Transcript Presentation Title

THE RECAPITALIZATION OF DETROIT
An Equity Investor’s View of the Current Crisis
Automotive News World Congress
Detroit, January 17, 2006
John A. Casesa
Research Analyst, MLFP&S
(212) 449 8431
[email protected]
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Refer to important disclosures on page 14.
Global Securities Research & Economics Group
9.3%
9.4%
8.4%
US Light Vehicle Sales
0.1%
1.1%
1.5%
2.0%
7.0%
4.8%
4.7%
4.8%
5.2%
5.6%
3.8%
0.7%
-3.6%
Detroit Three Operating Margin
-4%
10,000,000
8,000,000
6,000,000
-3.7%
-1%
12,000,000
-3.1%
-0.9%
-0.2%
2%
3.6%
6.9%
7.3%
6.0%
4.3%
5.7%
6.5%
5.3%
1.4%
4.2%
4.9%
5%
14,000,000
4.9%
8%
16,000,000
10.6%
11.4%
10.1%
11%
18,000,000
4.9%
Operating Margin
14%
20,000,000
10.3%
12.9%
12.8%
17%
13.4%
20%
16.4%
16.9%
15.6%
15.5%
13.3%
The Crisis at Hand:
Big Three Auto Margins
-7%
4,000,000
2,000,000
-
Refer to important disclosures on page 14.
Source: GM, Ford, DaimlerChrysler, ML Estimates
2005e
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
-10%
2
The Domino Effect:
Supplier Profitability Trends
Operating Margins
Return on Assets
12%
8%
OEM Avg
Supplier Avg
10%
6%
8%
4%
6%
2%
4%
2%
OEM Avg
0%
0%
Supplier Avg
-2%
Refer to important disclosures on page 14.
Source: Company filings.
2004
2003
2002
2001
2000
1999
1998
1997
1996
2004
2003
2002
2001
2000
1999
1998
1997
1996
-2%
3
Refer to important disclosures on page 14.
Source: NADA, Wards
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
5%
1993
14.2%
21.4%
25.1%
27.6%
30.7%
29.3%
27.0%
24.3%
22.1%
24.8%
30.0%
27.3%
28.7%
25.8%
23.0%
20.7%
20%
1992
1991
14.9%
10%
1990
15.5%
15%
1989
1988
1987
1986
25%
1985
35.3%
35.7%
34.9%
30%
29.6%
35%
1984
1983
Pretax Profit % of Ending Net Worth
45%
18
40%
17
16
15
14
U.S. Light Vehicle Sales
0%
13
12
U.S. Light Vehicle Sales (mm)
The Domino Effect (continued):
Dealer Profitability Trends
11
Franchised New Car Dealers' Pretax ROE
10
4
Oligopoly’s Gone:
Market Share Trends in US
40%
40%
GM
35%
30%
35%
30%
Ford
25%
25%
Japanese
20%
20%
DaimlerChrysler
15%
15%
Toyota
10%
5%
10%
European
Honda
5%
Source: Ward’s AutoInfobank
2005YTD
0%
2004
2003
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
Refer to important disclosures on page 14.
2002
Korean
0%
5
Refer to important disclosures on page 14.
5,717
6,155
6,513
6,923
12,401
12,197
11,486
11,190
10,898
10,698
2006e
2007e
2008e
2009e
2010e
Source: Ward’s AutoInfobank, ML Estimate
7,183
5,577
5,123
2005e
4,969
4,318
4,500
13,190
14,008
13,612
4,334
13,662
3,811
13,685
4,086
3,589
13,727
13,558
3,448
3,253
13,913
13,184
2004
00
12,787
New Dom estics Total
Big Three Total
2003
2002
2001
2000
1999
2,000
1998
4,000
1997
6,000
1996
8,000
1995
10,000
3,172
12,000
14,575
14,000
3,124
16,000
14,330
18,000
1994
1993
Total Capacity (000s)
Retreat:
Assembly Capacity in North America
20,000
6
Retreat Not Enough:
2006-2009 Volume Replacement Rates, US Mkt
Korean
141%
Honda
93%
Toyota
90%
Total Japanese
83%
Total
71%
DaimlerChrysler
68%
Nissan
67%
GM
Ford
European
Refer to important disclosures on page 14.
64%
59%
57%
Source: Merrill Lynch
7
They Can Afford to Spend:
Pretax Margins of Major Global OEMs, 2004E
Toyota
10.4%
Nissan
10.2%
Hyundai Motor
9.2%
Honda
8.7%
Renault
8.6%
BMW
8.0%
Kia Motors
5.4%
Average
5.0%
4.6%
Suzuki
Peugeot
4.6%
Ford
3.4%
Fuji Heavy
Mazda
2.5%
DaimlerChrysler
2.5%
General Motors
Volkswagen
-4%
1.4%
1.2%
Fiat
-3.4%
-6%
3.2%
-2%
Refer to important disclosures on page 14.
0%
2%
Source: Merrill Lynch
4%
6%
8%
10%
12%
8
Conclusions:
Industry Analogies Sobering

