DBRS Confirms Daimler AG at A (low), Trend Remains Stable

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 reflecting its status as a highly established premium automotive manufacturer, as well as world’s leading truck producer. DBRS also notes that Daimler’s financial profile remains wholly commensurate with the assigned ratings, notwithstanding some deterioration in the Company’s credit metrics as a function of markedly weaker earnings performance in recent periods (most notably in Q1 2013) that were below DBRS’s expectations. The trend on the ratings remains Stable, as DBRS expects the Company’s earnings for 2013 to be roughly flat year-over-year, with financial performance going forward likely subject to considerable improvement in line with a concerted product offensive at each of Daimler’s two core industrial businesses, Mercedes-Benz Cars (MBC) and Daimler Trucks (DT). Moreover, market conditions with respect to both businesses should stabilize and quite likely be subject to modest improvement. DBRS also notes that the Company’s focus on automotive and truck products has effectively been crystallized through Daimler’s recent sale of its remaining stake in European Aeronautic, Defence & Space Co. in Q2 of this year.

The Company’s profitability in 2012 and through the first half of 2013 was materially softer relative to its strong 2011 results (that benefited from record earnings in the MBC segment). While the unit sales of MBC continued to grow last year, profitability was adversely impacted by weaker product mix in addition to higher expenses that were largely attributable to new technology development and capacity expansion. In the first six months of 2013, these headwinds persisted, with the automotive industry in Daimler’s native Germany (which had proven very resilient in 2012) also undergoing a material decline, thereby resulting in negative country mix. In addition to MBC, the recent results of DT (Daimler’s second-largest segment) were also weaker as a function of softer demand in markets such as Western Europe and Latin America. While lower sales in these markets was partly offset by achieved gains in the North American Free Trade Agreement (NAFTA) region, this change in market mix adversely impacted profitability (given that unit margins in Europe and South America are typically higher than in North America). Moreover, as with MBC, ongoing product developments costs represented an additional headwind.

Notwithstanding the Company’s recent weak results, DBRS notes that Daimler’s financial risk profile remains strong, as the industrial operations continued to have a significant net cash position (including intersegment receivables) as of the first half of 2013, with income- and cash flow-based coverage measures persisting at levels commensurate with the current ratings.

Moreover, DBRS expects Daimler’s financial performance to materially improve in the second half of this year and through 2014 in line with projected firmer earnings at each of MBC and DT. With respect to MBC, the automotive segment is in the midst of improving its product cadence through launches that include a significant facelift of the E-Class range, as well as an entirely new S-Class line (the flagship of the Mercedes-Benz brand that typically generates the highest unit margins for MBC). With widespread availability of the facelifted E-Class being very recent and the S-Class still being progressively introduced across major markets, the earnings impact of E-Class and S-Class will be most significant in H2 2013 and in 2014, respectively. In addition to these model revisions, MBC is also actively expanding its product portfolio with new model launches in vehicle segments where MBC previously had little or no representation; the most significant of these being the new CLA-Class that has been subject to favourable reviews by the collective automotive press. In addition to the CLA-Class, the Company plans to launch further new models in the compact car and sport utility vehicle segments.

Regarding geographic markets, Daimler is enhancing its focus on China, with the Company having recently streamlined its wholesale distribution channel (to manage both imported as well as domestically-produced vehicles) while also launching new models and progressively increasing its dealership network within the country. On a global level, Daimler hopes to further reduce its cost position in the automotive segment through the increasing use of modular platforms across its product lines. Amid these initiatives, DBRS notes that automotive conditions are expected to be somewhat more favourable with industry levels in Europe having likely bottomed out, North America remaining subject to an ongoing recovery and emerging markets continuing to represent the majority of global growth going forward. Notwithstanding the above-cited tailwinds, negative mix effects represent a potential challenge going forward with MBC’s margins possibly being subject to some compression over the long term by ever increasing emissions regulations that tend to boost small car sales on a proportionate basis while also effectively increasing product development costs.

Regarding DT, this segment is also undergoing a concerted product offensive, with the European rollout of models (including the new Actros) compliant with the forthcoming Euro VI emissions regulations having already been completed. DT has also introduced new models across other markets, such as the Freightliner Cascadia Evolution and the Fuso Canter Eco Hybrid, with such resulting in share gains across various markets. DT remains the top truck manufacturer globally, maintaining leading position in Europe and the NAFTA region while ranking second and third in Brazil and Japan, respectively. While the segment’s earnings performance this year is expected to be roughly flat vis-à-vis 2012, profitability in 2014 is likely to improve considerably in line with projected revenue growth (reflecting DT’s product momentum across likely improving industry conditions) and substantial targeted costs reductions. Over the long term, DT’s global competitive position should be reinforced through its progressively increasing presence in the Brazil, Russia, India and China markets.

The Stable trend incorporates DBRS’s expectation that the ratings are likely to stay constant in the near term, reflecting Daimler’s solid competitive position amid somewhat favourable conditions in the automotive and truck industries (as in each case, ongoing challenges in certain geographic markets should be more than offset by tailwinds across other regions). This notwithstanding, in the event that Daimler’s forthcoming earnings persist at weak levels (i.e., in line with the poor H1 2013 results), this could result in negative rating implications. Over the long term, the Company remains well positioned to benefit from the ongoing growth of the global automotive and truck industries, with Daimler likely benefiting further as a result of its increasing presence in emerging markets, where the rate of growth is expected to be materially higher on a relative basis (particularly so with respect to the premium automotive vehicle segment).

Notes:
All figures are in euros unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Automotive Manufacturing Industry, which can be found on our website under Methodologies.

Ratings for Daimler Canada Finance Inc. and Daimler North America Corporation are based on the guarantee of Daimler AG.