NEW YORK--()--Fitch Ratings has affirmed the ratings of Autometal S.A. (Autometal) as follows:
--Foreign currency Issuer Default Rating (IDR) at 'BB';
--Local currency IDR at 'BB';
--National long-term rating at 'A+(bra);
--BRL250 million local debentures at 'A+(bra)'.
The Rating Outlook is Stable.
The ratings reflect Autometal's market position as a medium size regional player in the auto parts industry with annual sales around BRL1.5 billion (USD800 million). They take into consideration the company's diversified business model with operations in Mexico and Brazil, its relatively healthy margin versus peers, low leverage, and solid liquidity.
The ratings incorporate risks associated with Autometal's exposure to the volatility of raw material costs and changes in consumer trends. The ratings are also constrained by the weaker credit profile of Autometal's parent company, CIE Automotive (CIE), and the expectation that Autometal will maintain a maximum high dividend payout ratio of 55% in the medium term. Further considerations include the company's business growth strategy, which includes M&A activity as an important component.
The Stable Outlook reflects Fitch's expectation that Autometal will continue to deliver positive operating results due to its market position in the regional auto industry and geographic and product diversification. The ratings incorporate the view that the company will maintain a gross adjusted leverage ratio below 2.5 times (x) and solid liquidity reflected in a minimum cash position of BRL450 million. Autometal's acquisition activity is incorporated in the company's expected liquidity and leverage metrics.
Free Cash Flow to be Neutral to Positive in 2013
Autometal's 2012 financial performance was in line with expectations incorporated in the ratings. The company's revenues during the latest 12 months (LTM) September 2012 were BRL1.5 billion, which is similar to the revenue levels reached during 2011 and 2010. During LTM September 2012, the company's EBITDAR and EBITDAR margin reached levels of BRL272 million and 18%, respectively. The company's capacity to achieve these margins reflects its diversified pool of products, customer and processes which limit pressure on margins from OEMs. These margins are consistent with the 17% to 19% margins maintained by the company during the past four years. They compare favorably with industry peers.
For 2013, Fitch base case considers Autometal's revenue growth rate and EBITDAR margin to be about 5% and 18%, respectively. The company's 2013 free cash flow (FCF) is expected to be neutral to slightly positive.
Solid Liquidity and Low Leverage
Autometal had a cash position of BRL765 million as of Sept. 30, 2012, which compares positively with BRL285 million of short-term debt. The company's cash position was built through a BRL425 million equity increase (IPO) completed during the first quarter of 2011 and the issuance in 2012 of BRL250 million of debentures issued in early 2012. Positively factored is ratings is Autometal's target of keeping a minimum cash position of BRL450 million.
The company had approximately BRL602 million in total adjusted debt at the end of September 2012. This debt consists primarily of BRL559 million of on-balance-sheet debt. Off-balance-sheet debt is associated with lease obligations (rental payments during LTM September 2012 totaled BRL8.7 million). About 70% of the company's balance sheet debt is denominated in Brazilian real, while the remainder is in U.S. dollar. This debt composition is similar to the company's revenue structure. The company's leverage, as measured by the ratio of total adjusted debt/EBITDAR, was 2.2x as of Sept. 30, 2012. The ratings consider the expectation that the company will maintain adjusted gross leverage and net adjusted gross leverage ratios below 2.5x and 1.5x, respectively, in the medium term. Capex and acquisitions are expected to total about BRL150 million per year during 2013 and 2014.
Adequate Business Diversification
Autometal's revenue, geographic and product diversification support its business position by reducing its dependence upon a single customer or product. The company generates revenues from four basic processes: plastic molding, metal fabrication, painting, and stamping. Each of these processes generates approximately 25% of its total revenues. The company is geographically diversified through 10 facilities in Brazil and seven in Mexico. The company's customer base has a degree of concentration, which is partially mitigated by a more diversified automotive platform base. Sales with the OEMs Volkswagen, Ford, Chrysler, GM and Nissan represent approximately 22%, 13%, 13%, 12.5%, and 8%, respectively, of the company's total revenues. The company maintains a diversified set of products through with more than 100 platforms. No single platform accounts for more than 6% of revenues.
Positive Market Dynamics Expected for 2013 and 2014
The ratings reflect Autometal's exposure to Brazil and Mexico's auto industries, which are the two most important and growing auto markets in the Latin American region. These operations represent about 60% and 40%, respective, of the company's EBITDA. Autometal's operating results should continue to be driven by trends in the Brazilian and Mexican car production through the economic cycle. In line with other industrial manufacturing sectors, the auto supply industry is exposed to pronounced cyclicality and volatility. The generally discretionary nature of car demand and the production of vehicles depend, among other factors, on GDP development, disposable income, consumer confidence and preferences, and the availability of financing. The performance of the company's Mexican operations is closely aligned with auto demand in the U.S. market.
Brazilian automotive sector's fundamentals remain solid in the medium term based upon the country's positive business environment, increasing new middle class, and credit availability. After a challenging first half of 2012, Brazilian car production recovered, which is reflected in annualized car production for the 12 months ended Nov. 30, 2012 of 3.2 million units, representing an increase of 0.5% over the level reached by the same period of 2011. Sales in Brazil are forecast to grow annually be about 3% to 4% during 2013 and 2014.
The Mexican automotive industry recovery sharply between 2010 and 2012, following a contraction of about 30% during 2009. During the 12 month period ended Nov. 30, 2012, Mexico's light vehicle production units totaled 2.8 million units, an increase of 14% over the same period last year. Between 2013 and 2014, production levels in Mexico are expected to continue solid growth trends, reaching annual growth rates of between 15% and 20%.
Parent's Company's Credit Profile Constrains Ratings
Autometal is a subsidiary of Spain-based auto parts maker CIE Automotive (CIE), which holds a 78% participation in Autometal. CIE has above average geographic diversification with 65 plants around the globe; operations in Brazil and Mexico represent approximately 50% of CIE's total revenues and EBITDA, respectively. The parent company's revenue derives from Western Europe (41%), Eastern Europe (8%), Brazil (30%), Mexico (20%), and China (1%). Spanish operations represent only 5% of CIE's total revenues.
CIE's credit profile is weaker than Autometal's, which acts as a constraint upon Autometal's ratings. CIE's consolidated LTM EBITDA and EBITDA margins for the period ended Sept. 30, 2012 were EUR246 million and 15%, respectively, while its gross and net leverage ratios were 3.7x and 1.7. Fitch expects Autometal to maintain a maximum dividend payout ratio of 55%, which should result in its dividends ranging between BRL100 million and BRL120 million during the 2012 - 2013 period.
Key Rating Drivers
A combination of the following factors could lead to a positive rating action: continued expansion of the company's businesses in Brazil and Mexico that leads to increased cash flow and a stronger business position; lower leverage and high liquidity over a sustained period of time; and, a significant improvement in CIE's businesses outside of Autometal.
Conversely, factors that could lead to the consideration of a negative rating action include: a change in management's strategy with regard to the company's 2.5x financial leverage target; negative trend in cash flow generation due to declining sales volume in the company's main markets; and, shareholder friendly actions resulting in deviations in the company's dividend policy from the expectations incorporated in the ratings.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
--'National Rating Criteria', Jan. 19, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
National Ratings Criteria