brake manufacturers council general meeting las vegas, nv october 31, 2011

Brake Manufacturers CouncilGeneral Meeting

Las Vegas, NV

October 31, 2011

Agenda

• Welcome and Introductions – Bob Wilkes

• Review of Anti-trust Guidelines – Sarah Bruno

• Industry Analysis – Paul McCarthy

• MEMA Government Affairs Update – Ann Wilson

• SAE Task Force Update – Greg Vyletel

• Wrap-up and Adjourn – Bob Wilkes

Antitrust Guidelines

It is the unqualified policy of the Motor & Equipment Manufacturers Association to conduct its operations in strict compliance with the antitrust laws of the United States.

MEMA's antitrust policy prohibits any discussions which constitute or imply an agreement or understanding concerning: 1) prices, discounts, or terms or conditions of sale; 2) profits or profit margins or cost data; 3) market shares, sales territories or markets; 4) allocation of customers or territories; 5) selection, rejection or termination of customers or suppliers; 6) restricting the territory or markets in which a company may resell products; 7) restricting the customers to whom a company may sell; or 8) any matter which is inconsistent with the proposition that each manufacturer, wholesaler and distributor must exercise its independent business judgement in pricing its services or products, dealing with its customers and suppliers and choosing markets in which it will compete.

Aftermarket Point-of-View11/2011

Paul McCarthyVice President, Industry Analysis

Automotive Aftermarket Suppliers Association

This presentation is the property of the Automotive Aftermarket Suppliers Association (AASA) and subject to the protection of copyright, trademark and other intellectual property laws. No portion of this presentation may be reproduced or distributed (including by email) without the prior written consent of AASA.

Agenda

1. Recent Publications

2. Aftermarket Outlook:A. Why to be ConcernedB. Why to be Positive

3. Pulse: Supplier KPI Benchmarks

4. Upcoming Study: Longer Terms & Factoring

Status Report, World Motor Vehicle Market Report, Replacement Rates

World vehicle census by countryGlobal production and assemblyWorld trade in motor vehiclesWorld motor vehicle markets

On your memory cards and available for download on AASA website

Market sizeProduct durabilityParts demand

trends

Unperformed maintenanceAftermarket size and growthSize and growth of key

subsectorsVehicle population and usageOutlet channel market shareDIY market share trends

AASA Barometer: Very positive response to recent changes

If you’re one of the few that doesn’t participate, START!

• Insight, not data

• “So what” and trends clear

• More timely: use in quarterly management / investor reports

• Participation at all-time high

• Participants received a lot of this presentation’s content a month ago!

Barometer Changes

AASA Pulse: Supplier KPI Benchmarks

• Survey out in April

• So can better use in business planning

• PLEASE PARTICIPATE – you’re missing out if you don’t

Next Year

• New multiple choice format took average completion time down to 6 minutes

• Completely new report focused on the “so what” for your business

• Very favorable AASA Board feedback

• You’ll see select results in this deck

Big Changes This Year

Jeff Brekke (Gates): “I’m blown away by this report. This really is great business information you can’t get anywhere

else.”

•Recession expectations•What recession would means for aftermarket

•Impact of raw material prices•Impact of higher fuel prices•Japan disaster impact

New fuel economy regulations: Why

they may be good for the aftermarket

High Gas Prices: Is It Different This

Time?

Timely Barometer

feedback on the issues facing your business

Special Reports & Timely Analysis

A copy should be on the table in front of each of

you

Follow-up to Aftermarket 2020: Leveling the Playing

Field

If you missed it, other recent AASA Industry Analysis:

Agenda





Is the sky falling?

• There has been a lot of talk about recession risk, economic stagnation, and slowing growth

• What does this mean for the aftermarket?

• Should we be concerned or positive about the outlook?

Agenda





General economic trend is worrisome

NAM Economic Conference

•35-40% chance of recession

•Very vulnerable economy

•Two risks could easily tip us into recession:

1. European meltdown causes a banking crisis

2. Ill-timed fiscal tightening (either tax increase or big near-term government cuts)

Best case: Slow-growth “new normal”Consumer Confidence at recession

levels

Aftermarket suppliers are predicting a recession

AASA members’ outlook continued to worsenSentiment in the aftermarket in the range seen during last recession

Persistently high gasoline prices remain a drag on performance

Weekly U.S. Regular All Formulations Retail Gasoline Prices (Dollars per Gallon)Source: Energy Information Administration

