April 5, 2017 / 8:43 PM / 3 years ago

Fitch Upgrades Becle's Ratings to 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, April 05 (Fitch) Fitch Ratings has upgraded Becle, S.A. de C.V.'s (Becle) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) to 'BBB+' from 'BBB'. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release. The rating upgrade reflects Becle's improved business and financial profile following the initial public offering (IPO) of 15% its equity for MXN18.6 billion and the merger of its related operating company, Proximo Spirits. Fitch expects the company to use its improved financial flexibility to pursue opportunistic M&A activity that will enhance its geographic and product diversification. Becle's ratings are supported by the strong brand equity of Jose Cuervo tequila, its complementary portfolio of spirits, its vertically integrated operations across the production and distribution of tequila, and its geographical revenue diversification. The company has maintained a conservative capital structure with a low debt levels, sound liquidity and positive free cash flow (FCF) generation across the business cycle. The ratings are constrained by the product concentration in tequila, which represents close to 57% of its total revenues, strong competition within the alcoholic beverage industry, the volatility of prices in its main raw materials (agave), and risks related to changes in U.S. trade policies. KEY RATING DRIVERS Strong Tequila Brand Becle's ratings are supported by the strong brand recognition of its tequila Jose Cuervo, which is positioned as the leading tequila in the world in terms of sales volume. Jose Cuervo and other family brands also have an important geographical diversification with sales in more than 85 countries. The U.S. and Canada are its most important markets, accounting for around 67% of its total revenues, while the Jose Cuervo brand has the leading position in the U.S. tequila category in terms of sales volume. In Mexico, the company is the largest distributor of spirits and liqueurs in terms of volume and the second largest in terms of value, and contributes 21% of Becle's total revenues. Other countries' operations represent 12% of total revenues. Integration of Proximo: Becle merged its operations with Proximo, the main distributor and bottler of its products in the U.S. during the last quarter of 2016. Proximo, a related-party company, began operations in 2008 to distribute Tequila 1800 and after the termination in 2013 of the distribution agreement Becle had with Diageo, the company started to distribute Jose Cuervo's brands in the U.S. and Canada. Since Proximo took on the distribution of Jose Cuervo, the brand recovered its growth in the tequila category during 2014-2016. Fitch views this transaction as positive to Becle's credit profile as it improve its size and scale, strengthens its corporate structure and provides a better view of the company's operating performance. Portfolio Diversification: Fitch expects the company to use the proceeds from its IPO to improve its product portfolio by incorporating new brands in premium categories. In the whiskey category, the company has been working on increasing the market penetration of its Bushmills brand, a premium Irish whiskey that is consumed primarily in the U.S. and Europe. Also, Becle is increasing the presence of its premium rum brand, Kraken, which grew by double digits in the U.S. during 2016. These two categories represents close to 5% and 4%, respectively, of the company's consolidated revenues. Fitch believes Becle's strategy to incorporate premium and scalable brands in its portfolio combined with a strong brand equity in tequila will bring opportunities to strengthen its business position and geographic footprint. Good Operating Performance: Fitch expects Becle to continue improving its operating results through organic revenue growth and relatively stable profitability despite pressures on agave prices. Fitch projects revenue growth of 12% in 2017 supported by a low single-digit volume increase across its regions, higher prices, and the positive FX effect of its U.S.-dollar revenues against the Mexican peso depreciation. While volume in the U.S. could face some pressures due to higher prices and anticipated volume sales in the last quarter of 2016, this should be mitigated by volume growth from Mexico and rest of the world. Fitch also forecasts for 2017 an EBITDA margin of around 25%. Higher costs are expected to be compensated for by internal efficiencies and lower advertisement, marketing and promotion expenses. Low Leverage: Fitch anticipates that Becle's total adjusted debt to EBITDAR will remain at levels at or below 2x in 2017-2018, while the company is expected to maintain its large net cash position until acquisition opportunities materialize. Fitch believes the company has sufficient flexibility to absorb, at the current rating level, an acquisition that would use a combination of cash plus debt resulting in net leverage growing to around 1.5x. Becle's total adjusted debt-to-EBITDAR and net adjusted debt-to-EBITDAR calculated by Fitch were 2.1x and 1.3x, respectively, as of Dec. 31, 2016. Weak FCF in 2017: Fitch expects Becle's to maintain positive FCF in the mid- to long-term. However, for 2017 the company's FCF is projected to be negative assuming capex of MXN2.4 billion and dividends of MXN2.6 billion. Positive FCF should resume in 2018 to around MXN1.1 billion due to higher cash flow generation and lower capex. Higher capex levels in 2017 will be mainly used to expand the production capacity in its tequila and whiskey facilities. In 2016, Becle's FCF calculated by Fitch was around MXN2 billion after covering capex of MXN829 million and no dividends payments. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Becle include: - Revenue growth of 12% in 2017 and 5% in 2018; - EBITDA margin around 25% in 2016 and improving towards 26% in 2018; - Negative FCF in 2017 due to higher capex and dividends and positive over the mid-term. - Net adjusted leverage below 1.5x, including potential acquisitions. RATING SENSITIVITIES Fitch does not anticipate positive rating actions in the medium term. Further developments that may lead to negative rating actions include: - Sustained deterioration in operating performance leading to lower sales and profitability; - Negative FCF across the business cycle; - Net adjusted leverage above 1.5x on sustained basis. LIQUIDITY Becle's liquidity position is strong with a pro forma cash balance of around MXN21.2 billion including the proceeds from its IPO and a dividend payment in January 2017. In addition, Fitch believes the company has significant financial flexibility, as its next significant debt maturity is in 2025 for MXN10.3 billion (USD500 million) related to its bond. As of Dec. 31, 2016, Becle had a cash position of MXN5.1 billion with only MXN53 million of short-term debt maturities. FULL LIST OF RATING ACTIONS Fitch has upgraded the following ratings - Long-Term Foreign Currency IDR to 'BBB+' from 'BBB'; - Long-Term Local Currency IDR to 'BBB+' from 'BBB'; - USD500 million senior notes due 2025 to 'BBB+' from 'BBB'. 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 +1-212-9080-367 Committee Chairperson Daniel Kastholm, CFA Managing Director +1-312-368-2070 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021726 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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