GABELLI & COMPANY AUTOMOTIVE AFTERMARKET SYMPOSIUM OCTOBER 2017 INDUSTRY OVERVIEW
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
PRESENTATION AGENDA Market AASA Point of View New Aftermarket Realities Where Do We Go From Here
PRESENTATION AGENDA Market AASA Point of View Strong Market Fundamentals Decelerating Growth? Future Bright?
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, 2017 1 2017 light vehicles, source: IHS Markit; 2 2017 light vehicles, source: IHS Markit; 3 2016, source: Federal Highway Administration; 4 regular gasoline, 8/07/17, U.S. Energy Information Agency; 5 2017 Real GDP growth forecast, U.S. Federal Reserve, June 14 FOMC release; 6 8/17, source: U.S Bureau of Labor Statistics 5
WHICH HAS LED TO A STRONG, STABLE, AND ATTRACTIVE $277 BILLION AFTERMARKET 300 250 Aftermarket Size in Billions of Dollars U.S. aftermarket has doubled in size in the last 20 years $277 200 150 $139 100 AASA, the Automotive Aftermarket Suppliers Association, 2017 50 - Source: AASA / ACA Joint Channel Forecast by IHS Markit; 1997 2012 are historical actuals; 2013 2016 are IHS modeling based on economic actuals; 2017 2020 are forecasts. 6
PRESENTATION AGENDA Market AASA Point of View Strong Market Fundamentals Decelerating Growth? Future Bright?
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
WE HAVE RECENTLY ENJOYED ABOVE TREND GROWTH 2008-9: Great Recession 2010-12: Recovery 2014-16: Gas prices, miles driven, employment Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit; - AASA/ACA Joint Channel Forecast; AASA Analysis; Trendline based on 2003-2016 9
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
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% 2013 2014 2015 2016 F2017 F2018 F2019 F2020 Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit; AASA Analysis 11
CARS AT RECORD AGE, BUT SLOWING RATE OF INCREASE Average Age in Years 12 11 Age of Vehicles In Use Average Age Change in Age YOY 10.6 10.9 11.1 11.3 11.4 11.5 11.6 Change in Age YOY (Years) 11.7 11.7 11.8 0.3 0.2 10.3 10 9.8 9.8 9.9 10.0 0.1 9 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 F2017 F2018 F2019 Change in Age YOY Average Age of Vehicles 0 Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit; AASA Analysis 12
MILES DRIVEN POSITIVE, BUT SLOWING RATE OF INCREASE % Change in Miles Driven YOY 4% Miles Driven 3% ~+2.0% 2% 1% 0% -1% Forecast 2017-2020 IHS ~+0.95 % Forecast 2017-2020 EIA -2% * 2017-2020 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
GAS PRICES LOW BUT UNLIKELY TO SUPERCHARGE GROWTH $3.80 $3.60 3.62 3.52 3.51 $/Gallon Regular $3.40 3.3 $3.20 $3.00 $2.80 $2.60 $2.40 $2.20 2.43 2.15 2.33 2.33 $2.00 2011 2012 2013 2014 2015 2016 2017F 2018F Automotive Aftermarket Suppliers Association 2017 Source: Energy Information Agency: Short-Term Energy Outlook, 8 8 2017 14
LOW UNEMPLOYMENT, BUT NO BIG DELTA LIKE 2010-16 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% 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F Automotive Aftermarket Suppliers Association 2017 Source: IHS Markit 15
HEADWIND: REPLACEMENT RATES FOR MANY PARTS HAVE DECLINED, 2006-2016 Chart Title Parts Replacement Rates Positive Change Negative Change Source: IMR / AASA replacement rate reports
WHAT IMPACT FROM HURRICANES HARVEY AND IRMA? definitely half a point on the sales [lost in Q3]. Sales boost 60-90 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
PRESENTATION AGENDA Market AASA Point of View New Aftermarket Realities Where Do We Go From Here
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
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 $30 2015 2030 Source: McKinsey, 1/16; note that AAPEX analysis indicates the global aftermarket was $740 billion in 2016 20
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 2012 2013 2014 2015 2016 2017 2018 2019 2020 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 2012-20 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
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
PRESENTATION AGENDA Market AASA Point of View New Aftermarket Realities Where Do We Go From Here
PRESENTATION AGENDA Market AASA Point of View Strong Market Fundamentals Decelerating Growth? Future Bright?
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) 86 81 80 76 73 71 71 73 At the same time, cars 12+ years in age will grow by 10% 2016-21 2015 2016 2017 2018 2019 2020 2021 2022 Source: IHS Markit, AASA Analysis 25
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% 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F Price Volume 26
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
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
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
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
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
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