oTRATON SE is the leading truckmaker in Europe and South America, with market shares of about 30% in both regions. The key brands include Scania, MAN and VWCO.
oThe company has started an extensive program to use similar powertrain components across the brands, where it is targeting long-term synergies of up to EUR700 million and over-the-cycle return on sales of about 9%, up from about 7% in 2019.
oFor 2020, given the COVID-19-related recession, we expect break-even or even slightly negative reported operating profit for the industrial business, down from EUR1.7 billion in 2020 (6.6% margin) and a decline in adjusted funds from operations (FFO) to debt to about 30% from about 200% in 2019.
oWe view the company as a highly strategic subsidiary for its 89.7% owner Volkswagen AG (VW).
oWe are assigning our 'BBB' long-term issuer credit rating to TRATON.
oThe stable outlook reflects our expectation that the company will successfully execute its margin and cash flow preservation measures and pursue a conservative financial policy, ensuring adjusted funds from operations (FFO) to debt of about 30% at year-end 2020 and above 60% at year-end 2021.
MILAN (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
The rating also reflects our view of the company's solid combined market shares of its Scania premium brand, MAN, and VWCO brands. TRATON is leading the heavy duty market with a 33% share in Europe. It is also the leading operator in Brazil with about 38% market share. In addition, it holds the no. 1 position in South America overall with a 30% market share. We believe that the company's strong market position in its core markets is a competitive advantage against peers that are pursuing a follower strategy, once further integration will be accomplished. Moreover, we believe that the recent truck launches in its portfolio should support order intake once COVID-19 has been contained. We expect adjusted EBITDA margin will fall to about 3% from 9% in 2019, causing adjusted FFO to debt to fall to about 30% in 2020 from 200% in 2019, provided that capital expenditure (capex) for 2020 is at about EUR1 billion. We believe that TRATON's operating performance will be particularly affected by lower demand owing to the global recession from the pandemic. In addition, MAN is still in a parallel production phase of deploying new trucks, which is holding back margins, and the company has disbursed EUR1.4 billion of cash to terminate the domination and profit and loss transfer agreement (DPLTA) with its parent Volkswagen. Based on that, in our base-case scenario, we expect only break-even or even slightly negative reported operating profit for the industrial business, down from EUR1.7 billion in 2019. This implies that the loss reported by MAN will be balanced by Scania's operating performance, assuming some recovery in the second half from first-half 2020 lows. For 2021, we expect a marked increase in units sold, supporting a recovery of operating profit margins back to 2019 levels of 6.6% under its industrial business. Under our base-case scenario for the industrial operations, we forecast the company's FFO to debt at about 30% in 2020 from about 200% in 2019. At the same time, we expect that TRATON's industrial FFO to debt ratio will increase above 60% by 2021, sustained by improving profit margins. The company follows a conservative financial policy that aims to run its industrial business in a net cash position under normal circumstances. At the end of first-quarter 2020, TRATON's gross reported industrial debt, including lease liabilities, stood at EUR3.5 billion. Its gross cash stood at EUR3.4 billion. We anticipate intense credit pressure in second-quarter before cash absorption normalizes in the second half of 2020, provided that COVID-19 will be contained. On March 23, the company announced that the executive board had proposed a EUR1 dividend per share for 2019, subject to approval by the annual shareholder meeting, which has been postponed to a later date. Consequently, we included in our base-case EUR500 million cash for dividends in 2020, although shareholders haven't approved this yet. If the dividends were cancelled, we calculate that the company's adjusted FFO to debt would increase to about 40% for 2020 (all else being equal) in our base-case scenario, providing some cushion to our downgrade trigger of 30% in 2020. In 2019, the company's sold 242,219 units, up 4% from 2018, about equally split between Scania and MAN. In first-quarter 2020, orders were down 16% year on year to 54,000 units, and units sold were down 20% to 46,000. Although TRATON's market reach and brand positioning are solid for both its main brands, we understand that about 80% of operating profits came from Scania in 2019. In first-quarter 2020, the company's reported industrial operating profit margin declined to 2.4% from 7.3% in first-quarter 2019. The uneven margin contribution of Scania and MAN will eventually become even more prominent in full-year 2020, since we expect operating losses at MAN and operating margins of about 