Fitch Ratings has upgraded German manufacturer
The Outlook on the IDR is Stable. A full list of rating actions is provided below.
The upgrade reflects Siemens' improved operational cash generation to structurally higher than historical levels, on the back of a new business mix, which is less capital-intensive. Following the
The rating action also reflects Siemens' strong business profile that stands out among peers as
Key Rating Drivers
Better Operational Cash Generation: Following the carve-out of its project-related businesses that had weighed on profitability, Siemens' EBIT and FFO margins have improved significantly to levels that are more in line with a 'A' rating median in our Navigator. This has been a historical weakness compared with similarly rated peers such as Honeywell and Rockwell. Fitch believes that the change is not cyclical, and expects Siemens to generate FFO margins of around 12% despite its expectation of continued supply-chain disruptions and raw-material price increases. Siemens's portfolio mix is supported by long-term demand trends in automation, digitalisation and decarbonisation.
Strong Capital Structure: Despite its recent sizeable Varian acquisition, Fitch forecasts that Siemens will maintain an FFO net leverage for its industrial division of around 1x through the cycle, which is comfortably within the 'A' rating median. Fitch's forecasts do not incorporate any additional acquisitions of similar size, as Siemens is already close to its publicly guided leverage sensitivities. Although further investments are possible, we believe they will be financed through portfolio realignments and disposals of non-core businesses. Although management have a long record of adhering to this strategy, an aggressive shift in their M&A policy driving higher leverage could put negative pressure on the ratings.
Weak FCF for Ratings: We forecast a free cash flow (FCF) margin of around 3% to 2024, which is lightly weaker than the 'A' median of 4%. This reflects Siemens' generous dividend policy, along with our conservative tax and flat capex assumptions. We view Siemens' current financial policy as shareholder-friendly, but compatible with ratings.
European Innovator: Siemens's current R&D spend of around 8% of revenue and new patent applications stand out in Fitch's rated diversified industrials portfolio, where the 'A' median is around 5%. This also compares well with Siemens' historical average of around 6% pre-carve-out. Fitch believes the new business mix is less capital-intensive and more protected against competitive pressures from two years ago. Siemens' new cost base has proved resilient in the pandemic, underlining the less cyclical and volatile nature of data and automation-driven industries.
Market Leader: Siemens benefits from strong product and geographical diversification as
Adjustment for Financial Services: Fitch rates Siemens on an industrial-only basis and adjusts its consolidated debt to account for its financial services business. In line with Fitch's criteria, the debt-to-equity ratio at the financial services business is 5x, which is equivalent to an equity injection into the financial services business of
Derivation Summary
Siemens is one of the world's largest industrial conglomerates, comparable with
Industrial FFO margins are expected to improve to 12% from 9%, which was weak versus similarly rated peers'. The new business mix of Siemens will help generate FFO and EBIT margins that are commensurate with the 'A' rating median of 10%.
Siemens' business profile stands out among 'A' rated peers' as the leading European diversified manufacturer. Its R&D spending and patent applications are higher than its peers', and protect its market leadership in healthcare and automation. Its diversity of industrial operations is highly supportive of its credit profile, as it helps protect the group from weaknesses and cyclical swings in any one product, sector or geographical region. It has a highly diversified range of products and services and is active in more than 190 countries, although geographically it remains heavily reliant on
Key Assumptions
Low single-digit organic revenue growth to 2024
Industrial FFO and EBIT margins around 12% to 2024
Capex slightly higher than historical averages (3% of revenue) to 2024
Some debt repayment depending on FCF generation
No sizeable M&A to 2024
Financial services ratio to remain broadly stable to 2024
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action is unlikely; as we view the capital goods & diversified industrials sector risk profile to be below the 'AA' rating category
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Industrial FFO net leverage above 1.5x on a sustained basis
Industrial FFO margin below 10% on a sustained basis
FCF margin below 3% on a sustained basis
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Robust Liquidity: Siemens' liquidity comprised
Diversified Debt Structure: Siemens has the funding characteristics of a strong 'A' category rating, similar to its peers such as
Issuer Profile
Siemens is a technology company that is active in nearly all countries of the world, focusing on the areas of automation and digitalisation in the process and manufacturing industries, intelligent infrastructure for buildings and distributed energy systems, smart mobility solutions for rail and road and medical technology and digital healthcare services.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING PRIOR
senior unsecured
LT A+ Upgrade A
Siemens AG LTIDR A + Upgrade A
ST IDR F1+ Affirmed F1+
senior unsecured
ST F1+ Affirmed F1+
VIEW ADDITIONAL RATING DETAILS
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