OREANDA-NEWS. Fitch Ratings has affirmed the following ratings for Votorantim Cimentos (VCSA):

--Foreign currency Issuer Default Rating (IDR) at 'BBB';
--2017, 2021, and 2041 senior unsecured notes at 'BBB'.

The Rating Outlook is revised to Stable from Negative.

KEY RATING DRIVERS

Credit Linked to Votorantim Group:

Votorantim Cimentos is the key operating subsidiary of Votorantim Industrial S.A. (VID) and has been and continues to be the backbone of its rating. During 2014, Votorantim Cimentos accounted for 50% of VID's EBITDA and 71% of its net debt. VID had BRL24 billion of total debt and BRL7.5 billion of cash and marketable securities as of Dec. 31, 2014. During 2014, VID generated BRL7.1 billion of consolidated EBITDA, which represents an improvement from BRL5.4 billion during 2013. VID's funds from operations (FFO) adjusted net leverage ratio was 3.0x during 2014 and its net debt/EBITDA ratio was 2.3x. These represented improvements from 5.0x and 3.1x, respectively in 2013.

Intercompany Debt Guarantees Reduced but Still Exist Within Votorantim Group:

Several cross-guarantee structures exist within the group which VID is unwinding, despite VID's desire to have each subsidiary rated on a stand-alone basis. In March 2014, VPAR repurchased approximately USD900 million of notes due in 2019, 2020, and 2021 that were issued by VID and its subsidiaries and were guaranteed by VPAR (100%) and VCSA (50%). VCSA has USD1.25 billion of notes due in 2041, EUR303 million of notes due in 2017, and BRL1.4 billion of outstanding financing with BNDES that have a 100% guarantee from VID. Going forward, all new financing from BNDES to VCSA will not include any guarantees from VID. As of Dec. 31, 2014, 43% of VCSA's total debt had guarantees from VID compared to 88% of total debt as of Dec. 31, 2013. VCSA's remaining guarantees to its related parties was approximately BRL700 million as of Dec. 31, 2014 compared to BRL1.9 billion as of Dec. 31, 2013. The purpose of unwinding these guarantees is to provide VCSA and its sister companies more strategic flexibility, in addition to establishing VCSA in a better position for an equity issuance should market conditions improve over the medium term.

High Leverage Remains:

VCSA's net leverage remained high in 2014 at 3.4x in 2014 compared to 3.3x in 2013 due to flat EBITDA growth, higher net debt levels, continued expansion capex programs in Brazil, and BRL depreciation during the year. BRL depreciation negatively impacted VCSA's leverage by 0.2x in 2014. VCSA's challenge in 2015 is to conduct its operations during continued higher capex spending in its Brazil operations coupled with lower expected domestic demand volumes, which will delay the deleveraging process. The anticipated lower sales volumes will be offset to some extent by VCSA's ability to increase cement prices.

VCSA has the ability to accelerate its deleveraging through the sale of non-core assets, restricting dividends to its parent VID, and other contingency plans which is has in place. During May 2014, VCSA received an unfavorable ruling from Brazil's anti-trust agency, CADE, that resulted in a BRL1.5 billion fine and the forced sale of certain ready-mix assets. VCSA has appealed the ruling. The company will post guarantees during the appeal process, which is expected to extend beyond 2015.

Strong Cement Business Position:

VCSA is the world's eighth largest cement company with 54 million tons of installed capacity. On a standalone basis, the company's credit profile is consistent with a weak 'BBB' rating. An IPO or the organic deleveraging after its capital expenditure program would solidify its rating. VCSA's strength is derived from its 35% market share within Brazil, the world's fourth largest cement market with 32.3 million tons of annual capacity. Cement consumption in Brazil grew at a slower pace in 2014 at 1.3% to 72 million tons consumed. Fitch projects VCSA Brazil cement volumes will decline 2%-3% in 2015 as slower growth in the Brazilian economy negatively impacts cement consumption. In the U.S., the company has 5 million tons of capacity in Florida and the Great Lakes region. The U.S. market is projected to grow by 8% in 2015 and 10% in 2016 according to PCA forecasts. In recent years, the U.S. market has been more volatile than the Brazilian market which is expected to shift as the U.S. economy remains strong and Brazil faces potential energy rationing and possible water shortages. Despite the troubling conditions facing Brazil, VCSA has several contingency plans in place to ensure production volumes and operational costs are minimally affected. In EMEA, the company has 16 million tons of capacity in Spain, Morocco, Turkey, Tunisia, India, and China. The company intends to sell its Chinese cement assets, which have neither a strong national or regional presence.

