Fitch Ratings has upgraded German manufacturer Siemens AG's Long-Term IDR and senior unsecured ratings to 'A+' from 'A'.
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 Siemens Energy carve-out, Fitch forecasts that Siemens will maintain a funds from operations (FFO) margin of around 12%, which is higher than our 'A' rating median, and is comparable to its US peers'. This compares with a historical average of around 9%.
The rating action also reflects Siemens' strong business profile that stands out among peers as Europe's largest and leading manufacturer. Its R&D spending (8% of revenue) is higher than our 'A' rating median of 5% which, together with its innovation capabilities, is a strong barrier for its market leadership in healthcare, automation and digitalisation.
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 Europe's largest capital goods manufacturer. It holds dominant market positions in many sectors, serves a global customer base and has a significant emerging-market presence, which generates about one-third of total revenue. The diversity of its industrial operations is highly supportive of Siemens' credit profile, as it helps protect the group from weaknesses and cyclical swings in any one product, sector or geographical region.
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 EUR2 billion, with a corresponding debt transfer to the industrial operations of the group.
Siemens is one of the world's largest industrial conglomerates, comparable with General Electric Company (BBB/Stable), Honeywell Inc (A/Stable) and Schneider Electric. Siemens's leverage metrics are in line with those peers' and the 'A' median, despite an increase in leverage due to the Varian acquisition. Fitch forecasts Siemens to maintain an FFO net leverage of around 1x, which is slightly lower than our 'A' median of 1.5x.
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 Europe, which accounts for about half of total revenue.
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
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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Robust Liquidity: Siemens' liquidity comprised EUR12.9billion of cash at end-2020 (EUR10.6 billion at end-3Q21), adjusted for around EUR1.1 billion in non-available cash for intra-year working-capital swings. This compared with approximately EUR6 billion of short-term debt maturing in the 12 months to September 2021. Siemens' liquidity is further supported by FCF generation and from credit facilities of around EUR10 billion (excluding the facility available for Varian acquisition).
Diversified Debt Structure: Siemens has the funding characteristics of a strong 'A' category rating, similar to its peers such as Schneider Electric, ABB and Honeywell, with solid access to financial markets, and diversified and readily available unsecured funding options. It has no sizeable refinancing needs with a well-diversified maturity profile. Long-term maturity details for industrial operations are not provided in its annual report, but its average maturity profile is well above five years.
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.
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
Siemens Financieringsmaatschappij N.V.
LT A+ Upgrade A
Siemens AG LT IDR A+ Upgrade A
ST IDR F1+ Affirmed F1+
ST F1+ Affirmed F1+
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