didner & gerge · ˃ camera-based (mono or stereo): visual detection of lanes, lights,...
TRANSCRIPT
3
Outstanding business
Are these companies really…
» We are looking for corporations with proven business models and a
sustainable competitive edge that can be found in:
» Contrary to economic theory, competitive forces are not the highest in the
most profitable areas
» Which entrepreneur dreams of creating a new John Deere or Fresenius Medical?
Unique attributes
Corporate culture/identity
High barriers of entry
Innovation
Strong brands
Long customer relations
High returns recycling
High internal efficiency
Consistent and high profitability
A growing business
Outstanding free cash flow
Strong balance sheet
4
Outstanding business
» Corporate execution ˃ Changes happen and are understood slowly – still viewed as car supplier with limited
abilities to control its destiny ˃ Positions of strenght are created in recessions and upheld in growth periods
» Secular tailwinds ˃ Regulation ˃ Emerging Markets ˃ Active safety
» Far-sighted management ˃ R&D focus ˃ 2008/09 actions ˃ Vertical integration…
+ …in Asia to ensure/improve leading quality + …and in active safety to avoid high acq multiples and to ensure larger part of the
value chain
» Barriers of entry » Balance sheet strenght
˃ Net cash ˃ 11,6mn share buy-back ˃ Started Q413 @94,4mn sh ˃ Target leverage 0,5-1,5x EBITDA (@1x = $1bn=12% of mcap)
6
» 1953: Company founded by Lennart & Stig Lindblad as a repair shop
» 1956: First seatbelt launched (Renault, GM)
» 1968: Company name changed to Autoliv
» 1975: Autoliv acquired by Gränges, that
previously developed the seatbelt retractor
» 1980: Gränges/Autoliv becomes part of Electrolux
» 1980: Airbag production starts (after about a decade´s R&D)
» 1989: First JV in China (Nanjing, seatbelts)
» 1993: Autoliv listed on Stockholm Stock Exchange
» 1994: Merger with Morton ASP, the leading NA and Asian player
» 2002: Visteon Restrain Electronics acquired
» 2008: Acquisition of Tyco´s radar business
» 2009: Acquisition of Delphi´s passive safety business
8
» From reasonably well-run to outstanding performance ˃ Really built its moat 2000-2011:
+ # of innovations/patents increased from 1/employee/year to 15,5
+ # of ISO-certified factories from 44% to 96%
+ # of employees in low-cost countries from 24% to 63%
+ # of ”customer rejected products from 50/mn to 5/mn
+ Working capital from >20% to around 13%
+ # of training days per employee per year from 1,8 to 10
+ Consolidated at bottom of cycle 08/09 – Tyco Electronics ($42mn), Delphi passive
+ 2010: Q5 programme; products, customers, growth, behaviour, supliers
» Culture of investment, innovation and quality focus ˃ By far the highest combined capex (~5%) and R&D (~5,5%) of all players
» Company battle-hardened by slow EU market ˃ LVP at 12mn vehicles vs ATH of 16mn
10
0%
10%
20%
30%
40%
Market share in the global…
Improved in all
areas in 2013
» Regulation – 2014 marked start of ”second wave” of tougher 5* ratings
˃ China NCAP being benchmarked to Euro NCAP in 2015?
» Active safety
» Increased safety value per car ˃ DM: Regulation and active safety
˃ EM: More safety product per car as income grows
» Global LVP increasing by 3-5% every year
11
http://www.euroncap.com/home.aspx
» LVP: China already now largest car market in the world ˃ China: ~20mn units
~16% with driver´s license
˃ US: ~17mn units
˃ EU: ~12mn units
» Safety value per car: ˃ US: ~$420
˃ Germany: ~$500
˃ Japan: ~$400
˃ China: $220
˃ Brazil: ~$120
˃ India: ~$80
» Local competition
seem manageble
13
» Active safety: ˃ Camera-based (mono or stereo): Visual detection of lanes, lights, pedestrians etc
˃ Radar-based: Measurement of distance and velocity of objects
˃ Far-infrared based: Sensing living objects using thermal detection
» Intimate customer relationships
» Active safety in all but two car models below as of Q314
» All development in-house, since Visteon acq in 2000.
