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Three Weeks Later

12 July 2019 by jbchevrel

German auto CDS started the session on the back foot today, with Daimler (DAIGR) CDS underperforming in EUR IG space, wider +5 vs Main31’s fair value -0.4, after the German automaker issued the second profit warning in just three weeks... That timeline (on its own) is worrying. And the downgrade sounds significant, DAIGR now guiding for FY-2019 EBIT “significantly lower” than last year. Strong word. The cut will filter through to cash flow as well, DAIGR now guiding FY-2019 industrial FCF no longer “slightly higher than 2018”. For reference, on June 23, DAIGR had moved EBIT guidance to “flat y/y” vs “slightly up y/y” on the back of higher provisions for various ongoing governmental proceedings and measures relating to diesel vehicles in Mercedes Vans. The structural causes for today’s guidance upward revision & provisions upward revion include: 1/ potential “extended recall in Europe and ROW in connection with Takata airbags”, provisions increased by +c€1B 2/ “ongoing governmental and court proceedings and measures relating to Mercedes-Benz Diesel vehicles”, expected expenses +€1.6B 3/ “earnings of Mercedes Vans in Q2-19” c+€0.5B 4/ “slower product ramp ups affecting product availability throughout 2019” esp. GLE model 5/ “lower growth than expected” in auto markets. The widening stopped, especially after the stronger-than-expected industrial production figures at the Eurozone aggregate level for the month of May (+0.9% MoM vs +0.2% MoM BBG consensus). Going forward, life cycle effects and model changes, which had been a headwind in Q1-19, could revert especially in Mercedes brand’s SUV segment, where the number of units sold went from 212k in Q1-18 to 179k in Q1-19. Daimler Trucks had shown solid numbers, but it is notable that the biggest growth region there was NAFTA (48k units sold in Q1-19 vs 41k in Q1-18), while Europe had stagnated, and Asia had declined... Going forward, however, it doesn’t bode well for DAIGR Trucks, as they had ‘just’ 101k incoming orders as of Q1-19 vs 184k as of Q1-18. This was driven mainly by NAFTA region (decline from 89k to 27k!), largely a reflection of the risk of tariffs on EU industrial products in North America. A risk that FOMC member Evans recalled this afternoon. DAIGR is currently As/A2s/A-s but the outlook for future margins might make rating agencies less generous. The 5y CDS remains in the low end of the post-GFC [30,200] range although the stock is near the lowest in 7y.