DBRS Confirms Daimler AG & Related Entities at A (low), R-1 (low)

DBRS has today confirmed the long- and short-term ratings of Daimler AG (Daimler or the Company) and its related companies at A (low) and R-1 (low), respectively. The confirmations reflect the Company’s strong business profile given its leading positions in premium automotive vehicles and in trucks. The trend on the ratings remains Stable. The Company’s 2009 performance was weak in line with the global economic downturn, resulting in moderate deterioration of Daimler’s financial profile. However, the Company’s profitability through the first three quarters of 2010 has improved sharply year-over-year, with Daimler’s credit metrics as a result being significantly restored to historical levels and commensurate with the assigned ratings.

DBRS had anticipated a rebound in the Company’s earnings, although the rate of the recovery has exceeded expectations, with Daimler benefitting from particularly solid results of its core Mercedes-Benz Cars (MBC) segment given a significant strengthening in demand for premium vehicles in the United States, bolstered by high growth rates in emerging markets, most notably China. Daimler Trucks (DT) results are also significantly improved year-over-year as a result of growth in Asia and Latin America, although industry conditions in the developed markets of Europe and North America remain weak. Furthermore, earnings of the financial services operations have also rebounded as the global financial crisis has subsided; with this segment benefitting from higher interest rate spreads and lower credit loss provisions that combined have more than offset lower contract volumes.

MBC’s operating margin through the first nine months of 2010 was 8.9%, (vis-à-vis losses incurred over the similar prior-year period), which ranks very favourably relative to its peers amid what remains a modest recovery in the global automotive sector. DBRS notes that the segment’s profitability had been trending positively through 2009, (in which performance in the second half was notably stronger than in the first half), with this momentum continuing through 2010. Much of the improvement is attributable to last year’s launches of the new E-Class and revised S-Class MBC models, both of which have generated significantly increased sales resulting in higher global market share in their respective vehicle segments. In addition to higher unit sales, the strong showing of new models have also significantly augmented product mix, thereby bolstering margins. Emerging markets have also played a large role in 2010’s strong results, particularly China, which continues to generate sharp growth rates and now represents the world’s largest automotive market. In addition, DBRS notes that MBC commands very strong pricing in that market, with the Mercedes-Benz brand enjoying a stellar reputation. The Company has also benefitted this year from foreign-exchange tailwinds given the relative depreciation of the euro vis-à-vis many currencies. Further supporting earnings are significant efficiency initiatives implemented through the economic downturn. These include ongoing productivity gains at various automotive plants as well as shifting the Sindelfingen production of the C-Class to other lower-cost regional locations.

In April of this year, the Company also announced a strategic cooperation with Renault S.A. (Renault) and Nissan Motor Co. Ltd. (Nissan) aimed at sharing technology costs and best practices as well as increasing the scale and capacity utilization of the companies. The cooperation entails modest cross-shareholdings among the three companies through equity exchanges, with Daimler obtaining 3.1% of the shares of each of Renault and Nissan, with the latter two in turn obtaining 1.55% of Daimler shares each (for a total of 3.1%).

Going forward, Daimler hopes to further reduce its cost position through the increasing use of modular platforms across its product lines. However, DBRS notes that MBC’s profitability will be challenged in the long-term by ever increasing emissions regulations that are being implemented globally, but particularly in Europe. While such regulations serve to increase product development costs, they would also tend to boost small car sales on a proportionate basis, possibly resulting in significantly negative mix effects for a premium vehicle manufacturer such as MBC.

DT’s results through Q3 2010 are also quite improved vis-à-vis losses incurred in 2009, reflecting sales increases across most markets, particularly Asia and Latin America. As is the case with MBC, DBRS notes that DT’s margins have also been supported by various implemented efficiency initiatives. These include restructuring activities in Asia and in North America, the latter involving the shifting of truck production from the United States to Mexico. Notwithstanding the better results, DBRS notes that global trucking industry conditions remain lacklustre, with industry volumes in Europe and North America remaining well below historical norms. DT is well positioned to benefit from the eventual recovery in the sector, although “normal” conditions on a global basis are not expected to return until 2012.

Regarding the Company’s financial profile, DBRS notes that Daimler’s liquidity position was at an inordinately high level during the global financial crisis. DBRS expects the Company to continue reducing its excess liquidity, which going forward will be applied to debt reduction, with gross industrial debt levels therefore declining as a result.

DBRS expects the ratings to stay constant in the near- to medium-term, with the Company’s upcoming financial results remaining solid and in line with the expected ongoing (albeit protracted) recoveries in the automotive and truck sectors. However, in the event that the Company were to incur renewed losses or resume significant share repurchase activities (frequently implemented prior to the economic downturn) that would materially weaken its financial profile, this could result in negative rating implications.

Notes:
All figures are in euros unless otherwise noted.

The long- and short-term debt issued by Daimler Canada Finance Inc. and Daimler North America Corporation is guaranteed by Daimler AG.

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