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May 28 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Daimler AG's Long-term Issuer Default Ratings (IDR) and senior unsecured notes at 'A-' and Short-term IDR at 'F2'. The Outlook on the Long-term IDRs is Stable. A full list of rating actions is at the end of this release.
The affirmation reflects the group's solid business and financial profile, which remains in line with the ratings according to our Sector Criteria Factors. We also believe that 2014 will be a turn-around point for Daimler with operating margins that dipped to a low in 2013 strongly recovering as a result of a fresh product pipeline in most of the group's divisions, and extensive cost savings programmes of about EUR4bn in the coming two years.
KEY RATING DRIVERS
Large, Leading, Diversified Business
Daimler has wide geographical and business diversification. It has leading positions in the premium passenger-car segment with its Mercedes-Benz and Smart brands (MBC division). Daimler Trucks (DT) is the world's largest heavy-truck manufacturer. It is number one in Europe and North America and ranks second or third in several other countries/regions, including Brazil and Japan. The group also holds leading positions in the global van and bus markets.
Product Offensive
Daimler plans to regain the top position in the premium segment, ahead of BMW and Audi, by the end of the decade thanks to a robust product pipeline. The success of recently launched models should bolster earnings in the next two to three years but its competitors will not stand still and gaining market shares will be challenging. In addition, free cash flow (FCF) generation should be constrained by necessary investments to maintain the model flow and comply with increasingly stringent emission legislation.
Profitability to Recover in 2014
Group operating margin before exceptional items decreased to 6.4% in 2013 from 7.5% in 2012 and 8.2% in 2011, but Fitch assumes a recovery to 7.4% in 2014 and more than 8.5% by 2016. We expect MBC's operating margins to increase to 7.5% in 2014 from 7.1% in 2012 and 6.2% in 2013 and DT's margins to 6.1% from 5.5% and 5.2%, thanks to higher sales and further cost savings. However, we believe Daimler's targets of 10% and 8% for MBC and DT, respectively, are too ambitious in the next couple of years.
Disappointing Truck Division
DT underperformed its expectations in 2H12 and 2013, as earnings were hit by a combination of falling volumes and material start-up costs as the group went through a major product offensive. However, we expect the new products and additional cost savings to support a small rebound in profitability in 2014 and 2015, although not to the profitability target forecast by the group.
Strong Credit Metrics
Funds from operations (FFO) and FCF margins are relatively weak for the rating category as cash from operations (CFO) has been absorbed by increasing capex and generous dividends. However, credit metrics are supported by exceptional cash inflows from business divestments in 2012, 2013 and 2014. Daimler has adequate headroom in its ratings with CFO on adjusted debt largely above 100% and FFO adjusted leverage below 1x.
Healthy Liquidity
The group has historically reported a strong net cash position. Gross cash from the industrial business was EUR9.9bn at end-2013 and EUR10.9bn at end-1Q14 and more than covered total reported financing liabilities of EUR1.3bn at end-2013 and EUR1.4bn at end-1Q14, before adjustment for operating leases (EUR4bn at end-2013).
RATING SENSITIVITIES
Future developments that could lead to positive rating action include: Evidence that cyclicality of the truck division has diminished. In particular, this should be evidenced by a more stable and always above 3% EBIT margin through the cycle.
Ability to meet both of the group's main targets for MBC and DT profitability (10% and 8% through the cycle).
FCF margin remaining above 2.5%.
Future developments that could lead to negative rating action include: Operating margins remaining below 2% (industrial)/3% (group). Material negative FCF (actual or expected) for more than three years, coming from weak underlying performance, or shareholder-friendly actions. Gross adjusted leverage above 2x and significantly positive net adjusted leverage.
The rating actions are as follows:
Daimler AG:
Long-term IDR affirmed at 'A-'; Outlook Stable
Senior unsecured debt affirmed at 'A-'
Short-term IDR affirmed at 'F2'
Commercial paper affirmed at 'F2'
Guaranteed notes affirmed at 'A-' and 'F2'
Mercedes-Benz Australia/Pacific Pty. Ltd. :
Guaranteed notes affirmed at 'A-' and 'F2'
Daimler International Finance BV :
Guaranteed notes affirmed at 'A-' and 'F2'
Mercedes-Benz Japan Co. Ltd. :
Guaranteed notes affirmed at 'A-' and 'F2'
Daimler Finance North America LLC :
Guaranteed notes affirmed at at 'A-' and 'F2'
Daimler Canada Finance Inc. :
Guaranteed notes affirmed at 'A-' and 'F2'
Mercedes-Benz South Africa (Pty) Ltd. :
Guaranteed notes affirmed at 'A-' and 'F2'
Daimler Mexico S.A. de C.V. :
Guaranteed notes affirmed at 'A-' and 'F2'