AUTOMOTIVE AFTERMARKET OUTLOOK AND REFLECTIONS …

[Pages:5]G.research, LLC One Corporate Center Rye, NY 10580-1435 Tel (914) 921-8336

December 7, 2015

Gabelli & Company

AUTOMOTIVE AFTERMARKET OUTLOOK

AND REFLECTIONS FROM OUR 39th ANNUAL SYMPOSIUM

NOVEMBER 2 ? NOVEMBER 3, 2015

PRESENTING COMPANIES

Company

Exchange

Accuride Corporation

NYSE

Autoliv Inc.

"

AutoNation

"

AutoZone, Inc.

"

Clarcor

"

Cooper Tire & Rubber

"

Dana Holding Corporation

"

Donaldson Company

"

Genuine Parts Company

"

Lear Corporation

"

Lithia Motors

"

Monro Muffler Brake, Inc. NASDAQ

Motorcar Parts of America

"

Navistar International Corp. NYSE

O'Reilly Automotive

NASDAQ

Penske Automotive Group NYSE

Rush Enterprises, Inc.

NASDAQ

Standard Motor Products

NYSE

Superior Industries

"

Tenneco Inc.

"

Tower International

"

Uni-Select (b)

TO

(a) Adjusted for splits and dividends

(b) Prices in Canadian Dollars

Ticke r ACW ALV AN AZO CLC CTB DAN DCI GPC LEA LAD MNRO MPAA NAV ORLY PAG RUSHB SMP SUP TEN TOWR UNS

11/4/2013 11/4/2014 11/4/2015

Price (a) Price (a) Price (a)

$ 3.35 $ 4.71 $ 2.65

86.84

89.86 123.66

48.96

55.96

65.32

436.51 554.36 788.75

56.98

65.38

52.09

24.95

31.99

42.61

18.92

19.64

16.64

38.49

40.81

30.86

76.38

95.27

91.32

77.25

90.03 124.17

63.75

73.46 120.61

48.24

51.95

73.24

13.46

29.33

34.30

37.49

34.95

13.14

124.24 177.11 272.52

39.97

43.89

49.53

24.23

31.00

23.59

32.81

38.13

44.31

17.72

17.78

18.93

53.82

51.61

55.11

20.56

23.67

27.18

24.83

27.79

65.62

Brian C. Sponheimer Auto & Cap. Equip. Research (914) 921-8336

A. Carolina Jolly Research Analyst (914) 921-7762

Matthew Paige Research Analyst (914) 921-8358

- Please Refer To Important Disclosures At The End Of This Report -

SYMPOSIUM REFLECTIONS

THE AUTOMOTIVE AFTERMARKET

AUTO DEALERS

AUTO SUPPLIERS

COMMERCIAL TRUCKING

SYMPOSIUM PARTICIPANT GRIDS

COMPANIES ACCURIDE CORPORATION AUTOLIV, INC. AUTONATION, INC. AUTOZONE, INC. COOPER TIRE & RUBBER CLARCOR DANA HOLDING CORP, INC. DONALDSON COMPANY INC. GENUINE PARTS CO. LEAR CORP. LITHIA MOTORS MONRO MUFFLER BRAKE, INC. MOTORCAR PARTS OF AMERICA NAVISTAR INTERNATIONAL, INC. O'REILLY AUTOMOTIVE, INC. PENSKE AUTOMOTIVE GROUP, INC. RUSH ENTERPRISES, INC. STANDARD MOTOR PRODUCTS, INC. SUPERIOR INDUSTRIES TENNECO, INC. TOWER INTERNATIONAL, INC. UNI-SELECT, INC.

SAVE THE DATE!

