Fitch Affirms Cementos Progreso's IDRs at 'BB+'
Cempro's 'BB+' ratings reflect the company's leading position in Guatemala's cement industry. Its solid market position is viewed as sustainable considering the country's limited infrastructure and challenging logistics, which limit imports and significantly increase cement distribution costs. Further deterrents include the company's extensive distribution network and its focus on operational efficiency, which have resulted in a low cost structure.
The ratings are limited by the company's negative projected free cash flow (FCF) for 2016-2017 due to high expansion capex. The high proportion of foreign currency debt relative to the company's predominantly local currency revenues is also a concern. Guatemala's country ceiling of 'BB+' does not restrict the company's ratings, as Cempro's local currency rating is 'BB+'.
The Stable Outlook reflects Fitch's view that the company will sustain core operating cash flow during its current investment cycle that should result in net debt/EBITDA leverage levels below 3.0x.
KEY RATING DRIVERS
Dominant Market Position
Cempro has a leading position in Guatemala's cement industry. In terms of volume sold, its market share has remained stable since 2007 at about 83%. The company is the only producer with fully integrated operations, from the extraction of raw materials to distribution. Its only domestic competitor is Cemex LatAm Holdings (Cemex), which produces and sells cement and related materials such as ready-mix concrete. Cempro's solid market position is supported by its retail network of independent distributors that allows the company to serve its highly fragmented consumer base. Cempro maintains an exclusive relationship with about 80% of Guatemala's cement distributors. Cement, which represents 73% of the company's portfolio, is sold primarily (69%) for self-construction and is supplied to this segment as bagged cement.
Strategic Focus Supports Profitability
The company's strategic focus on operational efficiency has contributed to it maintaining some the highest EBITDA margins among public industry peers. The EBITDA margin during the latest 12 months (LTM) as of June 30, 2016 was 44%, which is above the 40% registered a year ago. Profitability should remain high in the intermediate term despite rising fuel and energy costs mainly due to the start-up of Cempro's San Gabriel cement plant in 2017. This plant will increase cement production capacity by about 70% and is located on the opposite of Guatemala City from the company's existing plant. This will result in a material reduction in transportation costs.
Negative FCF During 2016-2017
Cempro's total capex, excluding capitalized interest for 2016-2017, is expected to be around USD340 million as the company completes its USD880 million multi-year investment plan for the construction of its San Gabriel cement plant. Fitch estimates that expansion capex and dividends of about USD30-40 million per year will result in Cempro generating negative FCF of about USD40 million in 2016 and USD30 million in 2017. FCF should turn positive by 2018 to about USD80 million. Post expansion positive FCF should be supportive of long-term deleveraging.
Debt Structure
The company's total debt as of June 30, 2016 was USD574 million 69% of which was denominated in U. S. dollars. Although there is a risk that the company could face difficulties repaying foreign currency debt considering its predominantly Guatemalan quetzales revenue, Fitch believes the likelihood of significant depreciation of the local currency is low due to high levels of remittances from workers abroad (predominantly in the U. S.) which support the country's foreign currency inflows.
Leverage Expected to Peak in 2017
Cempro's gross (total debt/EBITDA) and net (net debt/EBITDA) leverage were 2.3x and 2.1x as of June 30, 2016, the same levels from as a year ago. Gross and net leverage are anticipated to peak at 2.5x and 2.3x in 2017 as a result of the additional debt required to fund construction of the new plant. Gross leverage is expected to decline to year-end 2015 levels of 2.3x by 2018, and trend toward a range of 1-2x in the following years.
Country Constraints
The company's performance is dependent upon continued stability and economic development in Guatemala. Fitch expects cement demand to maintain annual growth rates in the 3%-4% range, which is in line with projected GDP growth. Growth expectations are supported by a growing population, high expected urbanization rates and strengthening worker remittances. Infrastructure investment resulting from public and private partnerships has been mostly stranded, but any traction should result in incremental demand for cement. Cempro's revenues represented approximately 1% of Guatemala's GDP during 2015.
KEY ASSUMPTIONS
--Cement volumes grow mid-to-low single digits in 2016 and beyond.
--Costs remain relatively stable during 2017-2018 as higher fuel and energy costs are somewhat offset by distribution and other cost efficiencies of the new plant.
--FCF remains negative during 2016-2017 mostly due to expansion capex before turning positive in 2018.
--The Guatemalan Quetzal remains relatively stable for the next three years.
RATING SENSITIVITIES
Cempro's foreign-currency ratings would be capped at Guatemala's country ceiling, limiting positive rating actions. Local-currency ratings could be positively affected by long-term expectations of total gross leverage levels below 2x with robust positive FCF generation and strong liquidity metrics.
Factors that could lead to a negative rating action include a significant deterioration in Guatemala's macroeconomic and business environment; increasing competition from Cemex S. A.B. de C. V.; operational efficiency loss resulting in EBITDA margin deterioration; or sustained leverage levels above 3.5x on a gross basis or 3x on a net basis.
LIQUIDITY
Cempro expects to complete its investment plan with a combination of cash, cash flow generation and debt. As of June 30, 2016 the company's cash balance was USD46 million, its LTM cash flow from operations was USD179 million and as part of its financing strategy the company has executed local currency undrawn uncommitted loan agreements for approximately USD140 million with local banks. These loans rank equal in right of payment with Cempro's existing unsecured debt and amortize in 10 years with three years of grace period. Irrevocable letters of credit for about USD23 million back-up the purchase of equipment and provide additional liquidity support.
Fitch views Cempro's liquidity as comfortable. This is due to the company's ability to generate cash flow from operations, its low leverage, available cash balance and good access to local bank lending, which should allow it to fund projected negative FCF and modest upcoming debt maturities.
FULL LIST OF RATING ACTIONS
Fitch has affirmed Cempro's ratings as follows:
--Foreign currency IDR at 'BB+';
--Local currency IDR at 'BB+';
--USD350 million senior unsecured notes due 2023 at 'BB+'.
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