MONTERREY, Mexico & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to Cementos Progreso S.A. (Cempro):
--Local currency IDR 'BB+';
--Foreign currency IDR 'BB+';
--Proposed up to USD300 million senior unsecured notes due up to 2023 'BB+(exp)' .
The Rating Outlook is Stable
The ratings reflect the company's solid market position as the leader in Guatemala's cement industry with a stable market share around 84%. This position has resulted in high margins, moderate leverage and strong liquidity. Topographic characteristics of the country, as well as the difficulty of logistics, have limited the impact of imports; the probability of other competitors starting operations in the near future is low. Positively factored into the ratings is Cempro's track record of stable operational results based on a business model with fully vertically integrated operations. Further factored in are the positive funds from operations (FFO) and cash from operations (CFO) that the company has recorded throughout the business cycle. The ratings are limited by the company's negative free cash flow (FCF) due to high dividends pay-out, higher expected leverage as a result of current investment projects, the cyclical nature of housing construction, and the limited geographic diversification.
For the period 2013-2016, Fitch projects negative FCF for Cempro because of the construction of a new cement facility. The Stable Outlook reflects Fitch's view that Cempro will maintain a positive trend for its underlying cement operations during its current investment cycle. This trend should result in Cempro's total debt-to-EBITDA ratio remaining at or below 3.4x.
The company plans to issue senior unsecured notes up to USD300 million. The notes will be guaranteed by Cementos Progreso S.A. and Inversiones Sampdoria S.A.
Dominant Market Position
Cempro is the leader in Guatemala's Cement Industry with a dominant position the company has a market share around 84% in terms of volume sold in the first half of 2013. Cempro's only competitor is Cemex, which produces and sells cement and related materials such as ready-mix concrete and dry-mix products. Cementos Progreso is the only player with fully vertically integrated operations in Guatemala, from the extraction of raw materials to distribution of the end product to the final consumer. The Guatemalan cement market has grown at historical compound annual growth rate (CAGR) rates of 6.8% since 1950. Despite annual volatility, the industry has shown consistent long-term expansion. The total demand in Guatemala for cement during 2012 was approximately 2.9 million metric tons. The company sold 2.4 million metrics tons and registered USD508 million of total revenues during 2012 (approximately 1.0% of Guatemala's GDP), resulting in an installed capacity utilization rate of approximately 77%. The company has cement production capacity of 3.1 million metric tons distributed in two production facilities, San Miguel, located in the eastern part of the country, 50 kilometers outside of Guatemala City, and La Pedrera, its Guatemala City plant. Cement represents 73% of the company's portfolio, and 79% of demand comes from the self-construction segment and is supplied 100% in bags. The company's market position is further supported by its retail distribution network for construction material with over 450 exclusive distributors, 395 of which are its Construred franchises, out of 500 distributors in Guatemala.
High Margins, Moderate Leverage and Strong Liquidity
The company has the highest EBITDA margins among public industry peers. Cempro's EBITDA margin during LTM June 30, 2013 was 34.7%, resulting in EBITDA generation of USD175.5 million for the period. The ratings include Fitch's expectation that Cempro will maintain EBITDA margins of around 36% during the next few years. As of June 30, 2013, the company's short-term debt and cash positions were USD6.8 million and USD73.6 million, respectively. Total debt was USD419.4 million, primarily composed of bank credit facilities, of which 76.1% are denominated in USD and the rest in Quetzales. Cempro's gross leverage (total debt/ EBITDA) as of June 30, 2013 was 2.4x and net leverage (net debt/ EBITDA) for the same period was 2.0x.
Cement Operations Expected to Grow App. 3.5% in Next Few Years
The company is expected to continue to grow above Guatemala's GDP levels. Guatemala has maintained increasing economic growth for more than a decade. From 2001 to 2012, real Guatemalan GDP grew at a CAGR of 3.5%. During the last five years (2008-2012), the company's revenues grew at a CAGR of around 3.4%, and its EBITDA grew at a CAGR of 9.4% due to operational efficiencies.
Cempro's revenues were USD505.1 million during the LTM ended June 30, 2013, USD507.7 million during 2012 and USD501.1 million during 2011. The ratings incorporate the expectation that its revenue growth during 2013 will be around 0.4% and that sales volume will be about 2.3 million metric tons. In the medium term, the company's operations are expected to maintain annual growth rates in the 3% to 5% range. Expectations of growth are supported not only by economic growth, but also by Guatemala's housing deficit of approximately 1.4 million homes. Investments in infrastructure should also result in high demand for cement.
Negative FCF during 2013-2016 Driven by New Plant Capex Plan
During the LTM ended June 30, 2013, Cempro's FCF was negative USD71million due to extraordinary dividends to its holding company which in turn were used to pay for the purchase of Holcim's Ltd. 20% stake in Cempro. This FCF calculation considers cash flow from operations (CFFO) of USD140.5 million minus Capex and dividends of USD38.5 million and USD173 million, respectively. The ratings incorporate the view that the company's operations will generate negative FCF during 2013-2016 due to high expansion Capex to build the new plant. Capex including capitalized interests is expected to represent USD625 in the following four years. Cempro expects to become FCF positive in 2017. The ratings incorporate expectations that the company's annual paid-dividend levels will be in the range of USD40 million-USD55 million during 2013-2016.
Cempro is planning to increase its cement production capacity by approximately 71% through the building of a new cement plant (San Gabriel) in Guatemala's western region; the new plant will add annual cement capacity and clinker production of 2.2 million metric tons and 1.4 million metric tons, respectively. The San Gabriel plant, which is estimated to cost about USD800 million plus financial expenses, is scheduled to start operations during the first quarter of 2017. Around 49% of the cost of the new plant will be funded by equity and the rest by debt. The first phase of construction is already finished, with an investment of USD284 million. Besides the additional capacity to meet 100% domestic clinker and cement future demand, the San Gabriel plant will attempt to reach operational efficiencies and important cost reductions in energy consumption, maintenance and distribution costs that could represent a 9% cost reduction.
Expected Increase in Leverage
The company is expected to complete its new-plant Capex plan with a combination of cash, additional debt and its own cash flow generation. Cempro's gross leverage is anticipated to increase and remain around 3.0x during the 2013-2016 period, with a leverage peak of 3.4x in 2015 due to the additional debt required to fund the construction of the San Gabriel plant. Gross leverage is expected to decline to its current levels in 2017, reaching leverage ratios between 1.0x-2.0x in the next few years.
RATING SENSITIVITIES:
Positive Rating Action: Cempro's rating could be positively affected by significant improvement - above expectations already incorporated - in its cash flow generation, leverage and liquidity metrics. Any positive rating action is unlikely to occur before the company completes its expansion capital expenditure program.
Negative Rating Action: The company's rating could be negatively affected by some combination of the following factors: significant deterioration in Guatemala's macroeconomic and business environment; increasing competition and/or operational efficiency loss resulting in EBITDA margin deterioration; along with significantly higher levels of required Capex that lead to sustained leverage levels above current expectations.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=805628
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