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Fitch Affirms Gruma's FC, LC, Perpetual Bond Ratings

Posted on: Tuesday, 22 November 2005, 12:00 CST

Fitch Ratings has affirmed the 'BBB-' foreign currency and local currency ratings of Gruma, S.A. de C.V. (Gruma). Fitch has also affirmed the 'BBB-' rating on Gruma's US$300 million perpetual bonds. The Outlook for all Ratings is Stable.

The ratings are supported by the company's solid business profile as one of the leading producers of corn flour and tortillas in the U.S. and corn flour in Mexico, Central America, and Venezuela. The ratings are also supported by geographic diversification of revenues and cash flows and strong competitive advantages that include brand equity, broad distribution systems, proprietary technology, economies of scale, and diversified product lines.

Sales of wheat and corn tortillas in the U.S. continue to grow robustly due to strong demand for Mexican-style food items and a growing Hispanic population. The company's operations in the U.S. are the most important contributor to total revenues and EBITDA (53% and 65%, respectively, for the first nine months of 2005). In Mexico, Gruma enjoys a leading market position in the production and sale of corn flour, which accounted for 24% and 34% of revenues and EBITDA, respectively, for the first nine months of 2005. Domestic sales should continue to grow, albeit moderately, as tortilla producers and consumers convert to ready-mix corn flour from the traditional method of tortilla production. The company's growth potential from conversion alone is large since Gruma estimates that corn flour is used in only one-half of the tortillas produced in Mexico.

Consolidated sales growth continues to be driven by greater organic volume in the U.S. and to a lesser extent, by the incorporation of acquisitions in the U.S., Mexico, and Europe. Profit margins, however, have been affected by higher prices of energy and packaging and a severe deterioration in the profitability of the Venezuelan operations and of the domestic wheat flour operations. In 2004, these two businesses together accounted for 21% of revenues and 12% of EBITDA. For the first nine months of 2005, both operations reported negative EBITDA, due to increased competitive pressures and limited price flexibility in each of their markets.

Capital expenditures have increased considerably since last year as a result of acquisitions and capacity expansions in the U.S. where the company has been operating at high utilization rates. Investments during 2005 include the purchase of three tortilla plants in Minnesota, Texas, and Arizona, the construction of a new plant in Pennsylvania, the expansion of a corn mill in Indiana, the purchase last August of a corn flour and wheat flour producer in Mexico, and the acquisition last September of a tortilla plant in California.

Credit protection measures will weaken for the year as a result of lower EBITDA and higher debt related to increased capital expenditures. With projected EBITDA of US$250 million and on-balance sheet debt of US$640 million, the company should end the year with a ratio of total debt to EBITDA of 2.6 times (x) and interest coverage of 5.6x. Fitch believes that the company's recent capital investments, along with price increases planned for next year in the U.S., will boost revenues and cash flows over the next year and allow credit protection measures to recover. Further margin pressure from cost increases or the company's weakening operations in Venezuela and of wheat flour in Mexico may prevent the recovery of credit protection measures and pressure the ratings at the current level.

At Sept. 30, 2005, on-balance-sheet debt reached $642 million, almost entirely dollar denominated. The debt was composed of the following: $300 million of perpetual bonds; $51 million of senior notes due 2007; $189 million syndicated loan facility; $87 million of bank debt; and $15 million of privately placed debt. Last October, Gruma obtained a $250 million five-year loan due 2010 to refinance its existing syndicated credit facility and other bank debt, extending the maturity profile and lowering its cost of debt.

Gruma is one of the world's largest producers of corn flour and tortillas. The company has operations in Mexico, the U.S., Europe, Venezuela, and Central America. Gruma also produces and sells wheat flour in Mexico and Venezuela. In 2004, the company had revenues of $2.2 billion and EBITDA of $263 million.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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