GABELLI & COMPANY AUTOMOTIVE AFTERMARKET SYMPOSIUM OCTOBER 2017 INDUSTRY OVERVIEW. Industry Overview 2017 Gabelli Conference

Transcription

1 GABELLI & COMPANY AUTOMOTIVE AFTERMARKET SYMPOSIUM OCTOBER 2017 INDUSTRY OVERVIEW

2 PRESENTATION AGENDA 1. What is MEMA & Why Suppliers Matter 2. Mega-Trends: Opportunities from New Technologies 3. New Aftermarket Realities Where Do We Go From Here? Steve Handschuh President and CEO, MEMA Paul McCarthy Senior Vice President, Strategy, MEMA Executive Vice President, AASA Bill Long President and COO, AASA 4. Q&A All

3 PRESENTATION AGENDA Market AASA Point of View New Aftermarket Realities Where Do We Go From Here

4 PRESENTATION AGENDA Market AASA Point of View Strong Market Fundamentals Decelerating Growth? Future Bright?

5 VERY STRONG MARKET FUNDAMENTALS Fundamentals Status U.S. Statistic VIO Big and Growing 279 million 1 Avg. Vehicle Age High; Increasing 11.7 years 2 Miles Driven Record Levels 3.22 Trillion 3 Fuel Prices Low $2.38/gallon 4 Economy Growing 2.2% 5 Unemployment 16-year Low 4.3% 6 AASA, the Automotive Aftermarket Suppliers Association, light vehicles, source: IHS Markit; light vehicles, source: IHS Markit; , source: Federal Highway Administration; 4 regular gasoline, 8/07/17, U.S. Energy Information Agency; Real GDP growth forecast, U.S. Federal Reserve, June 14 FOMC release; 6 8/17, source: U.S Bureau of Labor Statistics 5

6 WHICH HAS LED TO A STRONG, STABLE, AND ATTRACTIVE $277 BILLION AFTERMARKET Aftermarket Size in Billions of Dollars U.S. aftermarket has doubled in size in the last 20 years $ $ AASA, the Automotive Aftermarket Suppliers Association, Source: AASA / ACA Joint Channel Forecast by IHS Markit; are historical actuals; are IHS modeling based on economic actuals; are forecasts. 6

7 PRESENTATION AGENDA Market AASA Point of View Strong Market Fundamentals Decelerating Growth? Future Bright?

8 RECENT CONCERNS / HEADLINES ABOUT SLOWING GROWTH 10% Big 4 Sales Trend 8% 6% 4% 2% 0% -2% 5-Yr Sales 1-Yr Sales Latest Quarter SSS -4% Advance AutoZone GPC O'Reilly 8 Source: Jeffries, and company quarterly reports; SSS = same store sales

9 WE HAVE RECENTLY ENJOYED ABOVE TREND GROWTH : Great Recession : Recovery : Gas prices, miles driven, employment Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit; - AASA/ACA Joint Channel Forecast; AASA Analysis; Trendline based on

10 MARKET SUMMARY: GROWTH RETURNING TO TREND? Market outperforming trend in recent years, as we enjoyed large, unusually positive deltas in key market drivers like VIO, vehicle age, miles driven, employment and fuel prices This may have led to unrealistic expectations Recent market numbers likely suppressed by unusually mild weather, higher gas prices, weak miles driven growth, etc. Many struggling to see the growth to meet plan or expectations We are still a large, stable, attractive market Market Fundamentals at a high, strong level but may not be accelerating in the same way that drove above-trend growth in recent years. Sales aren t declining so much as growth is 10

11 VIO GROWING, BUT GROWTH RATE DECELERATING 3.5% 3.0% 2.5% 2.0% The increase in VIO that drove high market growth in recent years Motor Vehicle Stock, % Change YOY 1.9% 2.1% 2.3% 2.0% 1.8% will continue but slow, which might dampen the growth rate in aftermarket parts volume 1.6% 1.5% 1.3% 1.5% 1.0% 0.5% 0.0% F2017 F2018 F2019 F2020 Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit; AASA Analysis 11