$3.42/gal 10/24/11

Miles driven is stagnating after 3 decades of steady growth

Source: US DOT

It’s harder for consumers to afford to maintain and repair vehicles

Number of US Americans who: %

Can’t pay for a $2,000 repair ~25%

Can afford a $2,000 repair from savings 38%

Can afford a $1,000 repair from savings 46%

Neglected car repairs & maintenance in the last 12 months due to economy

~25%

Holding on to older vehicle because they don’t want the financial burden of a new one

>50%

Sources: AAA

Rate of aftermarket supplier sales growth has declined for four consecutive quarters

Gro

wth

Note: “No change” is shown as neutral (as a zero value) on the chart to allow a visual depiction of

trends

Agenda





Addressable market – US parc – is enormous and stable

Source: Polk

Gas prices alleviating; a price spike is unlikely given slow global growth

Weekly U.S. Regular All Formulations Retail Gasoline Prices (Dollars per Gallon)Source: Energy Information Administration

Every $0.01 decrease moves $1 Billion into vehicle

owners’ pockets (annualized)

Aftermarket is growing robustly compared to other sectorsThere is no perfect measure, but all indicators are up

Sources: US Census Department, BB&T, AASA Barometer

Source Growth Rate

Retail sales - Auto parts, accessories & tire store (US Census)

+5.4% (Jan-Aug.)

Same-store sales, retailers & distributors (BB&T)

+3.2% in Q2

Manufacturer sales (AASA Supplier Barometer)

+6.1% in Q3

Vehicle age – the primary aftermarket driver – continues to increase

Source: Polk, Ward’s

8.0

8.5

9.0

9.5

10.0

10.5

11.0

2002 2003 2004 2005 2006 2007 2008 2009 2010

Average Age of Light Vehicles in Use (Years)

Next year, we will have the highest

number of vehicles out of warranty ever

The aftermarket sweet spot is shifting and broadening

Source: AASA Status Report, IMR, DesRosiers, Experian

“Age of vehicles that come into our shops used to be 6-10 years … but has widened to 4-12 years”

– Rob Gross, Chairman, Monro

•Vehicles >10 years old make up 46.6% of the aftermarket and will exceed 50% by 2013

•Weak economy and increasing vehicle durability changing the “repair or replace” equation

The trend is shifting back to DIFM after a DIY spike in the downturn

Source: IMR Inc., AASA Status Report

There is still pent-up demand for vehicle repair

• 2010 tied with the second-highest level ever, reached during the recovery from the last economic downturn

• Unemployment and tight household budgets caused many to put off maintenance and repairs unless they were unavoidable

Source: AASA Status Report, IMR, Experian

Which means our market could and should be much larger

Source: AASA Status Report, IMR, Experian

Even if a recession comes, 79% of suppliers think the aftermarket will outperform the general economy

Do you think the aftermarket will outperform the general economy as it did during the last recession?

The automotive aftermarket is much less cyclical than the OE market

Sources: AASA Status Reports (2003, 2010), Census Bureau, Ward’s, NBER, AASA analysis

Note: gray bars = recessions

This counter-cyclical behavior helps the attractiveness of the aftermarket to investors

Source: BB&T

Strong Operating Results Translates to Stock Outperformance

Automotive Aftermarket Suppliers: CTB, DORM, FDML, GT, MPAA, SPM, SNA; Professional Repair: MDS, MNRO, PBY; Retailers & Distributors: AAP, AZO, GPC, KAR, ORLY, PBY, PRTS, UNS; Collision: BYD.UN, CPRT, KAR, LKQX, SLH

Longer term, new U.S. fuel economy regulations are good for the aftermarket

New fuel economy standards will reduce the cost per mile driven, incentivizing miles driven and the aftermarket

Sources: AASA Status Reports (2003, 2010), Census Bureau, Ward’s, NBER, AASA analysis

Global vehicle population growth provides increasing opportunities

Source: Polk, Ward’s

We’ve passed a billion vehicles globally

CAGR2005-2010

5.7%

Outlook is positive: 89% of aftermarket suppliers are predicting growth for their company in 2012

Conclusion

• The sky is not falling in the aftermarket

• Aftermarket offers products and services that remain remarkably resilient even in difficult economic times

