Fitch Upgrades Hypermarcas' IDRs to 'BB+'; Outlook Stable
RIO DE JANEIRO -- September 23, 2013
Fitch Ratings has upgraded the following ratings of Hypermarcas S.A.'s
--Long-term foreign currency Issuer Default Rating (IDR) to 'BB+' from 'BB';
--Long-term local currency IDR to 'BB+' from 'BB';
--Long-term national scale rating to 'AA(bra)' from 'A+(bra)';
--Senior unsecured notes due in 2021 to 'BB+' from 'BB';
--Third debentures issuance at 'AA(bra)' from 'A+(bra)'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The upgrades reflect Hypermarcas' improving profitability and credit metrics
during 2013 and the expectation that this trend should continue through 2014,
when the company's net leverage ratio is projected to reach 2.5x. The rating
actions also take into consideration the company's more conservative approach
to growing through acquisitions.
Hypermarcas' ratings reflect its leading position in the competitive Brazilian
market, and the strength and diversification of its brands. The pharma
business resilience and Hypermarcas' low ticket and less discretionary
consumer portfolio are key to its adequate business fundamental. Hypermarcas'
operations are expected to continue to benefit from the long-term positive
fundamentals of the under-penetrated Brazilian healthcare market.
The company's still high gross leverage ratios, the ongoing challenges related
to the consolidation of its several past acquisitions, as well as the arising
competitive pressures from larger and well capitalized global peers, limit
Hypermarcas' ratings below investment grade. Other credit limitations include
its need for constant drug and product innovation.
Strong Business Position; Diversified Product Portfolio
Hypermarcas has one of the largest and most diversified consumer products
portfolios in Brazil, with focus on the pharmaceutical, beauty and personal
care segments. Hypermarcas' business strategy is to capture synergies through
the integration of acquired operations into a single cost platform in terms of
packaging, distribution, advertising and marketing. Currently, the company's
Pharma segment accounts for 56% of revenues, while its Beauty and Personal
Care segment accounts for the balance of revenues. The significant expansion
of Hypermarcas' operations and product portfolio in recent years has primarily
been achieved through 23 acquisitions since 2007. These transactions, which
totaled approximately BRL8.1 billion, were financed through a mix of debt and
Operating Cash Flow Improvement
Hypermarcas successfully improved its working capital cycle during 2012 and
integrated several newly acquired assets, which resulted in stronger EBITDA
and cash flow from operations (CFFO). During 2013, the company has been
focusing on simplifying its operational platform, improving productivity, and
reducing operational costs and SG&A expenses. There were significant advances
in the consolidation of the Consumer division's manufacturing and logistics
platform with the completion of both the new plant in Senador Canedo and the
Distribution Center located at Goiania, where labor costs are 30% cheaper and
productivity has been rising.
During the last 12 months ended on June 30, 2013, Hypermarcas' EBITDA reached
BRL935 million, an increase from BRL869 million of EBITDA in 2012 and BRL534
million in 2011. In addition, the company's EBITDA margin has improved to 23%
from 16% in 2012. Despite strong CFFO generation of BRL 447 million in the
period, free cash flow (FCF) dropped to BRL131 million, from BRL242 million in
2012, due to BRL102 million of dividends.
Further Decline in Leverage Expected
The continued recovery in the operating cash flow generation (EBITDA) and FCF
generation has supported the company's deleverage trend. Net leverage is
expected to reach 2.8x at the end of 2013 and 2.5x by 2014. These ratios
compare with 3.1x in 2012 and 5.1x reported in 2011. During 2011, the change
in commercial strategy and high integration challenges significantly
deteriorated Hypermarcas' operational performance, leading to high leverage
and weaker operating margins.
Fitch forecasts that Hypermarcas's FCF generation will be enhanced from 2014
on due to operating cash flow improvements, lower interests payments and lower
capex disbursements, which should be partially offset by a more aggressive
shareholder friendly dividend policy of 50% of net income. For 2014 and 2015,
Fitch foresees FCF of around BRL80 million and BRL150 million, respectively.
Solid Liquidity Position
Hypermarcas had BRL4.5billion of debt as of June 30, 2012, of which BRL1.2
billion is short term. The company's has a robust liquidity position with
BRL1.7 billion in cash and marketable securities. As of June 30, Hypermarcas
had a cash plus CFFO/short-term debt ratio of 1.8x. Its cash balance supports
debt amortization through 2014 and part of 2015.
Additional liquidity comes from the company recently signed stand-by credit
facility of BRL750 million, which can be drawn down until 2015 and has a final
maturity during 2019. The company also issued a BRL400 million local
debentures in July as part of its program to rollover its debt and repay its
most expensive credit lines. Fitch expects Hypermarcas to be active on its
liability management strategy in 2013 and 2014.
Fitch could consider a negative rating action on an unexpected material
debt-financed acquisition or deterioration in operational performance
associated with a step away from the company's track record of maintaining
strong liquidity levels. Ratings upgrades could occur with the combination of
the following factors: robust FCF generation, on a recurring basis, allowing
total leverage reduction, conservative approach on acquisitions, and the
maintenance of strong liquidity and well managed debt schedule profile.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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