12 CARS AT RECORD AGE, BUT SLOWING RATE OF INCREASE Average Age in Years Age of Vehicles In Use Average Age Change in Age YOY Change in Age YOY (Years) F2017 F2018 F2019 Change in Age YOY Average Age of Vehicles 0 Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit; AASA Analysis 12

13 MILES DRIVEN POSITIVE, BUT SLOWING RATE OF INCREASE % Change in Miles Driven YOY 4% Miles Driven 3% ~+2.0% 2% 1% 0% -1% Forecast IHS ~+0.95 % Forecast EIA -2% * Source: IHS Markit *Annualized YTD as of July 2017 Automotive Aftermarket Suppliers Association 2017 Source: Department of Transportation; IHS Markit; Energy Information Agency, AASA Analysis 13

14 GAS PRICES LOW BUT UNLIKELY TO SUPERCHARGE GROWTH $3.80 $ $/Gallon Regular $ $3.20 $3.00 $2.80 $2.60 $2.40 $ $ F 2018F Automotive Aftermarket Suppliers Association 2017 Source: Energy Information Agency: Short-Term Energy Outlook,

15 LOW UNEMPLOYMENT, BUT NO BIG DELTA LIKE TO DRIVE DEMAND 10.3% 9.3% 9.3% 8.9% U.S. Unemployment Rate 8.3% 7.3% 6.3% 8.1% 7.4% 6.2% 6.3% 5.3% 4.9% 4.3% 4.2% 3.9% 4.0% 3.3% 2.3% F 2018F 2019F Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit 15

16 HEADWIND: REPLACEMENT RATES FOR MANY PARTS HAVE DECLINED, Chart Title Parts Replacement Rates Positive Change Negative Change Source: IMR / AASA replacement rate reports

17 WHAT IMPACT FROM HURRICANES HARVEY AND IRMA? definitely half a point on the sales [lost in Q3]. Sales boost days after the storm potential to level out the losses. Carol Yancey, CFO Genuine Parts Co IHS Markit September 2017 Report HOUSTON FLORIDA VIO ~9.8 million VIO ~14.4 million REPLACEMENT ~400k to 500k ORLY has most stores Hurricane Harvey REPLACEMENT ~550k-700k AAP has most stores Hurricane Irma Sources: IHS Markit; Jefferies; Seeking Alpha

18 PRESENTATION AGENDA Market AASA Point of View New Aftermarket Realities Where Do We Go From Here

19 NEW AFTERMARKET REALITIES: DISRUPTORS Need for Access to Data E-tailing & Amazon Driver Assist / Automation Connected Car / OTA Shops able to repair new technologies? Software, DMCA Consolidation Telematics & Prognostics Electrificatoin Generation Shift Trade & Tax policy Shop of the future? Anything but business as usual as we look to the future of the aftermarket 19

20 MOBILITY TREND MAY LEAD, OVER TIME, TO GOLDEN AGE FOR AFTERMARKET and with it the size of the aftermarket: Significant growth $3,000 McKinsey size of global aftermarket, highdisruption scenario, $ billion Increasing opportunities new aftermarket services $2,500 $2,000 $1,500 $1,000 $500 $720 $1,200 $1,500 Traditional Aftermarket New Services (shared mobility, data connectivity, apps, remote service and upgrades, etc.) $0 $ Source: McKinsey, 1/16; note that AAPEX analysis indicates the global aftermarket was $740 billion in

21 E-TAILING SMALL PART OF MARKET; LARGER SHARE OF GROWTH Source: AASA / ACA Joint Channel Forecast by IHS Markit; AASA Analysis E-tailing Sales $7.1B +$0.7B Pure Play E-tail Contribution to Total Aftermarket Sales Sales do not include etailing sales of traditional brick and mortar retailers such as Walmart or AutoZone. +$0.8B +$0.9B +$1.0B +$1.0B +$1.1B +$1.1B It is estimated that e-tailing will double in size E-tail growing faster than the overall market. By taking a disproportionate share of growth in a slower growth market, it is likely to reduce the growth metrics of established players 21 E-tailing Sales $14.9B

