DBRS Confirms Daimler AG and Related Companies at A (low) and R-1 (low)
Autos & Auto SuppliersDBRS 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 in trucks. DBRS notes that the Company’s financial profile is also well commensurate with the assigned ratings, with Daimler’s two core industrial businesses, Mercedes-Benz Cars (MBC) and Daimler Trucks (DT), generating solid results amid generally improving market conditions for both segments. The trend on the ratings remains Stable. While industry conditions are expected to remain somewhat favourable going forward, headwinds persist in the form of weakening truck sales in the important Brazilian market as well as ongoing economic challenges in Western Europe that are adversely impacting both the car and truck markets. Moreover, Daimler is also faced with substantial investments over the next couple of years attributable to planned product renewals as well as the expansion/migration of the Company’s manufacturing footprint with emerging markets, notably the Brazil, Russia, India and China (BRIC) region, expected to represent the majority of global growth over the medium-to-long term.
The Company’s profitability in 2011 through the first half of 2012 has been strong. Revenues of MBC, Daimler’s largest and most important segment, attained record levels reflecting increased unit sales bolstered by achieved pricing gains. Emerging markets played a large role in the results, particularly China, which, notwithstanding some recent moderation, continues to generate material 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). While MBC’s 2011 earnings were also at record levels, profitability this year has lessened given weaker country and product mix, with the aforementioned increasing investments also adversely impacting results. This notwithstanding, DBRS notes that MBC’s H1 2012 operating margin of 8.0% remained solid.
Results of the Company’s second largest segment, DT, have also progressively improved in 2010 through 2011 amid the protracted recovery of the global trucking industry, with this segment’s earnings effectively reverting to historical norms. While revenues and total unit sales continued to increase this year, earnings growth has slowed primarily due to uncertain conditions in Europe (resulting mostly from the region’s sovereign debt crisis) and significant declines in Brazil (where 2011 volumes were boosted by pre-buying activity in advance of the tighter emissions standards introduced this year). As a function of the above, the relative proportion of North American truck sales (to total segment revenues) has increased, while the relative representation of European and South American sales has in turn moderated. Given that unit margins in Europe and South America are typically higher than in North America, this change in market mix has adversely impacted profitability, although DBRS notes again that the truck segment’s H1 2012 operating margin of 5.8% was well acceptable.
Earnings of the financial services operations also rebounded considerably, in line with higher volumes 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 in the automotive segment through the increasing use of modular platforms across its product lines. Industry prospects remain quite positive, with emerging markets expected to represent the primary source of global growth going forward. However, DBRS notes that MBC’s margins may be subject to some compression over 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. Accordingly, Daimler is planning to launch several new additional models in the smart as well as the A and B-Class model segments, likely resulting in negative mix effects for MBC.
With respect to DT, earnings growth over the near term is also expected to be somewhat muted given significant product investments. However, the progressive convergence of emissions regulations across all markets should favour global truck manufacturers such as DT, which is executing a significant model offensive in addition to targeted geographic expansion, primarily to the BRIC markets, and targets significant cost efficiencies to be derived from the increasing application of global product platforms.
DBRS expects the ratings to stay constant in the near term, in line with generally favourable conditions in the global automotive and truck sectors, notwithstanding some weaknesses in truck demand in the Latin American markets. DBRS acknowledges that persistent economic uncertainties in the United States and particularly Europe could yet derail conditions in these developed markets (and potentially trigger another downturn). Such events could have a potentially adverse impact on the Company’s future earnings performance, although likely not to a degree that would jeopardize the current ratings given Daimler’s very solid financial profile. Going forward, Daimler remains well positioned to benefit from the ongoing growth of the automotive and truck industries, with the possibility that the Company’s current extensive investment program will significantly bolster earnings performance over the long term.
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 Suppliers, which can be found on our website under Methodologies.
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