• Though we see shifts in:• Demand drivers• Winners and losers

Agenda





AASA Pulse Excerpts:Supplier KPI Benchmarks

2011 AASA Pulse: Supplier KPI Benchmarks

38

Returns


39

Total returns generally declined year-over-year


40

Share of Total Returns by CategoryWarranty and Stock/Obsolescence returns make up 87% of total

returns


41

Warranty ReturnsWarranty returns decreased significantly year-over-year


42

Stock and Obsolescence ReturnsHowever, median stock adjustments increased significantly;

customers appear to be watching inventory carefully given the uncertain demand


43

Fill Rates & Operations


44

Fill Rate – by Unit VolumePerformance decreased year-over-year, especially for low

performers; this is perhaps due to the challenges of meeting increased demand

However, competitive differentiation is small for most suppliers: median is close to top quartile, and at the industry target of 95%


45

Order TurnaroundOrder fill rate improved dramatically year-over-year, especially for the highest performers, as less than 24 hour turnaround become

more common


46

Order TurnaroundIn 2010, two models appear to predominate: either order turnaround

in less than 24 hours (26% of respondents) or 2-3 days (54%)


47

Financial Metrics


48

Published PricesResults indicate a significant year-over-year decline in supplier

pricing power

Decline is shocking considering increases in input prices and demandNote: Responses do not represent actual price changes; just changes in listed prices on published jobber price sheets


49

Gross MarginGM performance varies widely in the industry: 34% are above 35%

GM, while 32% are at worrisome levels of 19% or below


50

Aftermarket R&DAftermarket R&D intensity is generally very low, but there are

exceptions to this rule

38% spend <1% of sales on R&D, while 7% are

at 5% or higher spending


51

Sales Force


52

Sales Commissions1-3% is the most common range of sales commissions for

manufacturer reps, but some give much higher commissions (average is 3.3%)


53

Results Segmented by Company Size


54

ReturnsSmaller suppliers appear to keep their return rates lower; this may

be a function of the product segments they compete in

Respondent Revenue SizeMetric <=$150M $151-500M >$500MTotal returns Upper Quartile 6.2% 9.6% 5.5% Median 2.9% 4.7% 5.2% Lower Quartile 1.1% 3.6% 3.8% Mean (Avg.) 3.8% 8.1% 4.5%


55

Fill RatesLarger enterprises appear to have an advantage in terms of fill rate

Respondent Revenue SizeMetric <=$150M $151-500M >$500MFill rate as a % of unit volume Upper Quartile 97.0% 97.0% 97.0% Median 93.0% 95.0% 97.0% Lower Quartile 85.0% 92.0% 93.0% Mean (Avg.) 90.7% 92.5% 95.2%


56

Operational & Shipping MetricsThere are much higher rates of vendor direct and drop shipments

for larger companies; in future, those business models may migrate to smaller players

Respondent Revenue SizeMetric <=$150M $151-500M >$500MVendor direct (% of business) Upper Quartile 1.5% 4.0% 15.5% Median 1.5% 3.0% 6.5% Lower Quartile 0.0% 1.0% 3.5% Mean (Avg.) 1.9% 2.8% 11.9%Drop shipments/cross docking (% of business) Upper Quartile 5.5% 10.0% 15.0% Median 0.8% 3.5% 12.5% Lower Quartile 0.0% 3.5% 3.1% Mean (Avg.) 3.0% 6.0% 11.6%


57

Financial MetricsPricing power appears to be stronger at the extremes - larger

companies and smaller niche players

Respondent Revenue SizeMetric <=$150M $151-500M >$500MJobber price sheet (weighted % change) Upper Quartile 4.5% 2.0% 3.5% Median 2.5% 1.5% 3.5% Lower Quartile 1.5% 0.0% 2.8% Mean (Avg.) 2.8% 1.1% 3.9%


58

Financial MetricsAftermarket supplier SG&A costs tend to increase as the company

size increases

Respondent Revenue SizeMetric <=$150M $151-500M >$500MSG&A (% of aftermarket sales) Upper Quartile 15.0% 15.0% 15.0% Median 8.0% 10.0% 12.0% Lower Quartile 5.0% 5.0% 10.0% Mean (Avg.) 9.8% 10.9% 11.3%


59

Financial MetricsLarger companies appear to have significantly lower GM than their

smaller competitors

Respondent Revenue SizeMetric <=$150M $151-500M >$500MGross margin (weight average, aftermarket) Upper Quartile 37.5% 40.0% 27.5% Median 37.5% 37.5% 23.5% Lower Quartile 20.5% 19.0% 18.3% Mean (Avg.) 29.8% 29.9% 22.5%

