Credit Opinion: Siemens Aktiengesellschaft

Transcription

1 Credit Opinion: Siemens Aktiengesellschaft Global Credit Research - 03 Jul 2015 Munich, Germany Ratings Category Moody's Rating Issuer Rating Senior Unsecured MTN (P) Commercial Paper P-1 Other Short Term (P)P-1 Siemens Bank GmbH Issuer Rating ST Issuer Rating P-1 Siemens Financieringsmaatschappij N.V. Bkd Senior Unsecured Bkd Jr Subordinate A3 Bkd Commercial Paper P-1 Bkd Other Short Term Siemens Capital Company, LLC (P)P-1 Bkd Senior Unsecured Bkd Commercial Paper P-1 Bkd Other Short Term (P)P-1 Contacts Analyst Phone Roberto Pozzi/London Anke Rindermann/Frankfurt am Main Matthias Hellstern/Frankfurt am Main Key Indicators [1]Siemens Aktiengesellschaft 3/31/2015(L) 9/30/2014 9/30/2013 9/30/2012 9/30/2011 Revenue (USD Billion) $94.0 $97.6 $96.3 $100.5 $102.2 EBITA Margin 9.6% 10.5% 8.8% 10.5% 12.7% EBITA / Interest Expense 14.3x 18.4x 12.8x 12.6x 12.6x Debt / EBITDA 1.5x 1.3x 1.6x 1.5x 1.2x Retained Cash Flow / Net Debt 96.4% 122.5% 102.8% 122.2% 671.3% Free Cash Flow / Debt 5.5% 15.4% 15.8% 10.5% 23.3% [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics

2 Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers Global scale, multiple market leadership positions, broad customer and geographic diversification Strong R&D capabilities, complemented by acquisitions funded through asset disposals Underperforming businesses, frequent project charges remain a constraint for group performance Gross leverage stable but lower free cash flow Captive finance operations remain strong Company Profile Siemens Aktiengesellschaft (Siemens) is one of the world's leading manufacturers of power generation equipment and energy management systems, industrial automation products and services, building technologies, transportation equipment, as well as healthcare equipment and diagnostics. We expect the group will generate approximately EUR74 billion of revenue in fiscal Rating Rationale Siemens' senior unsecured and P-1 short-term debt ratings reflect (1) its broadly diversified revenue base, both, by product and geography; (2) leading and defensible market positions in a range of key industrial technologies and services with high barriers to entry and with (3) solid and consistent earnings and operating cash flow, all of which contribute to the company's strong debt protection measures. The company's entrenched market positions in key industrial markets lead to margin and cash flow stability, and Moody's expects that the company's industrial business operating margin will approximate around 10-11% in the current financial year, with free cash flow generation of approximately EUR2.5 billion after dividends and before planned share buy backs (expected to be in excess of EUR2 billion). The rating also considers Siemens' conservative capital structure and financial policy, as well as its sound liquidity position. Including the issuance of $7.75 billion of notes in May 2015, Siemens' debt/ebitda ratio (Moody's adjusted) will increase to above 2.0x, which will initially position Siemens relatively weakly in the rating category. Moody's also factors in the possibility that Siemens' debt metrics could be weaker than expected for the rating over the next months given the current weakness in the energy end markets, some of its key end markets. However, the current rating factors in expectations that the company's leverage will gradually improve, driven by recently initiated cost cutting programs which, in turn, are expected to improve Siemens' profitability. These strengths are partly offset by an increasing level of competition throughout most of Siemens' business segments and the company's still modest level of profitability in parts of its business portfolio. The Energy Management, Wind Power and Renewables and Mobility divisions combined will generate a third of group revenues in fiscal 2015 (ending September), but only 18% of its industrial profits, based on our estimates. Whilst Siemens has made clear progress in fixing underperforming businesses and streamlining its business portfolio, Moody's expects that Siemens' industrial business operating margin will only improve gradually over the next two years. Additionally, with its exposure to currently weak European markets and headwinds in its Power and Gas division, Moody's expects that Siemens will remain challenged to grow revenue on an organic basis, though Moody's does not expect this to lead to a more aggressive acquisition posture. DETAILED RATING CONSIDERATIONS GLOBAL SCALE, MULTIPLE MARKET LEADERSHIP POSITIONS, BROAD CUSTOMER AND GEOGRAPHIC DIVERSIFICATION Siemens' very large and diversified portfolio of industrial businesses spans over a broad range of customers, geographies and end markets, with a majority of businesses having leading market positions on a global scale, with high barriers to entry. The main drivers of the group's operating profits are the Power and Gas, Digital Factory

