Industry Update for Larry H. Miller Automotive

Industry Updatefor

Larry H. Miller Automotive

1/19/11

2

Daily interaction with all the players

– Manufacturers, captive finance companies, banks, credit unions, sub-

prime lenders, rental companies, and commercial fleets

– Dealers: franchised, independent, and wholesalers

Used vehicle market is:

– Large: $370 billion annually at retail in the U.S.

– Inextricably entwined with new vehicle market

– More representative of the national population than the new vehicle market

Real-time pricing information

– Derived in a competitive-bid process with knowledgeable parties on both

sides of the transaction

A view of future supply trends into the used vehicle market

Generally speaking, markets know more

than the people who write about them”

Jim Grant

Auction Industry Offers Unique Vantage Point From Which to Assess Industry Trends

3

Topic outline

Economic environment

New and used vehicle retail markets

Wholesale used vehicle pricing and supply

4

The recovery: an upward slanted “W”

Financial crisis leaves lasting scars

De-leveraging is slow and painful process

Policymakers add obstacles and uncertainty

Second dip in housing is likely

Quantitative easing part deux

Lasting weakness in the labor market

The reasons why

5

Nonfarm Payrolls Increase by

1.1 Million in 2010

-800

-600

-400

-200

0

200

400

600

Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

Source: Bureau of Labor Statistics

Monthly Change in Nonfarm Payrolls (in thousands)

6

-800

-600

-400

-200

0

200

400

Jan-08

May-08Sep-08

Jan-09

May-09Sep-09

Jan-10

May-10Sep-10

Jan-11

Total Private Sector

Monthly Change In Nonfarm Payrolls3-month moving average – in thousands


9

200,000

300,000

400,000

500,000

600,000

700,000

Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10


Initial Jobless Claims Show Signs of Improvement

Initial Jobless Claims - Four-Week Moving Average

10

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Personal income Wages & salaries

Source: Bureau of Economic Analysis

Personal Income & Wages and Salaries

Year-over-year percent change based on 3-month moving average

11

Retail Sales Recover from Summer Slowdown

-2%

-1%

-1%

0%

1%

1%

2%

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Retail Sales, excluding motor vehicles - Monthly Percent Change - Seasonally Adjusted

Source: U.S. Department of Commerce

12

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Jan-95Jan-97

Jan-99Jan-01

Jan-03Jan-05

Jan-07Jan-09

Jan-11

Source: Bureau of Economic Analysis

Personal Savings as % of Disposable Personal Income

Savings Rate Rises

13

Household net worth dips againin second quarter of 2010

0%

0%

0%

0%

0%

0%

1998

Q1

2000

Q1

2002

Q1

2004

Q1

2006

Q1

2008

Q1

2010

Q1

Source: Federal Reserve Board

Percent Change from Previous Quarter

14

Household net worth recovers, but remains $11 trillion below its peak.

$0

$10

$20

$30

$40

$50

$60

$70Household Net Worth – In Trillions

15

New and Used Vehicle Retail Markets

16

4

6

8

10

12

14

16

18

20

1960 1970 1980 1990 2000 2010

New Vehicle Sales

millions of units

Source: Automotive News

Peak-to-troughs:

1973 to 1975 -24%1978 to 1982 -33%1986 to 1991 -23%2000 to 2009 -41%

New Car & Light-Duty Truck Sales

17

Annual % Change in New Vehicle Sales versus % Change in Real GDP

Source: Automotive News & Bureau of Economic Analysis

1960 to 2009

19661982

2009

y = 0.0414x - 0.1153

R2 = 0.6607

-30%

-20%

-10%

0%

10%

20%

30%

40%

-4% -2% 0% 2% 4% 6% 8%

Real GDP

New

Veh

icle

Sal

es

18

9

10

11

12

13

14

15

16

17

18

19Ja

n-8

6

Jan

-88

Jan

-90

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

millio

ns o

f u

nit

s


Seasonally Adjusted Annual Rate - 3-Month Moving Average


19

Scrappage as % ofVehicles in Operation

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: R.L. Polk

20

Ratio of New Vehicle Sales to Number of Households

7%

9%

11%

13%

15%

17%

19%

21%

23%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: Automotive News & U.S. Dept. of Commerce

