Fitch Affirms Elementia's IDR at 'BB+'; Outlook Revised to Stable

CHICAGO--()--Fitch Ratings has affirmed Elementia, S.A.B. de C.V.'s (Elementia) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB+' as well as its long-term national scale rating at 'A+(mex)'. The Rating Outlook has been revised to Stable from Positive. A complete list of rating actions follows at the end of this press release.

The Outlook revision to Stable reflects Fitch's expectations of Elementia's net leverage increasing to slightly more than 3x from below 2x as of year-end 2015 due to the announced acquisition of a 55% stake of Giant Cement Holding, Inc. (Giant). This company has 2.8 million tons of annual cement capacity spread across three cement plants in the eastern United States.

KEY RATING DRIVERS

Capital Structure Should Remain Balanced

Elementia's leverage has been historically volatile, partly due to greenfield investments in the cement division, as well as asset acquisitions and dispositions within its business portfolio. The company issued shares in the equity markets for MXN3.9 billion (USD231 million) during 2015 and is seeking an additional capital increase among existing shareholders that should raise at least USD220 million to partially fund the acquisition. The 55% share of Giant includes three cement plants in South Carolina, Pennsylvania and Maine as well as other assets.

Elementia's operating cash flow has remained strong. EBITDA as of LTM to the second quarter of 2016 was MXN3.2 billion. This compares with MXN3 billion during 2015 and MXN2.7 billion during 2014. Fitch projects total consolidated EBITDA should be above MXN3.3 billion in 2016 and about MXN4.8 billion by 2017 on a pro forma basis. Increased cash flow generation from a potential acquisition, organic cash flow growth from Elementia's expansion of its Tula, Hidalgo plant and the use of equity proceeds to partially fund investments should result in gross leverage remaining below 4x in 2017.

Positive FCF Expected in 2017

The company's free cash flow (FCF) was negative by a modest MXN73 million during 2015 and compares with positive MXN749 million in 2014. Fitch expects Elementia's FCF to be negative by MXN1 billion during 2016 as the company deploys the bulk of the capex for its Tula, Hidalgo cement plant expansion. FCF is expected to turn positive by 2017. Fitch's FCF estimate includes strong CFFO generation of approximately MXN2.4 billion during 2016 and around MXN3 billion in 2017. Elementia's CFFO was MXN1.9 billion for the LTM ended June 30, 2016.

Continued Business Diversification

Fitch views the Giant acquisition as modestly positive for Elementia's country diversification, as it would increase cash flow generation from the U.S. market which today is represented mostly by the company's fiber-cement operations in that market. Elementia's standalone cash flow and profitability are supported by a diversified revenue base, wide distribution network and product offerings, and the contribution of its cement division, its highest-margin business. In addition, the company applies a cost-plus margin formula in its metal segment, allowing it to pass through metal price variations to end customers, mitigating the effect of lower metal prices.

Environmental Regulations Could Limit Operations

The company uses chrysotile fibers (the sole form of asbestos still in use) for part of its production of fiber-cement products. Elementia has invested in production capacity to use different fibers, with most of its facilities already aligned for production using different technologies. The use of this fiber is in line with international standards and local environmental regulations. Even though Elementia has not been subject to legal claims regarding the use of chrysotile in its products, future claims cannot be ruled out.

KEY ASSUMPTIONS

-- Successful completion of capital increase of at least USD220 million;

The following assumptions are on a standalone basis:

-- Mid- to high-single-digit revenue growth for 2016-2018, reflecting primarily revenue growth in building systems and cement divisions;

-- Cement sales volumes approach full capacity during 2016 and accelerate during 2017-2018.

-- The exchange rate averages about 18.5 Mexican pesos per U.S. dollar during 2016 and the U.S. dollar appreciates modestly during 2017-2018;

-- EBITDA margins in the range of 17%-19% during 2016-2018;

-- Aggregate FCF remains positive for 2016-2018;

-- Excess cash flow is used to fund organic or inorganic growth, or to a lesser extent, to pay dividends.

RATING SENSITIVITIES

Positive rating actions could be driven by a strengthening of Elementia's business and financial positions. Successful ramp-up of cement sales from the additional capacity in Hidalgo, coupled with expectations of expanding positive FCF generation and stable operating results through industry and economic cycles resulting in leverage levels of total debt/EBITDA around 2.5x and net debt/EBITDA below 2x would have positive implications for the rating.

Negative factors that could affect the company's credit profile include, among others, declining market shares along business lines and loss of competitive position, reduced operating cash flows and profitability, and reduced liquidity. Expectations of total debt/EBITDA above 4x or net debt/EBITDA above 3.5x would likely result in negative rating actions.

LIQUIDITY

Elementia's liquidity position is considered strong, supported by robust CFFO, adequate cash balance and no significant debt maturities until 2025. Its cash balance was MXN2.9 billion (USD155 million) as of June 30, 2016, which should adequately cover projected negative FCF of about MXN500 million remaining during 2016. The company's liquidity is further supported by about USD430 million (approximately MXN8 billion) of undrawn committed credit lines maturing in 2020. Equity proceeds were used to pay down MXN3 billion of local notes and the remainder was used to fund capex.

FULL LIST OF RATING ACTIONS

Fitch has affirmed Elementia's ratings as follows:

--Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BB+';

--Long-Term Local Currency IDR at 'BB+';

--Long-Term national scale rating at 'A+(mex)';

--Senior unsecured USD425 million notes at 'BB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013306

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013306

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https://www.fitchratings.com/regulatory

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or
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or
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Contacts

Fitch Ratings, Inc.
Primary Analyst
Gilberto Gonzalez, CFA
Associate Director
+1-312-606-2310
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Rogelio Gonzalez
Director
+81 83 99 9100
or
Committee Chairperson
Joe Bormann, CFA
Deputy Regional Group Head - Latin America
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com