(The following statement was released by the ratings agency)
LONDON, Feb 19 - Standard & Poor's Ratings Services said today it revised its outlook on Germany-based carmaker Volkswagen AG (VW) to negative from stable, owing to the group's lower-than-expected 2003 earnings. The outlooks on VW's related entities, including Volkswagen Financial Services AG (VW FS) and Volkswagen Bank GmbH (VW Bank), were also revised to negative from stable.
At the same time, Standard & Poor's affirmed the 'A' long-term and 'A-1' short-term corporate credit ratings on VW and related entities.
"The outlook revision follows the company's announcement of weaker-than-expected earnings in 2003, with operating profits declining by 48% to EUR2.5 billion before onetime items, from EUR4.8 billion in 2002", said Standard & Poor's credit analyst Maria Bissinger.
"Many of the challenges the group had to face in 2003 will continue well into 2004. This suggests that the group's prospects for returning to positive automotive net liquidity--excluding adjustments for the negative net liquidity of the financing and other companies, in particular intra-group factoring activities--and improving profitability might be delayed, particularly in view of the costs related to a high number of new product launches over the next 15 months and the continued weakness of key markets," added Ms. Bissinger.
"The outlook changes on VW FS and VW Bank solely reflect the outlook revision on their 100% owner VW, on which the ratings of both are based owing to their status as core subsidiaries," said Standard & Poor's credit analyst Harm Semder. "Standard & Poor's regards VW FS and VW Bank as captive finance companies, which, together with their operating parent company VW, are seen as a single business enterprise."
Standard & Poor's expectations on its current rating on VW are based on a modest profitability and free cash flow generation in 2003 and beyond, with gradual improvement in the medium term. The ratings could be reassessed if Standard & Poor's believed that VW was not on course to fulfill this expectation. Critical hurdles include:
-- The successful introduction of the new Golf V, which has made a slow start in Germany, although the mix is better than expected;
-- Retaining profitability in Europe, which will be of key importance to the group in view of expected losses in the North and South American markets in 2004 and, although still very profitable, declining operating profits and slower growth rates in China; and
-- Demonstrating that cost-cutting measures yield at least the targeted average improvement of EUR1 billion per year--although these measures in themselves are unlikely to be sufficient to allow VW to return to the profitability levels of the past years.
The ratings on VW reflect the group's position as the leading European mass-market automotive manufacturer, with about five million unit sales per year, coupled with a relatively strong financial profile. The ratings are supported by VW's strong and globally recognized brand name, which enables the group to charge a price premium in most segments, and its comprehensive product mix offered through the group's multibrand passenger car strategy.