May 24 (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 rating action reflects the group's robust financial structure including a significant net cash position providing headroom in the current ratings and our expectation that the decline in earnings anticipated for 2013 is only temporary.
KEY RATING DRIVERS
Large, Leading and Diversified
Daimler AG 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 in unit sales. It is the largest. in Europe and North America and the second or third largest in several other countries/regions, including Brazil and Japan. The group also holds leading positions in the global van and bus markets.
Profitability Under Pressure
Daimler's main divisions' earnings declined in 2012 and we expect further erosion in 2013. Group operating margin decreased to 3.5% in Q113 from 7.5% in 2012 and 8.2% in 2011 but we assume a recovery of both MBC's and DT's operating margins to approximately 7.5% in 2014 from 7.1% in 2012 and 3.3% in Q113 (for MBC) and 5.5% in 2012 and 1.7% in Q113 (for DT). However, we believe Daimler's targets of 10% and 8% for MBC and DT, respectively, are too ambitious in the next couple of years.
MBC to Recover in 2014
Sales of premium brands have performed extremely strongly since the 2008-2009 recession and underlying demand for premium vehicles remains robust, in both developed and emerging markets. However, MBC has underperformed its close peers in the recent past, both in unit sales and profitability, especially in the crucial Chinese market. The launch of several key products in 2013-2014 should bolster profitability from 2014.
Weak Truck Division
DT underperformed its expectations in H212 and early 2013, as earnings were hit by a combination of falling volumes and material start-up costs as the group is going through a major product offensive. However, we expect the new products to support a rebound in profitability in 2014 and 2015, although not to the level forecast by the group.
Strong Credit Metrics
In spite of weakening profitability and underlying cash from operations (CFO), Daimler still enjoys adequate headroom in its current ratings. CFO on adjusted debt remained above 100% at end-2012 and should remain so at end-2013 while funds from operations (FFO) adjusted leverage should remain below 1x. Negative operational free cash flow (FCF) will be offset by disposal proceeds in 2013.
Healthy Liquidity
The group has historically reported a strong net cash position. Gross cash from the industrial business was EUR9.9bn at end-2012 and EUR10.3bn at end-Q113 and more than covered total reported financing liabilities of EUR4.9bn at end-2012 and EUR2.9bn at end-Q113, before adjustment for operating leases (EUR4.2bn at end-2012).
RATING SENSITIVITIES:
Positive: Future developments that could lead to positive rating actions 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)
Negative: 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 poor 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'