(The following statement was released by the ratings agency)
LONDON, June 22 - Standard & Poor's Ratings Services said today that it had assigned its 'BB-' corporate credit rating to Germany-based automotive production equipment supplier Duerr AG. The outlook is stable.
At the same time, Standard & Poor's assigned a 'B' debt rating to the group's proposed subordinated EUR200 million bond, two notches below the corporate credit rating, owing to contractual and structural subordination. "The ratings reflect Duerr's currently very weak profitability and challenging position as a supplier to original equipment manufacturers," said Standard & Poor's credit analyst Nicolas Baudouin. "The ratings are nevertheless supported by Duerr's leading global positions, strong customer relationships, and widely recognized know-how in its core markets." Duerr's financial measures were adequate for the current ratings at year-end 2003, with a funds from operations (FFO)-to-net debt (adjusted for leases and pensions) ratio of 25%, but are expected to weaken in 2004 due to anticipated cash outflows for the group's ongoing restructuring program and increasing working capital needs, resulting in higher net debt levels in 2004. From 2005, once one-off costs and working capital effects have been absorbed and cost savings start materializing, financial measures are expected to improve significantly.
With annual sales of about EUR2.3 billion, Duerr is one of the world's leading suppliers of production systems and services for the automotive industry, deriving 57% of its EBITDA from paint shops. Although the group enjoys a leading world position, this does not translate into adequate profitability: Operating margins (based on EBITDA) bottomed out at 3.2% in 2003, and are, in Standard Poor's opinion, not likely to substantially exceed 6% in the future, even after benefits from the restructuring program materialize. Duerr is in the midst of a transitional period, after several years of strong external growth that increased revenues but weakened profitability. Drastic cost savings measures are underway, but the bargaining power of automotive original equipment manufacturers is expected to absorb part of the forecasted productivity gains. The group's earnings enhancement program, "Sprint Squared", should, however, boost financial measures from 2005 forward, and will be key to generating free cash flows since revenues, constrained by pricing pressure, are expected to remain flat. "We expect that Duerr will maintain its leading market shares, significantly enhance profitability, and abstain from making any important acquisitions in the short-to-medium term," added Mr. Baudouin.