MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' foreign currency and local currency Issuer Default Ratings (IDR) of Kimberly-Clark de Mexico, S.A.B. de C.V. (KCM).
Fitch has also affirmed KCM's other ratings as follows:
--Long-term national rating at 'AAA(mex)';
--USD 250 million notes due 2024 at 'A';
--MXN2.3 billion unsecured CBs due 2014 at 'AAA(mex)';
--MXN1.5 billion unsecured CBs due 2015 at 'AAA(mex)';
--MXN800 million unsecured CBs due 2016 at 'AAA(mex)';
--MXN2.5 billion unsecured CBs due 2017 at 'AAA(mex)';
--MXN1.5 billion unsecured CBs due 2018 at 'AAA(mex)';
--MXN400 million unsecured CBs due 2019 at 'AAA(mex)';
--MXN2.5 billion unsecured CBs due 2020 at 'AAA(mex)';
--MXN1.75 billion unsecured CBs due 2023 at 'AAA(mex)'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect KCM's leading market position, strong cash flow generation, solid capital structure and liquidity position, proven debt-payment track record, and partial ownership by Kimberly-Clark Corporation (KMB), which is rated 'A' by Fitch with a Stable Outlook. KMB owns 47.9% of KCM.
STRONG BUSINESS PROFILE
KCM's solid business profile is supported by its brand portfolio, low cost structure, extensive distribution network, and access to KMB's technology and research and development capabilities. The ratings reflect KCM's ability to withstand competitive pressure, manage pricing and offset input cost pressure, all of which is based on its leading business position in Mexico's consumer product market. The company is the market leader in most of the product categories in which it participates, with market share positions that are usually three to six times those of the nearest competitor.
KCM's ratings reflect the company's strong credit profile and partial ownership by KMB, which maintains an equity stake of 47.9% in KCM. The company is a strategic investment for KMB, as its largest affiliate worldwide. KMB has five seats on KCM's 12-person board of directors. Because of this, KCM obtains from KMB recognized global brands, common processes and product technology, consistent financial reporting and controls, and worldwide purchasing and sourcing.
EBITDA MARGIN TO IMPROVE IN 2015
For the last 12 months (LTM) ended June 30, 2014, KCM's EBITDA margin narrowed about 100 basis points over the second quarter of 2013 (2Q'13) LTM to 27.9%, and it's expected to potentially drop to 26%-27% by year-end 2014. This is the result of a somewhat more heated competitive environment, as well as pricing initiatives undertaken in 4Q'13, coupled with low Mexican consumer confidence and spending in the first half of 2014 (1H'14). Revenue decline was -3.3% for 2Q'14 on an LTM basis, hindered by the 4Q'13 pricing initiatives that resulted in pricing falling -1% for full year 2013, while volume grew only 2%. Both revenue growth and margins are expected to improve in 2015 back to historical levels. Nonetheless, the ratings are supported by KCM's historical good track record of successfully managing through Mexico's business cycle while maintaining high operating margins and a conservative financial profile. The company's EBITDA margin has been, on average, about 30.3% during the last 10 years.
STRONG CASH FLOW GENERATION
KCM has a long record of sizeable levels of EBITDA and operating cash flow generation, as well as positive pre-dividend free cash flow (FCF). Fitch expects cash flow from operations (CFO), main source supporting the company's liquidity and leverage, to remain ample over the medium term. For June 30, 2014, on an LTM basis, CFO was MXN8.1 billion, resulting in a CFO margin of 22.9% which is higher than the 10-year average of 20.7%. The ratings incorporate the company's medium-term ability to internally fund its Capex levels and dividend payouts. For 2Q'14 LTM, KCM's FCF was MXN564 million. FCF is expected to be neutral-to-positive going forward, consistent with historical levels.
LOW LEVERAGE; SOLID LIQUIDITY
The ratings include expectations that KCM's debt to EBITDA leverage should be around 1.5 times (x) in the short to medium term. For June 30, 2014 LTM, total debt to EBITDA was 2.0x, while net debt to EBITDA was 1.1x. This was the result of MXN16.4 billion in debt and a cash position of about MXN7.9 billion including proceeds from the recent senior notes issuance. The upcoming 3Q'14 maturity of a MXN2.3 billion Cebures issuance will result on a debt/EBITDA ratio of about 1.8x on a pro forma basis. Fitch expects gross leverage to return to levels around 1.5x by 2015.
Fitch views the liquidity position as solid. KCM's longstanding ability to steadily generate significant amounts of operating cash flow underpins its considerable liquidity and significant access to capital markets. For June 30, 2014, on a LTM basis, KCM's CFO and cash position combined (approximately MXN14.6 billion) covers about 90% of the company's MXN16.4 billion debt, whose maturities are spread out between 2014 and 2024. KCM maintains ample access to capital markets, both domestic and international, and the ratings incorporate expectations that KCM's debt maturity schedule will remain manageable.
With a highly stable business, considerable cash flow, low leverage, and strong liquidity changes in KCM's ratings are likely to be dependent on management's actions. Since KCM is not expected to change its financial policies in the near future, Fitch does not foresee any significant upgrade potential at this time.
Conversely, any change in the company's financial policies that results in sustained higher leverage above 2.0x debt to EBITDA in conjunction with significantly lower cash balances from historical levels, sustained lower profitability and negative FCF generation, could derive in negative rating actions. Also, any significant deterioration in KMB's brands, financial profile, or operational support to its Mexican affiliate could also pressure KCM's ratings. In addition, a downgrade in Mexico's sovereign rating and country ceiling could also stress KCM's ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage