Fitch Affirms Cementos Progreso's IDRs at 'BB+'; Outlook Stable
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 2015-2016 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. Of 500 distributors in Guatemala, 450 are exclusive Cempro distributors. Cement, which represents 73% of the company's portfolio, is sold primarily (68%) 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 Cempro maintaining the highest EBITDA margins among public industry peers. Cempro's EBITDA margin during the latest 12 months (LTM) as of June 30, 2015 was 39.8%. The ratings include Fitch's expectation that Cempro's EBITDA margins will remain above 37% and will likely strengthen in the long-term due to distribution efficiencies from the new cement plant that is scheduled to begin operations in 2017. Cempro's new plant in San Gabriel will increase its cement production capacity by about 70%.
Negative FCF During 2015-2016
Cempro's total capex, excluding capitalized interest for 2015-2017, is expected to be around USD500 million as the company completes its USD807 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 USD140 million in 2015 and USD50 million in 2016 and positive USD50 million in 2017. Post expansion positive FCF should be supportive of long-term deleveraging.
Debt Structure
The company's total debt as of June 30, 2015 was USD535 million 75% 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 2016
Cempro's gross (total debt/EBITDA) and net (net debt/EBITDA) leverage were 2.3x and 2.1x as of June 30, 2015, below the 2.6x and 2.2x registered at year-end 2014. As a result of the additional debt required to fund construction of the new plant, Cempro's gross and net leverage are anticipated to increase to 2.7x and 2.6x in 2015 and to 2.8x and 2.7x in 2016, respectively. Gross leverage is expected to decline to year-end 2014 levels by 2017, 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 Cempro's operations to maintain annual growth rates in the 3%-5% range, which is in line with projected GDP growth in Guatemala. Growth expectations are supported by moderate expected economic growth and Guatemala's housing deficit of approximately 1.4 million homes. Investments in infrastructure should also result in high demand for cement. During 2014, Cempro's revenues represented approximately 1% of Guatemala's GDP.
KEY ASSUMPTIONS
--Cement volumes grow mid-single digits in 2015 and mid-to-low single digits in 2016 and beyond.
--Both cement prices and costs increase in 2015 to reflect higher cement distribution taxes. In 2016 and beyond higher costs reflect moderately higher fuel costs and inflation while prices adjust upward once every few years.
--EBITDA margins remain in the 38%-40% range during 2015-2017 and increase in 2018 as the San Gabriel plant begins operations.
--FCF is significantly negative during 2015-2016 mostly due to expansion capex, and turns positive in 2017.
--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, 2015 the company's cash balance was USD48 million, its LTM CFFO was USD165 million and as part of its financing strategy the company has executed local currency uncommitted loan agreements for approximately USD160 million with local banks. These loans would 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 USD70 million back-up the purchase of equipment and provide additional liquidity support.
Fitch views Cempro's liquidity as comfortable considering no significant debt maturities for the next three years and expected negative FCF relative to its high ability to generate cash flow from operations, its low expected leverage, available cash balance and good access to local bank lending.
FULL LIST OF RATING ACTIONS
Fitch has affirmed Cempro's ratings as follows:
--Foreign IDR at 'BB+';
--Local currency IDR at 'BB+';
--USD350 million senior unsecured notes due 2023 at 'BB+'.
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