Rebound of us_supplier_industry_final[1]

1 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx

Rebound of the US Supplier industry? – Fragile and not appreciated by the Street Supplier Study North America Detroit, MI – October 2012


Contents

© 2012 Roland Berger Strategy Consultants

Rebound of the US supplier industry – Healthy emergence from the crisis with record level profits

No appreciation from the Street – Stock prices keep eroding

Paradox or new reality? – Industry undervaluation resulting from volatile markets, increasing complexity and uncertainty

Unlock value – How stock separation can help return to fair valuations

Supplier CEO agenda – From operations and strategy to decisive financial actions


US light vehicle sales recovered after the crisis – Much faster than expected

2008 2007 2006 2005 2012e 2011 2010 2009

Jan

Jul Apr SAAR

forecast 13.8

14.3 14.1

Source: LMC Automotive Forecasting; Roland Berger

17.0

12.5

US light vehicle sales [m units]

10.4

14.9 Sep


US supplier industry with an impressive rebound vs. peers – Record level profits in 2011 and H1/2012

Source: Roland Berger/Lazard supplier database

Revenue growth EBIT margin [%]

2012 H1

2011 2010 2009 2008 2007 2006 2005 2012 FC

100

2009 2008 2011 2010 2007 2006 2005

6.0

10.5

5.3

5.0

142

362

125

115


Healthy balance sheets – US supplier industry is financially stronger than ever


Net debt/equity ratio [%]1) Current ratio [%]2)

100

2012 H1

2011 2010 2009 2008 2007 2006 2005 2012 H1

2011 2010 2009 2008 2007 2006 2005

88

34 28

21

215 208

168

119

1) Net debt / equity ratio = (Long term debt-cash)/(Book equity) 2) Current ratio = (Inventories+AR+Cash)/(AP+short-term financial debt)


But… no appreciation from the Street – US supplier index back to pre-crisis levels and flat

Source: ThomsonOne; Roland Berger

Jul 12 Jan 12 Jul 11 Jan 11 Jul 10 Jan 10 Jul 09 Jan 09 Jul 08 Jan 08 Jul 07 Jan 07

100

Roland Berger regional supplier stock index development

127

179

112


Only a few suppliers have outperformed the market – Total of USD 23 bn destroyed in the last 20 months

Source: ThomsonOne, Yahoo Finance, Roland Berger

Total USD 23 bn in market capitalization destroyed during the last 20 months

+13%

Oct 12 Jul 12 Apr 12 Jan 12 Oct 11 Jul 11 Apr 11 Jan 11

100 -9%

S&P 500 Roland Berger US Supplier Index

Market cap. development US suppliers


Neither constant EPS outperformance, nor strategic acquisitions seem to move the needle

1) Constantly exceeding: Actual EPS >5% over expectations in at least 2 of last 4 quarters (Q2'10-Q2'11) Constantly meeting: Actual EPS +/-5% of expectations at least 2 of last 4 quarters (Q2'10-Q2'11 Constantly missing: Actual EPS <-5% under expectations in least 2 of last 4 quarters (Q2'10-Q2'11

Source: ThomsonOne; Company reports; Reuters; Roland Berger

… constantly exceeding

… constantly meeting

… constantly missing

Impact on market cap. [%]

+8%

-20%

+6%

S&P: +25%

-4%

+10%

-23%

+8%

-15%

EPS performance1)

Impact on market cap.2) [%]

Strategic acquisitions – selected examples

2) 3 months period after announcement

Acquisition example 1






VOLATILE market outlook – with crisis still in mind A

Fundamental changes in the industry – already underway, increasing COMPLEXITY and UNCERTAINTY B

Ongoing diversification – fueling analyst AMBIGUITY C

Paradox – or new reality?


We believe the automotive market will not collapse – but the coming 12 months will be difficult


36.3

2009

67.3

32.6

34.7

2008

66.0

35.9

30.1

2007

70.3

35.6

34.8

2013

82.1

40.9

41.2

2012

78.4

40.2

38.2

2011

75.4

37.9

37.5

2010

72.4

36.1

Forecast

H1 (Jan-Jun)

H2 (Jul-Dec)

+4.0%

+1.9% +7.7%

+6.0% +1.8%

+4.7%

Global sales of light vehicles [m vehicles]

