TRATON SE 16 March 2021 Update Following Rating Affirmation
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CORPORATES CREDIT OPINION TRATON SE 16 March 2021 Update following Rating Affirmation Update Summary TRATON SE’s (TRATON) Baa1 rating reflects (i) the group's strong market positions in Europe and South America in the heavy-duty truck segment, (ii) the expectation of profitability improvements driven by a sizable synergy potential between the group brands and restructuring measures at its MAN subsidiary, (iii) a solid liquidity profile, (iv) the RATINGS company's commitment to preserve a capital structure in line with the requirements for a TRATON SE solid investment grade rating, as well as (v) the ownership and assumed support from its Domicile Germany main shareholder Volkswagen Aktiengesellschaft (VW, A3 negative), which is committed to Long Term Rating Baa1 remain a major shareholder going forward. Type LT Issuer Rating - Fgn Curr We expect the group's debt to EBITDA to be at around 2.0x on a stand-alone basis in 2021 Outlook Negative (i.e. excluding any impact from the pending acquisition of Navistar International Corp. Please see the ratings section at the end of this report (Navistar, B2 negative)) even in a scenario of continued weakness in truck markets because for more information. The ratings and outlook shown of a continued focus on debt repayment and supported by stringent financial policies. If fully reflect information as of the publication date. debt funded, we expect the acquisition of Navistar to increase TRATON's leverage to slightly above 3x in 2021, before declining towards 2x in 2022. Contacts Exhibit 1 Matthias Heck, CFA +49.69.70730.720 TRATON's leverage will be high for a Baa1 through 2022, at least, if Navistar was fully debt- VP-Sr Credit Officer financed [email protected] Debt/EBITDA (Moody's adjusted) Anke Rindermann +49.69.70730.788 TRATON (stand alone) TRATON + Navistar 3.5x Associate Managing Director [email protected] 3.0x Lukas Brockmann +49.69.70730.724 2.5x Associate Analyst [email protected] 2.0x Moody's expectation for the Baa1: 1.5x - 2.0x » Contacts continued on last page 1.5x 1.0x CLIENT SERVICES Americas 1-212-553-1653 0.5x Asia Pacific 852-3551-3077 0.0x 2018 2019 2020 2021 2022 Japan 81-3-5408-4100 Estimates based on Moody's recovery assumption for the global truck market and assuming the acquisition of Navistar to be fully debt-financed EMEA 44-20-7772-5454 Source: Moody's Financial Metrics (MFM), Moody's Investors Service The rating negatively incorporates the cyclical nature of truck market demand, which has weighed on operating performance in 2020 as indicated by weak order intake in Europe over the last few quarters and the group's focus on medium- and heavy-duty trucks and MOODY'S INVESTORS SERVICE CORPORATES buses with no other diversifying business operations. We also note that the group's operating profitability is weaker than that of some key peers. However, we consider the group's clear objective of better integrating its MAN and Scania activities, which should help to gradually strengthen its operating margins towards the high single digits in percentage terms (i.e. EBITA margin as defined by Moody's). The truck market downturn brought on by the coronavirus will cause a pronounced weakening in TRATON's credit metrics. In 2020, TRATON’s revenues declined 16% to €22.6 billion, and its operating profit margin dropped to only around 1%, compared with 7.4% in 2019 (both Moody’s adjusted EBITA). However, the company should be able to restore its metrics to appropriate levels by 2022 because the restructuring of MAN Truck & Bus has been agreed with workers unions recently, the industry is showing signs of recovery and TRATON has ample liquidity to bridge a prolonged downturn. Moody’s expectation is also supported by TRATON’s guidance of a sharp increase in unit sales, substantial increase in revenues and its forecast of 5.0% to 6.0% operating return on sales in 2021 (before restructuring and effects of the Navistar takeover). Credit strengths » Heavy- and Medium-Duty Truck brands with leading market positions in Europe and South America » Sizeable synergy potential between the group brands and restructuring potential at MAN » Conservative financial policy » Long-term commitment from and strategic importance to its major shareholder VW Credit challenges » Revenue concentration in the highly cyclical truck market » Some execution risk and long lead times before full potential of identified synergies will materialize » Weakening truck market in Europe » Weakening credit metrics following the proposed acquisition of Navistar Rating outlook The negative outlook reflects the impact that the pandemic and the cyclical downturn in the truck market have on TRATON's operating performance and credit metrics into 2022. After a drop of 21% in TRATON’s unit sales in 2020, we expect for 2021 industry unit sales and TRATON’s volumes to rebound and grow by about 10-15%. The expected acquisition of Navistar will increase TRATON’s debt/ EBITDA, and the negative outlook reflects the risk that TRATON might be unable to de-lever sustainably to below 2x debt/EBITDA (Moody’s adjusted), a level that Moody’s expects for its Baa1 rating. Moreover, future demand for vehicles could be weaker than our current estimates, the already competitive environment in the truck sector could intensify further, and TRATON could encounter greater headwinds than currently anticipated in the recovery of its credit metrics. