Rebound of us_supplier_industry_final[1]

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

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

Contents
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
© 2012 Roland Berger Strategy Consultants 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 2

US light vehicle sales recovered after the crisis –
Much faster than expected
US light vehicle sales [m units]
17.0
14.9 Sep
14.3 Jul
SAAR
14.1 Apr
12.5 forecast
13.8 Jan

10.4

2005 2006 2007 2008 2009 2010 2011 2012e

Source: LMC Automotive Forecasting; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 3

US supplier industry with an impressive rebound vs. peers –
Record level profits in 2011 and H1/2012
Revenue growth EBIT margin [%]

10.5
362

6.0
142
5.3
125
100 5.0
115

2005 2006 2007 2008 2009 2010 2011 2012
FC 2005 2006 2007 2008 2009 2010 2011 2012
H1

Source: Roland Berger/Lazard supplier database 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 4

Healthy balance sheets – US supplier industry is
financially stronger than ever
Net debt/equity ratio [%]1) Current ratio [%]2)

215
208

100 168
88

34
28 119
21
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
H1 H1

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
Roland Berger regional supplier stock index development

179

127
100 112

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

Source: ThomsonOne; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 6

Only a few suppliers have outperformed the market –
Total of USD 23 bn destroyed in the last 20 months
Market cap. development US suppliers

+13%
100 Total USD 23 bn in
-9% market capitalization
destroyed during the
last 20 months

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

Roland Berger US Supplier Index S&P 500

Source: ThomsonOne, Yahoo Finance, Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 7

EPS outperformance, nor strategic
Neither constant
acquisitions seem to move the needle
EPS performance1) Strategic acquisitions – selected examples
S&P: +25%
Impact on market cap. [%] Impact on market cap.2) [%]

… constantly -15% Acquisition example 1
+6%
exceeding
+8% Acquisition example 2
… constantly
+8% -23% Acquisition example 3
meeting
+10% Acquisition example 4
… constantly
-20%
missing -4% Acquisition example 5

1) Constantly exceeding: Actual EPS >5% over expectations in at least 2 of last 4 quarters (Q2'10-Q2'11) 2) 3 months period after announcement
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 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 8

Paradox – or new reality?

VOLATILE market outlook – with crisis still in mind
A
Fundamental changes in the industry – already underway, increasing

B COMPLEXITY and UNCERTAINTY

Ongoing diversification – fueling analyst AMBIGUITY
C

We believe the automotive market will
not collapse – but the
coming 12 months will be difficult
Global sales of light vehicles [m vehicles]
Forecast
+4.7% 82.1
+4.0% 78.4
72.4 75.4
70.3 67.3
66.0
+7.7% 41.2
H2
36.3 37.5 +1.9% 38.2
(Jul-Dec) 34.8 30.1 34.7

H1 36.1 37.9 +6.0% 40.2 +1.8% 40.9
35.6 35.9 32.6
(Jan-Jun)

2007 2008 2009 2010 2011 2012 2013
+x.x% = YoY growth rate


We expect many core markets to further slow down in
H2/2012 and H1/2013
Global sales of light vehicles [YoY change in %]
NAFTA WESTERN EUROPE CHINA
13% 6% 17%
9%
7% 7% 7% 0% 8% 9%
7%
3% -6% -6% 4% 5%
-8%
-12%
2010 2011 H1/12 H2/12 H1/13 H2/13 2010 2011 H1/12 H2/12 H1/13 H2/13 2010 2011 H1/12 H2/12 H1/13 H2/13

SOUTH AMERICA WORLD JAPAN/KOREA
34%
14%
8% 8%
9% 6% 12%
3% 4% 1%
2%
2% 2%
-5%
-2% -1% -11% -13%
2010 2011 H1/12 H2/12 H1/13 H2/13 2010 2011 H1/12 H2/12 H1/13 H2/13 2010 2011 H1/12 H2/12 H1/13 H2/13

= Forecast


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
Effect of Toyota recovery after Tsunami- Operating margin [%]
related collapse in 2011 approx. 1%-pt. 14
1
~5.5 12 2

10
5.2 ~5.0
8
6
4
2
0
0
-2
’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’12 0 2.5 5.0
H1 H2
Sales [m vehicles]

