Fitch upgrades Grupo Cementos de Chihuahua's ratings to 'BB'; outlook Stable

Fitch upgrades Grupo Cementos de Chihuahua's ratings to 'BB'; outlook Stable
Published: 13 January 2016


Fitch Ratings has upgraded Grupo Cementos de Chihuahua (GCC) local and foreign currency Issuer Default Ratings (IDRs) to 'BB' from 'BB-'. Fitch also upgraded GCC's US$260m senior notes due 2020 to 'BB' from 'BB-'. The rating outlook is Stable.

The ratings upgrade reflects the strengthening of US residential construction across several of the company's markets as well as a favourable economic environment in northern Mexico that should support cement demand in the state of Chihuahua. Robust demand should result in continued high utilisation 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, its diversified operations in Mexico and the US 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 ratings drivers


Leading market shares
Fitch notes that 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 US Midwest, and the southwest and mountain regions. The company generates about 70 per cent of revenues from its US operations.

Mexico better than expected
Cement sales volumes of GCC's Mexican operations grew 12 per cent in the first nine months of 2015 after growing seven per cent in 2014. Prices also increased and the company benefitted from increased cement exports to the US. 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 US operating performance
US cement sales volumes year-to-date to September 2015 grew two per cent holding up at the already robust levels of 2014 when the company's US capacity utilisation was strong at around 90 per cent and cement volumes grew 10 per cent 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 US contributed to consolidated EBITDA margin expansion and healthy EBITDA growth. As of 30 September, 2015 EBITDA for the latest-12 months grew to US$159m from US$143m a year ago, and
EBITDA margins expanded to 20.8 per cent from 19.5 per cent, respectively.

Manageable exposure to oil and gas
The majority of GCC's markets showed above-average volume recovery from 2011-14, 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 US$108m in 2014, significantly higher than the US$60m-US$80m per year for 2010-13, primarily due to solid performance of GCC's US. division. Fitch projects CFFO to remain around USS110m over the next two years, reflecting modest volume declines in Mexico due to lower infrastructure spending and flat volumes in the US, partially offset by a benign pricing environment in both countries and an improved product mix in Chihuahua.

Expansion capex to be fnanced organically
GCC recently announced plans to expand the cement capacity of its Rapid City, SD, plant by 440,000tpa year. The company should be able to finance, through cash flow generation and available cash, all of its capex needs including the US$90m total investment in the plant over the next two years. Considering modest projected dividends of US$10m-15m and maintenance capex of about US$53m, FCF should be about US$20m in 2015, negative about US$30m in 2016 and about neutral in 2017.

Total debt as of 30 September 2015 was US$437m, below the US$474m 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 US$165m 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, notes Fitch.