The Post-Crisis Auto Industry

OESA 2011 Outlook Conference, Detroit

J
John
A. Casesa
November 7, 2011

Table of Contents
Section
1

A New Investment Thesis

Long-Term Themes

A New Investment Thesis

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
p g themes
Lookingg ahead,, this Post-Crisis Era will be defined byy three sweeping
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 mobility
In our view, the Post-Crisis Era is the auto industrys Era of Reinvention

The Auto Industry is at an Inflection Point

Returns have rebounded strongly across the industrys value chain

14

9%
8%

7.3%

7%

13

6%

4.9%

12

5%

11

4%
3%

10

2%

1%
E
2011E

200 9

0%

200 7

9.4%

15

9%

14

8%
7%

13
12

10%

6%

4.7%

5%

11

4%
3%

10

2%

1.5%

1%

0%

21.5%

16

20%

15
14

14.9%

15.3%

15%

13
12

10%

11
10

5%

9
8

0%

E
2011E

15

10%

11%

16

200 9

9.1%

12%

NA Dealer Pre-Tax ROE vs. US Auto

Demand(3)
(in millions)
17
25%

200 7

11%

16

(in millions)

E
2011E

12%

Detroit Three EBITDA Margin

vs. US Auto Demand(2)
17

200 9

(in millions)

200 7

NA Supplier EBITDA Margin

vs. US Auto Demand(1)
17

________________________
Source: FactSet, JD Power LMC Forecast, Moodys Industrial Reports and ThomsonOne.
((1)) Includes American Axle,, ArvinMeritor,, Autoliv,, BorgWarner,
g
, Dana,, Federal-Mogul,
g , Gentex,, Harman,, Johnson
J
Controls,, Lear,, Magna,
g , Superior
p
Industries,, Martinrea,, Tenneco,, Tower,, TRW and Visteon.
(2) 2011E does not include Chrysler.
(3) Includes Americas Car-Mart, Asbury, AutoNation, CarMax, Group 1, Lithia, Penske and Sonic.

A New Investment Thesis for the Auto Industry

The industrys growth, risk and return outlook is the best in decades
Trend

Comments

Cyclical Demand
R
Recovery
in Mature Markets

Rising vehicle sales in the US are being driven by gradual recovery in:
consumer confidence
disposable personal incomes
employment
Rebuilding in Japan should stimulate replacement demand
Europes debt crisis depressing vehicle demand

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

Implication

GROWTH
Volumes likely to
rise in most global
markets

A New Investment Thesis for the Auto Industry

The industrys growth, risk and return outlook is the best in decades
Trend

Comments

Cyclical Demand
R
Recovery
in Mature Markets

Rising vehicle sales in the US are being driven by gradual recovery in:
consumer confidence
disposable personal incomes
employment
Rebuilding in Japan should stimulate replacement demand
Europes debt crisis depressing vehicle demand

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
H
lthi Industry
Ind t
Value Chain

Automakers, suppliers and dealers:

have rationalized capacity
have de-levered and/or recapitalized
are consolidating

Implication

GROWTH
Volumes likely to
rise in most global
markets

RETURNS
Rising
Ri
i b
because off
lower breakeven
points

A New Investment Thesis for the Auto Industry

The industrys growth, risk and return outlook is the best in decades
Trend

Comments

Cyclical Demand
R
Recovery
in Mature Markets

Rising vehicle sales in the US are being driven by gradual recovery in:
consumer confidence
disposable personal incomes
employment
Rebuilding in Japan should stimulate replacement demand
Europes debt crisis depressing vehicle demand

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
H
lthi Industry
Ind t
Value Chain

Automakers, suppliers and dealers:

have rationalized capacity
have de-levered and/or recapitalized
are consolidating
Climate change and energy security concerns are resulting in increased and
costly
tl regulation
l ti

Increasingly
Complex External
Environment

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
instabilityy hurt visibilityy and drive volatilityy

Implication

GROWTH
Volumes likely to
rise in most global
markets

RETURNS
Rising
Ri
i b
because off
lower breakeven
points
RISK
Industry remains
risky because of
increasing
regulation and
external factors
5

A New Investment Thesis for the Auto Industry

The industrys growth, risk and return outlook is the best in decades
Trend

Comments

Cyclical Demand
R
Recovery
in Mature Markets

Rising vehicle sales in the US are being driven by gradual recovery in:
consumer confidence
disposable personal incomes
employment
Rebuilding in Japan should stimulate replacement demand
Europes debt crisis depressing vehicle demand

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
H
lthi Industry
Ind t
Value Chain

