Fitch Ratings raises GCC outlook

Fitch Ratings has revised its outlook for Grupo Cementos de Chihuahua (GCC) from 'Stable' to 'Positive.'
The upward revision reflects Fitch's view that GCC's operations could gain momentum resulting from US construction spending expanding in 2014 driven by continued strength in residential construction, and to a lesser extent in modest recovery in commercial and public construction spending.

The outlook also incorporates an expectation of higher public spending in Mexico in 2014. In Fitch's view, materialisation of such expectations, in conjunction with scheduled debt amortisations, would likely result in a strengthening of the company's leverage metrics, which in turn could result in a positive rating action.

"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 US in the non-residential and residential sectors; as well as positive free cash flow generation through the cycle. The ratings are limited by the company's high leverage and pressure on profitability given market and competitive conditions," Fitch said in a statement.

At the beginning of 2013, GCC refinanced the full amount of its existing debt by issuing US$260m of 2020 Senior Secured Notes and obtaining a US$250m syndicated loan with final maturity in 2017. As a result, the company improved its maturity profile and increased its financial flexibility.

A better pricing environment in the fourth quarter of 2013 and in 2014 fuelled by higher construction spending in the US as a result of strengthening in the residential construction market and increased public spending in Mexico, will likely improve GCC's operating results and outweigh cost pressures in Mexico in the coming years. In 2013, low public infrastructure spending in both Mexico and the US, slow residential construction in Chihuahua, high fuel prices in Mexico and continued competitive pressures in the US resulted in a weak operating environment for GCC, the rating's agency notes. In addition, a volatile Mexican peso which strengthened during the first half of the year and a longer-than-average winter also contributed to lower results from the Company's US operations, it adds. During the last 12 months to September, 2013, the company's cement volumes declined 0.5 per cent from the same period a year ago.

GCC is leader in the state of Chihuahua in all product segments and has strong cement market positions in North and South Dakota, Wyoming, Colorado, New Mexico, and the region of El Paso, Texas. The majority of these markets was less affected during the US housing crisis, and has shown above average volume recovery in 2012 and 2013, largely as a result of their exposure to oil and gas and agriculture sectors.

"GCC's contiguous North American footprint allows for economies of scale, ease of distribution and international trading capabilities. According to the Portland Cement Association (PCA), a majority of the states where GCC has presence have a better-than-average outlook for the medium-term," Fitch states.