3 and Healthcare divisions, together representing around three quarters of the profits from its industrial operations. Siemens' historic presence, reputation and consistent investments, in particular in R&D, continue to translate in multiple market leading positions, despite a few recent setbacks. In the energy industry, Siemens is the second largest global supplier of gas turbines and generally holds number 1 or 2 positions in power transmission and distribution equipment and solutions. Its Digital Factory division holds global market leading positions in programmable logic controllers (PLCs), industrial switching and industrial software. Siemens' Process Industries and Drives division is global leader in inverters and controls, motors, generators and gear-boxes. The Healthcare division is one of the global market leaders in imaging equipment and in-vitro diagnostics. Each of these divisions has multiple business units that compete against a range of strong companies worldwide. As of September 2014, 48% of Siemens' orders backlog of EUR100 billion comes from project business, 35% from services and 17% from products. Project business has historically been lower margin than services and products. In fiscal 2014, Siemens generated approximately 54% of its revenues in Europe, C.I.S., Africa and Middle East, 26% in the Americas and 20% in Asia and Australia. The company serves a broad range of customers including large power utilities, industrial companies, hospital groups, the construction and real estate industry, as well as public transportation and government entities. STRONG R&D CAPABILITIES, COMPLEMENTED BY ACQUISITIONS FUNDED THROUGH ASSET DISPOSALS Siemens' breadth and depth of technology and research capability, as evidenced by its ranking #2 in Europe and #13 in the US in terms of patents applications and grants, respectively, establishes the company as a leading innovator that has continued to invest through cycles. We expect Siemens' R&D spend to further increase next year from already sizeable EUR4.1 billion (5.7% of revenue) in fiscal 2014, driven by investments in large gas turbine technology, plant data services and next generation integrated healthcare platforms. After peaking at 10% in 2007, organic growth has declined to an average 1% p.a. over the past six years, with Siemens expecting revenues to remain flat in fiscal 2015 on a like for like basis. Amongst the medium term growth initiatives under way, Siemens is accelerating the digitization of its product and service offering across all main business segments. The company believes that the increasing digitalisation of capital goods will provide additional growth opportunities and intends to leverage on its leading market positions and large installed bases in factories, power plants and grids, buildings and rail networks. To supplement its internal research/product development, Siemens strategically fills out its products and service portfolio with acquisitions. For instance, Siemens has invested approximately EUR10 billion in both R&D and acquisitions over the past eight years to boost its product offering in automation and industrial software, including the $3.5 billion acquisition of US software producer UGS Corp in 2007 to expand its product spectrum in automation technology to include industrial software for planning, design and simulation in Product Lifecycle Management (PLM). Across all business segments, the largest transactions were the $7.0 billion spent on USbased Dade Behring, Inc., a leading clinical laboratory diagnostics company, also in 2007, and the $7.8 billion acquisition of US-based Dresser-Rand Company (Ba2 under review for upgrade) in June 2015, a leading supplier of compressors, engines, turbines and other highly engineered rotating equipment, and after-market parts and services mainly to the oil & gas and petrochemical industries. UNDERPERFORMING BUSINESSES, FREQUENT PROJECT CHARGES REMAIN A CONSTRAINT FOR GROUP PERFORMANCE Despite Siemens' strengths, around a fifth of its business portfolio have generated low or no margins over the past years. Whilst Siemens has made clear progress in fixing underperforming businesses and streamlining its business portfolio - e.g. Power and Gas was strengthened through the acquisition of Dresser-Rand and Rolls- Royce's aero-derivative business, Metals Technologies was contributed to a joint venture with Mitsubishi Heavy Industries, Healthcare IT and Water Technologies were sold - businesses with revenues of approximately EUR15 billion (compressors, transmission, mechanical drives) remain to be "fixed." Siemens has a long track record in terms of "execution" challenges, particularly in the activities recently combined in the Energy Management and Mobility divisions. Between 2003 and 2013, Siemens has taken approximately EUR19 billion write offs of projects and restructuring charges (net of one-off gains), equivalent to 25% of its pre-tax income on average. The vast majority of these charges in recent years have been related to the group's "project" business, currently representing around half of its EUR100 billion orders backlog. The company currently has three legacy projects in Transmission (2 in Canada and one in the UK) with zero margins until completion in 2016/2017. Additionally, Siemens is a member of a supplier consortium that has been contracted to construct the

