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OESA 2011 Outlook Conference, Detroit
The Post-Crisis Auto Industry
John A. CasesaJNovember 7, 2011
Table of Contents
Section
1 A New Investment Thesis
2 Long-Term Themes
A New Investment ThesisA New Investment Thesis11
Summary
The Recapitalization of Detroit, which we feared, expected and wrote about in 2005, is complete
Today, the North American auto industry is healthy and investors should take a positive view of its prospects
Looking ahead, this Post-Crisis Era will be defined by three sweeping themesg , y p g Consolidation: driven by the need to achieve scale, fill product gaps, and maintain returns in
slow growth mature markets
Globalization: driven by the need to penetrate massive growth markets Innovation: required to address the global societal trends redefining the role of the car and of
personal mobilitypersonal mobility
In our view, the Post-Crisis Era is the auto industrys Era of Reinvention
1
The Auto Industry is at an Inflection Point
Returns have rebounded strongly across the industrys value chain
11%
12%
16
17
NA Supplier EBITDA Margin vs. US Auto Demand(1) (in millions)
Detroit Three EBITDA Margin vs. US Auto Demand(2) (in millions)
NA Dealer Pre-Tax ROE vs. US Auto Demand(3) (in millions)
11%
12%
16
17
21.5%
25%
16
17
7.3%
9.1%
7%
8%
9%
10%
13
14
15
16 9.4%
7%
8%
9%
10%
13
14
15
16
14.9% 15.3%
21.5%
15%
20%
13
14
15
16
4.9%
3%
4%
5%
6%
7%
11
12
13
4.7%
3%
4%
5%
6%
7%
11
12
13
10%11
12
13
0%
1%
2%
3%
8
9
10
7 9
E
1.5%
0%
1%
2%
3%
8
9
10
7 9
E
0%
5%
8
9
10
7 9
E
________________________Source: FactSet, JD Power LMC Forecast, Moodys Industrial Reports and ThomsonOne.(1) Includes American Axle, ArvinMeritor, Autoliv, BorgWarner, Dana, Federal-Mogul, Gentex, Harman, Johnson Controls, Lear, Magna, Superior Industries, Martinrea, Tenneco, Tower, TRW and Visteon.
2
0
0
2
0
0
2
0
1
1
E
2
0
0
2
0
0
2
0
1
1
E
2
0
0
2
0
0
2
0
1
1
E
( ) , , , g , , g , , , J , , g , p , , , ,(2) 2011E does not include Chrysler.(3) Includes Americas Car-Mart, Asbury, AutoNation, CarMax, Group 1, Lithia, Penske and Sonic.
2
A New Investment Thesis for the Auto Industry
The industrys growth, risk and return outlook is the best in decades
Cyclical Demand R
Rising vehicle sales in the US are being driven by gradual recovery in: consumer confidence disposable personal incomes
Trend Comments Implication
Recoveryin Mature Markets
disposable personal incomes employment
Rebuilding in Japan should stimulate replacement demand Europes debt crisis depressing vehicle demand
GROWTH
Volumes likely to rise in most global
markets
Demand in the BRICs is growing three times as fast as the rest of theSecular Acceleration in Global Demand
Demand in the BRICs is growing three times as fast as the rest of the world, implying secular global demand CAGR of 5%+, double its historical rate
3
A New Investment Thesis for the Auto Industry
The industrys growth, risk and return outlook is the best in decades
Cyclical Demand R
Rising vehicle sales in the US are being driven by gradual recovery in: consumer confidence disposable personal incomes
Trend Comments Implication
Recoveryin Mature Markets
disposable personal incomes employment
Rebuilding in Japan should stimulate replacement demand Europes debt crisis depressing vehicle demand
GROWTH
Volumes likely to rise in most global
markets
Demand in the BRICs is growing three times as fast as the rest of the
H lthi Ind t
Automakers, suppliers and dealers: have rationalized capacity
RETURNS
Ri i b f
Secular Acceleration in Global Demand
Demand in the BRICs is growing three times as fast as the rest of the world, implying secular global demand CAGR of 5%+, double its historical rate
Healthier Industry Value Chain
have rationalized capacity have de-levered and/or recapitalized are consolidating
Rising because of lower breakeven
points
4
A New Investment Thesis for the Auto Industry
The industrys growth, risk and return outlook is the best in decades
Cyclical Demand R
Rising vehicle sales in the US are being driven by gradual recovery in: consumer confidence disposable personal incomes
Trend Comments Implication
Recoveryin Mature Markets
disposable personal incomes employment
Rebuilding in Japan should stimulate replacement demand Europes debt crisis depressing vehicle demand
GROWTH
Volumes likely to rise in most global
markets
Demand in the BRICs is growing three times as fast as the rest of the
H lthi Ind t
Automakers, suppliers and dealers: have rationalized capacity
RETURNS
Ri i b f
Secular Acceleration in Global Demand
Demand in the BRICs is growing three times as fast as the rest of the world, implying secular global demand CAGR of 5%+, double its historical rate
Healthier Industry Value Chain
have rationalized capacity have de-levered and/or recapitalized are consolidating
Rising because of lower breakeven
points
Climate change and energy security concerns are resulting in increased and tl l ti RISK
Increasingly Complex External
Environment
costly regulation
On the positive side, new opportunities exist for innovation in fuel efficiency, emissions, safety, connectivity, intelligent mobility, etc.