21

Annual Growth of Vehicles in Operation

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: R.L. Polk

Five-year Moving Average - In Millions

22

4

6

8

10

12

14

16

18

20

1960 1970 1980 1990 2000 2010

New Vehicle Sales:A long-term perspective

millions of units



Used Vehicle Production

23

Vehicles in Operation from 2 & 3 Model Years Past (in millions of units)

0

5

10

15

20

25

30

35

40

24

Vehicles in Operation from 6, 7, & 8 Model Years Past (in millions of units)

0

5

10

15

20

25

30

35

40

45

50

1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

25

Used Vehicle Retail Sales

10

15

20

25

30

35

40

45

50

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Mil

lio

ns

Total Dealers

Source: CNW Marketing Research

26

Used Vehicle Sales Inherently More Stable then New Vehicle Sales

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1978 1982 1986 1990 1994 1998 2002 2006 2010

New Vehicle Sales Used Vehicle Sales

Source: Automotive News & CNW Marketing Research

• In 25 of the last 33 years, the absolute % change in new vehicle sales was greater than for used vehicles.

• Used vehicle retail sales perform considerably better than new vehicles during an economic recession.

• The simple correlation between changes in new vehicles sales and real GDP is .79; for used vehicles it is only .54

• Used vehicle sales are more of a “need” rather than discretionary purchase. There is also substitution from new purchases to used purchases during times of economic weakness.

27

Ratio of Used Vehicles Retailedto New Vehicles Retailed

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Source: Automotive News & CNW Marketing Research

28

% Change Used Units Retailed – Same Store Basis (Publicly-traded Dealership Groups)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2004 2005 2006 2007 2008 2009 2010

Source: Company filings

Weighted average for KMX *, AN, PAG, SAH, GPI, ABG, and LAD

*KMX shifted forward one month to correspond with calendar quarter

29

Wholesale Supplies

30

New Vehicle Sales Into Rental &Rental Fleet Size

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

1998 2000 2002 2004 2006 2008 2010

Mil

lio

ns

New Purchases Average Fleet Size

Source: Bobit Business Media

31

New Vehicle Sales into Rental

50,000

150,000

250,000

350,000

450,000

550,000

650,000

750,000

850,000

2002 2003 2004 2005 2006 2007 2008 2009 2010

GM Ford Chrysler


32

Distribution of New Vehicle Sales into Rental - Program versus Risk

0%10%20%30%40%50%60%70%80%90%

100%

Program Risk

Source: Bobit Business Media & Manheim Consulting

33

Average Auction Price – Rental Risk Units

$8,500

$9,000

$9,500

$10,000

$10,500

$11,000

$11,500

$12,000

$12,500

$13,000

$13,500

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2007 2008 2009 2010

Source: Manheim Consulting

34

Average Mileage – Rental Risk Units

20,000

25,000

30,000

35,000

40,000

45,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2007 2008 2009 2010


35

New Lease Originations

3.43.7

3.5

2.72.5

2.1 2.12.5

2.7 2.7

2.0

1.1

1.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1998 2000 2002 2004 2006 2008 2010


Millions of Units

36

Lease Penetration Ratesby Manufacturer

2008 2009Nov YTD

2010

Chrysler 17.0% 2.9% 8.8%

Ford 15.1% 5.5% 9.7%

GM 11.1% 2.1% 8.2%

Honda 19.4% 18.6% 28.2%

Toyota 15.8% 15.7% 24.7%

Hyundai 2.4% 2.2% 12.0%

BMW 51.0% 51.3% 48.4%

Mercedes-Benz 49.2% 46.6% 51.3%

Total Industry 17.9% 13.1% 18.9%

Source: J.D. Power and Associates

37

Ford Credit Auction Values at Constant Third Quarter 2010 Mix

$16,540

$14,675

$16,670

$17,820

$19,385

$18,010 $18,235$18,860 $19,030

$13,675

$11,900

$13,375

$14,775

$15,615$15,080

$15,545$16,165 $16,235

$11,000

$13,000

$15,000

$17,000

$19,000

$21,000

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

24-month leases 36-month leases

Source: Ford Credit

38

60%

70%

80%

90%

100%

110%

120%

130%

2007Q3 2008Q3 2009Q3 2010Q3

Source: Ally

GMAC Sales Proceeds as % of ALG – U.S. Lease Terminations

39

Off-Lease Volumes – Another Down Cycle Ahead

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

mill

ion

s o

f u

nit

s


41

Repossession Volumes Decline in 2010

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Millions of Units

42

Repossession Frequency & Severity –Ford Credit

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Severity (dollars per vehicle)