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

Source: FactSet; OEM's annual/half-yearly reports; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 12

Suppliers feel the heat – OESA Sentiment Index is
consistently falling
OESA Supplier Sentiment Index

POSITIVE

50

46
NEGATIVE

Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep
08 08 08 09 09 09 10 10 10 11 11 11 12 12 12

Source: OESA 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 13

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

EBIT margin of auto suppliers [%] Key profit drivers

2011 > Sales considerably higher than 2010
> Extra volume at lower margins due to fully
6.0 utilized capacity (special shifts, premium
~5.0-5.5 freight, etc.)
5.5
GLOBAL
~4.5-5.0 H1 > Suppliers highly dependent on European
volume brands and/or CVs saw sales and
2012 profits drop already in H1
> Suppliers focused on US still at record levels

H2 > Almost all suppliers adjusting sales
expectations, Premium and luxury OEMs
2012 revise targets
2005 2006 2007 2008 2009 2010 2011 2012 2012 > Suppliers focused on US start seeing impact
H1 H2 > Counter-effect of falling raw material prices not
sufficient to compensate for market downturn


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

EUROPE CHINA US

COLLAPSE of the Euro SLOWER GROWTH in USD 600 bn FISCAL
zone? China a new reality? CLIFF in 2013?
> Most likely scenario is "no > Politics-fueled investment boom > Reduction of public deficit by
change" likely to restart after change in half, but…
leadership…
> But: Devastating effects could – Potential GDP growth down
hit the industry > …but on a lower level and with to 0.5%
different focus and mix
– Danger of double-dip

Source: Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 15


A


C

The only thing that's certain is uncertainty –
What "visionaries" have said about the future…
Technology "Nuclear-powered vacuum cleaners will probably be a reality in 10 years."
Alex Lewyt, president of vacuum cleaner company Lewyt Corp., 1955

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

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

Communication "The telephone has too many shortcomings to be seriously considered as a
means of communication."
Western Union internl memo, 1876

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

Source: Roland Berger; Research 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 17

Megatrends are getting real –
Evidence of recent development
China High volatility/
economic variability of Ongoing
slowdown governments population aging
GEO- Japan university CHANGING
new electrode
POLITICAL Ghosn: DEMO-
patent
CHANGE "Over 5 m EV in GRAPHICS
Euro zone China by 2020" Megacities
instability CHANGING on the rise
A123 advance in Dynamic traffic
battery technology TECHN- lights/intersections
OLOGY

Overcapacity Crisis leading to
for traditional "de-focus"
manufacturing
model EVOLUTION Voluntary CO2 targets SUSTAIN- Kyoto protocol
OF MOBILITY become a must ABILITY successor
Vehicle
Car sharing
platooning
Google self-driving car


This development is happening at an increasingly faster
rate than expected
Recent examples of technology innovation

RECYCLING OF DRIVING VIA
EMISSIONS BRAIN WAVES
> Bio-AgtiveTM developed a > Freie Universität Berlin built a
system that injects cooled vehicle with embedded brain
exhaust from diesel emissions wave patterns that responds
into the soil during seeding when participants think
"brake," "accelerate," "turn left,"
> Montana State University "turn right"
show plant growth and grain
yields when seeded with > Chaotic Moon Labs has a
exhaust are similar to those motorized skateboard
seeded with recommended controlled by an on-board
fertilizers tablet that processes your
thoughts to accelerate and stop

Source: Bio-AgtiveTM; Montana State University; Freie Universität Berlin; Chaotic Moon Labs; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 19

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


Change in OEM powerhouse – Traditional OEMs are
already losing importance

Top 10 CV manufacturers (GVW > 6t) THE NEW OEM
2005 2011 POWERHOUSE
1 Daimler Dongfeng > Industry landscape has been
2 Volvo Daimler turned upside down in only 5
years
3 Tata FAW1)

4 Dongfeng Tata > 6 of the top 10 OEMs are now
coming from emerging markets
5 Paccar CNHTC2)

6 International Volvo > Similar developments expected
in LV space – since many CV
7 FAW1) Paccar
players are also active in LV
8 Ford MAN