Geopolitical factors, from exchange rates to energy prices to social instability hurt visibility and drive volatility
RISK
Industry remains risky because of
increasing regulation and external factorsy y y external factors
5
A New Investment Thesis for the Auto Industry
The industrys growth, risk and return outlook is the best in decades
Cyclical Demand R
Rising vehicle sales in the US are being driven by gradual recovery in: consumer confidence disposable personal incomes
Trend Comments Implication
Recoveryin Mature Markets
disposable personal incomes employment
Rebuilding in Japan should stimulate replacement demand Europes debt crisis depressing vehicle demand
GROWTH
Volumes likely to rise in most global
markets
Demand in the BRICs is growing three times as fast as the rest of the
H lthi Ind t
Automakers, suppliers and dealers: have rationalized capacity
RETURNS
Ri i b f
Secular Acceleration in Global Demand
Demand in the BRICs is growing three times as fast as the rest of the world, implying secular global demand CAGR of 5%+, double its historical rate VALUATIONS
Trending higher
Healthier Industry Value Chain
have rationalized capacity have de-levered and/or recapitalized are consolidating
Rising because of lower breakeven
points
Climate change and energy security concerns are resulting in increased and tl l ti RISK
Increasingly Complex External
Environment
costly regulation
On the positive side, new opportunities exist for innovation in fuel efficiency, emissions, safety, connectivity, intelligent mobility, etc.
Geopolitical factors, from exchange rates to energy prices to social instability hurt visibility and drive volatility
RISK
Industry remains risky because of
increasing regulation and external factorsy y y external factors
6
The Long Shadow of History: 10 Year Returns Across the Automotive Value Chain
21.0%
20%
24%Return on Equity, 10 Year Weighted Average
12.2% 12.5%13.9%
15.5%16%
20%
4.7% 4.8%
7.7%8%
12%
0%
4%
Global Tires Global Suppliers Global OEMs US Used Vehicle S&P 500 US New Vehicle Global Truck & NA Auto Parts (1)ppRetailers Retailers Off-Highway Retailers &
Distributors
________________________Source: Factset and NADA.(1) Average dealership ROE from NADA.
7
Stock Performance and Valuation Summary
Manufacturers have significantly under-performed the market reflecting global macroeconomic concerns and are trading a low multiples despite respectable and rising margins; car and parts retailersconcerns, and are trading a low multiples despite respectable and rising margins; car and parts retailers have been far more defensive
YTD Stock 2011E Valuation 2011E Margin
Performance EV/EBITDA P/E EBITDA EBIT
Global OEMs (20.6%) 3.3x 6.0x 9.8% 5.3%
NA Suppliers (23.1%) 5.4x 11.1x 9.6% 5.6%
NA Dealers 4.4% 7.4x 11.8x 3.9% 3.4%
NA Parts Retailers & Distributors 11.7% 9.4x 16.2x 13.2% 10.7%
NA Truck OEMs (20.4%) 7.5x 10.9x 14.6% 10.5%
S&P 500 (2.8%) 13.0x
________________________Source: Company filings and FactSet. Stock performance and valuation data as of October 27, 2011.
8
LongLong--Term ThemesTerm Themes22
Forces Reshaping the Auto Industry
A dynamic new landscape is evolving
The legacy auto industry is adjusting profitably
Consolidation is being driven by the need to achieve scale, fill product gaps, and maintain returns in slow growth mature marketsg
Recent example: Chrysler-Fiat alliance
Globalization is creating new markets and new competitors
Globalization is being driven by the need to penetrate massive growth markets like the BRICs, and is being achieved via greenfield investments, creation of global platforms, JVs and cross-border M&A
A d f fRecent example: Beijing Automotive acquired Dutch sunroof supplier Inalfa
Global societal trends are redefining the role of the car
Innovation is accelerating to address the global societal megatrends redefining personalInnovation is accelerating to address the global societal megatrends redefining personal mobility.
