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Fitch Affirms Kimberly-Clark de Mexico's IDRs at 'A'; FC IDR Outlook Revised to Stable
May 12, 2017 / 5:14 PM / 7 months ago

Fitch Affirms Kimberly-Clark de Mexico's IDRs at 'A'; FC IDR Outlook Revised to Stable

(The following statement was released by the rating agency) MEXICO CITY, May 12 (Fitch) Fitch Ratings has affirmed Kimberly-Clark de Mexico S.A.B. de C.V.'s (KCM) Long-Term Local Currency (LC) and Foreign-Currency (FC) Issuer Default Ratings (IDRs) at 'A' and the long-term national scale rating at 'AAA(mex)'. The Rating Outlook for the FC IDR was revised to Stable from Negative. The Rating Outlook for the LC IDR and the long-term national scale rating is Stable. A full list of rating actions follows at the end of this press release. The FC IDR Outlook revision to Stable is based on Fitch's assessment of the company's ability to service hard currency (HC) debt, as per Fitch's 'Rating Non-Financial Corporates Above the Country Ceiling Rating Criteria'. Last December, Fitch revised KCM's FC IDR Outlook to Negative following Mexico's sovereign Rating Outlook revision to Negative from Stable. In the event Mexico's sovereign rating and country ceiling are downgraded by one notch, KCM's FC IDR can be rated one notch above the country ceiling provided the LC IDR remains at 'A'. Fitch's core approach is to assess the issuer's ability to service HC external debt service from cash flow generation or available liquidity. In KCM's case, the company possesses HC liquid assets offshore that are available for HC external debt service, if needed. Fitch also takes into account that the HC readily available cash abroad should be held in accounts of financial institutions rated investment grade. Another aspect considered is KCM's strategic partner, Kimberly-Clark Corporation (KMB), which could be relied on as an additional source of HC foreign exchange. KCM's ratings reflect its leading market position, strong cash flow generation, solid capital structure and liquidity position, proven debt-payment track record, and partial ownership by 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 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 2017, CFO was MXN5.2 billion and Fitch expects it to increase to around MXN6 billion by the end of the year and to above MXN6 billion going forward. The ratings incorporate the company's medium-term ability to internally fund its maintenance capex and dividend payouts. For the LTM ended March 2017 and as a consequence of the intense capex plan to increase capacity, KCM's FCF was negative MXN3.1 billion. Fitch expects FCF to remain negative during 2017 due to the ongoing investment plan. 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 2x before returning to Fitch's medium-term expectation of 1.5x. For the LTM ended March 31, 2017, total debt to EBITDA and net debt to EBITDA were 2.0x and 1.2x, respectively. The leverage ratio considers KCM's hedges related to USD-denominated debt. Fitch expects EBITDA margins to be slightly lower than those presented in 2015-2016 of 27%. For the LTM ended March 31, 2017, KCM reported an EBITDA margin of 25.8%, which was affected by a combination of higher exchange rates and price increases of some raw materials and electricity. Fitch also expects KCM to continue its cost savings program, which historically reduced sales costs by 3%-4% annually. During 2016, the company achieved savings of MXN1.1 billion and it expects a similar amount for 2017. 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 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. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: --Exchange rate and inflation forecast is based on Fitch sovereign group estimations; --Average revenue growth of 7% per year during 2017-2020; --The company continues with its cost reduction program; --EBITDA margins close to 26.2% on average during 2017-2020; --CFO generation of MXN6.9 billion on average during 2017-2020; --Capex of USD350 million during 2016-2017 and USD85 million per year during 2018-2019; --The company refinances its debt maturities due in 2017 and 2018; --Dividend payments are adjusted for inflation every year. RATING SENSITIVITIES 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 rating 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 2x 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 of several notches in Mexico's sovereign rating and country ceiling could also stress KCM's foreign currency ratings. LIQUIDITY 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, 2017, KCM's cash position was MXN7.3 billion and short-term maturities are MXN2.5 billion, referring to a local issuance due in June 2017. Fitch does not foresee any liquidity problem for KCM given its relatively stable cash generation and widespread maturities due between 2017 and 2025 FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: --Foreign Currency Long-Term IDR at 'A'; Outlook Revised to Stable from Negative; --Local Currency Long-Term IDR at 'A', Outlook Stable; --Long-term national scale rating at 'AAA(mex)'; Outlook Stable; --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)'. Contact: Primary Analyst Maria Pia Medrano Associate Director +52 55 5955 1600 Fitch Mexico S.A. de C.V. Blvd. Manuel Avila Camacho 88, Piso 10 Edificio Picasso, Ciudad de Mexico. Secondary Analyst Johnny DaSilva Director +1-212-908-0367 Committee Chairperson Alberto Moreno Senior Director +52 81 8399 9100 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Date of Relevant Rating Committee: May 11, 2017. Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Rating Non-Financial Corporates Above the Country Ceiling Rating Criteria (pub. 15 Feb 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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