22 MOAT AGAINST E-TAILING VARIES WIDELY BY PRODUCT AND MARKET SEGMENT Easier to Sell Online Easily digitized Highly standardized Low weight/volume Drivers of Online Penetration PRODUCT CHARACTERISTICS Physical products Relatively standardized Harder to Sell Online Physical products Individualized, not standardized Perishable/short shelf life Complex product/ installation High weight/volume relative to price Low touch Discretionary purchase MARKET CHARACTERISTICS Physical handling and sale Discretionary purchase Assisted sale Same-day delivery Assisted sale Immediate fulfillment Relationship-based sale Source: AASA e-tailing report, Booz & Co. 22

23 PRESENTATION AGENDA Market AASA Point of View New Aftermarket Realities Where Do We Go From Here

24 PRESENTATION AGENDA Market AASA Point of View Strong Market Fundamentals Decelerating Growth? Future Bright?

25 REPLACEMENT SWEET SPOT BOTTOMING OUT; POISED TO RESUME GROWTH Post-recession new vehicle sales increases will move into the aftermarket sweet spot in 2019, joining the increasing number of cars older than 12 years Number of Vehicles in 'Sweet Spot' 6-11 Years Old (Millions) At the same time, cars 12+ years in age will grow by 10% Source: IHS Markit, AASA Analysis 25

26 GROWTH COMING FROM PRICE OF HIGHER TECHNOLOGY PARTS 8.0% 7.0% 6.0% 5.0% Growth Rate Contributions Price versus Volume Increasing technology complexity, lightweighting, friction reduction, ADAS, electrification, sensorization, etc. will increase parts value Source: AASA / ACA Joint Channel Forecast by IHS Markit; AASA Analysis 4.0% 3.0% 2.0% 1.0% 0.0% 4.9% 1.6% 2.0% 2.5% 2.6% 1.3% 0.4% 0.2% 0.2% 1.8% 1.6% 1.7% 1.8% 1.7% 2.2% 2.9% 3.2% 3.1% F 2018F 2019F 2020F Price Volume 26

27 MOBILITY TREND MAY LEAD, OVER TIME, TO GOLDEN AGE FOR AFTERMARKET (1/2) Mobility & automation will ultimately lead to significant increase in miles-driven Source: Morgan Stanley, 6/16 U.S. forecast to grow from 3 to 5 trillion miles driven 27 Basic economic equation: good becomes more appealing (automation frees up time for work, entertainment, consumption) + cheaper per unit of use (increased safety, shared mobility models) = increased demand May happen a bit later than forecasts, which are overoptimistic on automated vehicle timing. But this is our future

28 AFTERMARKET FUTURE BRIGHT? Market large, stable, attractive a market that the rest of the auto or retail industries would love to have U.S. OE volume softening, increasing incentives Consumer price inelasticity when needs repaired, it needs repaired Turned corner on sweet spot Parts complexity increasing cost per part; mega-trends of fuel economy regulations and sensorization accelerating opportunity Mobility trends likely to dramatically increase miles driven and size of the aftermarket Global growth for aftermarket sector A generation of OE global unit growth coming into the aftermarket 28

29 WHAT TO LOOK FOR: POTENTIAL NEW POSITIVE DELTAS FOR U.S. AFTERMARKET Potential new drivers of positive deltas to further stimulate near-/mid-term U.S. aftermarket growth rates: Inflation General economy Industry-specific Increased economic growth rate Increased consumer spending power Increased failure rate of new technology Large technology deltas have historically led to temporary increased More fuel-efficient, lightweighted, lower-friction technologies Infotainment and electronics / software / sensor content Longer-term drivers of growth (automation, global) are positive 29

30 WHERE DO WE GO FROM HERE? To grow, the aftermarket needs to: Take advantage of the opportunities that increasing vehicle technology and parts complexity bring Ensure aftermarket remains the provider of choice Now, more than ever, suppliers and channelpartners must collaborate for mutual growth and long-term success 30

31 PRESENTATION AGENDA 1. What is MEMA & Why Suppliers Matter Steve Handschuh President and CEO, MEMA 2. Cross-Industry Mega-Trends Paul McCarthy Senior Vice President, MEMA Strategy, Planning & Information Services 3. New Aftermarket Realities Where Do We Go From Here? Bill Long President and COO, AASA 4. Q&A ALL

32 THANK YOU