DBRS Confirms Daimler at A (low)

DBRS has today confirmed the long-term ratings of Daimler AG (Daimler or the Company) and its related companies at A (low), all with a Stable trend. The confirmation reflects the Company’s strong business and financial profiles.

Following its August 2007 divestiture of an 80.1% interest in Chrysler LLC (Chrysler), as of August 4, 2007, Chrysler’s results are accounted for via the equity method, representing Daimler’s remaining 19.9% interest. With the sale of Chrysler, Daimler’s core businesses consist of Mercedes-Benz Cars (MBC) and the Daimler Trucks Division (DT). MBC is among the global automotive leaders in the premium segment, which typically has generated higher margins while also proving more resilient to economic downturns, thereby fostering earnings stability. DT, in turn, is the world’s leading truck manufacturer, with sales and production well diversified geographically.

The Company’s profitability was significantly higher in 2007 through much-improved results at MBC, with DT also moderately increasing earnings despite challenging conditions in some major markets. MBC’s stronger results were a function of the following: the successful launch of the new C-Class; continued progress with smart; and ongoing cost reductions stemming from the CORE efficiency enhancement program launched in 2005. Improving efficiencies also contributed to the slight profit growth at DT during 2007, despite significant downturns in the United States, Canada and Japan. Through the first half of 2008, MBC’s earnings continued to grow while DT remained solidly profitable, although margins decreased nominally given the continued weakness in the United States. Daimler’s financial services businesses also generated lower profit due to narrowing spreads and the costs of establishing independent operations in the United States following the separation with Chrysler.

The Company’s liquidity position markedly improved with the Chrysler divestiture. While Daimler assumed Chrysler’s former debt, it also received proceeds from the settlement of intercompany financing receivables due from Chrysler, resulting in a cash inflow of more than €24 billion. Daimler has since been reducing leverage expeditiously, with close to €25 billion in debt being paid down in 2007.

The strong liquidity and improved profitability levels prompted the Company to implement several shareholder-friendly initiatives in the past twelve months. In August 2007, a share buyback program for the total amount of €7.5 billion was announced (through the first half of 2008, €6.5 billion in shares had been repurchased). Daimler also increased its dividend payout for 2007 by more than 30% and initiated a further share buyback program in the amount of €6 billion in June 2008. DBRS notes that Daimler’s financial profile remains strong in spite of these actions and expects the Company to act judiciously with respect to further shareholder-friendly initiatives, thereby maintaining a conservative financial policy.

While DBRS acknowledges Daimler’s improved results and very significant liquidity position, positive rating implications are undermined by future challenges facing the Company in several of its major markets, particularly the United States and Western Europe. While MBC achieved significant sales increases in the United States through the first half of 2008, DBRS notes that the decline in industry sales in that country has significantly worsened the past few months, with low volumes expected to persist through the end of 2009. This has been exacerbated by increasing oil and fuel prices that have spurred a sharp acceleration in the shift in vehicle segmentation away from larger, high gas-consuming vehicles and toward smaller, more fuel-efficient models. While this segmentation shift has thus far most severely impacted trucks and SUVs, DBRS estimates that the premium segment will also be negatively affected (albeit to a lesser extent). With respect to the commercial vehicle industry in the United States (following low 2007 sales levels attributable to increasing emissions standards), a definitive rebound in demand has yet to be demonstrated and is considerably threatened by the difficult economic climate and reduced construction activity. Daimler’s U.S. earnings are also negatively impacted by the strength of the euro relative to the U.S. dollar. While Western Europe has recently been a positive market for both MBC and DT, this region is also expected to show weakness through the remainder of 2008 and 2009.

Notwithstanding the above, DBRS notes that Daimler remains well positioned to generate strong results going forward, in light of expected further efficiency improvements and its strong geographic diversification, with significant exposure to emerging markets. However, future positive rating actions depend on the Company’s ability to withstand downturns in its major developed markets, with increasing raw materials costs and environmental legislation representing additional headwinds.

Notes:
All figures are in euros unless otherwise noted.
The senior debt of Daimler Canada Finance Inc. and Daimler North America Corporation is guaranteed by Daimler AG. The commercial paper issued by Daimler Canada Finance Inc. and Daimler North America Corporation is guaranteed by Daimler AG.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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