SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Tupy S.A. (Tupy) as follows:
--Long-term foreign currency Issuer Default Ratings (IDRs) at 'BB';
--Long-term local currency IDRs at 'BB';
--Long-term national scale rating at 'AA(bra)';
Tupy Overseas S.A.
--USD350 million senior notes, guaranteed by Tupy, due in 2024, at 'BB'.
The Rating Outlook for the corporate ratings is Stable.
The ratings reflect Tupy's capacity to continue generating adequate operational cash flows even during unfavourable macroeconomic environments, such as the current depressed automotive market in Brazil. Tupy has consistently reported positive free cash flows (FCF) due, in part, to deriving approximately 73% of its revenues from the external market, resulting in higher stability in operational cash flows and margins. In the last 12 months (LTM) ended March 31, 2015, 54% of Tupy's revenues derived from the NAFTA, 26% from Brazil, 15% from Europe and 5% from Asia and other markets.
The ratings also incorporate Tupy's conservative capital structure and comfortable liquidity, as well as its leading position in the global engine blocks and cylinder heads manufacturing over the last years. High variable costs and efficient cost management have provided the company with an important operating flexibility to rapid adjust production to demand fluctuations of the automotive sector, allowing it to maintain resilient operating margins through cycles. In March 2015 (LTM), Tupy's EBITDA margin improved to 16.7% from 16.2% in 2014 and the average of 14.8% from 2010 to 2014.
Tupy's ratings remain constrained by its relatively low scale and still limited geographic diversification when compared to other global auto-part companies and by the high cyclicality and competitive environment of the automotive industry. Also factored into the ratings, is the challenging scenario in the Brazilian economy and the domestic auto sector, which are not expected to improve materially in the near term.
Fitch expects Tupy will continue to preserve a solid capital structure and adequate liquidity during the challenging environment in the Brazilian automotive market. The agency forecasts increasing exposure to the external market and moderate levels of investment will be key to support Tupy's cash flows generation in the next two years.
KEY RATING DRIVERS
External Market Will Continue to Support Adequate Cash Flows
Fitch believes Tupy will continue to benefit from its increasing exposure to the external market, particularly the U.S. and Mexico, to keep reporting consistent cash flow generation. In March 2015 (LTM), Tupy's EBITDA strengthened to BRL517 million from BRL503 million in 2014, despite the 12% drop in sales volumes. Cash flow from operations (CFFO) of BRL253 million decelerated from BRL300 million in 2014 and 2013 reflecting a longer cycle of international revenues and inventory built up, but was still enough to cope with investments of BRL197 million and dividends of BRL50 million, resulting in a FCF of BRL7 million. Fitch projects CFFO and FCF of BRL250 million and BRL50 million in 2015 based on maintenance of adequate EBITDA level, gradual destocking post a scheduled stoppage in Tupy's production lines, during July 2015, and lower capex.
Capital Structure Should Remain Conservative
Tupy's capital structure is conservative and should not change over the next years. The company has maintained prudent financial policies, supported by low leverage, high cash in comparison to short term debt and lengthened debt profile. At the end of March 2015, Tupy's leverage, measured by net adjusted debt to EBITDA, was 1.9x in comparison to 1.6x in 2014 and 1.5x in 2013. The slight increase is due to the local currency depreciation on USD debt and higher working capital requirements as the company prepares to the maintenance of two production lines. Fitch forecasts Tupy's net leverage should decline to the same levels of the last years based on steady destocking throughout the year and the positive effects of the local currency depreciation not yet fully captured in the EBITDA.
Fitch believes Tupy will maintain its good financial discipline, keeping robust cash position over the next years to support the inherent volatility of the automotive industry. At the end of March 2015, Tupy's cash of BRL1,427 million was sufficient to cover debt maturities by 2023. Financial policies are conservative and establish minimum cash position of BRL700 million and maximum net leverage of 2x.
Higher Diversification Should Partially Offset Depressed Domestic Markets
Brazilian automotive production and sales dropped by 21% and 19%, respectively, from January to May 2015 due to weak economic momentum, with increasing interest rates, persistently high inflation and low consumer confidence. The end of fiscal exemptions through reduced taxes for new vehicle acquisition since the beginning of 2015, has also contributed to worsen vehicle sales. Fitch believes domestic volumes will remain weak in the next two years but will be partially offset by Tupy's increasing exposure to the international market.
Higher geographic footprint following Tupy's acquisitions in Mexico, in 2012, led to greater exposure to the U.S. and Mexican automotive markets. The steady recover of European market should also help Tupy diversify revenues as long as domestic volumes remain pressured. Longer-term, Fitch believes Tupy will continue to pursue higher geographic diversification and scale gains through a combination of organic growth and small and strategic acquisitions in the high value added heads and blocks markets.
Business Profile Supported by Leading Position in High Added Value Markets
Tupy is currently one of the main suppliers of casted engine blocks and cylinder heads globally. The company has a market participation of 43% in Americas and 25% in the Western hemisphere. Despite the strong competitive position in its main operating sector, the company has a small to medium scale within the sector. With net revenues of BRL3.1 billion in March 2015 (LTM) and moderate geographic footprint, considering its high exposure to the American continent, Tupy has as its main challenge to compete with larger companies with higher geographic reach worldwide.
The high customer concentration in a few and strategic global OEMs (Original Equipment Manufacturers) is partially offset by longstanding relationships and the fact that Tupy supplies multiple products in different regions. As OEMs' demands become more complex and migrate to other regions, Tupy will have the challenge to keep its competitive position in the sector without damage its cost structure and margins.
Fitch's key assumptions within its rating case for the issuer include:
--Sales volume declining 13% in 2015 due mainly to depressed domestic market;
--Gross margin of 18% in 2015;
--Longer cash cycle of 80 days in 2015 due to increased exposure to the foreign market;
--Capex of BRL190 million for 2015 and BRL150 million for 2016.
Future developments that may individually or collectively lead to a negative rating action include:
--Relevant deterioration in Tupy's capital structure, leading to adjusted net debt/EBITDA above 2.5x with no expectation of improvement in the near term;
--Weakening in liquidity, with cash/ST debt below 1.5x.
Positive rating actions are unlikely in the medium term due to Tupy's still moderate scale and geographic diversification and depressed automotive market in Brazil.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
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