Automakers, suppliers and dealers:

have rationalized capacity
have de-levered and/or recapitalized
are consolidating
Climate change and energy security concerns are resulting in increased and
costly
tl regulation
l ti

Increasingly
Complex External
Environment

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
instabilityy hurt visibilityy and drive volatilityy

Implication

GROWTH
Volumes likely to
rise in most global
markets

VALUATIONS
RETURNS
Rising
Ri
i b
because off
lower breakeven
points

Trending
higher

RISK
Industry remains
risky because of
increasing
regulation and
external factors
6

The Long Shadow of History: 10 Year Returns Across the Automotive Value Chain

Return on Equity, 10 Year Weighted Average

24%

21.0%
20%
15.5%

16%

13.9%

12%

12.2%

12.5%

US Used Vehicle
Retailers

S&P 500

7.7%

8%
4.7%

4.8%

Global Tires

pp
Global Suppliers

4%
0%
Global OEMs

(1)

US New Vehicle Global Truck &

Retailers
Off-Highway

NA Auto Parts
Retailers &
Distributors

________________________
Source: Factset and NADA.
(1) Average dealership ROE from NADA.

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 retailers
concerns,
have been far more defensive

YTD Stock
Performance

2011E Valuation
EV/EBITDA
P/E

2011E Margin
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%

4.4%

7.4x

11.8x

3.9%

3.4%

11.7%

9.4x

16.2x

13.2%

10.7%

(20.4%)

7.5x

10.9x

14.6%

10.5%

NA Dealers
NA Parts Retailers & Distributors
NA Truck OEMs
S&P 500

(2.8%)

13.0x

________________________
Source: Company filings and FactSet. Stock performance and valuation data as of October 27, 2011.

Long--Term Themes
Long

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 ggrowth mature markets
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
Recent example: Beijing Automotive
A
acquired
d Dutch sunrooff supplier Inalfa
f

Global societal trends are redefining the role of the car

Innovation is accelerating to address the global societal megatrends redefining personal
mobility.
Recent example: MyFord Touch

Forces Reshaping the Auto Industry - Responses

A dynamic new landscape is evolving

The legacy auto industry is adjusting profitably

Consolidation

Consolidation is being driven by the need to achieve scale, fill product gaps, and maintain
returns in slow ggrowth mature markets
Recent example: Chrysler-Fiat alliance

Globalization is creating new markets and new competitors

Globalization

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
Recent example: Beijing Automotive
A
acquired
d Dutch sunrooff supplier Inalfa
f

Global societal trends are redefining the role of the car

I
Innovation
ti

Innovation is accelerating to address the global societal trends redefining personal

mobility.
Recent example: MyFord Touch

10

Consolidation: Profitability of North American Suppliers

Returns vary widely depending on product mix and business model, and correlated to valuations
NA Auto Supplies R2 (Excluding Gentex)

NA Supplier Returns and Valuation

2011E
(1)
Excess Return

4.0x

R2 = 0.6375

EV/IC

NA Auto Suppliers
Gentex
A t li
Autoliv
TRW
Lear
BorgWarner
Johnson Controls
Harman
Tenneco
Magna
Meritor
(2)
Martinrea
Linamar
F d lM l
Federal-Mogul
Tower International
Modine
Superior
Visteon
American Axle
Dana

35.0%
34 1%
34.1%
27.2%
25.9%
21.3%
16.1%
16.6%
16.3%
16.7%
15.0%
9.6%
8.4%
6 3%
6.3%
8.8%
8.9%
8.3%
7.0%
5.8%
%
8.1%

23.6%
22 7%
22.7%
15.8%
13.4%
11.8%
7.7%
5.5%
5.4%
5.4%
2.7%
0.8%
0.4%
(2 6%)
(2.6%)
(2.9%)
(3.2%)
(3.5%)
(4.1%)
((4.7%)
%)
(5.2%)

6.2x
27
2.7x
1.9x
2.4x
3.4x
2.5x
2.1x
1.9x
1.3x
2.1x
0.9x
1.0x
10
1.0x
1.1x
1.3x
0.9x
1.3x
0.7x
0.8x

Mean
Median

15.5%
15.0%

4.7%
2.7%

1.9x
1.3x

________________________
Source: FactSet and Company
p y filings.
g Enterprise
p
value as of October 27,, 2011.
(1) Defined as return on invested capital minus the weighted average cost of capital.
(2) Includes invested capital from Honsel acquisition.

