oGermany-headquartered global car and truck maker Daimler AG has met its EU emission targets for 2020 thanks to increased battery and plug-in hybrid electric vehicle (xEV) sales in second-half 2020, and reported fourth-quarter retail sales for Mercedes-Benz cars at the same levels as last year.
oWe believe Daimler will increasingly benefit from stabilizing demand, cost efficiency measures, and favorable shifts in its product mix, and have thus raised our forecast for Daimler's cumulative adjusted free operating cash flow (FOCF) in 2021-2022 by about EUR3 billion.
oWe are therefore revising our outlook on Daimler to stable from negative and are affirming our 'BBB+/A-2' long- and short-term ratings on the company and its debt.
oThe stable outlook indicates that we expect Daimler will report adjusted EBITDA margins of more than 8% and FOCF to sales of at least 2% during the next two years as car and truck markets recover from the COVID-19 pandemic.
FRANKFURT (S&P Global Ratings)
S&P Global Ratings today took the rating actions listed above.
Daimler's strict focus on costs and its model mix should support healthier margins and FOCF in the next two years.
In our updated base case, we now expect Daimler will generate adjusted FOCF of EUR2.0 billion-EUR3.0 billion in 2021 and EUR3.5 billion-EUR5.0 billion in 2022, exceeding our previous expectation of negative EUR1.0 billion-EUR1.0 billion and EUR1.5 billion-EUR3.0 billion in 2021 and 2022, respectively. We have also raised our forecast for Daimler's adjusted EBITDA margins for the next two years by about 1.5 percentage points, to 9.0%-10.5% in 2021, after about 8.0% in 2020. The forecast revision is linked to our view of gradually improving visibility on the recovery of demand following the COVID-19-related slump, a more favorable shift in Daimler's sales mix, and increasing confidence in cost reduction and cash management measures. In 2020, retail sales for Mercedes-Benz Cars (excluding Smart) declined by 7.5%, compared with a 14%-15% decline for global passenger car markets, demonstrating the premium car segment's greater resilience to the challenging economic conditions. We expect the premium segment will exceed our forecast of light vehicle market growth of 7%-9% in 2021, and we expect a double-digit sales rebound in Daimler's truck segment. For Mercedes-Benz Cars, Daimler aims to reduce its fixed cost base, cash spent on investments in research and development, and capital expenditure (capex) by more than 20%, as well as variable costs by 1% per year on average. These efforts to reduce costs are complemented by similar ongoing measures in Daimler's truck division. Although supported by temporary cost reduction measures such as "Kurzarbeit" (furlough), we believe Daimler's strong operational results during first-nine-months 2020 reflect the company's emphasis on cost and cash preservation, and Daimler has made further progress in the last quarter both with the sale of a manufacturing plant in France and the decision to phase out car production in Brazil. Given the short-term success of Daimler's measures, we continue to forecast FOCF of EUR4.5 billion-EUR5.0 billion for full-year 2020. Furthermore, compared with our previous base case, we now anticipate that Daimler will benefit from a shift in sales mix toward higher-margin models and improved pricing, particularly in 2021. Our assumption is supported by the sales ramp-up of the recently launched S-Class luxury sedan (for which pre-orders exceed the level for its predecessor at the same stage) and continued growth in SUVs in key markets, for which Mercedes recorded 13% growth to 885,000 units even in 2020. We expect these factors will more than offset margin dilution from the increasing share of xEV sales this year. Overall, we think higher profitability and efficient capex allocation will allow Daimler to gradually achieve structurally better cash conversion than before the COVID-19 pandemic (see chart 1). This is despite its still material nonrecurring cash outflows for warranty and legal proceedings of EUR4 billion-EUR6 billion related to previous years, which we consider in our base case for 2021-2022. Furthermore, we think Daimler's conservative financial policy will ensure increases in shareholder returns during market recovery will remain adequately covered by FOCF. This will help keep the company's S&P Global Ratings-adjusted debt to EBITDA at very low levels of well below 0.5x.
Rising xEV sales indicate progress in Daimler's electrification strategy, reducing the risk of regulatory penalties.
