Porsche

What is the Problem?

Revenue:
45% 40% 10% 3% 2% EUR USD GBP JPY CHF

Costs:
911 Boxster Cayenne Germany (EUR) Finland (EUR) Slovakia (SKK - EUR stabilized)

Comparative Exposure
Automaker
BMW Fiat Mercedes

U.K. Sales
11% 6% 9%

U.K. Production
15% 0% 0%

N.A. Sales
26% 0% 19%

N.A. Production
11% 0% 7%

Peugeot
Porsche Renault Volkswagen

12%
11% 9% 7%

6%
0% 0% 0%

0%
42% 1% 13%

0%
0% 1% 7%

Hedging Strategy
Porsche created a three-year rolling portfolio of put options. Hedging net dollar exposures out three years required the company not only to forecast sales and subsequent exposures out three years, but to continually carry options possessing notional principals of a full three years of net exposure.

Comparative Hedging
Automaker
BMW Mercedes Porsche Volkswagen

2003 2004 2005 (estimate) (estimate) (estimate) 90% 70% 35%

90% 100% 40% 60% 100% 70% 30% 100% 30%

Financial Effects
Year 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 EBIT margin Treasury margin 3.5% -2.6% 6.5% -3.0% 7.4% -.9% 9.6% 2.2% 9.6% 1.7% 7.4% 3.9% 7.0% 5.2% 9.6% 6.5% 10.0% 6.5%

Assessment
Even if we sell a few or no cars at all in the U.S. we make money . . . Because we bought dollars cheap which we now sell expensively. Our hedging is extremely good. . . . Many analysts were highly critical of the cost of such a strategy.

Profit from Hedging

Jul-01 USD/EUR Spot Rate USD/EUR Strike Price USD LIBOR (APR) EUR LIBOR (APR) Maturity (Years) Volatility (%) EUR/USD Option Premium EUR Sales (Billion) USD Sales (Billion) N.A. Sales (42%) N.A. Sales (10% Growth) Cost of Puts (Million) 4.441 3.826 1.607 1.768 50.912 1.945 91.978 2.139 129.196 0.8616 0.9000 4.001 4.310 1.000 11.550 0.0288 0.9500 4.200 4.400 2.000 15.680 0.0473 1.0000 4.400 4.400 3.000 18.080 0.0604 2-Jul 3-Jul 4-Jul

USD/EUR Spot Rate EUR Profit per USD Gross Profit (million) Net Profit (million)

0.9931 0.1042 184.138 133.226

1.1362 0.1725 335.446 243.468

1.3000 0.2308 493.619 364.422

Alternative Hedges
Natural Hedge Financial Hedge Exchange Rate Pass Through

Natural Hedge

North American Manufacturing

Porsche believed that the quality of its engineering and manufacturing were at the core of its brand, and leadership had not been willing to move production beyond the existing European footprint. BMW and Mercedes are increasing their manufacturing capacity in the U.S. Would manufacturing an SUV in the U.S. harm Porsches image worse than manufacturing it in a Volkswagen plant in Slovakia?

Financial Hedge

Comparative Financial Performance

Automaker Audi BMW Sales EBIT (billion EUR) Margin 22.6 42.3 6.6% 8.0% 12.1 P/E Ratio Debt Ratio .2% 47.5% A1 Moodys Rating

Fiat
Mercedes Peugeot

58.2
50.2 54.4

1.6%
6.4% 5.3% 5.9

31.3%

Ba3

42.9%

A2

Porsche
Renault Volkswagen

5.6
36.3 86.9

16.4%
4.1% 5.2%

16.5
7.5 6.4

6.4%
47.6% 42.4% Baa2 A1

Attitude towards Debt

Porsches view on debt was rather extreme compared to that held by most of the other major European-based automobile manufacturers. We learnt the hard way that banks are there for you when you dont need them, and when you do need them, theyre nowhere to be seen. This antidebt philosophy was also consistent with the emphasis placed by Porsche on both cash flow and cash balances. We need to optimize all of the cash we generate so that were able to continue to finance our growth ourselves, and have the confidence that if anything happens in the future that is beyond our control, well always be able to survive. Thats absolutely essential. Although long-term debt was readily available to a company of Porsches financial health, debt was clearly anathema to current management.

Attitude

Porsche was somewhat infamous for its independent thought and occasional stubbornness when it came to disclosure and compliance with reporting requirements. In 2002 the company had chosen not to list on the New York Stock Exchange after the passage of the Sarbanes-Oxley Act. Management had also long been critical of the practice of quarterly reporting, and had, in fact, been removed from the Frankfurt exchanges stock index in September 2002 because of its refusal to report quarterly financial results. Porsche also continued to report only under German accounting standards. The compensation packages of Porsches senior management team were nearly exclusively focused on current-year profitability, with no management incentives or stock option awards related to the companys share price. The Porsche and Pich families held all of the ordinary shares, which held all voting rights.

Foreign Exchange Pass Through

Market Power
911: Exclusive ownership of its market segment and price inelastic, but sales had been historically cyclical and heavily dependent on the disposable income of buyers. Boxster: Affordable and less sensitive to the business cycle but in an increasingly competitive market segment. Cayenne: One of the most successful product launches in history but in a competitive market segment that may shrink with rising gasoline prices.

911 Carrera 4S Cabriolet in 2003

Apr EUR Price EUR Margin (15.7%) EUR Cost USD/EUR Spot Rate Full USD Price Target USD Price EUR Revenue EUR Cost EUR Margin 85,900 13,486 72,414 1.0862 93,305 93,200 85,804 72,414 13,390 15.6% May 85,900 13,486 72,414 1.1565 99,343 93,200 80,588 72,414 8,174 10.1% Jun 85,900 13,486 72,414 1.1676 100,297 93,200 79,822 72,414 7,408 9.3% Jul 85,900 13,486 72,414 1.1362 97,600 93,200 82,028 72,414 9,614 11.7% Aug 85,900 13,486 72,414 1.1286 96,947 93,200 82,580 72,414 10,166 12.3% Sep 85,900 13,486 72,414 1.1267 96,784 93,200 82,719 72,414 10,306 12.5% Oct 85,900 13,486 72,414 1.1714 100,623 93,200 79,563 72,414 7,149 9.0% Nov 85,900 13,486 72,414 1.1710 100,589 93,200 79,590 72,414 7,176 9.0% Dec 85,900 13,486 72,414 1.2298 105,640 93,200 75,785 72,414 3,371 4.4%

Hedging Strategy
Natural Hedge? Financial Hedge? Exchange Rate Pass Through? Current Policy?