CHICAGO--Fitch Ratings has upgraded Grupo Cementos de Chihuahua, S.A.B. de C.V.'s (GCC) local and foreign currency Issuer Default Ratings (IDRs) to 'BB' from 'BB-'. Fitch also upgraded GCC's USD260 million senior notes due 2020 to 'BB' from 'BB-'. The Rating Outlook is Stable.
The ratings upgrade reflects the strengthening of U.S. residential construction across several of the company's markets as well as a favorable economic environment in Northern Mexico that should support cement demand in the state of Chihuahua. Robust demand should result in continued high utilization rates over the next few years and allow GCC to maintain solid profitability and cash flow generation. The upgrade also considers GCC's improved credit profile following debt repayments during the past year, the recent bank debt refinancing and its solid liquidity, which should allow it to finance its planned South Dakota plant expansion without incurring debt.
GCC's ratings reflect the company's solid business position in the cement, ready mix and aggregates segments in the regions where it has a presence; diversified operations in Mexico and the U.S. in the non-residential and residential sectors; as well as positive free cash flow generation through the recent industry cycle. The ratings are limited by the company's scale relative to industry peers' and by the cyclicality of the cement industry.
KEY RATING DRIVERS
Leading Market Shares
Grupo Cementos de Chihuahua, S.A.B. de C.V.'s (GCC) is the largest cement producer in the state of Chihuahua across all product segments. It also has strong cement market positions in Colorado, North and South Dakota, Wyoming, New Mexico and the El Paso, TX, area. Its contiguous presence from Chihuahua in northern Mexico to North Dakota and efficient distribution and logistics allow GCC to serve markets in 13 states across the U.S. Midwest, and the southwest and mountain regions. The company generates about 70% of revenues from its U.S. operations.
Mexico Better Than Expected
Cement sales volumes of GCC's Mexican operations grew 12% in the first 9 months of 2015 after growing 7% in 2014. Prices also increased and the company benefited from increased cement exports to the U.S. Fitch believes the company could continue to benefit from residential construction growth due to low unemployment and increased manufacturing activity in Northern Mexico. Growth in middle income housing and available credit should help to mitigate a projected slowdown in public infrastructure spending in Chihuahua by replacing some of the lost lower margin bulk volume with higher margin retail cement sales.
Sound U.S. Operating Performance
U.S. cement sales volumes year-to-date to September 2015 grew 2% holding up at the already robust levels of 2014 when the company's U.S. capacity utilization was strong at around 90% and cement volumes grew 10% from the prior year. Robust volumes coupled with better cement and ready-mix pricing, and lower freight and fuel costs as a result of cheaper natural gas and gasoline in the U.S. contributed to consolidated EBITDA margin expansion and healthy EBITDA growth. As of Sept. 30, 2015 EBITDA for the latest-12 months grew to USD159 million from USD143 million a year ago, and EBITDA margins expanded to 20.8% from 19.5%, respectively.
Manageable Exposure to Oil and Gas
The majority of GCC's markets showed above-average volume recovery from 2011-2014, partly due to their direct and indirect exposure to the agriculture and oil and gas sectors, which showed positive momentum. In Fitch's view, a slowdown in cement demand related to energy infrastructure spending should be manageable for GCC as residential construction is projected to expand at a faster pace in most markets and public construction spending should counter some the negative effect of lower demand from the energy sector.
Operating Cash Flow Expansion Should Slow
GCC's cash flow from operations (CFFO) was USD108 million in 2014, significantly higher than the USD60 million-USD80 million per year for 2010-2013, primarily due to solid performance of GCC's U.S. division. Fitch projects CFFO to remain around USD110 million over the next two years, reflecting modest volume declines in Mexico due to lower infrastructure spending and flat volumes in the U.S., partially offset by a benign pricing environment in both countries, and an improved product mix in Chihuahua.
Expansion Capex to be Financed Organically
GCC recently announced plans to expand the cement capacity of its Rapid City, SD plant by 440,000 tons per year. The company should be able to finance, through cash flow generation and available cash, all of its capex needs including the USD90 million total investment in the plant over the next two years. Considering modest projected dividends of USD10 million-USD15 million and maintenance capex of about USD53 million, FCF should be about USD20 million in 2015, negative about USD30 million in 2016 and about neutral in 2017.
Total debt as of Sept. 30, 2015 was USD437 million, below the USD474 million registered a year ago. Total (debt/EBITDA) and net leverage were 2.8x and 2.1x respectively which compare favorably to 3.3x and 2.8x as of third-quarter 2014. GCC should generate about USD165 million of EBITDA over the next few years which should allow it to maintain total leverage levels stable at or near management's target of 2.5-2.75x.
--Revenues measured in USD grow mid-single digits, mostly reflecting price gains;
--EBITDA hovers around USD165 million for the next few years and margins remain above 21%;
--Capex is financed mostly through internal cash flow generation and available cash;
--Dividends remain low in the USD10 million-USD15 million per year range.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Weak operational results reflecting increased price competition, market share loss or a material slowdown in cement demand on GCC's key markets of Chihuahua, Colorado, South Dakota and New Mexico;
--A large debt-financed acquisition that increases total leverage above 3.5x;
--A down turn industry cycle that causes net debt/EBITDA to rise above 3.0x;
--Sustained negative FCF generation.
A rating upgrade in the near term is unlikely considering the company's, business profile, target capital structure and already strong credit metrics. A return to positive FCF after its South Dakota expansion project, together with a track record of maintaining total leverage levels at or below 2x and a strong liquidity profile would be considered positive for credit quality.
GCC's liquidity relative to debt maturities and projected investments remains adequate. In July 2015, the company announced the refinancing of USD194 million of syndicated bank debt. This new five-year amortizing loan frees GCC's maturity profile for the next two years and should allow the company to finance its capex plan for the next two years through internal cash flow generation and available cash. As of Sept. 30, 2015 GCC's cash position was USD96 million or USD18 million higher than a year ago, despite net debt repayments of USD32 million during the last 12 months. Committed credit facilities of USD30 million maturing over the next two years also provide additional liquidity support.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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