DBRS Comments on DaimlerChrysler Update on Financial Performance and Outlook for Full-Year 2006
Dominion Bond Rating Service (DBRS) notes that DaimlerChrysler AG (DaimlerChrysler, or the Company) lowered its full-year 2006 operating profit forecast on September 15, 2006. (Details regarding the forecast were presented today.) DBRS deems that rating actions at this time are not warranted, despite a worse-than-expected setback at Chrysler Group (Chrysler), because (1) the Company’s financial profile is still acceptable, albeit aggressive for the current ratings, and (2) DBRS views the reduced profit forecast as partly due to a short-term problem related to inventory adjustment. The Company continues to have a strong balance sheet (virtually debt free in the industrial businesses) and liquidity. However, the sharp downward revision of the Company’s operating profit to well below DBRS’s expectation has placed the ratings at a higher risk. DBRS expects Chrysler to achieve positive results in the fourth quarter of 2006 as forecasted by the Company and to maintain its improvement through 2007. DBRS will take rating action if the turnaround at Chrysler falters. (Note that trend on all long-term ratings remains Negative. (See the DBRS report on the Company issued September 7, 2006, for additional details.)
The Company now expects the Chrysler Group (Chrysler) to report an operating loss of about €1 billion in 2006, a sharp decline from a breakeven position forecasted on July 27, 2006, just seven weeks ago. Concurrently, the Company has also lowered the Company’s operating profit forecast for the full-year 2006 to about €5 billion, similar to the 2005 levels but down from the previous forecast of about €6 billion.
DBRS anticipated that Chrysler would experience difficulties in the second half of 2006. DBRS confirmed the ratings of DaimlerChrysler on September 7, 2006, recognizing the good progress in the turnaround of the Mercedes Car Group and improving profitability at the Truck Group and Financial Services. However, DBRS maintained a Negative trend on the long-term ratings, reflecting concerns about Chrysler’s deteriorating performance and the uncertainty regarding the turnaround of the smart brand. (For details, see the DBRS press release dated September 7, 2006.) DBRS expected Chrysler to have problems staying profitable in 2006 but the magnitude of the forecasted losses at Chrysler is larger than anticipated.
Additionally, the large forecasted operating losses at Chrysler are due to declining market share and costs associated with production cuts and new-models introduction. Contributing factors for the share loss included (1) high gasoline prices turning consumers away from pickups, SUVs and minivans where Chrysler has a strong position; (2) lack of fuel-efficient vehicles to meet rising consumer preference; (3) declining sales in some of its popular models; and (4) a lack of new models. Even the use of high sales incentives has not been effective in halting the sales decline. Nevertheless, DBRS believes that the situation at Chrysler will start to improve in 2007. Costs associated with the production cuts to reduce dealer inventory are one-off and are not expected to influence operating results beyond 2006. Successful launches of the new models (eight new models in the second half of 2006) would help stabilize Chrysler’s market share, and the full benefits of the new models would boost Chrysler’s operating results in 2007.
DBRS notes that business diversity is a key strength supporting the Company’s current ratings. DBRS expects the Company’s other businesses, the Mercedes Car Group (excluding the smart brand), the Truck Group and Financial Services to show continuing improvement. Contributions from the healthy businesses give the Company the resources and the time to take corrective actions. Overall, the Company’s financial profile is still acceptable, albeit aggressive for the current ratings. The Company continues to have a strong balance sheet (virtually debt free in the industrial businesses) and liquidity.
DBRS is headquartered in Toronto, with offices in New York, Chicago, London, Frankfurt and Paris, and covers entities worldwide.
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