DBRS Comments on Daimler’s Fourth Quarter Results

DBRS notes that Daimler AG (Daimler or the Company) yesterday announced its fourth-quarter and full-year 2008 results. The results for both periods are significantly lower on a year-over-year basis. DBRS notes that this decline was not unexpected and reflects very weak conditions across most major markets in the Company’s Mercedes-Benz Cars (MBC) and Daimler Trucks (DT) divisions. Additionally, the results also incorporate significant negative impacts associated with Chrysler LLC (Chrysler); (Daimler continues to hold a 19.9% equity stake in Chrysler). Despite the weaker operating results, the Company’s financial risk profile remains acceptable for the current A (low) long-term ratings.

The Company recorded earnings before interest and tax (EBIT) of EUR 2.7 billion for 2008, down sharply from the EUR 8.7 billion in EBIT generated in 2007. For the fourth quarter alone, Daimler incurred a loss of EUR 1.95 billion, relative to EUR 1.39 billion in EBIT posted in the fourth quarter of 2007. MBC, Daimler’s primary segment, incurred a loss of EUR 359 million in the fourth quarter as the global automotive markets underwent a severe downturn that was particularly accentuated in the second half of the year. DT, the Company’s other major business division, was able to generate EUR 86 million in EBIT in the fourth quarter, but this again was sharply lower than the EUR 512 million generated one year prior. In addition, free cash flow was highly negative at EUR 3.9 billion; DBRS notes that is in large part attributable to high working capital absorption, given much-reduced activity in response to the market downturn.

Exacerbating the above are losses associated with Chrysler. For FY2008, Chrysler’s negative impact on EBIT totalled EUR 3.2 billion, of which EUR 1.4 billion was attributable to the negative at-equity results of Chrysler, with a further EUR 1.8 billion in impairments taken on Chrysler-related assets. (DBRS notes that Daimler continues to be in negotiations with Cerberus Capital Management regarding its remaining stake in Chrysler.)

DBRS notes that weak market conditions are expected to prevail in 2009 and will continue to pressure earnings over the near term. However, Daimler does remain well positioned to withstand the downturn. The Company’s industrial operations continue to have a significant net cash position as of December 31, 2008. On a consolidated basis (including the financial services segment), the Company continues to enjoy access to well-diversified funding sources, notwithstanding challenging credit market conditions. Daimler maintains a USD 5 billion multi-currency revolver that expires in 2011. Furthermore, in October 2008, the Company also obtained a new EUR 3 billion multi-currency revolver. DBRS also notes that the Company has effectively addressed its 2009 capital market obligations through three recent Eurobond issues totalling EUR 3.6 billion.

Daimler is also undertaking several measures to conserve cash over the near to medium term. In October 2008, the Company’s share repurchase activities (which used a significant amount of cash) were suspended indefinitely. Future capital expenditures and budgets will also be subject to rigid review to help ensure a more disciplined approach to spending cash. As such, DBRS is of the opinion that Daimler’s strong liquidity position should remain sufficient to avoid any negative rating actions in the near term. However, should the protracted market declines continue unabated and result in cash burn that is higher than DBRS’s expectations, then negative rating implications would likely result.

Notes:
All figures are in euros unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our web site under Methodologies.

This is a Corporate (Autos and Auto Parts) rating.