- Swedish truck and bus maker Scania (publ.) is now fully owned by German auto manufacturer Volkswagen AG.
- We are changing Scania’s group status to “highly strategic” from “strategically important.”
- We are revising the outlook on Scania to stable from positive, and are affirming our ‘A-/A-2’ ratings.
- The stable outlook reflects our view that Scania will continue to be a “highly strategic” entity of Volkswagen.
Standard & Poor’s RatingsServices today revised its outlook to stable from positive on Sweden-basedtruck and bus manufacturer Scania (publ.) AB. At the same time, we affirmedour ‘A-‘ long-term and ‘A-2’ short-term corporate credit ratings.
We also affirmed the ‘zaAA+’ long-term and ‘zaA-1’ short-term South Africanational scale ratings and the ‘K-1’ Nordic regional scale short-term ratingon Scania.
The outlook revision follows our review of Scania’s group status withinVolkswagen AG (VW; A/Stable/A-1). VW acquired the last shares in Scania in thesecond quarter of 2014, so we now assess Scania’s group status in VW as”highly strategic,” versus “strategically important” in our previousassessment. This implies our view that Scania is almost integral to VW’scurrent identity and future strategy. We believe the group would supportScania under almost all foreseeable circumstances. Under our criteria, weassess our long-term credit ratings on “highly strategic” subsidiaries at onenotch below the group credit profile or in line with the company’s stand-alonecredit profile (SACP). As we continue to assess Scania’s SACP at ‘a-‘, wecurrently don’t see the potential for the rating to move in line with VW andare therefore revising our outlook to stable from positive.
In our view, Scania fulfils our criteria to be classified as a “highlystrategic” entity within the VW group. We believe VW is unlikely to sellScania over the long term, and we think that Scania will play an importantrole in VW’s heavy truck operations. We view Scania as very successful in itsline of operation and expect the company’s performance will continue to be inthe upper end of heavy truck makers. Scania’s truck and bus businesses benefitfrom leading market positions, up-to-date product lines, and the highestdegree of component commonality in the global truck industry. Furthermore,even though Scania maintains its own name, we believe the company’s image isclosely linked to the VW brand and reputation. In the larger VW group,however, Scania does not qualify as a material entity of the consolidatedgroup nor is it, for now, fully integrated. As a result, at this stage, Scaniadoes not qualify as a “core” entity under our criteria. A revision of Scania’sgroup status to “core” would at least require the completion of severalintegration steps that the group may now contemplate either in terms ofplatform sharing, common use of modular approach, joint research anddevelopment and procurement, or pension management and intra-group funding.
We continue to assess Scania’s business risk profile as “satisfactory.” Ourview reflects the company’s leading market positions in Europe and LatinAmerica in the manufacturing of heavy trucks and buses. Scania is one of thelargest heavy-truck producers globally, behind Daimler AG and AB Volvo. It hasa top-tier position in South America, notably in Brazil. In our opinion, a keyoperational strength is the company’s advanced modular production system inthe truck industry, meaning that Scania uses the lowest number of individualparts for different vehicle specifications. This allows Scania to tailorvehicles to individual customers’ needs, but still benefit from economies ofscale. Furthermore, Scania has an up-to-date product range and lines andoffers a wide range of bus and coach products from chassis to fully builtbuses. These benefits translate into very high profitability measures comparedwith peers. For full year 2013, operating profit stood at 8.1%, and we don’texpect any major deviation from this ratio in 2014 and 2015. We don’t projectthat the operating margin will fall below 4%-5% at the bottom of the cycle,also reflecting Scania’s focus on the owner-operator market and the efficiencyresulting from the modular concept. We continue to regard Scania’s financial risk profile as “minimal.” Our viewtakes into account the company’s conservative financial policy, robust creditratios, and prudent liquidity goals. We don’t anticipate any changes in thecompany’s financial management now that VW is the full owner. Also, we takecomfort that VW continues to have control via the board of directors. Weexpect Scania’s credit ratios will remain robust in the coming years, but weassume a gradual, yet limited, debt build-up. This follows mainly increasedcapital expenditures for the development of a new cabin. In 2014 and 2015, weexpect capital expenditures of about Swedish krona (SEK)6 billion-SEK7 billion(€650 million-€760 million) in our base case. Nevertheless, we expect thatcredit ratios, such as funds from operations (FFO) to debt and debt to EBITDA,will remain well in line with Scania’s current “minimal” financial riskprofile on a stand-alone basis.
Under our base case, we assume:
- 1.0% GDP growth for the eurozone (European Economic and Monetary Union) in 2014, 2.7% in South America, and 5.4% in Asia-Pacific.
- No growth in revenues in 2014 and only low-single-digit growth in 2015, reflecting increasing declining market situation in South America and price pressure in the market European market, on which we expect reasonable growth, however.
- Capital expenditure of about SEK6 billion-SEK7 billion (excluding customer finance operations) in 2014, reflecting our view that the ongoing investment in a new truck cabin will push spending up, compared with previous periods.
Based on these assumptions, we arrive at the following credit measures:
- Operating margin 7%-8%.
- FFO to debt well above 100%.
- Debt to EBITDA below 0.5x.
The stable outlook reflects our view that Scania will continue to be a “highly strategic” entity within VW group. Therefore, the rating is likely to be one notch lower than VW, or in line with Scania’s SACP, over our rating horizon for 2014-2015. We could raise the rating on Scania if we raised the rating on VW to ‘A+’. Over time, if we have clear evidence Scania is becoming more integrated in the group, we could consider a review of the group status. If we were to view Scania as core in the group, we could consider a positive rating action. Downside rating potential is predominantly tied to the rating on the VW group, and it would likely only occur if the rating on VW were to fall below ‘A-‘, or any negative change in the group status were to occur. We don’t think this is likely.