Agenda






61

AASA Pulse: Terms & Conditions


62

Longest Terms with a Major CustomerTerms are being extended due to factoring and high customer

bargaining power: avg. longest terms are 165 days and the lower quartile is at 270 days


63

Days Sales OutstandingDSO went down year-over-year, likely due to increasing use of

factoring

High DSO at a small set of outliers increased the 2010

mean over 2009

Terms of doing business are unusual in our industry

64Note: Quarter ending 7/31/2011Sources: AASA MFSG from public filings

General Retailers Aftermarket-only Retailers

The example of one AASA member shows the potential exposure of reverse factoring

65

Metric Impact

Days Sales Outstanding (DSO) 36

DSO without reverse factoring 275

Sensitivity to a 1% increase in interest expense

10.5% reduction in net

income

Source: 10Ks, Public filings, market assumptions, analysis. Findings are directionally correct only

This is symptomatic of the general lack of manufacturer leverage with customers noted in Aftermarket 2020

66

20092008200720062005

Top 3 Retailers(+ ~2% points)

Select Manufacturer

s(– ~2% points)

Booz Aftermarket 2020 Study: Average Gross Margin

1) Average of gross margins weighted by company sales; includes global aftermarket segment of Federal Mogul, Standard Motor Products, Tenneco, and Dorman.

2) Includes AutoZone, Advance Auto Parts, and O’Reilly. Average of gross margins weighted by company sales.Source: Company financials; Analyst reports; Booz & Company analysis

49%48%48%47%47%

19%17%19%21%21%

There are reasons suppliers are doing this

67

Source: 10Ks, Public filings, market assumptions, analysis. Findings are directionally correct only

• Reverse factoring is seen as a financially attractive way to retain or grow sales

– Interest expense is modest at the current time– A low cost of financing versus other facilities

• Incentives/threats from customers to accept longer terms/reverse factoring

• Expedites cash flow into business

Risks are low as long as money is essentially free …

68

• … the Fed rate can reasonably be expected to rise by 500 to 600 basis points when inflation or economic growth returns; similar impact on LIBOR

• Mode (most common value) for Fed funds rate is 5.5% (1990-present)

• Early in the Reagan administration, the Fed Funds rate exceeded 19%

Source: US Federal Reserve; Fed Fund effective rate, monthly data 1990 to 8/2011

… But are rising interest rates the Achilles heel for aftermarket suppliers – in the same way an economic downturn was for US automakers?

69

Detroit 3 AutomakersScenario planning matrix, 2006

Impact

• Economic cycle• Fuel price spike

Result: they weren’t prepared for

inevitable risk and went bankrupt

Aftermarket ManufacturersScenario planning matrix, 2012

Impact

Result: ???Are we prepared for a similar high likelihood/high impact

risk?

• Interest rate increase?

What will study cover?

70

P0tential next steps Value1) Determine the real costs and risks to

the industry• Now• In a rising interest rate environment

• Open dialogue with customers

• As per past successful study on pay-on-scan

2) Investigate alternatives to factoring• Other ways to address working capital

and credit insurance needs

• Help broaden supply base alternatives

3) Suggestions welcome • Needs to be member-driven

Please contact if you are interested in serving on Advisory Committee

Thank you!

Paul T. McCarthyVice President

Industry Analysis, Planning & Member Services

AASA | Automotive Aftermarket Suppliers Association10 Laboratory Drive | Research Triangle Park | NC | 27709

Office: 919.406.8812 | Mobile: 248.914.2567

www.aftermarketsuppliers.org

Brake BreakBe back at 3:30

Legislative Update

Ann WilsonSenior VP Government Affairs

Motor & Equipment Manufacturers Association

Brake Manufacturers CouncilWashington

• Signed into law March 19, 2010• 2014 – no more than trace amounts of asbestos,

cadmium, chromium, lead, & mercury• January 1, 2013 – industry to provide baseline

data on regulated substances• 2015 – risk assessment begins• 2021 – 5% copper content for brake friction

materials

Brake Manufacturers CouncilWashington

• On-ramp important • Inventory run-off essential• Tough Issues

– OES exemption broader than inventory run-off– Encouraged other states!