+x.x% = YoY growth rate


We expect many core markets to further slow down in H2/2012 and H1/2013

= Forecast

3%2%

-1%-2%

9%14%

H2/13 H1/13 H2/12 H1/12 2011 2010

9%7%8%5%4%

17%

H2/13 H1/13 H2/12 H1/12 2011 2010

7%

3%

7%

13%

9%7%

H2/13 H1/13 H2/12 H1/12 2011 2010

12%

-13%-5%

34%

-11%

1%

H2/13 H1/13 H2/12 H1/12 2011 2010

6%

-6%-12%

-8%

0%-6%

H2/13 H1/13 H2/12 H1/12 2011 2010

JAPAN/KOREA

CHINA NAFTA WESTERN EUROPE

WORLD SOUTH AMERICA

Global sales of light vehicles [YoY change in %]


8%

2% 2%

6% 4%

8%

H2/13 H1/13 H2/12 H1/12 2011 2010


-2

0

2

4

6

8

10

12

14

2.5 0 5.0

5.2

~5.5

’11 ’10 ’12 H2

~5.0

’12 H1

’09 ’08 ’07 ’06 ’05 ’04 ’03 ’02 ’01

Difficult market conditions have already shown an impact on OEMs – Even luxury OEMs revising targets

EBIT margin of OEMs1) [%] Development of OEMs in H1/2012 vs. 2011

Source: FactSet; OEM's annual/half-yearly reports; Roland Berger

1) n = 14 (BMW, Daimler, Fiat, Ford, General Motors, Honda, Hyundai, Mazda, Nissan, PSA, Renault, Suzuki, Toyota, Volkswagen) 2) Excl. Chrysler; 2011 margin excl. extraordinary effects of approx. EUR 1.1 bn

Effect of Toyota recovery after Tsunami-related collapse in 2011 approx. 1%-pt.

Operating margin [%]

Sales [m vehicles]

0

2 1


Suppliers feel the heat – OESA Sentiment Index is consistently falling

Source: OESA

4650

Sep 12

May 12

Jan 12

Sep 11

May 11

Jan 11

Sep 10

May 10

Jan 10

Sep 09

May 09

Jan 09

Sep 08

May 08

Jan 08

POSITIVE

NEGATIVE

OESA Supplier Sentiment Index


Profit margins are further deteriorating in 2012 – and will also hit the US supply base

EBIT margin of auto suppliers [%] Key profit drivers


> Sales considerably higher than 2010 > Extra volume at lower margins due to fully

utilized capacity (special shifts, premium freight, etc.)

2011

H1 2012

> Suppliers highly dependent on European volume brands and/or CVs saw sales and profits drop already in H1

> Suppliers focused on US still at record levels

H2 2012

> Almost all suppliers adjusting sales expectations, Premium and luxury OEMs revise targets

> Suppliers focused on US start seeing impact > Counter-effect of falling raw material prices not

sufficient to compensate for market downturn

2012 H2

2012 H1

2011 2010 2009 2008 2007 2006 2005

6.0 ~5.0-5.5

GLOBAL ~4.5-5.0

5.5


Macro-economic outlook: Volatile economic development in all major regions – Will the US be affected next? EUROPE

> Most likely scenario is "no change"

> But: Devastating effects could hit the industry

CHINA

> Politics-fueled investment boom likely to restart after change in leadership…

> …but on a lower level and with different focus and mix

US

> Reduction of public deficit by half, but… – Potential GDP growth down

to 0.5% – Danger of double-dip

COLLAPSE of the Euro zone?

SLOWER GROWTH in China a new reality?

USD 600 bn FISCAL CLIFF in 2013?

Source: Roland Berger







The only thing that's certain is uncertainty – What "visionaries" have said about the future…

Source: Roland Berger; Research

"Nuclear-powered vacuum cleaners will probably be a reality in 10 years." Alex Lewyt, president of vacuum cleaner company Lewyt Corp., 1955

"Who the hell wants to hear actors talk?" H.M. Warner, co-founder of Warner Brothers, 1927

"I think there is a world market for maybe five computers." Chairman of IBM, 1943

"The telephone has too many shortcomings to be seriously considered as a means of communication."

