Fitch Ratings has affirmed Gruma, S.A.B. de C.V.'s (Gruma) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB'.
Fitch has also affirmed Gruma's National Long-Term rating at 'AAA(mex)' and the National short-term rating at 'F1+(mex)'. The Rating Outlook on the IDRs and National Long-Term rating is Stable.
Gruma's ratings reflect its strong business position as one of the world's largest producers of corn flour and tortillas, with recognized brands in its main markets and geographically diversified operations. The ratings also incorporate its solid financial profile, with good profitability margins, low leverage metrics and ample liquidity.
Fitch anticipates Gruma will manage effectively in 2020 the challenges associated with a weaker economic environment and the disruptions to the coronavirus pandemic. It is expected that higher volume demand of its products in the retail channel across its key markets offset the weakened demand in the food service segment. Fitch projects Gruma's total debt to EBITDA (excluding IFRS 16) to remain between 1.5x to 2.0x over the next 12-24 months.
KEY RATING DRIVERS
Coronavirus Disruptions Manageable: Gruma's operations have shown resilience during the coronavirus pandemic as consumers have shifted their preferences to consume food at home compared with food away from home. The company has benefited by higher sales volume of corn flour and tortillas in the retail channel that has more than offset the decline in the food service category. In addition, while Gruma has incurred additional expenses for the safety of employees and operations, no material pressures in profitability are expected given the increase in revenues from the more profitable retail channel and the higher demand of value added products.
Positive Performance: Fitch expects Gruma will maintain a positive operating performance despite the coronavirus pandemic and the expected contraction in economic growth in the countries where the company operates. Fitch forecasts Gruma's revenues to grow around 14% in 2020 and normalize to close to 4% in 2021. The increase in revenues in 2020 will be mainly supported by higher sales volume, better sales mix and the foreign exchange benefit due to the depreciation of the Mexican peso against the U.S. dollar. Gruma's profitability is expected to improve due to better sales mix in products and channels, favorable cost inputs environment and higher operating leverage that will offset pressures related to sales expenses and safety initiatives. Fitch estimates Gruma's EBITDA margin (excluding IFRS 16) to be around 15% to 16% in 2020-2021.
Stable Leverage: Fitch expects Gruma's total debt to EBITDA (excluding IFRS 16) to be around 1.8x and total net debt to EBITDA around 1.5x by YE 2020. In absence of major investments, acquisitions or extraordinary shareholder's capital distributions these metrics should gradually decrease to 1.5x and 1.3x, respectively, by 2021, supported by EBITDA growth and moderate debt reduction. While Gruma has the free cash flow generation capacity to continue deleveraging over the long term, the ratings incorporate that the company will maintain its gross leverage metric between 1.5x to 2.0x over the rating horizon. For the LTM as of June 30, 2020, Gruma's gross and net leverage (excluding IFRS 16) calculated by Fitch were 2.0x and 1.5x, respectively, which compares with 1.9x and 1.6x, at YE 2019.
Strong FCF: Fitch anticipates Gruma's FCF to remain robust over the midterm. For 2020, Fitch projects FCF of approximately MXN2.2 billion, assuming close to MXN3.3 billion of capex and MXN2 billion of dividends. This level of FCF should continue by 2021 despite an estimated increase in capex to MXN4.1 billion and dividends around MXN2.1 billion. Gruma's FCF calculated by Fitch for the LTM ended June 30, 2020 was MXN4.8 billion after covering a capex of MXN2 billion and dividends of MXN1.9 billion.
Sound Business Profile: Gruma is one of the world's largest producers of corn flour and tortillas, with operations in the U.S., Mexico, Europe, Central America and, to a lesser extent, in Asia and Oceania. The company's business position is supported by its leading Maseca brand in the corn flour business, and the Mission brand in the tortillas and value-added products segment. Fitch also believes Gruma's broad distribution network, diversified product lines and proprietary technology provide a competitive advantage to continue long-term growth in its main markets.
Geographical Diversification: Gruma's credit profile benefits from geographically diversified operations outside of Mexico that help to mitigate business risk and cash flow volatility. The company generates around 56% of its total revenue and 62% of its EBITDA from its U.S. operations, while Europe contributes 7% and 4%, respectively. Fitch views positively the company's potential growth opportunities with the U.S. Hispanic community and the increased popularity of tortillas among global consumers. Its Mexican operations, which are concentrated in corn flour, represent approximately 28% of consolidated revenue and EBITDA.
DERIVATION SUMMARY
Gruma's 'BBB' ratings reflect its solid business position, good profitability levels and low leverage ratios. The company's weaker position in terms of size and scale and a less diversified portfolio of products and brands when compared with other peers in the packaged food industry is compensated by maintaining lower leverage ratios (net leverage below 2.0x), higher profitability (EBITDA margin around 16%) and a better access to cash flow generation from high rated countries (62% of its EBITDA is generated in the U.S.). Peers such as Grupo Bimbo, S.A.B. de C.V. (BBB/Stable) or Sigma Alimentos, S.A. de C.V. (BBB/Stable), which have higher leverage metrics (net leverage close to 3.0x) and lower profitability margins (EBITDA margin around 11% to 12%) than Gruma, benefit from a more diversified portfolio of leading brands in different products, relatively higher size and scale, and adequate geographical exposure to countries outside Mexico. Also, Gruma's financial position in terms of leverage and size is similar to peers such as Flower Foods, Inc. (BBB/Stable), while in terms of business profile is weaker than General Mills, Inc. (BBB/Negative) or Mondelez International (BBB/Stable), which have a higher scale, product diversification and profitability.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within the Rating Case for the Issuer Include
Revenue increases by around 14% in 2020 and 4% in 2021;
EBITDA margins around 15% to 16% in 2020-2021;
Capex around MXN3.3 billion in 2020 and MXN4.1 billion in 2021;
Dividends of MXN2 billion in 2020 and MXN2.1 billion in 2021;
FCF positive of approximately MXN2.2 billion in 2020 and MXN3.1 billion in 2021;
Total debt to EBITDA and total net debt to EBITDA close to 1.5x and 1.3x, respectively, by 2021.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Greater operational scale, product diversification and mix of value added products;
Improvement in profitability margins;
FCF/revenue above 3%;
Total debt to EBITDA sustained below 1.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A significant deterioration in profitability margins;
Negative FCF through the business cycle;
Significant debt-financed acquisitions;
Total debt to EBITDA sustained above 2.5x.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: As of June 30, 2020, Gruma had MXN7.1 billion of cash and cash equivalents and MXN757 million of short-term debt. In addition, the company has committed revolving credit facilities up to MXN14.2 billion (USD620 million) of which MXN12.4 billion (USD540 million) are available. The committed credit facilities are due in 2022 and 2024.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
Gruma, S.A.B. de C.V. LT IDR BBB Affirmed BBB
LC LT IDR BBB Affirmed BBB
Natl LT AAA(mex) Affirmed AAA(mex)
Natl ST F1+(mex) Affirmed F1+(mex)
senior unsecured
LT BBB Affirmed BBB
senior unsecured
Natl LT AAA(mex) Affirmed AAA(mex)
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
GRUMA, S.A.B. DE C.V. 