4% at Scania. To face the unprecedented COVID-pandemic, with most countries in which it operates having been under lockdown and facing supply shortages, TRATON halted its production for about five weeks in March-April 2020. Therefore first-quarter operating profit was partially affected by COVID-19 and partially by MAN's parallel production. We expect units sold to decrease by 65% year on year in second-quarter to about 22,000 and by about 25% in the third quarter to about 40,000. However, in the fourth quarter, we expect units sold to be similar to 2019 at about 60,000. This would imply units sold will decrease by about 30% in 2020, before improving by about 20% in 2021 from 2020 levels. In 2019, the company undertook cost-cutting measures in light of gloomier truck market prospects in 2020 to gain operating flexibility. Apart from curbing costs, we anticipate that capex and some research and development spending will be contained in 2020. In addition, over the past few weeks, TRATON and its subsidiaries have closed multiple bilateral credit lines, which are on top of the permanent EUR3 billion undrawn lines the company has from VW. As a result, TRATON had EUR5.6 billion of undrawn committed lines available at March 31, 2020. TRATON has several strategic projects that could increase leverage in 2020-2021. The group focuses primarily on integrating the Scania, MAN, and VWCO brands for extracting synergies. Although we continue to see the successful integration as pivotal for the rating we have assigned today, it still entails some execution risk that could result in delays to synergies and cash flow generation. Earlier this year, TRATON announced its proposition to squeeze-out MAN's minority shareholders. It holds 94.36% of MAN's share capital, while the remainder is free float. MAN's annual general meeting has been postponed, which creates uncertainty of the decision and timing. In our base-case scenario, the transaction occurs in 2021, resulting in a cash out of about EUR450 million. The company also holds 16.7% of NAVISTAR's share capital and has made a nonbinding tender offer to acquire the shares outstanding for $35 per share, or about $2.9 billion. Although we see the transaction increasing TRATON's market reach in North America, where it is currently not present, we acknowledge NAVISTAR's leverage (about $5 billion of S&P Global Ratings-adjusted industrial debt at Oct. 31, 2019) would put further significant negative pressure on TRATON's credit metrics. Given the offer's nonbinding nature and the uncertainty regarding the timing and price, we excluded it from our base-case scenario, so have not considered the potential transaction in our rating and outlook on the company. We believe that VW regards TRATON as a strategic asset. In 2019, it contributed about 17% of VW's consolidated top line. Moreover, TRATON has access to VW's purchasing platforms and both MAN and VWCO's financial services are offered through VW's captive operations. Furthermore, VW has granted TRATON a permanent EUR3 billion revolving credit facility. As long as we view TRATON as a highly strategic subsidiary for VW, the long-term rating on it will remain one notch below that on VW. This would remain the case even if we revise our SACP on TRATON to 'bbb-' or below, provided VW retains a 'BBB+' long-term issuer credit rating. Our rating on TRATON could equal, but not exceed, the rating on VW if its SACP is at least equal to the rating on VW, although this is currently not the case. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
The stable outlook reflects our expectation that TRATON will successfully execute its margin and cash flow preservation measures and pursue a conservative financial policy, ensuring adjusted FFO to debt of about 30% at year-end 2020 and above 60% at year-end 2021.
We could lower the rating if we were to downgrade VW while revising downward our SACP on TRATON. The latter could follow a drop in adjusted FFO to debt well below 60% with no prospect of near-term recovery.
Ratings upside could arise if the company's operating performance improves. This would be on the back of meaningful progress under its integration plans translating to a strengthening of industrial adjusted EBITDA margin to at least 10% and free operating cash flow to debt of about 25%.
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 | Industrials: Key Credit Factors For The Auto And Commercial Vehicle Manufacturing Industry, Nov. 19, 2013
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
oGeneral Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Related Research
oSwedish Truckmaker Scania Downgraded To 'BBB' On Expected Gradual Integration With TRATON; Outlook Stable, May 14, 2020
oHeavy Truck Manufacturer Volvo Affirmed At 'A-/A-2' In Weaker Operating Environment; Outlook Stable, May 14, 2020
oCOVID-19 Will Further Slow Demand For Heavy Trucks, May 5, 2020
oNavistar International Corp. CreditWatch Implications Revised To Negative Due To Coronavirus Impact, April 15, 2020
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