Morningstar DBRS Confirms Mercedes-Benz Group AG at "A" With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed its long-term credit ratings on Mercedes-Benz Group AG (Mercedes or the Company) and subsidiaries Mercedes-Benz Finance Canada Inc., Mercedes-Benz Finance North America LLC, and Mercedes-Benz International Finance B.V. at "A". Concurrently, Morningstar DBRS confirmed the associated short-term credit ratings at R-1 (low). The trends on all credit ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Mercedes' solid business risk assessment as a leading global original equipment manufacturer (OEM) of premium automotive vehicles. Furthermore, notwithstanding some softening in earnings this year, the Company's financial performance has remained solid, which, amid its conservative financial policy, renders Mercedes' financial risk assessment (FRA) strong in the context of the assigned credit ratings.

CREDIT RATING DRIVERS
Consistent with the Stable trends, Morningstar DBRS expects Mercedes' credit ratings to remain constant over the near term, as the Company is solidly placed within the current credit rating category. Morningstar DBRS could take a negative credit rating action if there were a sustained weakening of share in Mercedes' core markets and/or a significant and sustained deterioration in operating results, resulting in sizable negative free cash flow generation and leading to a material weakening in the Company's FRA. Morningstar DBRS is unlikely to upgrade the credit ratings and does not anticipate doing so in the near term because of the meaningful cost and investments headwinds facing the industry, which likely constrain a further strengthening in Mercedes' FRA to positively affect its credit ratings.

EARNINGS OUTLOOK
The Company's 2024 earnings are estimated to soften year-over-year (YOY; albeit from very solid 2023 levels) amid less favourable industry conditions across some of its key markets. This includes Europe, where demand growth has slowed amid interest rate pressures and high vehicle pricing, with 2024 regional industry volumes now estimated to be essentially flat YOY. Additionally, in China, slowing demand growth, increasing competition from the continued emergence of domestic New Energy Vehicle (NEV) manufacturers, and very thin pricing are pressuring Mercedes' regional performance, with decreasing demand for higher-end models such as the S-Class also adversely affecting earnings. In aggregate, decreasing volumes, as well as a softer product mix and pricing, caused Mercedes to revise its forecast downward, and the Company now expects consolidated revenue to be slightly lower YOY (i.e. ranging from 2% to 7.5%), with consolidated profit now estimated to be significantly lower YOY (i.e. decreasing by more than 15%). Morningstar DBRS notes, however, that despite the downward revised 2024 guidance, Mercedes will nonetheless remain substantially profitable for the year.

Going forward, over the near to medium term, Morningstar DBRS expects the Company's earnings to remain at sound levels, albeit likely moderating compared with recent years given an anticipated slowing of volume growth, moderation in pricing, and ongoing cost/investment headwinds. Morningstar DBRS also notes that Mercedes' earnings will likely be influenced by the sales progression of electric vehicles (EVs), which continue to generate lower margins than legacy internal combustion engine vehicles.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates that Mercedes' cash flow from operations in 2024 will remain solid, albeit decreasing YOY in line with softer earnings. Capital expenditures (capex) are forecast to remain substantial and increase YOY in line with ongoing investments into Mercedes' electrification efforts and renewal of product portfolio. Dividend payments in 2024 are projected to be essentially constant YOY, approaching EUR 6 billion. As a result, Morningstar DBRS expects gross free cash flow (i.e., before working capital items) in 2024 to decrease YOY but remain sizably positive.

Going forward, cash flow from operations is projected to remain solid but could potentially decline somewhat over the medium term amid some anticipated earnings pressure. Capex will likely persist at substantial levels for the foreseeable future, notwithstanding some potential moderation (in both absolute and revenue percentage terms) over the medium term as the Company seeks to attain some efficiency gains in its investments. Dividends are projected to remain sizable. Notwithstanding substantial capex and dividend payments, Morningstar DBRS anticipates Mercedes' free cash flow to persist at positive levels over the medium term, with the Company's strong financial profile estimated to sufficiently absorb ongoing share repurchases and any merger and acquisition activity in connection with its new mobility business initiatives.

CREDIT RATING RATIONALE
Mercedes' favourable market position among the world's leading premium automotive OEMs supports its credit ratings. Morningstar DBRS notes that the premium automotive segment has several advantages over the mass-market segment, including (1) higher profitability; (2) lower cyclicality, as premium customers are less sensitive to economic conditions; and (3) brand loyalty, given that premium customers tend to be more loyal to a particular brand. These aspects provide Mercedes with additional visibility regarding earnings/cash flow generation. With respect to its electrification ambitions, Mercedes appears reasonably well positioned relative to its immediate peers, with EVs and electrified vehicles (including plug-in hybrids) representing 12% and 20%, respectively, of 2023 car sales volumes. Despite this, there are several challenges in the EV space, particularly ongoing high product development costs, slowing recent momentum of EV sales, and increasing competition from Chinese NEV manufacturers. Mercedes' financial services business is a source of significant and stable earnings, providing diversification benefits and playing an important role in supporting vehicle sales. Finally, the Company's liquidity position is substantial and its industrial operations have a sizable net cash position.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Morningstar DBRS considered that the Environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represent a relevant factor, as Mercedes is subject to a wide range of environmental compliance requirements relating to carbon dioxide, fuel efficiency, emissions control, and other factors. In the event that the Company does not comply with applicable regulations, it could receive significant penalties and reputational harm. Correspondingly, the Company announced its Ambition 2039 initiative, which targets carbon neutrality of Mercedes vehicles across their lifecycles. This includes climate neutrality in the Company's supply base, carbon-neutral production across its global production facilities, and the carbon neutrality of Mercedes vehicles during their use phase. The expected costs of compliance with global environmental regulations and in pursuit of Mercedes' Ambition 2039 initiative are sizable.

There were no Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at (August 13, 2024) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of BRA Factors
In the analysis of Mercedes, the relative weighting of the BRA factors was approximately equal.

B) Weighting of FRA Factors
In the analysis of Mercedes, the relative weighting of the FRA factors was approximately equal.

C) Weighting of the BRA and the FRA
In the analysis of Mercedes, the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 10, 2024)
https://dbrs.morningstar.com/research/441029

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The following additional regulatory disclosures apply to Mercedes, Mercedes-Benz Finance Canada Inc., and Mercedes-Benz Finance North America LLC.:

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The following additional regulatory disclosures apply to Mercedes-Benz International Finance B.V.:

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

Regarding Mercedes-Benz International Finance B.V., with respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: YES

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President,
Rating Committee Chair: Anke Rindermann, Managing Director,
Initial Rating Dates: Mercedes - August 29, 2000; Mercedes-Benz Finance Canada Inc. - May 19, 1995; Mercedes-Benz Finance North America LLC - November 14, 2016; Mercedes-Benz International Finance B.V. - November 16, 2023.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577