Fitch affirms Kimberly-Clark de Mexico's foreign currency, local currency Issuer Default Ratings at A, reflecting its dominant market position, strong cash flow, solid liquidity; rating outlook stable
August 30, 2011
– Fitch Ratings has affirmed the 'A' foreign currency and local currency Issuer Default Ratings (IDR) of Kimberly-Clark de Mexico, S.A.B. de C.V. (KCM).
In conjunction with this rating action, Fitch has also affirmed KCM's other ratings as follows:
--Long-term national rating at 'AAA(mex)';
--MXN1,250 million unsecured CBs due 2013 at 'AAA(mex)';
--MXN2,300 million unsecured CBs due 2014 at 'AAA(mex)';
--MXN1,500 million unsecured CBs due 2015 at 'AAA(mex)';
--MXN800 million unsecured CBs due 2016 at 'AAA(mex)';
--MXN2,500 million unsecured CBs due 2017 at 'AAA(mex)';
--MXN400 million unsecured CBs due 2019 at 'AAA(mex)';
--MXN2,500 million unsecured CBs due 2020 at 'AAA(mex)'.
The Rating Outlook is Stable.
The ratings reflect KCM's dominant market position, strong cash flow generation, solid liquidity and low leverage. The rating of the company's foreign currency IDR above Mexico's 'A-' country ceiling is due to the company's strong capital structure and liquidity position, proven debt-payment track record, and implicit support from Kimberly-Clark Corporation (KMB), which is rated 'A' by Fitch with a Stable Outlook. KMB owns 47.9% of KCM. The Stable Outlook reflects the company's solid business position and its capacity to maintain a conservative capital structure due to its consistent generation of sizeable free cash flow. It also takes into consideration the sustainability of the company's business position during the near to medium term. Fitch expects KCM's credit protection measures to remain strong.
Key rating drivers, with a highly stable base business, considerable cash flow, low leverage, and strong liquidity changes in KCM's ratings are likely to be dependent on management's actions. KCM is not expected to change its financial policies in the near future. Growth should continue to be funded with operating cash flow, and dividends or stock repurchases should not affect the company's capital structure. Any change in the company's financial policies or philosophy that resulted in higher leverage would likely result in negative rating actions. KCM's foreign currency IDR of 'A' incorporates implicit support from Kimberly-Clark Corporation (KMB). Changes in KMB's ratings are likely to result in similar rating actions on KCM's Foreign Currency IDR.
Leading Market Position:
The ratings reflect KCM's ability to withstand competitive pressure, managing pricing and offsetting input cost pressure, based on its dominant business position in Mexico's consumer product market. The company is the market leader in almost every product category in which it participates with market share positions that normally are two to four times nearest competitor.
KCM's business strength is supported by its solid brand portfolio, low cost structure, extensive distribution network, and access to Kimberly-Clark Corporation's (KMB) technology and research and development capabilities.
The combination of access to global brands and development of proprietary local brands has allowed the company to target customers of all income levels for each product category. In addition, the company maintains a strong, growing, and well-diversified customer base of over 5,000 customers with some concentration in large customers. Further, the company maintains strong position with large retailers, wholesalers, pharmacies and government stores.
KCM's Foreign Currency IDR Reflects Implicit Support from Kimberly-Clark Corporation (KMB):
KCM's foreign currency rating, which is above Mexico's sovereign ceiling (rated 'A-' by Fitch), is based on the company's strong credit and implicit support from Kimberly-Clark. Kimberly-Clark Corporation (KMB) maintains an equity stake of 47.9% in KCM. KCM is a strategic investment for KMB as its largest and most profitable affiliate worldwide. KMB has five seats on KCM's 12-person board of directors. In addition, KCM benefits from its strong relationship with KMB, which provides the company with recognized global brands, common process and product technology, consistent financial reporting and controls, and worldwide purchasing & sourcing.
EBITDA Margin Expected to Remain Stable at 30% during 2011:
The ratings reflect KCM's good track record of successfully managing through Mexico's economic cycles while maintaining high operating margins, the company's EBITDA margin has been consistently around 30% during the last 10 years. During LTM June 2011 the company has reached some deceleration in revenues, while EBITDA and EBIT margins have decline around 200 basis points over levels reached in 2009. The revenue growth rate for 12 month period has contracted from reaching approximately 7% during 2008/09 period to 3.5% during LTM June 2011. The main factors behind recent trend in revenues and margins are increasing competition affecting pricing and continued increase in cost/raw materials. The ratings incorporate the view that the company's revenue growth will be limited to levels around 3% and that the company's 2011 EBITDA margin will remain stable around 30% during 2011
Strong Cash Flow Generation:
KCM has a long record of sizeable levels of EBITDA, operating cash flow generation and positive free cash flow. Fitch expects cash flow from operations (CFO), main source supporting the company's liquidity and leverage, to remain ample over the medium term. KCM's annual CFO average for the period between December 2009 and June 2011 was MXN 5.0 billion. During LTM June 2011, the company's CFO was MXN4.9 billion resulting in a CFO margin of 18.8%. Fitch expects KCM's CFO margin to remain stable around 19% during the next 12 month period ended in June 2012.
The ratings consider the company's ability to internally fund its capex levels and dividend payouts. The company's FCF generation was negatively affected during LTM June 2011 driven by increase in inventory cost and unusual capex levels. For the LTM ended in June 2011, the company's free cash flow (FCF) was negative in MXN296 million. KCM's FCF calculation for the period considers cash flow from operations (MXN 4,932 million) less capital expenditures (MXN 1,743 million) less distributed dividends (MXN 3,485 million). The company's FCF is expected to return to positive levels during the next 12 month period ended in June 2012 driven by more stable working capital and lower capex levels.
The company's strong cash flow generation supported its share repurchases of MXN779 million and MXN1 billion during LTM June 2011 and FY2010, respectively. The ratings factor in the expectation that the company will continue funding with internally cash flow generation its capex level, distributed dividends, and stock repurchase over the medium term without compromising its capital structure.
KCM's longstanding ability to steadily generate significant amounts of operating cash flow underpins its considerable liquidity and significant access to capital markets. By the end of June 2011 KCM's LTM CFO and cash position combined (approximately MXN10.9 billion) covers more than 8 times (x) the company's debt payment due during the next two years (approximately MXN1,3 billion) ended in June 2013. In addition the company maintains approximately USD300 million of unused credit lines available at June 30, 2011. Fitch views company's liquidity solid.
The company maintains ample access to local and international capital markets as evidenced with several issuances during the last years. Further, KCM currently has a manageable debt maturity profile with no maturities during 2011 and 2012, the company faces debt maturities of MXN1.25 billion million and MXN2.3 billion during June 2013 and October 2014, respectively. Ratings incorporate expectations that KCM's debt maturity schedule will remain manageable.
Leverage Expected to Remain Low:
The ratings include expectations that KCM's net leverage will be around 0.85x during the next 12-month period ended in June 2012. During 2010 and the LTM ended June 2011, KCM generated MXN8.0 billion and MXN7.9 billion of EBITDA, respectively. KCM's total debt was MXN11.2 billion at the end of June 2011, while its cash and marketable securities balance was MXN5.9 billion. These figures result in a net debt-to-EBITDA ratio of 0.7x for the LTM ended in June 2011, which is in line with the company's average net leverage of 0.6x for the 2008 - 2010 period. The company's gross leverage, measured by total debt to EBITDA ratio, was 1.4x by the end of June 2011, the company's gross leverage average during 2008 - 2011 was 1.3x.
Additional information is available at ' www.fitchratings.com '.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria
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