Brake Manufacturers CouncilCalifornia

• Signed into law September 28, 2010• 2014 – no more than trace amounts of asbestos,

cadmium, chromium, lead, & mercury• 2021 – 5% copper content of brake friction

materials• 2025 – 0.5% copper content of brake friction

materials

Brake Manufacturers CouncilCalifornia

• No fee• No specific Green Chemistry• But no on-ramp• Extensions process outlined for 2025

Washington Better Brakes• Stakeholders meet via conf call bi-weekly

– Includes Reps from Industry (MEMA/BMC, SAE, AAIA), Wash DEC and Calif DTSC, Environmental NGOs, Retailers

• Issues discussed so far:– Self-certification– Edge code marking– Package Labeling/Certification Mark– Exemptions/Exclusions– SAE Test Methodology Task Force

• Timeline Targets– Oct. 28 -1st Draft Rule– Jan/Feb - Public Workshop– May 23 – Formal Rule– June/July - Mandatory Public Hearings– Oct. 17 – Final Rule

State of California• DTSC has not yet started their rulemaking process

– Partly due to change in Governorship and delays in getting state agency appointments for key CalEPA and DTSC posts

– DTSC will continue to work and coordinate with WA DEC.– DTSC will issue guidance. Guidance centers on analytical procedures, certification, and

edge codes. Areas of concern exist.

• MEMA/BMC have been looking at the state’s screening process and expects to prepare recommendations

Self-Certification & Federal Law• U.S. Code definition: “manufacturer” means a person—

– (A) manufacturing or assembling motor vehicles or motor vehicle equipment; or

– (B) importing motor vehicles or motor vehicle equipment for resale.

• National Traffic and Motor Vehicle Safety Act– It is the responsibility of a manufacturer of vehicles and/or items of motor

vehicle equipment to self-certify that each motor vehicle and/or equipment item is in full compliance with the minimum performance requirements of all applicable Federal Motor Vehicle Safety Standards (FMVSSs)

• U.S. has a self-certification system; not type-approval system

81

How Self-Certification Compliance Works

• According to NHTSA Office of Vehicle Safety Compliance:– The manufacturer must not only be concerned with the initial certification, but

should also monitor continued compliance of vehicles and/or items of motor vehicle equipment throughout the production run. To accomplish this, an effective quality control program must be established to periodically inspect and test vehicles and/or items of motor vehicle equipment randomly selected from the assembly line to ensure that the original performance is carried through to all other units.

• When no FMVSS apply, it is reasonable to measure the product’s design against existing, accepted product standards, such as a set of voluntary industry standards.

– Self-certification could include conformity assessment from a 3rd party certification body

– International Standards Organization (ISO) is just one example of a 3rd party certification body

82

Self-Certification Program Goals

• Develop an industry-wide, self-certification program that ensures friction material suppliers (domestic and imported) manufacture, sell and distribute within NAFTA only products which comply with applicable California and Washington requirements (as amended).

• Program will use accredited laboratories (ISO 17025 or NELAC certified) to ensure compliance with applicable state regulations for copper and other constituents contained in brake friction material products, based on:

– SAE testing protocol (currently in-process) – Edge Code Markings

• Program will use a third-party registrar to confirm regulatory compliance and provide public access to list of certified companies and products.

• Develop successful implementation and marketing of the Program to:– OEM vehicle and truck manufacturers, aftermarket spare parts manufacturers– Legislative, regulatory and environmental stakeholders – Integral tool to achieve a NAFTA solution in the absence of federal legislation

83

Self-Certification:Essential Program Elements

• Industry accepted 3rd party registrar to certify program compliance.• Importer of Record or other suitable US based entity must obtain certification for

imported product.• Suitable product testing, edge code markings and product packaging labels utilized

to confirm and advertise product compliance with Program.• SAE approved testing protocol and accredited laboratories (ISO 17025 or NELAC

certified) required.• Initial certifications valid for 3 years – then may be renewed for subsequent 3 year

periods upon updated testing results. • Product and packaging labels shall be marked with required edge code markings

which include notation of regulatory compliance and product date code.• Product edge code and compliance confirmation will be available on Registrar’s

Internet site for stakeholders’ confirmation and review.• Consumer focused product marking (i.e. Low Copper Product, Complies with

California Copper Requirements, etc.) will be the decision of retail box designer.

84

Thank you!

Ann [email protected]

(202) 312-9246

mailto:[email protected]

SAE Material Testing

Greg VyletelSr. Global Technical Expert

Meritor

• Next BMC Meeting June 1, 2012Longboat Key, FL (The day

before FMSI meeting June 2-3)

Save the Date!

Wrap-up

Thank You!

brake manufacturers council general meeting las vegas, nv october 31, 2011

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