Western Union internl memo, 1876

"If anything remains more or less unchanged, it will be the role of women." David Riesman, conservative American social scientist, 1967

Technology

Media

IT

Communication

Equality


Megatrends are getting real – Evidence of recent development


GEO-POLITICAL CHANGE

China economic slowdown

High volatility/ variability of governments

Euro zone instability

SUSTAIN-ABILITY

Crisis leading to "de-focus"

Kyoto protocol successor

Voluntary CO2 targets become a must

CHANGING TECHN-OLOGY

Ghosn: "Over 5 m EV in China by 2020"

A123 advance in battery technology

Japan university new electrode

patent

Dynamic traffic lights/intersections

EVOLUTION OF MOBILITY

Google self-driving car

Vehicle platooning

Overcapacity for traditional

manufacturing model

Car sharing

CHANGING DEMO-

GRAPHICS Megacities on the rise

Ongoing population aging


This development is happening at an increasingly faster rate than expected

Source: Bio-AgtiveTM; Montana State University; Freie Universität Berlin; Chaotic Moon Labs; Roland Berger

Recent examples of technology innovation

RECYCLING OF EMISSIONS

DRIVING VIA BRAIN WAVES

> Bio-AgtiveTM developed a system that injects cooled exhaust from diesel emissions into the soil during seeding

> Montana State University show plant growth and grain yields when seeded with exhaust are similar to those seeded with recommended fertilizers

> Freie Universität Berlin built a vehicle with embedded brain wave patterns that responds when participants think "brake," "accelerate," "turn left," "turn right"

> Chaotic Moon Labs has a motorized skateboard controlled by an on-board tablet that processes your thoughts to accelerate and stop

http://www.chaoticmoon.com/labs/board-of-awesomeness/

http://www.co2x.com/userfile/media/285medlarge.png


> Change in OEM powerhouses – Traditional OEMs are losing importance

> China on the rise – Chinese and other foreign competitors are already on our home turf

> Changes in personal mobility – The love affair with the automobile is ending

> Overcapacity – Excess overcapacity and legacy will further harm the industry

We are right in the middle of an ongoing fundamental change of the industry



Change in OEM powerhouse – Traditional OEMs are already losing importance

Top 10 CV manufacturers (GVW > 6t)


THE NEW OEM POWERHOUSE > Industry landscape has been

turned upside down in only 5 years

> 6 of the top 10 OEMs are now coming from emerging markets

> Similar developments expected in LV space – since many CV players are also active in LV

2005 2011

1 Daimler Dongfeng

4 Dongfeng Tata

5 Paccar CNHTC2)

6 International Volvo

7 FAW1) Paccar

8 Ford MAN

9 VW/Scania BAIC3)

10 IVECO Ashok Leyland

2 Volvo Daimler

3 Tata FAW1)

1) FAW: First Automotive Works; 2) CNMTC: China National Heavy Duty Truck Corp.; 3) BAIC: Beijing Automotive Industry Corp.


China on the rise – Chinese and other emerging market competitors are already on our home turf

Supplier market shares [% of top-150] Acquisition volume of emerging market suppliers [USD m]

Source: ThomsonOne; Roland Berger

EMERGING MARKET SUPPLIERS

US SUPPLIERS

1,451

506

26

2011 2006 2002

1,033

151 6

IN THE US

IN WESTERN EUROPE

14% 7% 5%

42% 33% 24%

2002 2006 2011


Changes in personal mobility – The love affair with the automobile is ending

Source: JAMA; University of Michigan; USA Today; Roland Berger

Personal interest development1) Teens with a license in the US2)

6 5 4 3 2 1 10 9 8 7

PAST STUDENTS (Current age in 40's & 50's)

CURRENT/FUTURE STUDENTS (Current age in early 20's)

A.

"If I didn't have a computer or have a cellphone, I would definitely push myself more to get a license to go out and do things."

--Hannah, 17

19

80%

18

75%

17

66%

16

44%

Age 1980

1) JAMA market research of personal vehicles among university students 2) University of Michigan Transportation Research Institute

18

61%

17 19

45% 70%

16

28%

2010

6 10 5 9 4 8 3 7 2 1 17

A.