4 nuclear power plant Olkiluoto 3 in Finland on a turnkey basis (Siemens' share of the contract value is approximately 27%), the completion of which has been delayed for reasons which are in dispute. The customer rejected the monetary claims made by the supplier consortium and made counterclaims currently estimated at EUR2.3 billion. Although improved margins in low voltage (part of Energy Management), and promising trends in Building Technologies and Mobility, we expect Siemens will continue to find it challenging to "fix" its remaining underperforming businesses and achieve its own medium term margin targets of 8-11% and 6-9%, respectively, given its track record and unfavourable structural economics of some of its businesses. While the benefits from ongoing portfolio changes and efficiency measures will not become fully visible before 2016/17, we see downside risks in terms of additional project charges, intensifying competition and pricing pressure in traditionally high margin businesses (gas turbines but also imaging, which is part of healthcare) and deteriorating market conditions (oil & gas). GROSS LEVERAGE STABLE BUT LOWER FREE CASH FLOW Moody's anticipates that Siemens' gross leverage will increase to above 2.0times over the next year, compared with 1.5times as of LTM March 2015 (including Moody's adjustments), driven by the recent $7.75 billion bond issuance. These proceeds will be mainly used to finance the Dresser-Rand acquisition. However, higher gross leverage is, to some extent, balanced by a rather high cash balance which was supported by proceeds from recent asset disposals, such as the sale of Siemens' stake in BoschSiemens Hausgeräte to Bosch in January However, going forward, Moody's expects that lower customer advances will drive cash on balance sheet lower, thus affecting net but not gross leverage measures. Debt maturities over the next 2 years are USD500 million due March 2016, USD1.75 billion due October 2016 and two (non-mandatory) hybrid bonds callable in 2016 for an equivalent amount of EUR2.0 billion due September 2066, to which Moody's assigns a 50% equity credit. Moody's projects free cash flow will approximate EUR2.5 billion after dividends over the next year, with the company allocating the bulk of funds generated to share buybacks. Moody's expects that Siemens' M&A activity will be modest over the next year as management focuses more on consolidation of recently acquired assets, such as Dresser-Rand, or the gas turbines business from Rolls-Royce, as well as internal operational consolidation rather than portfolio measures. Management intends to achieve a ratio of industrial net debt to adjusted EBITDA of up to 1.0x, excluding the company's finance operations (and also excluding Moody's standard adjustments related to pension plans, credit guarantees, hybrid bonds and hedge accounting). The ratio was 0.4x as of March We expect this ratio to increase toward 1.0x over the next year due to lower cash balances driven by cash outflows related to recent portfolio, such as the Dresser-Rand acquisition and restructuring measures, adverse currency movements and other factors. CAPTIVE FINANCE OPERATIONS REMAIN STRONG On the finance side of its business, Siemens manages its EUR22 billion global finance assets (as of September 2014) with financial leverage Moody's measures by debt to equity at about 7 times. We consider this level of leverage appropriate for the type of assets financed, the diversity of its customer base, and management's solid track record. The growth of the finance assets was predominantly financed with increasing debt, which has reached a level of EUR19 billion by September Siemens' finance operations are largely captive, with a small minority of its finance assets being non-siemens related. Finance assets include customer finance as well as project, structured and leverage finance assets. Since 2007, SFS' asset portfolio has increased 2.5x (total assets from EUR8.9 billion in FY07 to EUR22 billion in FY14 despite Siemens' revenues having been flat over the same period. In Moody's view, SFS' portfolio remains well managed, although it is somewhat less strongly positioned today as compared to 2007, reflecting somewhat lower capitalisation and margin pressure. SFS has been able to grow its business while maintaining its profit margins at or above its target range of 15-20% which we consider strong. We expect profit margins weaken going forward given the low growth low interest environment and revived competition in project finance as banks continue to recover from the financial crisis. Rating The stable rating reflects our expectation that Siemens will remain one of the leading players in the global power generation, industrial automation and healthcare equipment sectors, and that even with cyclical pressures and periodic shareholder return initiatives, the company's operating performance and financial policies will remain solidly supportive of an rating over the long-term, as evidenced by EBITA margins of around 10% and debt to

