May 15, 2017 / 9:16 PM / a year ago

Fitch Affirms Grupo Bimbo's Ratings at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, May 15 (Fitch) Fitch Ratings has affirmed Grupo Bimbo, S.A.B. de C.V.'s (Bimbo) Long-Term Foreign and Local Currency Issuer Default Rating (IDR) at 'BBB'. Fitch has also affirmed Bimbo's National long-term rating at 'AA+(mex)'. The Rating Outlook on the IDRs and National long-term rating remains Stable. A full list of ratings actions is provided at the end of this release. The affirmations incorporate Fitch's expectation that Bimbo's total debt-to-EBITDA and total adjusted debt-to-EBITDAR will remain below 3.0x and 3.5x, respectively, in the midterm, despite a challenging operating environment expected for 2017. The combination of lower economic growth expected in Mexico, difficult industry conditions in North America, and higher pressures on profitability margins related to raw material and U.S. dollar-denominated costs could hinder Bimbo's results. Fitch believes these pressures could be partially mitigated by the company's geographical diversification, strong brand equity, productivity efficiencies, and expense controls. KEY RATING DRIVERS Strong Business Position: Bimbo's ratings incorporate its solid business position as a global leader producer of baked goods with operations in Mexico, the U.S., Canada, Latin America, Europe and Asia. The company has a product portfolio of well-known brands with leading positions in many of its categories across the markets in which it participates. Bimbo has maintained relatively stable market positions across its territories despite strong competition in markets such as the U.S., Canada and Iberia. The company's competitive advantages include its position as a low-cost producer and an extensive distribution network among its main markets. Geographic Diversification: Bimbo has a good geographic diversification with around 69% of its total revenues and 47% of its total EBITDA generated from operations outside Mexico. Its acquisitions in the U.S., Canada and Europe have provided access to hard currency revenue and EBITDA generation contributing to counterbalance the exposure between mature and emerging economies. Fitch believes Bimbo will continue expanding its operations in the regions it operates in by incorporating strong brands into its product portfolio and capturing access to strategic distribution channels. In 2017 the company acquired a small producer of slow-baked bread in Canada and a producer of specialized baked goods in Morocco with estimated sales of CAD18 million and USD11 million, respectively. Fitch views these transactions as positive for the company as they will provide additional diversification. Challenged Operating Environment: Fitch expects a challenging operating year in 2017 for Bimbo given the slower economic growth in Mexico, weak industry trends in North America in the packaged bread category, and an environment of higher raw materials costs. Fitch projects the company's consolidated revenues to grow around 9% in 2017 supported mainly by the positive effect of foreign currency exchange from operations outside Mexico, higher revenues in Europe coming from the full-year consolidation of Donuts Iberia and volume growth in Mexico. Bimbo's profitability is expected to face more pressures than last year due mainly to higher raw material costs associated with a stronger U.S. dollar, higher integration costs in Canada and Europe, and higher promotional expenses to support volume growth. The company's initiatives to improve its production and distribution costs combined with selective price actions should contribute to offset some of the margin pressures. Fitch forecasts a consolidated EBITDA margin of around 10% for the company in 2017. Stable Leverage Fitch projects Bimbo's total debt-to-EBITDA and total adjusted debt-to-EBITDAR to be around 2.9x and 3.4x in 2017, respectively, and then gradually decline to 2.5x and 3.0x by 2018. Modest debt reductions are projected in 2017 and deleveraging in 2018 is expected to be related to the payment of local issuances for MXN5 billion and higher EBTIDA generation. Fitch expects Bimbo to continue incorporating small bolt-on acquisitions that should not materially change our leverage forecasts. For the last 12 months (LTM) as of March 31, 2017, the company's total debt-to-EBITDA estimated by Fitch was 2.8x and its total adjusted debt-to-EBITDAR was 3.3x. Solid FCF: Fitch expects Bimbo to maintain positive free cash flow (FCF, after capex and dividends) in 2017-2018. Fitch estimates that Bimbo will generate in 2017 around MXN17.6 billion of cash flow from operations (CFFO) that will be sufficient to cover capex of MXN13.2 billion and dividends of MXN1.3 billion. FCF is projected at approximately MXN3.1 billion in 2017 and should increase to MXN6.1 billion in 2018 due to lower capex, stable dividends and higher cash flow generation. For the LTM as of March 31, 2017, Bimbo's Fitch-calculated FCF was MXN3.5 billion. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Consolidated revenue increase of 9% in 2017 and 4% in 2018; --EBITDA margin around 10% in 2017 and 11% in 2018; --FCF of approximately MXN3 billion in 2017 and MXN6 billion in 2018; --Total debt-to-EBITDA and total adjusted debt-to-EBITDAR at around 2.5x and 3.0x, respectively, by 2018. RATING SENSITIVITIES Fitch would view as positive to credit quality a combination of debt reduction, higher profitability, and strong FCF leading to a sustained improvement in total net debt-to-EBITDA and total adjusted net debt-to-EBITDAR below to 2.0x and 2.5x, respectively. Bimbo's ratings are likely to be downgraded if there is a sustained deterioration in its revenue growth and profitability margins leading to negative FCF and a total net debt-to-EBITDA and a total adjusted net debt-to-EBITDAR above 3.0x and 3.5x, respectively. Also, significant debt-financed acquisitions could pressure the ratings. LIQUIDITY Fitch believes Bimbo's liquidity position is ample due to its positive FCF generation, adequate cash balance, and an undrawn committed credit facility of USD2 billion that expires in 2021. As of March 31, 2017, the company had MXN7.8 billion of cash and cash equivalents and short-term debt of MXN2.9 billion. In addition, Bimbo's debt amortization profile is manageable in the following two years with only MXN5 billion due in 2018. Next significant debt amortization is in 2020 for MXN17.9 billion. FULL LIST OF RATING ACTIONS Fitch affirms Bimbo's ratings as follows: --Long-Term Foreign Currency IDR at 'BBB'; --Long-Term Local Currency at IDR 'BBB'; --National Scale long-term rating at 'AA+(mex)'; --USD800 million senior notes due 2020 at 'BBB'; --USD800 million senior notes due 2022 at 'BBB'; --USD800 million senior notes due 2024 at 'BBB'; --USD500 million senior notes due 2044 at 'BBB'; --Local Certificados Bursatiles Issuances at 'AA+(mex)'. The Rating Outlook is Stable. Contact: Primary Analyst Rogelio Gonzalez Director +52-81-8399-9100 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 Alberto Moreno Senior Director +52-81-8399-9100 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: 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 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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