Preference

Preference


Overcapacity – Excess overcapacity and legacy will further harm the industry

> Global overcapacity of >30 m in 2016

> New engine producers, new materials, and new business models will further increase pressure on traditional manufacturing model

North America

Western Europe

China Manufacturing forecast 2016 [m light vehicles]

Actual production

17.0

Un- utilized

2.1

Production capacity

19.2

Actual production

14.6

Un- utilized

5.3

Production capacity

19.9

Actual production

29.0

Un- utilized

11.2

Production capacity

40.2

4.6 17.6 13.0 6.0 20.0 14.0 6.2 23.4 17.1 2011



New business models

Industry changes constantly increase complexity for suppliers – With limited financial resources…

Changing supplier playing field… … at continuous cost pressure

Technology evolution New players

New competitors arising Aging society

Need for manufacturing flexibility

New regions

New OEMs Tightening regulations

Changing customer preferences


…increases complexity

Price pressure from OEMs

Raw material price increase

Rise in financing cost mid-term

Low-cost competition


… in an uncertain environment


Example: 2020 forecasts for alternative powertrains Pure BEV BEV and PHEV Fuel cells

~1 m (1%) Avicenne Energy ~2 m (2%) J.D. Power, IEA1)

~4 m (4%) Deutsche Bank ~5 m (5%) Poth, RB high

~6.5m (6%) BCG low

~7.5 m (7%) Frost & Sullivan

~9 m (8%) BCG high, Fraunhofer low

~11 m (10%) Carlos Ghosn March 2011

~27 m (25%) Fraunhofer high

5 m (5%) Gartner low

7 m (6.5%) IEA

9 m (8%) Gartner high

10 m (9%) McKinsey opt., MIT, Deutsche Bank

>10 m (>10%) RB high (Upside scenario)

1 m (1%) McKinsey cons. 1.5 m (1.5%) Avicenne Energy

4 m (4%) Bosch

0.4 (0.4%) Pike research (Upside scenario) <0.01 (<0.01%)







Increasing volatility and complexity is increasing diversification – Suppliers are adjusting to the new reality

New

Traditional

Adjacent

Traditional New Adjacent

Markets/ industries

Products/technology


http://www.eaton.com/Eaton/index.htm

http://www.neapco.com/


Diversification leads to ambiguity – The Street seems to heavily discount diversified suppliers


Selected diversified supplier consolidated EV vs. SOTP EV

4.15.2

3.3

6.1

Supplier 2 Supplier 3 Supplier 1 Supplier 4

7.98.4

4.9

8.1

Consolidated

SOTP

Discount vs. Median

-25% -33% -38% -48%

7.35.33.5

6.3

2.55.13.0

5.2

Enterprise value using median EV/EBITDA multiple EV/EBITDA MIN – MAX multiple range


Peer group confusion due to diversification – Analysts have a clearer view on pure play comps than on diversified

Source: Analyst reports; Bloomberg; Roland Berger

4.75.1

3.3

4.3

5.66.1

7.1

4.34.5

5.1

3.34.1

3.5

4.54.0

2.8

4.44.5

3.24.0

3.43.7

2.4

0.9Industry Min 0.1

Industry Med 5.0

Industry Max 15.1

Min Actual as of 9/27/12 Max

PURE PLAY DIVERSIFIED

EV/E

BITD

A

MULT

IPLE

rang

e


Summary: We have to face a VUCA environment as new reality


V olatile markets, where

… And corresponding CONSERVATIVE VALUATIONS

U ncertainty and

C omplexity are increasing, leading to

A mbiguity of investors


Today's reality: Undervaluation could further depress the upside of strategic actions


Acquisitions Strategic sale/JV > Shareholders would not receive fair value

for any sale/JV given the pre-existing valuation discount

> Acquisitions might further reduce stock value due to increased diversification

> Any valuation appreciation gained through an acquisition will likely be hampered due to the pre-existing valuation discount

STRATEGIC ACTIONS SHOULD BE COMPLETED AFTER FAIR STOCK APPRECIATION TO ENSURE SHAREHOLDERS CAPTURE ALL THE INHERENT VALUE

Impact of undervaluation on strategic actions


Options to unlock fair value – Transparency and communication are key in line with organizational alignment


ORGANIZE, COMMUNICATE AND IMPLEMENT

Transparent communication > Clearly outline company's plan for growth – for each business unit > Communicate relevant comps for each BU > Compare BU growth and profitability with relevant market > Point-out potential synergies between BUs

Organizational alignment > Organize business units with clearly defined strategic goals – Clear

cut business unit structure if underlying markets are different > Provide the resources and guidance necessary to achieve the

strategic goals


Case study: DiverseCo active in two completely different market segments – and undervalued by USD 1.5 bn

Source: Company reports; ThomsonOne; Bloomberg; Roland Berger

EV/EBITDA Multiples Valuation [USD bn]

Business Unit 1: "Commodity"