5 EBITDA below 2x (Moody's adjusted). With an estimated gross leverage above 2.0x (Moody's adjusted) for the end of September 15, Siemens will initially be weakly positioned in the rating category as there remain weaknesses in some of its key end markets. However, Siemens' rating factors in our expectation that the company's leverage will improve over time. What Could Change the Rating - Up The rating could be raised if there were reduced competitive pressures throughout Siemens' broad operations. Additionally, revenue growth combined with EBITA margins sustained above 13% whilst maintaining a solid financial profile, as evidenced by adjusted debt to EBITDA sustained below 1.5x, and strong liquidity could also contribute to upwards rating pressure. What Could Change the Rating - Down Conversely, downward rating pressure could develop if there was evidence of a sustained erosion in Siemens' competitive strength, profitability and cash flow generation, particularly with respect to the group's core businesses. In the case of a more aggressive financial policy, this would be either through additional debt-funded acquisitions or share buybacks exceeding free cash flow generation. This erosion would lead to debt metrics below expectations for the current rating on a sustained basis, as evidenced by a debt to EBITDA ratio sustained above 2.5x (Moody's adjusted). Negative rating pressure could also result from a weakening of profitability, as evidenced by EBITA margin meaningfully below 10% on a sustained basis, or weak asset quality in Siemens' captive finance operations. Other Considerations MAPPING TO MOODY'S GLOBAL MANUFACTURING METHODOLOGY Utilizing the rating factors identified in our Global Manufacturing rating methodology, Siemens' rating factors suggest an grid score outcome, in line with the actual rating assigned. While Siemens' scale and financial policy point to Aaa/Aa outcomes, the company scores weaker on margins, leverage, and free cash flow-based metrics. Moody's 12- to 18-month forward view of Siemens' financial profile also suggests a grid indicated outcome of, reflecting our expectation of modest improvement over the rating horizon but continued weakness in leverage, coverage and cash flow-based metrics that will remain in line with assigned rating level. Rating Factors Siemens Aktiengesellschaft Manufacturing Industry Grid Current LTM [3]Moody's Month Forward ViewAs [1][2] 3/31/2015 of 7/3/2015 Factor 1 : Business Profile (20%) Measure Score Measure Score a) Business Profile A A A A Factor 2 : Scale (20%) a) Revenue (USD Billion) $94.0 Aaa $90 - $95 Aaa Factor 3 : Profitability (10%) a) EBITA Margin 9.6% Ba 9% - 11% Baa Factor 4 : Coverage and Leverage (40%) a) EBITA / Interest Expense 14.3x Aa 10x - 15x Aa b) Debt / EBITDA 1.5x A 1.8x - 2.3x Baa c) Retained Cash Flow / Net Debt 96.4% Aaa 40% - 60% Aa d) Free Cash Flow / Debt 5.5% Ba 7.5% % Baa Factor 5 : Financial Policy (10%) a) Financial Policy Aa Aa Aa Aa Rating: a) Indicated Rating from Grid b) Actual Rating Assigned

6 [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. [2] As of 3/31/2015(L); Source: Moody's Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures 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 for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY S CREDIT RATINGS OR MOODY S PUBLICATIONS IN MAKING ANY INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing

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