US steel in the 1990s

US airlines in the early 2000s

Parallels suggest it gets worse before it gets
better
Refer to important disclosures on page 14.
Source: Merrill Lynch
9
Conclusions:
What Could be Worse?

New deal or serious confrontation with UAW by 9/07

Increased demand risk given incentive pull-ahead,
higher energy prices & higher rates

Accelerated supply base consolidation as more weak
companies fail

Further shift in dealer capital away from GM & Ford

More share gains for Japanese & Korean OEMs

Radical downsizing of GM & Ford
Refer to important disclosures on page 14.
Source: Merrill Lynch
10
Conclusions:
What Will be Better?

Better demand/supply balance

Stable vehicle pricing & higher margins

Detroit OEMs with more focused, desirable
product portfolios

Fewer, stronger suppliers with balance sheets to
invest in technology

Consolidated, more consumer friendly dealers
Refer to important disclosures on page 14.
Source: Merrill Lynch
11
Conclusions:
Detroit Will be Recapitalized

Current owners (stockholders) lose
value/control - happening now!

Unsustainable operating & financial structures
get cleaned-up – in or out of court

Recapitalization means new owners
 Creditors
– lenders become stockholders
investors – private equity, institutional investors
including hedge funds, rich individuals, etc.
 New
Refer to important disclosures on page 14.
Source: Merrill Lynch
12
Conclusions:
Bide Your Time

Expect continued poor equity performance until
these radical restructuring actions are taken

Easy to lose money in early restructuring stages


1989 & 2005 were examples, lots of restructuring, but
incremental not radical, so earnings & stocks were a disaster
Can be great coming out

After radical actions, lean cost bases made for 1992-1993
earnings & and stock explosion

