MEXICO CITY--(BUSINESS WIRE)--Fitch Ratings has affirmed Kimberly-Clark de Mexico S.A.B. de C.V.'s (KCM) Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) at 'A'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.
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), rated 'A' by Fitch.
KEY RATING DRIVERS
STRONG BUSINESS PROFILE
KCM's solid business profile is supported by its brand portfolio, extensive distribution network, low cost structure and access to KMB's technology and research and development capabilities. The ratings reflect KCM's ability to withstand competitive pressures and soft consumer demand, undertake pricing initiatives and offset input cost volatility. The company is the market leader in most of the product categories in which it participates, with market share positions that are --in some categories-- substantially higher than those of the nearest competitors.
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. KMB has four seats on KCM's 12-person board of directors. The company is a strategic investment for KMB, as its largest affiliate worldwide. KCM has access to KMB's recognized global brands, common processes and product technology, consistent financial reporting and controls, and worldwide purchasing and sourcing.
RESILIENT PERFORMANCE THROUGH THE CYCLE
KCM has a good track record of successfully managing through Mexico's business cycle while maintaining healthy operating margins and a conservative financial profile. The company's consumer products are well positioned to take advantage of potential product penetration due to demographics and economic growth. In addition, KCM's most important products enjoy a stable demand from customers while the economic environment influences the revenue mix.
STRONG CASH FLOW GENERATION
KCM has a consistent track record of sizeable EBITDA and operating cash flow generation, as well as positive pre-dividend free cash flow (FCF). Fitch expects cash flow from operations (CFO) to remain ample over the medium term. During the last 12 months (LTM) ended in March 2016, CFO was MXN6.5 billion and Fitch expects to remain above MXN6.0 billion going forward.
The ratings incorporate the company's medium-term ability to internally fund its capex and dividend payouts. For the LTM ended March 2016, KCM's FCF was MXN2.7 billion. Fitch expects FCF to be negative during 2016 and 2017 due to the investment plan to expand capacity. However, FCF should return to neutral-to-positive levels once the investments start generating cash flows in 2018.
SOUND FINANCIAL PROFILE
Fitch expects KCM's total debt (adjusted by hedging instruments) to EBITDA to be around 2.0 times (x) before returning to Fitch's medium term expectation of 1.5x. For the LTM ended March 31, 2016, total debt to EBITDA and net debt to EBITDA were 2.1x and 0.9x; respectively. The leverage ratio includes KCM's hedges related to debt and the new USD200 million credit facility that should be used to finance part of the capex plan and refinancing needs.
Fitch expects EBITDA margins to remain relatively stable over the next few years. For the LTM ended March 31, 2016, KCM reported an EBITDA margin of 27.7%, an increase from the previous year. During 2015, KCM managed to recover EBITDA margins from 2014, when they reported a 25.7% margin due to an intense competitive environment and subdued consumer behavior.
OPERATING FX EXPOSURE
KCM is exposed to currency variations as almost 60% of the company's cost structure is denominated in or linked to the USD. However, the company has been able to offset the FX risk due to operating efficiencies, lower raw material costs and higher revenues related to price increases and to a lesser extent to volume increases. KCM's hedging strategy has kept the debt and interest payments constant in Mexican Peso terms despite the devaluation of the Mexican peso versus the U.S. dollar.
Fitch's key assumptions within the rating case for the issuer include:
--Average revenues growth of 7% per year during 2016-2019;
--The company continues with its cost reduction program, which historically reduced 3%-4% of sales costs annually;
--EBITDA margins close to 27.6% on average during 2016-2019;
--CFO generation above MXN6.0 billion;
--Capex of USD400 million during 2016-2017 and USD92 million per year during 2018-2019;
--Dividend payments are adjusted for inflation every year.
With a highly stable business, considerable cash flow, low leverage, and strong liquidity, changes in KCM's ratings are likely to depend on management's actions. Since KCM is not expected to change its financial policies in the near future, Fitch does not foresee any positive action at this time.
Future developments that may individually or collectively lead to a negative rating action include any change in the company's financial policies that results in sustained higher leverage measured as total debt to EBITDA above 2.0x or a net debt to EBITDA ratio above 1.5x, sustained lower profitability and negative FCF generation. Also, any significant deterioration in KMB's brands, financial profile, or operational support to its Mexican affiliate could also pressure KCM's ratings. A downgrade in Mexico's sovereign rating and country ceiling could also stress KCM's foreign currency ratings.
The company's liquidity position is sound. KCM's longstanding ability to steadily generate significant amounts of operating cash flow underpins its liquidity and ample access to capital markets, both domestic and international. As of March 31, 2016, KCM's CFO (LTM) and cash position combined (approximately MXN17.6 billion) cover about 93% of the company's MXN19.0 billion debt which matures between 2017 and 2025. The company does not face maturities in 2016 and the next maturity is a MXN2.5 billion local issuance due in 2017.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
--Foreign Currency Long-Term IDR at 'A';
--Local Currency Long-Term IDR at 'A';
--Long-term national scale rating at 'AAA(mex);
--USD250 million senior notes due in 2024 at 'A';
--USD250 million senior notes due in 2025 at 'A';
--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)';
--MXN1.77 billion unsecured CBs due 2023 at 'AAA(mex)'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: June 3, 2016.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
National Scale Ratings Criteria (pub. 30 Oct 2013)
Dodd-Frank Rating Information Disclosure Form