Recent example: MyFord Touch
9
Forces Reshaping the Auto Industry - Responses
A dynamic new landscape is evolving
The legacy auto industry is adjusting profitably
Consolidation is being driven by the need to achieve scale, fill product gaps, and maintain returns in slow growth mature marketsConsolidation gRecent example: Chrysler-Fiat alliance
Globalization is creating new markets and new competitors
Globalization is being driven by the need to penetrate massive growth markets like the BRICs, and is being achieved via greenfield investments, creation of global platforms, JVs and cross-border M&A
A d f f
Globalization
Recent example: Beijing Automotive acquired Dutch sunroof supplier Inalfa
Global societal trends are redefining the role of the car
Innovation is accelerating to address the global societal trends redefining personalI ti Innovation is accelerating to address the global societal trends redefining personal mobility.
Recent example: MyFord Touch
Innovation
10
Consolidation: Profitability of North American Suppliers
Returns vary widely depending on product mix and business model, and correlated to valuations
2011E 2011EROIC Excess Return EV/IC
NA Auto SuppliersGentex 35.0% 23.6% 6.2xA t li 34 1% 22 7% 2 7
3.5x
4.0xNA Supplier Returns and Valuation
R2 = 0.6375
NA Auto Supplies R2 (Excluding Gentex)
(1)
Autoliv 34.1% 22.7% 2.7xTRW 27.2% 15.8% 1.9xLear 25.9% 13.4% 2.4xBorgWarner 21.3% 11.8% 3.4xJohnson Controls 16.1% 7.7% 2.5xHarman 16.6% 5.5% 2.1x 2.5x
3.0x
v
e
s
t
e
d
C
a
p
i
t
a
l
Tenneco 16.3% 5.4% 1.9xMagna 16.7% 5.4% 1.3xMeritor 15.0% 2.7% 2.1xMartinrea 9.6% 0.8% 0.9xLinamar 8.4% 0.4% 1.0xF d l M l 6 3% (2 6%) 1 0
1.5x
2.0x
e
V
a
l
u
e
/
2
0
1
1
E
I
n
v
(2)
Federal-Mogul 6.3% (2.6%) 1.0xTower International 8.8% (2.9%) 1.1xModine 8.9% (3.2%) 1.3xSuperior 8.3% (3.5%) 0.9xVisteon 7.0% (4.1%) 1.3xAmerican Axle 5.8% (4.7%) 0.7x 0 5x
1.0x
E
n
t
e
r
p
r
i
s
e
% ( %)Dana 8.1% (5.2%) 0.8x
Mean 15.5% 4.7% 1.9xMedian 15.0% 2.7% 1.3x
0.0x
0.5x
(6%) (1%) 4% 9% 14% 19% 24%
Excess Return (2011E ROIC-WACC)________________________Source: FactSet and Company filings. Enterprise value as of October 27, 2011. ( )p y g p ,(1) Defined as return on invested capital minus the weighted average cost of capital.(2) Includes invested capital from Honsel acquisition.
11
Consolidation: Auto Supplier Profitability and Capital Intensity
Attractively positioned suppliers generate higher margins with lower capital
NA Auto Suppliers (Excluding Gentex)
9.0% Higher MarginHigher Margin
7.0%
8.0%
M
a
r
g
i
n
)
BWA ALV
AXL
g gLower Capital Intensity
Higher Margin Higher Capital Intensity
4.0%
5.0%
6.0%
2
0
1
1
E
N
O
P
A
T
M
HAR
TRW
LEA MGA
TEN MTOR
JCI FDML SUP
LNR
DAN
1 0%
2.0%
3.0%
P
r
o
f
i
t
a
b
l
i
t
y
(
2 MGAMTOR MRE
VC
MOD TOWR
L r M r in
0.0%
1.0%
0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x
Capital Intensity (2011E Sales/Invested Capital)
Lower MarginLower Capital Intensity
Lower Margin Higher Capital Intensity
12
Globalization: Auto Ownership vs. Income
Despite recent strong growth, the BRIC markets are in the infancy of auto ownership
800
900
1,000
United StatesUnited Kingdom Germany
600
700
800
a
n
d
P
o
p
.