3.5x

Enterprisee Value/2011E Invvested Capital

2011E
ROIC

3.0x

2.5x

2.0x

1.5x

1.0x

0 5x
0.5x

0.0x
(6%)

(1%)

4%

9%

14%

19%

24%

Excess Return ((2011E ROIC-WACC))

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 Margin
Higher Capital Intensity

ALV

8.0%

Profitablity (22011E NOPAT M

Margin)

Higher
g
Margin
g
Lower Capital Intensity

BWA

7.0%

AXL

6.0%

TRW

5.0%

DAN
FDML

4.0%

SUP

HAR
TEN

LNR
MRE

3.0%

LEA

JCI
MGA

MTOR

MOD
TOWR
VC

2.0%

Lowerr Margin
L
M r in
Higher Capital Intensity

1 0%
1.0%

Lower Margin
Lower Capital Intensity

0.0%
0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

Capital Intensity (2011E Sales/Invested Capital)

12

Globalization: Auto Ownership vs. Income

Despite recent strong growth, the BRIC markets are in the infancy of auto ownership
1,000
United Kingdom

Vehiclees per Thousaand Pop., 2010

900

Germany

United States

800
Italy

700

Slovenia

600

Poland

500

Spain
Japan

Greece

400

Korea

Mexico

300

Brazil

200

Russia

China

100
India

0
$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
Korean 8%

Hyundai/Kia
8%

Mazda Mitsubishi
1%
2%
Nissan
Honda
5%
5%
Suzuki
3%

Japanese 27%

Other
13%

US 18%

Toyota
11%

GM
9%

Chinese
9%

Ford
7%
Chrysler
2% Renault
4%

Chinese 9%
PSA Porsche-VW
5%
9%

BMW
2%
Fiat
Daimler
3%
2%

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
Japan
North America
Hyundai/
Kia
8%

Hyundai/
Kia
5%

Europe

Other
6%
Honda
10%

GM
19%

Chrysler
0%

Nissan
8%

Ford
17%

GM
9%

Mitsubishi
4%
Mazda
5%

Honda
1%
Toyota
y
5%

Other
7%

PorscheVW
18%

Hyundai/
Kia Honda
6%
3% Toyota
4%
Other
Nissan
6%
2%

South America

Fiat
18%
Fordd
10%

Renault
7%

PSA
Group
5%

PorscheVW
18%

Beiqi Foton Brilliance

Jinbei
4%
2%

China

Ford
2%

North America
Europe
Japan
China
Korea
Other

Suzuki
12%

Toyota
44%

PSA Group
2%

Chang'an
6%
Cherry
Dongfeng
4%
Motor
3%

Other
21%

Suzuki
1%

GM
20%

Nissan
14%

Fiat
8%

PSA
Group
13%

BMW
Porsche- Daimler 2%
VW
2%
4%

Suzuki
1%

Daimler
5%

Renault
13%

Chrysler
9%

Honda
13%

Fuji Heavy
4%

BMW
4%

Ford
8%

Toyota
15%

Nissan
3%

Other
4%

FAW Jilin
4%

GM
6%
SAIC
9%

Porsche-VW
11%

Toyota
Suzuki
5%
2%

Nissan Honda
4%
4%

Geely
3%

Hyundai/Kia
7%

________________________
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
Daimler
Nissan
Honda
Volkswagen
T
Toyota
Median
Fiat
BMW
PSA
Renault
Ford
GM

2007 ROIC
20.8%
17.3%
14.5%
13.7%
13 4%
13.4%
11.8%
11.8%
9.6%
9 5%
9.5%
4.7%
4.5%
(10.4%)

OEMs
BMW
Volkswagen
Daimler
Ford
Nissan
Median
GM
PSA
Honda
Fiat
Toyota
Renault

2011 ROIC
19.8%
19.6%
18.5%
13.8%
13 0%
13.0%
10.2%
10.2%
9.3%
7.9%
6.5%
3.4%
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
The aging population
The content explosion

18

Innovation: Global Societal Trends are Redefining the Role of the Car and of
Personal Mobility
New kinds of cars
Climate change
Energy security
The connectivity revolution
Urbanization
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
New kinds of cars
Climate change
Energy security
The connectivity revolution
Urbanization

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
New kinds of cars
Climate change
Energy security
The connectivity revolution
Urbanization

New ways of living with the car

Safety and pedestrian protection

The aging population

New ways
y of living
g without the car

The content explosion

21

Innovation: Global Societal Trends are Redefining the Role of the Car and of
Personal Mobility
New kinds of cars
Climate change
Energy security
The connectivity revolution
Urbanization

New ways of living with the car

Safety and pedestrian protection

The aging population

New ways
y of living
g without the car

The content explosion

22

John A. Casesa
Senior Managing Director
212.901.9354 office
917.865.1947 cell
john.casesa@guggenheimpartners.com
www.guggenheimpartners.com

23