» Autoliv working towards systems integration (ESDC) ˃ Feature (”algo on a chip”; Mobileye)
˃ Component (camera)
˃ Surrounding electronics and actuators
» Value per car of ~$250-700
» Slowly go from add-on to standard
» Currently margin-dilutive
14
» The integration of passive and active safety: ESDC ˃ Electronic Safety Domain Controller
˃ Links together all safety sensors and actuators that control vehicle motion (brakes, steering, engine)
16
» Company been hurt by raw materials,
considerable potential when this revert
» R&D ˃ Through P&L
˃ Client funded
» Active safety barely break-even
» Vertical integration costs
» Clear improvement in ROC – set up to
sustain
17
30%
35%
40%
45%
50%
55%
60%
65%
2006 2007 2008 2009 2010 2011 2012 2013
Raw materials Value added
Raw material and value added in supply chain
as % of component cost
0%
10%
20%
30%
40%
50%
60%
2006 2007 2008 2009 2010 2011 2012 2013Component cost Labour cost
0%
5%
10%
15%
20%
25%
ROI…
We strive for a conservative, consistent, entry-price (our ”base”)
Establish a sustainable number across the business cycle
Could finance other ideas at 40-50% above BV
Return on capital
Sustainable free cash flow
HOLT™
Base valuation
Long term growth Required return 19
Outstanding business
ROCE
14%
Sust FCF
450mn
HOLT™ (Low) $103
Base valuation
$90
Long term growth
3%
Required return
10% 20
Outstanding business All things equal – assesment of company, management, balance sheet – not look to sell
below $130
» Slower short-term growth due to slowing Chinese car market
» Investment phase, both through P&L (R&D) and capex ˃ FCF 2014 significantly below last year´s level?
» Somewhat rigid margin structure, with GM at 20%
» Somewhat restrictive with financial information ˃ Do not disclose margins per geography
˃ Important car models?
21
» Founded in 1994 by Henrik Didner and Adam Gerge
» Partnership based
» Funds (all equities, long only)
» Swedish large cap (Nov 1994-)
» Nordic small cap (Dec 2008-)
» Global (Sep 2011-)
» Small & Micro (Aug 2014-)
» Concentrated, independent thinking, low turnover
» Two managers per fund
» AuM around $5bn
23
» Standard method: Start with the index composition, take small active bets in order to outperform. Risk = tracking error.
» Our objective: Very competitive return over a reasonable time period (3-5 years) with reasonable risk (business-, balance sheet-, valuation) = form follows function
Mr. Market 24
Outstanding business
”You´ve got to stand for something, otherwise you´ll fall for anything”
John C. Mellencamp
25
» ”Honey, what did you do at the office today?”
» ”Well dear, actually nothing.”
» ”But honey, weren´t you out looking for some alpha?”
26
» We are looking for corporations with proven business models and a
sustainable competitive edge that can be found in:
» Contrary to economic theory, competitive forces are not the highest in the
most profitable areas
» Which entrepreneur dreams of creating a new John Deere or Fresenius Medical?
Unique attributes
Corporate culture/identity
High barriers of entry
Innovation
Strong brands
Long customer relations
High returns recycling
High internal efficiency
Consistent and high profitability
A growing business
Outstanding free cash flow
Strong balance sheet
27
Outstanding business
» ”Not everything which can be measured counts, and not everything which counts can be measured”. Albert Einstein
» Corporate culture is often viewed as a ”soft” asset » Nonetheless, it is of crucial importance in most businesses
» Long-termism (Deere), discipline (Oaktree), honesty (Markel)
» Insurance companies, asset managers, consumer companies, industrials…
28
Outstanding business
» ”What we are looking for is honest and able management”. Warren Buffett
» ”Boards don´t look for dobermans, they look for cocker spaniels”. W Buffett
» An articulated vision of where they see the company in 5 years » Do they view shareholders as partners or minorities to manipulate?
» Evidence of sensible capital allocation
» Direct ownership
» A great mgmt team can lower the required return by 3%*
» Management meetings – not a requirement » According to a survey, 76% of investors meet management prior to investing
(source: Rivel Intelligence Council, Jan2014)
» According to the same study, investors want management to allocate a maximum of 10% of their time to investor meetings.
29
* According to a study by Richard Taffler, Warwick Business School, 2014
Outstanding business