November 7, 2017 / 7:38 PM / 8 months ago

Fitch Affirms Gruma at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, November 07 (Fitch) Fitch Ratings has affirmed Gruma, S.A.B. de C.V.'s (Gruma) Long-Term Foreign and Local Currency Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable. A full list of ratings actions is provided at the end of this release. The affirmation reflects Gruma's strong business position as one of the world's largest producers of corn flour and tortillas with recognized brands in its main markets and geographically diversified operations. Fitch expects the company will maintain its leverage metrics at low levels for the next 18 to 24 months with a projected total debt-to-EBITDA and total adjusted debt-to-EBITDAR at or below 1.7x and 2.0x, respectively. Fitch also forecasts Gruma's EBITDA margin will be relatively stable at around 16% and assumes that pressures of higher grains cost and U.S. dollar denominated raw material will be compensated by pricing actions and internal efficiencies. KEY RATING DRIVERS Sound Business Profile: Gruma is one of the largest producers of corn flour and tortillas in the world with operations in the U.S., Mexico, Europe, Central America and in a lesser extent in Asia and Oceania. The company's business position is supported by its leadings brands Maseca, in the corn flour business, and Mission, in the tortillas and value added products segment, which are well recognized among consumer. Fitch also considers that Gruma's broad distribution network, diversified product lines and proprietary technology provide a competitive advantage to continue growing in the long-term growth in its main markets. Geographical Diversification: Gruma's credit profile benefits from geographically diversified operations outside of Mexico that help to mitigate business risk and cash flow volatility. Fitch views positively the company's potential growth opportunities in the U.S. Hispanic community and the increased popularity of tortillas among global consumers. Its main markets are the U.S. and Mexico, which represent approximately 60% and 27% of consolidated EBITDA, respectively. Softer Operating Growth: Fitch anticipates a softer grow on revenues and relatively stable EBITDA margin for Gruma in 2017-2018. Revenues are projected to grow annually around 3% by a combination of volume growth in the low single-digits and better sales mix. The expected lower volumes in Central America and flat volumes in the U.S. during 2017, should be compensated by a better performance in Mexico and Europe. Gruma's EBITDA margin is forecasted to be around 16% in 2017-2018 assuming pressures of higher grains cost and U.S. dollar denominated raw material to be compensated by pricing actions and internal efficiencies. Stable Leverage: Fitch expects Gruma will maintain its leverage metrics at low levels for the next 18 to 24 months with a projected total debt-to-EBITDA and total adjusted debt-to-EBITDAR at or below 1.7x and 2.0x, respectively. While these metrics are higher than our previous expectation of 1.1x and 1.5x, they remain within the range of the current rating level. The increase in leverage during 2017 was mainly due to MXN4.2 billion of additional debt for the acquisition of shares from its subsidiary Grupo Industrial Maseca, S.A.B. de C.V. (GIMSA) and working capital requirements. For the last 12 months (LTM) as of Sept. 30, 2017, the company's total debt-to-EBITDA calculated by Fitch was 1.8x, whereas its total adjusted debt-to-EBITDAR was 2.1x. Temporal Decline in FCF: Gruma's strong free cash flow (FCF) capacity will be affected in 2017 by higher working capital requirements related to inventories, capex and dividends compared to 2016. Fitch projects the company's FCF to be negative in 2017 for around MXN1.1 billion assuming working capital investments of MXN2.2 billion, capex of MXN5.4 billion and dividends of MXN1.4 billion. A recovery in Gruma's FCF to levels above MXN1.5 billion is expected in 2018 and onwards as lower working capital and capex requirements are projected by the company. For the LTM ended Sept. 30, 2017, Gruma's FCF calculated by Fitch was negative MXN4 billion. DERIVATION SUMMARY Gruma's 'BBB' ratings reflect its solid business position, good profitability levels and low leverage ratios. The company's weaker position in terms of size and scale and a less diversified portfolio of products and brands when compared to others peers in the packaged food industry is compensated by maintaining lower leverage ratios (net leverage below 2.0x), higher profitability (EBITDA margin around 16%) and a better access to cash flow generation from high rated countries (60% of its EBITDA is generated in the U.S.). Peers as Grupo Bimbo, S.A.B. de C.V. (BBB/Stable) or Sigma Alimentos, S.A. de C.V. (BBB/Stable) which have higher leverage metrics (net leverage close to 3.0x) and lower profitability margins than Gruma (EBITDA margin around 11% to 12%) benefit from a more diversified portfolio of leading brands in different products, relatively higher size and scale and adequate geographical exposure to countries outside Mexico. Also, Gruma's financial position in terms of leverage and profitability is stronger than other companies in the regions as BRF S.A. (BBB-/Stable) or Tyson Foods, Inc. (BBB/Stable), which have a higher scale and product diversification. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Consolidated revenue increase of around 3% in 2017 - 2018; --EBITDA margin around 16% in 2017 - 2018; --Negative FCF in 2017, and resume positive in 2018; --Total debt/EBITDA and total adjusted debt/EBITDAR at around 1.7x and 2.0x, respectively, by 2018. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Larger operational scale and product diversification; --Improvement in profitability margins; --FCF/revenue margin above 3%; --Total debt/EBITDA and total adjusted debt/EBITDAR at or below 1.0x and 1.3x, respectively, on a sustained basis. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --A significant deterioration of profitability margins; --Negative FCF generation through the business cycle; --Significant debt-financed acquisitions; --Total debt/EBITDA and total adjusted debt/EBITDAR above 2.0x and 2.3x, respectively, on a sustained basis. LIQUIDITY Ample liquidity: As of Sept. 30, 2017, Gruma had a cash balance of MXN3.7 billion, available committed credit facility of USD250 million and short-term debt of MXN3.2 billion. In addition, during 2017 the company obtained new revolving credits facilities for USD520 million that were used to refinance existing debt and improve its debt maturity profile. Gruma's next long-term debt amortizations are MXN437 million in 2019, MXN2.7 billion in 2020, MXN528 million in 2021 and MXN13.4 billion afterwards. The company's total debt as of Sept. 30, 2017, was MXN20.2 billion. FULL LIST OF RATING ACTIONS Fitch has affirmed Gruma's ratings as follows: --Long-Term Foreign IDR at 'BBB'; --Long-Term Local Currency IDR at 'BBB'; --USD400 million senior unsecured notes due 2024 at 'BBB'. The Rating Outlook is Stable. Contact: Primary Analyst Rogelio Gonzalez Director +52 8399 9100 Fitch Mexico S.A. de C.V. Prol. Alfonso Reyes 2612 Monterrey, N.L., Mexico Secondary Analyst Johnny Da Silva Director +1-212-908-0367 Committee Chairperson Joseph Bormann, CFA Managing Director +1-312-368-3349 Summary of Financial Statement Adjustments --Operating leases are treated as debt-like obligations and gross rent expense is capitalized using a multiple of 6x. Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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