9 VW/Scania BAIC3)

10 IVECO Ashok Leyland

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

1,451
EMERGING IN THE
MARKET US
SUPPLIERS 506
14%
5% 7% 26
2002 2006 2011 2002 2006 2011
IN 6
151
WESTERN
US 24% EUROPE
SUPPLIERS 33%
42% 1,033

Source: ThomsonOne; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 22

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

Personal interest development1) Teens with a license in the US2)
PAST 80%
75%
STUDENTS 66%
(Current A.

age in 40's 44%
& 50's) 70%
61%
45%
1 2 3 4 5 6 7 8 9 10 28%
Preference
Age 16 17 18 19
CURRENT/ 1980 2010
FUTURE A.

STUDENTS "If I didn't have a computer or have a
(Current cellphone, I would definitely push myself
age in early more to get a license to go out and do
20's) things."
1 2 3 4 5 6 7 8 9 10 17
Preference
--Hannah, 17

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

Source: JAMA; University of Michigan; USA Today; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 23

Overcapacity – Excess overcapacity and legacy will further harm
the industry
Manufacturing forecast 2016 [m light vehicles]
North Western China
America Europe > Global
40.2 11.2 overcapacity of
>30 m in 2016
29.0 > New engine
producers, new
19.2 2.1 19.9 5.3 materials, and new
17.0
14.6 business models
will further
increase pressure
on traditional
Production Un- Actual Production Un- Actual Production Un- Actual manufacturing
capacity utilized production capacity utilized production capacity utilized production
model
2011 17.6 4.6 13.0 20.0 6.0 14.0 23.4 6.2 17.1


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

Changing supplier playing field… … at continuous cost pressure
Need for manufacturing flexibility
New business models Price pressure from OEMs
Technology evolution
New players
Raw material price increase
Changing customer preferences
New OEMs
Tightening regulations Rise in financing cost mid-term
Aging society
New competitors arising Low-cost competition
New regions

…increases complexity

… in an uncertain environment
Example: 2020 forecasts for alternative powertrains
Pure BEV BEV and PHEV Fuel cells
~27 m (25%) Fraunhofer high

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

~11 m (10%) Carlos Ghosn
March 2011 10 m (9%) McKinsey opt.,
MIT, Deutsche Bank
~9 m (8%) BCG high, 9 m (8%) Gartner high
Fraunhofer low
~7.5 m (7%) Frost & Sullivan
7 m (6.5%) IEA
~6.5m (6%) BCG low

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

~2 m (2%) J.D. Power, IEA1) 0.4 (0.4%) Pike research
1.5 m (1.5%) Avicenne Energy (Upside scenario)
~1 m (1%) Avicenne Energy 1 m (1%) McKinsey cons.
<0.01 (<0.01%)



A


C

Increasing volatility and complexity is increasing
diversification – Suppliers are adjusting to the new reality
Markets/
industries
New

Adjacent

Traditional

Traditional Adjacent New
Products/technology


Diversification leads to ambiguity – The Street seems to
heavily discount diversified suppliers
Selected diversified supplier consolidated EV vs. SOTP EV
6.3 7.3
6.1 5.3
5.2
Consolidated 5.2 3.5 4.1
3.3
5.1
3.0 2.5

Supplier 1 Supplier 2 Supplier 3 Supplier 4
SOTP

4.9

8.1 8.4 7.9

Discount -25% -33% -38% -48%
vs. Median
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

DIVERSIFIED PURE PLAY
Industry 7.1
Max 15.1
6.1
5.6
5.1
Industry 5.1 4.7
MULTIPLE range

Med 5.0 4.3 4.3
EV/EBITDA

4.5 4.5
4.0 4.1 3.3 4.5 4.4
3.5 4.0 3.3
3.7
2.8 3.4 3.2
2.4

Industry 0.9
Min 0.1
Max Actual as of 9/27/12 Min

Source: Analyst reports; Bloomberg; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 30

Summary: We have to face a VUCA environment as new
reality
V olatile markets, where
U ncertainty and … And
corresponding
C omplexity are increasing, leading to CONSERVATIVE
VALUATIONS
A mbiguity of investors

