Fitch Ratings has affirmed Mexico-based 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 is Stable.
"Elementia's ratings reflect its strong business profile characterised by geographic and product line diversification, leading market shares in copper and in several of its building systems products, which have high brand recognition. Other factors include a well-developed distribution network, stable operating results and the company's shareholders' strength. Factors that limit Elementia's ratings are its history of high leverage, industry cyclicality and input cost volatility," Fitch said in a statement.
Key ratings drivers
The key rating's as outline by Fitch are as follows:
Broad product offering: Elementia's profitability is supported by a diversified revenue base and wide distribution network and product offerings. The cement division (49 per cent of pro forma consolidated EBITDA) should remain the highest margin segment. The metal segment (28 per cent) applies a cost-plus margin formula, allowing it to pass through metal price variations to end customers, resulting in more stable cash flow generation. The building systems segment (23 per cent) sells a variety of roofing, sidings, water storage tanks and other products in the Americas.
Expanding cement business: The company's cement division became the largest contributor to EBITDA in 2016. This segment's relative contribution should continue to grow during 2017. Elementia recently completed a 1.5Mta expansion of its Tula cement plant in Hidalgo, Mexico, and is in the process of integrating its acquisition of Giant Cement Holding Inc.
Balanced funding strategy: Elementia's leverage has been 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 MXN3.9bn (US$231m) during 2015 and raised an additional MXN4.4bn in 2016 through a rights offering to partially fund the acquisition of its stake in Giant.
High leverage should decline: Elementia's net adjusted debt/EBITDA should trend to around 2.5x by 2018 from 3.0x as of 1Q17 on a pro-forma consolidated basis with the acquisition of Giant. The main drivers of deleveraging should be the start of Elementia's cement expansion plant in Tula, rising cement demand and stronger pricing in the US, and cost efficiencies. The reopening of Elementia's Indiana fibre cement facility, which is expected to begin ramp-up in 2018, should also contribute.
Positive FCF expected: The company's free cash flow (FCF) was negative MXN743m during 2016 as it invested MXN2.6bn in its Tula plant. This compares to a modest negative MXN73m during 2015. Fitch projects Elementia's FCF to be positive between one per cent and two per cent of sales through 2019 as the company has deployed the bulk of its expansion capex. Fitch's FCF estimate includes solid cash flow from operations (CFFO) of approximately MXN2.8bn during 2017 and around MXN3bn in 2018.
