 1.5x in September 2014. As of March, 2015 net leverage was 2.7x, above management's long-term target of 2.0x, primarily due to the purchase of the Lafarge assets. Gross leverage as of March 2015 was 3.8x, higher than the 2.9x registered in the same period a year ago and similar to the 3.9x recorded as of Dec. 31, 2014.

In Fitch's view, leverage volatility should moderate considering the full contribution of Elementia's cement business and an equity issuance would further increase its flexibility to finance current projects and pay down existing debt. Although Fitch considers that Elementia currently has flexibility within its 'BB+' rating to continue to finance its growth strategy without raising equity, deterioration in leverage ratios or large debt financed acquisitions or investments could pressure the company's credit profile.

Adequate Liquidity

As of March 31, 2015, the company had sufficient liquidity to meet its upcoming debt obligation of MXN3.0 billion of Certificados Bursatiles due in October 2015. Cash and cash equivalent balance was MXN3.1 billion and covers its short-term debt by 1.0x; the company has no other significant debt maturities until 2025. Further supporting the company's liquidity position are USD300 million of undrawn committed credit lines maturing in 2018. Fitch expects that Elementia's internally generated cash flows and financial flexibility will allow it to manage its debt profile.

Environmental Regulations Could Limit Operations

The company uses chrysotile fibers (the sole form of asbestos still in use) for part of its production of fiber-cement products, which are sold locally where permitted in the North and South American regions. Elementia has been investing in capacity production to use different fibers, such as cellulose fiber and polyvinyl alcohol (PVA), with the majority of its manufacturing facilities already aligned to produce with different technologies. The use of this fiber is in line with international standards and local environmental regulations. Even though Elementia has not been subject to legal claims regarding the use of chrysotile in its products, future claims cannot be ruled out, resulting in uncertain litigation risk.

KEY ASSUMPTIONS

--Low double digit revenue growth in 2015 reflecting higher capacity utilization and price improvement in cement division; stable to low single digit volumes growth and strong USD in metals division;

--Mid to high single digit revenue growth for 2016-2017;

--EBITDA margin around 17% from 2015-2017;

--Cash and cash equivalents balances of around MXN1 billion;

--Partial use of committed credit lines to fund debt payments or investments;

--Net debt/EBITDA at or below 2.8x for 2015-2016.

RATING SENSITIVITIES

Negative factors that could affect the company's credit profile include, among others, declining market shares along business lines and loss of competitive position, reduced operating cash flows and profitability; and reduced liquidity; reaching or exceeding financial covenants could also put additional pressure on the company's credit quality. Expectations of total debt/EBITDA above 4x or net debt/EBITDA above 3.5x would likely result in negative rating actions.

Positive rating actions could be driven by strengthening of Elementia's business and financial positions. Positive FCF generation and stable operating results through industry and economic cycles resulting in leverage levels of total debt/ EBITDA around 2.5x and net debt/EBITDA below 2x would have positive implications for the rating. Significant delevering resulting from an IPO would improve the company's financial position and would be viewed positively.

Fitch has affirmed Elementia's ratings as follows:

--Long-term Issuer Default Rating (IDR) at 'BB+';

--Long-term Local Currency IDR at 'BB+';

--Long-term National Scale Rating at 'A+(mex)';

--Sr. unsecured USD425 million notes issuance at 'BB+';

--MXN3,000 million Local Certificados Bursatiles due in 2015 at 'A+(mex)'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Scale Ratings Criteria' (Oct. 30, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985275

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Fitch RatingsPrimary AnalystGilberto Gonzalez, CFAAssociate Director+1-312-606-2310Fitch Ratings, Inc.70 West Madison StreetChicago, IL 60602orSecondary AnalystDebora JallesDirector+1-312-606-2338orCommittee ChairDaniel R. Kastholm, CFARegional Group Head - Latin America+1-312-368-2070orMedia Relations:Elizabeth Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com