> Stagnating growth of addressable market

> Commodity types and low margin business

> Company outperforms peers

Business Unit 2: "Tech Driven"

> Strong market growth > High margin business > Company grows in line with market

2.9 Min

5.5 Med

9.2 Max

6.5 Min 7.8 Med 8.4 Max

3.3

3.0

1.9

Consolidated EV

SOTP EV

4.8

EV/EBITDA multiple of 4.6x used for the consolidated company

EV/EBITDA multiples of 5.5x for Commodity BU and 7.8x for Tech Driven BU


Case study ctd': Stock separation prior to strategic actions can protect potential acquisitions from today's low valuations

Consolidated Unlock value through separation

Source: Company reports; ThomsonOne; Bloomberg; Roland Berger

3.3

New EV

5.0 Acquisition

Acquisition

Consolidated EV

1.9

New CommodityCo

EV

>3.0 Acquisition

CommodityCo EV

3.0

New TechCo

EV

>4.0 Acquisition

TechCo EV

4.6 4.6 Multiple 5.5 ~5.5 Multiple 7.8 >7.8 Multiple

Consolidated EV

A B

1 2

1 2

>7.0


Stock separation of assets can represent a significant valuation increase – With relatively low risk

Source: Yahoo Finance; OneSource; Google Finance; Roland Berger

PROS CONS/RISKS

STOCK SEPARATION WILL INCREASE TRANSPARENCY FOR BETTER VALUATION OF INDIVIDUAL ASSETS IN THE PORTFOLIO

> Increased asset transparency will result in a higher combined valuation

> Legacy and brand may be preserved through licensing between entities

> Leaner, focused operations should streamline performance

> Strategic actions are more accretive and value will be unlocked

> Institutional investor base could change due to portfolio investment requirements of market capitalization, credit rating, index, etc.

> The market will only give a valuation increase if independent management teams are identified and a clear growth strategy is communicated

> Some cross-functional knowledge may be lost


Groceries & Snack Foods

> In August 2011, Kraft Foods announced a split into two companies: – A fast growing global snacks

business – A slower-growing North

American grocery business > On Oct 3, 2012 the stock split was

completed

Home and Commercial Security Oil & Gas, Chemical Processing

> In May 2012, ConocoPhillips split into two companies: – ConocoPhillips – oil and gas

exploration and production – Phillips 66 – oil and gas refining

and chemical processing

Other industries have chosen split-offs to unlock asset values, increase focus, and make M&A activities more accretive

MOTIVATION > Unlock value of high growth

assets and improve product focus

MOTIVATION > Position assets for growth

driven M&A and potential sale

MOTIVATION > Improve equity valuation in

creating two pure play companies

Source: ThomsonOne; Press research; Roland Berger

> In September 2011, Tyco announced its intention to split into three companies: – ADT residential security – Flow control (e.g., pipes and

valves manufacturing) – Commercial and fire security


> Stock price has appreciated 13% since the announcement

> Kraft stock in-line with snack comps > Stock split completed Oct 3, 2012

> Stock price has appreciated 26% since the announcement

> Highest valuation improvement in its peer group

> Since May 3, 2012: – Phillips 66 has appreciated by 27% – ConocoPhillips has appreciated by 3%

Stock markets are clearly appreciating these moves

Source: ThomsonOne; Press research; Roland Berger

130%

120%

110%

100%

90% 0%

+19%

+16% +13%

+5%

-7%

Announcement

120%

110%

100%

0% Sep 12 Aug 12 Jul 12 Jun 12 May 12

130%

+27%

+3%

0%

Split-off completed 140%

130%

120%

110%

100%

90%

0% Jul 12 Jan 12 Jul 11

+26%

+22%

+12%

+12%

-13%

Announcement

Jul 11 Jan 12 Jul 12

S&P 500

S&P 500

S&P 500

Stock price development


Exciting times ahead – The CEO Agenda 2013

Safeguard 2012 and 2013 profitability through focused and continuous improvements in OPERATIONS

Be prepared for the volatile macro-economic outlook and ensure STABILITY

Carefully choose STRATEGIC ACTIONS to capture the ongoing transformation of the industry

Carefully watch STOCK PRICE develop-ment and potentially take decisive actions

1 2

3 4



Your contact in North America…


Thomas F. Wendt Partner Roland Berger Strategy Consultants

[email protected] +1 (248) 729-5000

Date post:	10-Sep-2014
Category:	Business
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