Frequency (as % of contracts outstanding)

Source: Ford Motor Credit

2007 201020092008

43

Source: GM Financial

44

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10

Auto Index Bank Card Index First Mortgage Index

Source: S&P / Experian

Credit Default Rates

45

Auto ABS Issuance (in billions)

$0

$5

$10

$15

$20

$25

$30

1Q 07 1Q 08 1Q 09 1Q 10

Source: Securities Industry and Financial Markets Association

46

New Vehicle Sales into Commercial and Government Fleets

0

200

400

600

800

1,000

1,200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 e

Th

ou

sa

nd

s

Commercial Government


47

New Vehicle Sales to Commercial Fleets

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2002 2003 2004 2005 2006 2007 2008 2009 2010

GM Ford Chrysler


48

Level of new vehicle sales

Level of retail used vehicle sales

Gross margin and inventory turn for retail used vehicles

Dealership wholesaling percentages

Share of wholesale volume captured by NAAA member auctions

What Drives Dealer Consignment Volumes

49

1

2

3

4

5

6

Mil

lio

ns

The Forecast:

Source: 1999-2009 NAAA Surveys, 20010-2015 Manheim Consulting estimate

Dealer Consigned Vehicles Sold at NAAA Member Auctions

50

Auction Volumes

0

2

4

6

8

10

2004 2005 2006 2007 2008 2009 2010 2011e

2012e

2013e

Mil

lio

ns

Dealer Rental-program Rental-risk Repos Off-lease All other


51

Manheim Used Vehicle Value Index

All Manheim U.S. sales (5+ million annually)

Classify by market segment

Account for shifts in mileage

Weight to provide unchanging mix

Seasonally adjust

Steps:

A single measure of used vehicle price change that is independent of underlying shifts in the characteristics of vehicles being sold

Concept:

52

95

100

105

110

115

120

125

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11


January 1995 = 100

Manheim Used Vehicle Value Index

53

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Manheim Used Vehicle Value Index –Annual Average Percent Change


54

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1Q96

1Q97

1Q98

1Q99

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

Manheim Used Vehicle Value Index –Quarterly Percent Changes


55

50

60

70

80

90

100

110

120

130

140

150

Jan-70 Jan-80 Jan-90 Jan-00 Jan-10


New Vehicle CPI1982-1984 = 100

56

Manheim Index versus Mix & Quality AdjustedNew Vehicle Price 3 ½ Years Prior

30%

35%

40%

45%

50%

55%

Jan-9

5

Jan-9

6

Jan-9

7

Jan-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Source: Bureau of Labor Statistics & Manheim Consulting

57

New Vehicle Inventory Count

1.5

2.0

2.5

3.0

3.5

4.0

4.5

J an-86 J an-91 J an-96 J an-01 J an-06 J an-11

Millio

ns

Source: Automotive News & Manheim Consulting

12-month moving average

58

The Restructured Automotive Industry

-$10.6 B @ 17.0 M in ’05

+$4.8 B @ 11.6 M in ‘10

59

Outlook and Implications

New vehicle sales– A lower underlying trend

– Movements around that trend driven by labor market and credit conditions

– Manufacturers maintain inventory and pricing discipline

Retail sales and profits continue to shift in favor of used vehicles

Less supply and stable demand means strong used vehicle pricing

Economic recovery may surprise to the upside in the near-term,

but we will fail to achieve previous peaks in employment, household

net worth, and new vehicle sales prior to the next recession.

60

Price Changes for Selective Market Classes

7.4% 7.4%6.3%

5.2%

9.5%8.8%

12.5%

0%

2%

4%

6%

8%

10%

12%

14%

Total Compactcars

Midsizecars

Luxurycars

Pickups SUV / CUV Vans


Annual Average % Change, 2009 - 2010

61

$9,000

$10,000

$11,000

$12,000

$13,000

$14,000

$15,000

$16,000

$17,000

$18,000

$19,000

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Unadjusted Mileage & Seasonally Adjusted


Average Auction Price –Fullsize SUVs

Industry Update for Larry H. Miller Automotive

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