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 16 March 2021 TRATON SE: Update following Rating Affirmation MOODY'S INVESTORS SERVICE CORPORATES Factors that could lead to an upgrade Although an upgrade within the next 24 months is not likely, Moody’s would consider upgrading TRATON's ratings in case of » Improving the longer-term returns for the MAN and VWCO truck brands; » EBITA margin of around 8% through the cycle; » Positive Free Cash Flow on a sustainable basis; » Debt/EBITDA (Moody's adjusted) consistently below 1.5x; » Building a track record of conservative financial policy and a strong liquidity profile. Factors that could lead to a downgrade TRATON's ratings could be downgraded in case of » Inability to realize identified synergies within the group’s truck brands resulting in profitability below expectations; » EBITA margin sustainably below 6%; » Debt/EBITDA (Moody's adjusted) sustainably above 2.0x; » Weakening liquidity profile; » Negative Free Cash Flow generation. Key indicators TRATON Key Indicators TRATON SE EUR Millions Dec-18 Dec-19 Dec-20 PF Dec-20* 12-18 Month Forward View Revenue 24,963 26,444 22,156 28,767 32,500 - 35,000 EBITA Margin % 5.4% 7.4% 1.6% 0.9% 5.5% - 7.5% Debt / EBITDA 2.5x 1.4x 2.4x 5.6x 2.0x - 3.0x RCF / Net Debt 49% 802% 58% 10% 30% - 40% FCF / Debt 1% 9% -1% -2% 2% - 10% EBITA / Interest Expense 7.5x 16.2x 3.4x 1.0x 6.0x - 10.0x Note: All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. *Pro forma for acquisition of Navistar, assuming 100% debt financing of the acquisition price; Financials for Navistar as per October 2020 converted to Euro at 1.13. 12-18 Months forward view includes Navistar (fully debt funded). Source: Moody’s Financial Metrics™ 3 16 March 2021 TRATON SE: Update following Rating Affirmation MOODY'S INVESTORS SERVICE CORPORATES Profile Headquartered in Munich, Germany, TRATON is one of the world’s largest manufacturer of medium- and heavy-duty trucks and buses sold under its strong brands Scania, MAN and VWCO. Moreover, TRATON offers customer financing solutions through its Scania financial services business. During the year 2020, TRATON's Industrial business (excl. financial services) generated revenues of €22.2 billion and a company- adjusted operating profit of €135 million. TRATON is listed on the Frankfurt and Stockholm stock exchange since its IPO in June 2019, with Volkswagen AG remaining its major shareholder with around 89.7% of TRATON's shares. Exhibit 3 Exhibit 4 Unit Sales by Geography Revenues by Brand Based on FY2020 unit sales Based on FY2020 revenue Rest of VWCO World Germany 6% 19% 17% South America (ex Brazil) 4% Scania MAN 51% 43% Brazil 21% EU27+3 (ex Germany) 39% Source: Company information Source: Company information Exhibit 5 Exhibit 6 Pro Forma Unit Sales by Geography (including Navistar) Pro Forma Revenues by Brand (including Navistar) Based on FY2020 unit sales Based on FY2020 industrial revenue North Germany VWCO America 12% 4% 20% Navistar brands 23% Scania 40% EU27+3 (ex Rest of Germany) World 29% 20% South America (ex Brazil) Brazil MAN 3% 16% 33% Navistar based on October 2020 data; Charge outs; other markets are allocated to Rest of Navistar based on October 2020 data converted to Euro at 1.13. Excludes Financial World Services Source: company information Source: Company information Detailed credit considerations Global Champion Strategy to offer growth potential and improve regional diversification As a part of its so-called Global Champion Strategy, TRATON strives to become a global champion by leveraging the scale and global reach of its strong brands and its strategic alliances to enable growth and achieve best-in-class profitability. At the core of its strategy are TRATON’s leading brands Scania, MAN and VWCO and the aim to increase cooperation between those brands in order to generate greater economies of scale and unlock the synergy potential. Furthermore, TRATON has entered into several alliances in the past, partially in the form of at-equity ownership Sinotruk, as well as via strategic partnerships as in the case of the strategic alliance with 4 16 March 2021 TRATON SE: Update following Rating Affirmation MOODY'S INVESTORS SERVICE CORPORATES Hino.