Solid Operating Cash Flow but High Growth Capex Impacting Capital Structure:

VCSA's cash from operations (CFO) was BRL1.9 billion for 2014, down from BRL2.1 billion for 2013. However, growth capex has been high, as VCSA continues to invest in its expansion program in Brazil. Capex was BRL1.4 billion in 2014 compared to BRL1.3 billion in 2013, and is expected to be BRL2 billion in 2015. Since the beginning of 2011, VCSA has increased its production capacity by 9.1 million tons in Brazil and plans to reach total capacity of 37 million tons by 2017. Most of this new capacity will be in the Northeast and Midwest of Brazil, where cement needs are high and prices are favorable. During 2014, dividends to the parent company were BRL382 million which compared favorably to a high level of dividends of BRL986 in 2013 and BRL2.3 billion in 2012; most of the 2012 dividend was done in anticipation of the IPO. Free cash flow (FCF) improved to BRL177 million during 2014 from negative BRL186 million for 2013 due to the lower dividend payments. Fitch projects FCF to be negative in 2015 as continued planned investments and flat cash flow from operations will limit FCF generation.

Decrease in Leverage Post Capex Projects:

VCSA will likely maintain high net leverage over the next 12-18 months absent any inorganic deleveraging events. While VCSA's current net leverage of 3.4x is high for the rating category, leverage is expected to improve after the company complete its capex plan. Peak investments are planned for 2015 and 2016, after which deleveraging in 2016 and beyond is expected to happen at a solid rate due to increased prices, improved demand levels, and no funding needs in the medium term. Furthermore, the sale of non-core assets or equity support from its parent VID would allow leverage to reduce at a faster pace.

Strong Liquidity:

VCSA's liquidity is very strong. The company's cash position was BRL2.5 billion as of the fiscal year ended Dec. 31, 2014 which compared favorable to its cash position of BRL1.9 billion for fiscal 2013. VCSA's amortization schedule is manageable, with an average debt maturity of 9.3 years. Current cash on hand can cover more than 3.5 years of debt amortization. VCSA internally tries to maintain cash balances of approximately BRL2 billion a year. Fitch projects VCSA cash balance could drop to BRL1.5 billion in 2015 due to funding needs for capital expenditures and weaker cash flow generation in Brazil. However, VCSA has an extended maturity schedule with no large concentrations of repayment over the next three years. Furthermore, VCSA has strong capital market access in both Brazil and abroad.

Lower Margins in 2014 but Still High Compared to Peers:

VCSA's consolidated margins declined to 27.1% in 2014 compared to 29% in 2013 as EBITDA was negatively impacted by lower volumes in Brazil and difficult operating conditions in the U.S. during the year. Despite the compression, VCSA's margins remain among the highest within its industry globally and higher than any of its large peers. Keys to the company's strong margins are driven by its Brazilian operations, which include a favorable sales mix of bagged to bulk cement, fully integrated operations, and its large presence in every region of the country. VCSA's EBITDA margins for its Brazil operations remained above 30% in 2014 as lower cement consumption was offset by price increases across the region during the year. The company's margins in North America dropped to 13% in 2014 from 18% in 2013 due to higher fuel costs and operational stoppages despite volume growth in the region over the year. On a consolidated basis, Fitch projects EBITDA margins to remain between 26-28% in 2015, as consumption of cement in Brazil remains low making margin recovery difficult.

Challenging Operating Environment:

Fitch expects cement fundamentals to weaken in Brazil over the next 12 months due to the country's deteriorating economic conditions. Cement consumption grew 1.3% to 72 million tons in 2014 from 71 million tons in 2013, its slowest growth rate in the last five years. While producers with diversified operations such as VCSA are expected to effectively navigate the deteriorating economic environment, companies with concentrated regional sales volumes could suffer the most due to lack of diversification. Furthermore, potential energy rationing and water restrictions in Brazil would negatively impact cement producers that have limited contingency plans in place. The impact of these restrictions would affect both cement producers capacity utilization levels and demand from its customers resulting in deteriorating cash flow generation.

RATING SENSITIVITIES

Negative Rating Action: Votorantim Cimento's rating could be negatively affected by a significant deterioration in global macroeconomic and business environment resulting in declining profitability and weaker credit metrics or significantly higher levels of capital expenditures resulting in negative FCF. Fitch expects Votorantim Cimentos to maintain net leverage at 2.5x or below through the cycle, with tolerance during high investment periods. Fitch expects VID to support the company's capital structure during periods of high leverage. A downgrade of Votorantim Cimento's ratings could take place should such support not be forthcoming. Votorantim Cimentos would also be downgraded should VPAR/VID have negative rating actions.

Positive Rating Action: Votorantim Cimento's rating or outlook could be positively affected by stronger than expected improvement in its cash flow generation, leverage, liquidity, and profitability metrics. An upgrade is unlikely until VCSA completes its capex program, exhibits consistent net leverage below 1.0x, and upgrade is given to its parent VID/VPAR. Increased geographic diversification would also be viewed positively for the credit.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Low single digit revenue growth;
--2015 cement volumes of -2.5% growth in Brazil, -2% growth in Europe/Asia, and 3% growth in North America, with low positive growth rates for each region from 2016-2018;
--EBITDA margin between 27%-28%;
--Working Capital of need of BRL100 million in 2015;
--Capital expenditures of BRL2 billion in 2015;
--Net leverage to remain above 3.25x in 2015;
--Maintaining strong liquidity position in 2015.