TABLE OF CONTENTS

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Table 1

Auto Stocks as % of the S&P 500

(Millions)

COMPONENTS

Automobile Manufactuers

Ford General Motors TOTAL

Share s Outs tanding*

10/31/15

3,898 1,556 5,454

Oct 31, 2013

Oct 31, 2014

Oct 31, 2015

Market % S&P Market % S&P Market % S&P

Value

Inde x

Value

Inde x

Value

Inde x

66,277 51,323 $ 117,600

0.79% $

53,230 50,450 103,680

0.55% $

57,726 54,326 112,052

0.58%

Auto Parts & Equipment

BorgWarner Dana Delphi Honeywell Johnson Controls TOTAL

226 153 280 782 654 1,869

7,490 2,878 17,743 47,724 31,620 $ 107,455

0.72% $

11,735 3,466 20,424 67,709 31,469 134,802

9,691 Not in S&P

23,231 80,740 29,551 0.71% $ 143,213

0.75%

Automotive Retail

Advance Auto Parts AutoNation AutoZone Carmax O'Reilly Automotive TOTAL

73

Not in S&P

Not in S&P

14,528

111

5,847

6,478

6,990

30

14,793

17,735

23,913

208

6,806

7,538

12,277

99

9,607

9,214

27,461

522

$

37,053

0.25% $

40,965

0.22% $

85,169

0.44%

Construction, Farm mMchinery, Heavy Trucks

Caterpillar Cummins Deere Paccar TOTAL

582 178 328 355 1,443

53,047 23,687 31,332 19,617 $ 127,683

0.85% $

61,394 26,706 30,659 23,176 141,934

0.75% $

42,497 18,386 25,597 18,604 105,084

0.55%

Dis tributo rs

Genuine Parts

152

$

12,168

0.08% $

14,862

0.08% $

13,759

0.07%

Industrial Machinery

Eaton Corp.

463

$

33,481

0.22% $

32,458

0.17% $

25,625

0.13%

Tires & Rubber

Goodyear Tire & Rubber

269

$

5,177

0.03% $

6,653

0.04% $

8,831

0.05%

Total Auto Components & Equipment

* All shares are basic and split adjusted from prior years

$ 440,617 2.95% $ 475,354 2.51% $ 493,733 2.61%

Source: Standard & Poor's, Thomson Reuters

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SYMPOSIUM REFLECTIONS

Aftermarket: Optimism reigns, tech beginning to become focus Demographics still overwhelmingly positive. Not surprisingly, retailer and suppliers alike spoke to demographics (miles driven, vehicle age, cars in operation, lower gas prices) as still very much tailwinds for the automotive aftermarket and are likely to remain so for the foreseeable future.

Retailers and distributors will continue to flex their strength over the supply base. The "Big 4" (ORLY, AZO, GPC, AAP) continue to expand their respective store bases amidst an auto parts store population that is fairly static. Thus, the parts that producers sell are increasingly being purchased by stronger buying groups that are continuously becoming more important. While the industry has been without all-important price inflation for some time, it may be that when inflation does take place that suppliers do not participate to the same extent as their customers given the increasing buying power of the "Big 4".

Factoring terms likely flattening. DIY and DIFM retailers and distributors have overwhelmingly benefited over the past several years from payables factoring programs. These programs have enabled the "Big 4" to extend payable terms to suppliers, in many cases up to 360 days, effectively moving the burden of inventory finance from the customer to the vendor. We believe that payables dating has likely reached or is nearing an equilibrium, meaning that cash flow from retailers and distributors will more closely mirror earnings less capital expenditures and not be inclusive of additional cash from massive reductions in working capital.

Telematics will change the industry. Vehicle connectivity is about to set the next battlefield for the aftermarket dollar. With cars becoming increasingly Wi-Fi and data enabled, auto dealers will be able to engage with owners earlier in a vehicle's life. This will, in effect, give dealers an opportunity to reach out and garner aftermarket maintenance work well ahead of when the consumer would normally choose to get that work done (work that, in many cases, would have been handled by an independent aftermarket service provider). Theoretically, a better serviced car population would mean that cars could stay on the road longer, providing more opportunities for older vehicles to require maintenance parts.

Along those lines, it will become increasingly important for the independent aftermarket and its suppliers to better understand vehicular needs as parts proliferation increases and technicians require access to a greater number of SKUs in order to effectively compete with dealers.