Thanks to a surge in deliveries, particularly in the last quarter of the year, the share of xEVs in Daimler's sales jumped to more than 7% in 2020 from just 2% in 2019. As per Daimler's estimates, this increase is enough to ensure compliance with the EU CO2 targets for 2020. We view this increase as positive, especially given Daimler has managed to significantly narrow the gap in terms of xEV share with key competitor BMW, which it lagged by a significant margin in 2019. Furthermore, although entirely driven by its Smart brand and its mid-size Mercedes EQC model, about 29% of all 160,000 xEVs sold in 2020 were battery-electric vehicles (BEVs). In 2021, Daimler's product pipeline includes further EV launches, including the EQA compact class BEV, EQS luxury sedan BEV, and several Plug-In Hybrid Vehicles (PHEVs), overall targeting availability of at least five BEVs and at least 20 PHEVs. Although the calculation basis for the EU CO2 targets will become more demanding in 2021 with the phaseout of the 5% compliance exemption that allows original equipment manufacturers (OEMs) to exclude the worst-performing 5% of cars, and given the company used up its super credits in 2020, we do not expect Daimler will incur material fines for noncompliance in 2021.
We think Daimler needs to further develop its xEV and digital vehicle technology to defend its market position against increasing competition.
In our view, state-of-the-art xEV technology and vehicles' digital features will play a bigger role in defining car OEMs' market positions in the next three-to-five years. We expect an abundance of new xEVs will hit the market in 2021-2023, implying substantially more competition from both traditional OEMs and pure BEV players such as Tesla during the ramp-up phase of Daimler's xEV portfolio, which could make it harder to build and defend xEV market shares. According to market research company LMC, the globally available portfolio of BEVs alone is set to more than quadruple to over 400 models by 2025 (see chart 3). Maintaining sustainable differentiation from other premium players will require Daimler to make difficult choices in terms of capital allocation and technology, and to retain enough flexibility within its cost and cash flow targets for targeted investments. For example, while Daimler's dedicated xEV platform for larger models will go into series production from 2021, its xEV-native compact and mid-size platform will only be available in 2024-2025. We also consider competitive in-car software that supports a wide range of applications such as infotainment, drivetrain, and lower-level assisted driving functionality, for example, and which can be updated remotely, as an important part of the future value proposition and a prerequisite for unlocking new, more recurring revenue streams from digital services. Daimler is developing its own proprietary car operating system MB.OS, but the software will be fully completed only in 2024. Given the rapid evolution of competition on this front, we think there could be a need for Daimler to accelerate progress in order to hedge its longer-term market position. We note, however, that Daimler's market shares in key passenger car markets such as Western Europe (about 6% in 2020) or the U.S. (about 2% in 2020) have steadily increased or remained stable in recent years, and we believe Daimler's strong premium brand and customer loyalty will give the company some time to implement its technology strategy.
As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects.
Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www. spglobal.com/ratings). As the situation evolves, we will update out assumptions and estimates accordingly.
The stable outlook reflects our view that Daimler's vehicle sales will continue to recover from the pandemic-related slump in 2021 and 2022. Combined with the company's efforts to trim its cost base, we think this will enable the company to maintain adjusted leverage well below 0.5x and generate adjusted FOCF to sales of 2%-3% in the next two years.
We could raise the rating if successful execution on Daimler's cost efficiency plans and ongoing success with new vehicle launches supported structurally better profitability and cash generation, with adjusted EBITDA margins above 10% and FOCF to sales approaching 4% on a sustainable basis. In addition, we would require Daimler to solidify its market position in xEVs through upcoming successful launches of BEV and PHEVs, such as the EQS and EQA/B BEVs, and a leading product pipeline tailored to premium customers in its key geographic markets. At the same time, Daimler would need to protect its competitive position through accelerated development of leading vehicle software and autonomous-drive technology.
We could lower the rating if a more protracted recovery in car and truck markets, as well as setbacks with Daimler's initiatives to streamline costs and investments caused adjusted EBITDA margins to remain below 8% and FOCF to sales below 2% for an extended period. We could also lower the rating if more intense competition weakened Daimler's position in the premium car market during the transition toward electric and technology-enabled vehicles.
Related Criteria
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oGeneral Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
oCriteria | Corporates | General: Methodology: The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers, Dec. 14, 2015
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011
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