DBRS Confirms Daimler AG and 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 confirmation recognizes the Company’s strong business profile given its leading positions in premium automotive vehicles and trucks. The trend on the ratings remains Stable. DBRS notes that the Company’s financial profile, which deteriorated in 2009 with weak performance in line with the global economic downturn, has effectively reverted to historical levels. Recently improved earnings performance reflects improving conditions in each of Daimler’s core automotive and trucking businesses, although DBRS notes that in both cases the recoveries stem from very weak levels. As such, global industry volumes remain subject to further material growth going forward. This growth, however, could be undermined by ongoing economic headwinds in North America and, in particular, Europe.

The Company’s profitability in 2010 through the first half of 2011 has been very strong. DBRS had anticipated a rebound in the Company’s earnings, although the rate of the recovery has exceeded expectations, with Daimler benefitting from the 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.

MBC’s operating margins in 2010 and through the first six months of 2011 were 8.7% and 10.0%, respectively, which rank very favourably relative to its peers amid what remains a modest recovery in the global automotive sector. 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 these new models has also significantly augmented product mix, thereby bolstering margins. Emerging markets have also played a large role in the 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.

Results of the Company’s second largest segment, Daimler Trucks (DT), improved significantly in 2010 vis-à-vis 2009, primarily due to growth in Asia and Latin America, while industry conditions in the developed markets of Europe and North America continued to be weak. However, through the first half of 2011, segment earnings have been predominantly bolstered by volume increases in developed markets. Nonetheless, DBRS notes industry activity remained below mid-cycle levels.

Earnings of the financial services operations also rebounded considerably in line with higher volumes, wider interest rate spreads and lower credit loss provisions, with this segment once again a material contributor to consolidated earnings.

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 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.

DBRS expects the ratings to stay constant in the near term, in line with the expected ongoing (albeit protracted) recoveries in the automotive and truck sectors. DBRS notes that Daimler’s financial profile effectively exceeds the assigned ratings. However, DBRS also observes that persistent economic uncertainties in the U.S. and particularly Europe could yet derail the recovery in these developed markets (and potentially trigger another downturn). Such events could potentially impact the Company’s future earnings performance adversely (although likely not to a degree that would jeopardize the current ratings given Daimler’s very solid financial profile). In the event that the Company’s earnings momentum persists and the above-cited economic headwinds dissipate, positive rating implications would likely result.

Note:
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.