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

Acquisitions Strategic sale/JV
> Acquisitions might further reduce stock > Shareholders would not receive fair value
value due to increased diversification for any sale/JV given the pre-existing
> Any valuation appreciation gained valuation discount
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


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
EV/EBITDA Multiples Valuation [USD bn]
4.8
Business Unit 1: "Commodity" 9.2 Max
1.9
> Stagnating growth of addressable 3.3
market
> Commodity types and low margin 5.5 Med
business
> Company outperforms peers 3.0
2.9 Min

Business Unit 2: "Tech Driven" 8.4 Max
7.8 Med Consolidated SOTP
> Strong market growth 6.5 Min EV EV
> High margin business
> Company grows in line with market EV/EBITDA EV/EBITDA
multiple of 4.6x multiples of 5.5x for
used for the Commodity BU
consolidated and 7.8x for Tech
company Driven BU

Source: Company reports; ThomsonOne; Bloomberg; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 34

Case study ctd': Stock
separation prior to strategic actions can
protect potential acquisitions from today's low valuations
A Consolidated B Unlock value through separation

Consolidated EV >7.0
Acquisition 5.0
Acquisition 2
Acquisition >4.0
3.3 1
Acquisition >3.0 3.0 2
1.9 1

Consolidated New CommodityCo New TechCo New
EV EV EV CommodityCo EV TechCo
EV EV
4.6 Multiple 4.6 5.5 Multiple ~5.5 7.8 Multiple >7.8

Source: Company reports; ThomsonOne; Bloomberg; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 35

Stock separation of assets can represent a significant
valuation increase – With relatively low risk
PROS CONS/RISKS
> Increased asset transparency will result in a > Institutional investor base could change due to
higher combined valuation portfolio investment requirements of market
> Legacy and brand may be preserved through capitalization, credit rating, index, etc.
licensing between entities > The market will only give a valuation increase if
> Leaner, focused operations should streamline independent management teams are identified
performance and a clear growth strategy is communicated
> Strategic actions are more accretive and value > Some cross-functional knowledge may be lost
will be unlocked

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

Source: Yahoo Finance; OneSource; Google Finance; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 36

Other industries have chosen split-offs to unlock asset values,
increase focus, and make M&A activities more accretive
Groceries & Snack Foods Home and Commercial Security Oil & Gas, Chemical Processing
> In August 2011, Kraft Foods > In September 2011, Tyco > In May 2012, ConocoPhillips split
announced a split into two announced its intention to split into into two companies:
companies: three companies: – ConocoPhillips – oil and gas
– A fast growing global snacks – ADT residential security exploration and production
business – Phillips 66 – oil and gas refining
– A slower-growing North – Flow control (e.g., pipes and and chemical processing
American grocery business valves manufacturing)
> On Oct 3, 2012 the stock split was – Commercial and fire security
completed

MOTIVATION MOTIVATION MOTIVATION
> Unlock value of high growth > Position assets for growth > Improve equity valuation in
assets and improve product driven M&A and potential sale creating two pure play
focus companies

Source: ThomsonOne; Press research; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 37

Stock markets are clearly appreciating these moves
Stock price development
130% 140% 130%
Announcement Announcement Split-off completed +27%
130% +26%
120% +19%
+22% 120%
S&P 500 +16% 120%
+13%
110% S&P 500 +12%
110% 110%
+12%
+5%

100% 100% +3%
100%
S&P 500 0%
-7% 90%
-13%
90%
0% 0% 0%
Jul 11 Jan 12 Jul 12 Jul 11 Jan 12 Jul 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12
> Stock price has appreciated 13% since > Stock price has appreciated 26% since > Since May 3, 2012:
the announcement the announcement – Phillips 66 has appreciated by 27%
> Kraft stock in-line with snack comps > Highest valuation improvement in its peer – ConocoPhillips has appreciated by 3%
> Stock split completed Oct 3, 2012 group

Source: ThomsonOne; Press research; Roland Berger 12-10-18-RB-Rebound of US Supplier Industry_mail out-F.pptx 38

Exciting times ahead – The CEO Agenda 2013

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

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

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

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


Your contact in North America…

Thomas F. Wendt
Partner
Roland Berger Strategy Consultants

Thomas.Wendt@rolandberger.com
+1 (248) 729-5000


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