Seems more like 1989 than 1992 right now

Get ready, but bide your time
Refer to important disclosures on page 14.
Source: Merrill Lynch
13
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Refer to important disclosures on page 14.
14
Backup Slides
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Refer to important disclosures on page 14.
Global Securities Research & Economics Group
Demand: Long-term Trend in the US
20,000,000
16,000,000
U.S. Light Vehicle Sales
2000-2003
-4%
1978-1982
-31%
OPEC II
18,000,000
14,000,000
12,000,000
1955 -1958
-35%
10,000,000
1988-1991
-20%
Gulf War
1973-1975
-23%
OPEC I
8,000,000
2000: 17.3 million
2001: 17.1 million
2002: 16.8 million
2003: 16.6 million
2004: 16.9 million
2005: 16.9 million
2006e: 16.0 million
6,000,000
4,000,000
2,000,000
Refer to important disclosures on page 14.
Source: Ward’s AutoInfobank, ML Estimates
04
01
98
95
92
89
86
83
80
77
74
71
68
65
62
59
56
53
50
0
16
September 11th:
The Straw that Broke the Camel’s Back
19
1.2
1.1
15
0.9
13
December = 0.915
0.8
11
0.6
9
0.5
Consumer Confidence
17
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
U.S. Light Vehicle Sales (mils)
Consumer Confidence, LTM Trend
U.S. Light Vehicle Sales, LTM Trend
Refer to important disclosures on page 14.
Source: U. of Michigan Survey Research
17
Refer to important disclosures on page 14.
Source: Federal Reserve
19.0
18.0
17.0
16.0
15.0
14.0
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
$35,000
60
55
50
45
40
35
30
2005
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
2004
1988
2003
1987
1986
1985
2002
2001
2000
1984
1983
1999
1982
1998
1981
1980
1979
1997
1996
1995
1978
65
1977
Avg. Maturity of New Car Loans
1994
1976
1975
Amount Financed
1993
1992
1991
1990
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
Auto Loan Interest Rate Trends
Direct Consumer Loan Rate
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
Months
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
Loan Rate
Lucky:
Low Rates & Liquidity Overcame the Confidence Gap
$30,000
$25,000
$20,000
$15,000
$10,000
Auto Finance Company Rate
$5,000
$0
18
Supply: Days’ Supply Inventory
80
30%
70
20%
60
10%
50
0%
40
% + / - 5yr Avg
-10%
Total (DS)
Refer to important disclosures on page 14.
Source: Ward’s AutoInfobank
Oct-05
Jul-05
Apr-05
Jan-05
Oct-04
Jul-04
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
-20%
Oct-00
30
19
Pricing: Incentives & CPI
Demand vs. Incentives
20,000
$3,000
LTM Average Incentive
Consumer Price Index
LTM Average Incentive
Dec-05
Jun-05
Sep-05
Mar-05
Dec-04
Jun-04
Sep-04
Mar-04
Dec-03
Jun-03
Sep-03
Jun-01
Mar-01
Mar-03
$1,000
Dec-02
15,000
Jun-02
$1,400
Sep-02
16,000
Mar-02
$1,800
Dec-01
17,000
Sep-01
$2,200
Dec-00
18,000
Jun-00
$2,600
Sep-00
LTM U.S. LV Sales
LTM U.S LV Sales
19,000
6%
5.4%
5%
4%
4.5%
4.2%
3.7%
3.6%
3.4%
3.0% 3.1% 3.0%
3%
2%
4.4%
3.9%
2.4%
2.4%
3.4%
3.0%
2.6%
2.8%
2.2%
2.9%
2.5%
2.3%
1.7%
1.4%
2.9%
2.8%
1.3%
2.7%
2.3%
2.2%
1.6%
1.6%
0.8%
1%
0.6%
0.2%
0.5%
0.0%
0%
0.2%-
0.2%0.7%-
-1%
0.8%-
0.4%0.6%-
0.6%1.2%-
-2%
CPI
CPI New Cars
CPI New Trucks
2.0%-
1.2%-
0.7%-
1.9%-
-3%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
YTD
Refer to important disclosures on page 14.
Source: Ward’s AutoInfobank, Autodata2, U.S. Department of Commerce
20
Competition: New Model Launches in US
80
# of New Models Launched
70
67
Average = 35, 1987-2005
60
48
50
40
35 31 34
30
35
38
39
36
35
38
41
41
39
43
47
45
41
36
32
26
21
21
20
10
Refer to important disclosures on page 14.
Source: Source: Merrill Lynch
2009E
2008E
2007E
2006E
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
-
21
Competition: Market Showroom Age Trend
Average Showroom Age of Models on US Market
5.0
Average Showroom Age in Years
4.5
4.0
4.0 4.0 4.0
4.3 4.2
3.6 3.6 3.7
3.5
3.8
3.5
3.1 3.0
3.0
2.9 2.9 3.0
3.2 3.1 3.1
3.0
2.9 3.0
2.5 2.6
2.5
2.0
1.5
1.0
0.5
Refer to important disclosures on page 14.
Source: Merrill Lynch
2009E
2008E
2007E
2006E
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
-
22
Competition:
Replacement Rates, Showroom Age & Market Share
Average Volume Replacement
Rate 1995-2005 Model Years
GM
14%
Ford
15%
DaimlerChrysler
16%
European
18%
Japanese
20%
Korean
26%
Average Showroom Age
Higher/(Lower) Than Industry
Average 1995-2005
0.8
0.3
0.0
(0.3)
(0.5)
(1.3)
U.S. Market
Share Change*
-5.8%
-6.4%
-0.7%
2.5%
7.2%
3.2%
* Market Share is Based on Calendar Years 1994-2004
Refer to important disclosures on page 14.
Source: Merrill Lynch
23