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