DIY will continue to lose share. Increasing electronic and technology content, greater SKU count, and general changes in consumer time availability/desire to do their own repair work will continue to create headwinds for traditional parts shops that cater predominately to DIY customers.

Battle for Commercial business will intensify. With the business unquestionably heading towards greater share in the DIFM market, AAP and AZO are continuing to intensify plans to better compete with traditional DIFM stalwarts GPC and ORLY. Both Advance and AutoZone are embarking upon major distribution center investments to increase deliveries per day/week and, ultimately, parts availability.

Legislative forces are impacting business profits and the industry must work to shape policies for new technology. The AASA spoke to the need for collaboration at the regulatory level to ensure that its members were given access to vehicular architecture. Without equal access to vehicles, suppliers will argue that the broader aftermarket will be underserved, creating a situation where 1) consumers are disadvantaged by only being able to go to dealers and 2) aftermarket parts suppliers will suffer as OE parts gain share.

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Dealers: 17+ million cars in 2016, focus on Used, Parts &Service

Speakers were generally positive on US market. While growth rates will clearly decelerate, presenting dealers spoke to general optimism for the new vehicle retail market over the next 2-3 years. A stronger job market (more buyers), elevated vehicle age, favorable finance terms, generally high used vehicle prices, and attractive new vehicle technology are all expected to contribute to another year of >17 million units in sales. Additionally, market forces appear substantially positive in such a manner that AutoNation, Penske, and Lithia see the possibility for >16 million SAAR into the future.

Used car growth upcoming. With new vehicle growth decelerating, dealers are increasingly looking to grow their used vehicle presence. The used car retail market is upwards of 3x the size of that of new vehicle sales, and offers dealers the opportunity for additional Parts & Service work that 1) adds revenue and profit and 2) offers better bay utilization for dealers.

Landscape consolidation will continue. Berkshire Hathaway's entrance into the auto retailing world through its March 2015 purchase of the Van Tuyl Group has not been followed up with any further announcements. What is clear, however, is that the strong cash flow and competitive dynamics associated with running auto dealerships is continuing to attract new buyers looking to consolidate, with many new entrants including private equity groups that are looking to partner with existing operators. We expect dealers to continue to use excess free cash to buy more dealers (AutoNation's recent announcement of its purchase of 12 stores from Allen Samuels Group in Texas is the latest example).

As stated above, telematics will play a vital role in dealers gaining Parts & Service share by enabling contact between dealer and owner to schedule predicted maintenance.

Volkswagen's woes are still in their infancy, with little done thus far to remedy the root cause of its emissions issues. While VW is providing dealers with some floorplan relief for affected inventory along with some cash offers to diesel VW owners, the company has yet to roll out an articulated plan for a fix to its diesel engine problems.

Suppliers: Diesel isn't dead, tech a major M&A focus

Still a growth industry. Presenting managements unsurprisingly consider OE Auto Parts supply to be a growth industry. Further comments from Motor & Equipment Managers Association (MEMA) backed up these opinions, citing IHS expectations for growth in global annual light vehicle production to 113 million units in 2025 from 87 million in 2015.

Volkswagen impact still unknown. From a suppliers' perspective, it is still too early to know what exactly the near and long-term impact of VW's emission scandal will have on the company. While other large scandals have undoubtedly hurt near-term sales (Toyota in particular), in general consumers tend to have short memories and market share usually shows some recovery. Most suppliers felt that the impact on share for VW in the US will be small given the relatively small number of vehicles affected. The broader problem for the company exists in Europe, where diesel share is significantly higher and competition is already steep in small displacement diesel engine markets.

Diesel far from dead. Most presenters think diesel technology in light vehicles will not be dramatically affected by the VW scandal. Diesel engines offer significantly better fuel economy and are critical components for automaker reduction of CO2 in Europe. General consensus in Las Vegas was that VW's issues were its own and not indicative of any material hit to diesel usage in Europe. 4

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