,
2
0
1
0
Italy
Japan
Slovenia
PolandSpain
300
400
500
e
s
p
e
r
T
h
o
u
s
a
KoreaMexicoRussiaBrazil
JapanGreece
0
100
200
V
e
h
i
c
l
e
China
India
$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000
GNI per Capita, 2010($US)
________________________Source: JD Power LMC Forecast, World Bank.
14
Globalization: Vehicle Manufacturer Global Market Share, 2010
The Koreans and Chinese have already carved out pieces of the world pie
Honda
Mazda2%
Mitsubishi1%Nissan
Hyundai/Kia8%
Japanese 27%
Korean 8%
Honda5% 5% Suzuki
3%Other13%
Toyota11%
Chinese9%
GM9%US 18%
9%
BMW2%DaimlerFiat
Porsche-VW9%
PSA 5%Renault
4%
Chrysler2%
Ford7%
Chinese 9%
Daimler2%3%
4%
European 25%
________________________Source: JD Power LMC Forecast.
15
Globalization: Vehicle Manufacturer Market Share by Region, 2010
Despite its global nature, no OEM or national OEM grouping has succeeded in all markets
Hyundai/Kia8%
Other6%
North AmericaJapan
EuropeHyundai/
Kia5%
Honda1%
ToyotaNissan
3%
Honda13%Fuji Heavy
4%
Mazda5%
Mitsubishi4%
Other4%
Honda10%
Nissan8%
Toyota15%
Ford 17%
GM19%
6% y5% Suzuki
1%
BMW4%
Daimler5%
Fiat
Chrysler0%
Ford8%
GM9%
Other7% Nissan
14%
Suzuki12%
Toyota44%15%
BMW 2%Daimler
2%Porsche-
VW4%
Chrysler 9%
17%
Hyundai/Kia6%
Honda3% Toyota
China
8%
Porsche-VW18%
PSA Group
13%
Renault13%
Beiqi Foton4%
Brilliance Jinbei
2%Chang'an
6%
Cherry4% Dongfeng
MotorOther21%
44%
4%Nissan
2%
Suzuki 1%
Fiat 18%
d
GM20%
Other6%South America
Motor3%
FAW Jilin4%
Geely3%SAIC
9%Porsche-VW
11%
PSA Group2%
Ford2%
GM6%
21%
North America
Porsche-VW18%
PSA Group
5%
Renault7%
Ford10%
Hyundai/Kia7%
Honda4%
Nissan4%
Suzuki2%
Toyota5%
JapanChina
Europe
KoreaOther
________________________Source: Casesa & Co., JD Power LMC Forecast.
16
Globalization: Profitability of the Worlds Top Automakers2007 vs. 2011E
Remarkable change in the profitability of OEMs before and after the crisis
OEMs Ranked by ROIC
OEMs 2007 ROIC OEMs 2011 ROIC
Daimler 20.8%Nissan 17.3%Honda 14.5%Volkswagen 13.7%T 13 4%
BMW 19.8%Volkswagen 19.6%Daimler 18.5%Ford 13.8%Nissan 13 0%Toyota 13.4%
Median 11.8%Fiat 11.8%BMW 9.6%PSA 9 5%
Nissan 13.0%Median 10.2%GM 10.2%PSA 9.3%Honda 7.9%PSA 9.5%
Renault 4.7%Ford 4.5%GM (10.4%)
Honda 7.9%Fiat 6.5%Toyota 3.4%Renault 2.9%
________________________Source: FactSet and Company filings.
17
Innovation: Global Societal Trends are Redefining the Role of the Car and of Personal Mobility
Climate change Energy security The connectivity revolution Urbanization Safety and pedestrian protection Safety and pedestrian protection The aging population The content explosion
18
Innovation: Global Societal Trends are Redefining the Role of the Car and of Personal Mobility
Climate changeNew kinds of cars
Energy security The connectivity revolution Urbanization Safety and pedestrian protection Safety and pedestrian protection The aging population The content explosion
19
Innovation: Global Societal Trends are Redefining the Role of the Car and of Personal Mobility
Climate changeNew kinds of cars
Energy security The connectivity revolution Urbanization Safety and pedestrian protection
New ways of living with the car
Safety and pedestrian protection The aging population The content explosion
20
Innovation: Global Societal Trends are Redefining the Role of the Car and of Personal Mobility
Climate changeNew kinds of cars
Energy security The connectivity revolution Urbanization Safety and pedestrian protection
New ways of living with the car
Safety and pedestrian protection The aging population
New ways of living without the car The content explosion
y g
21
Innovation: Global Societal Trends are Redefining the Role of the Car and of Personal Mobility
Climate changeNew kinds of cars
Energy security The connectivity revolution Urbanization Safety and pedestrian protection
New ways of living with the car
Safety and pedestrian protection The aging population
New ways of living without the car The content explosion
y g
22
John A. CasesaSenior Managing Director
212.901.9354 office917.865.1947 cell
john.casesa@guggenheimpartners.com
www.guggenheimpartners.com
23