John Casesa - Guggenheim

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



Cyclical Demand R






GROWTH


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


Healthier Industry Value Chain

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

Rising because of lower breakeven

points

4



Cyclical Demand R






GROWTH


markets


H lthi Ind t


RETURNS

Ri i b f






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



Cyclical Demand R






GROWTH


markets


H lthi Ind t


RETURNS

Ri i b f


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




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


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



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





Safety and pedestrian protection The aging population

New ways of living without the car The content explosion

y g

21





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

[email protected]

www.guggenheimpartners.com

23

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John Casesa - Guggenheim