Porsche

What is the Problem?

• Revenue:– 45% EUR– 40% USD– 10% GBP– 3% JPY– 2% CHF

• Costs:– 911 Germany (EUR)– Boxster Finland (EUR)– Cayenne Slovakia (SKK - EUR stabilized)

Comparative Exposure

Automaker U.K. Sales U.K. Production

N.A. Sales N.A. Production

BMW 11% 15% 26% 11%

Fiat 6% 0% 0% 0%

Mercedes 9% 0% 19% 7%

Peugeot 12% 6% 0% 0%

Porsche 11% 0% 42% 0%

Renault 9% 0% 1% 1%

Volkswagen

7% 0% 13% 7%

Hedging Strategy

• Porsche created a three-year rolling portfolio of put options.

• Hedging net dollar exposures out three years required the company not only to forecast sales and subsequent exposures out three years, but to continually carry options possessing notional principals of a full three years of net exposure.

Comparative Hedging

Automaker 2003 (estimate)

2004 (estimate)

2005 (estimate)

BMW 90% 70% 35%

Mercedes 90% 60% 30%

Porsche 100% 100% 100%

Volkswagen 40% 70% 30%

Financial EffectsYear EBIT margin Treasury margin

1995/96 3.5% -2.6%

1996/97 6.5% -3.0%

1997/98 7.4% -.9%

1998/99 9.6% 2.2%

1999/00 9.6% 1.7%

2000/01 7.4% 3.9%

2001/02 7.0% 5.2%

2002/03 9.6% 6.5%

2003/04 10.0% 6.5%

Assessment

• “Even if we sell a few or no cars at all in the U.S. we make money . . . Because we bought dollars cheap which we now sell expensively. Our hedging is extremely good. . . .”

• Many analysts were highly critical of the cost of such a strategy.

Profit from HedgingJul-01 2-Jul 3-Jul 4-Jul

USD/EUR Spot Rate 0.8616USD/EUR Strike Price 0.9000 0.9500 1.0000

USD LIBOR (APR) 4.001 4.200 4.400EUR LIBOR (APR) 4.310 4.400 4.400Maturity (Years) 1.000 2.000 3.000Volatility (%) 11.550 15.680 18.080

EUR/USD Option Premium 0.0288 0.0473 0.0604

EUR Sales (Billion) 4.441USD Sales (Billion) 3.826N.A. Sales (42%) 1.607N.A. Sales (10% Growth) 1.768 1.945 2.139

Cost of Puts (Million) 50.912 91.978 129.196

USD/EUR Spot Rate 0.9931 1.1362 1.3000EUR Profit per USD 0.1042 0.1725 0.2308Gross Profit (million) 184.138 335.446 493.619Net Profit (million) 133.226 243.468 364.422

Alternative Hedges

• Natural Hedge

• Financial Hedge

• Exchange Rate Pass Through

Natural Hedge

North American Manufacturing

• Porsche believed that the quality of its engineering and manufacturing were at the core of its brand, and leadership had not been willing to move production beyond the existing European footprint.

• BMW and Mercedes are increasing their manufacturing capacity in the U.S.

• Would manufacturing an SUV in the U.S. harm Porsche’s image worse than manufacturing it in a Volkswagen plant in Slovakia?

Financial Hedge

Comparative Financial PerformanceAutomaker Sales

(billion EUR)

EBIT Margin

P/E Ratio

Debt Ratio

Moody’s Rating

Audi 22.6 6.6% .2%

BMW 42.3 8.0% 12.1 47.5% A1

Fiat 58.2 1.6% 31.3% Ba3

Mercedes 50.2 6.4%

Peugeot 54.4 5.3% 5.9 42.9% A2

Porsche 5.6 16.4% 16.5 6.4%

Renault 36.3 4.1% 7.5 47.6% Baa2

Volkswagen 86.9 5.2% 6.4 42.4% A1

Attitude towards Debt

• Porsche’s view on debt was rather extreme compared to that held by most of the other major European-based automobile manufacturers.

• “We learnt the hard way that banks are there for you when you don’t need them, and when you do need them, they’re nowhere to be seen.”

• This antidebt philosophy was also consistent with the emphasis placed by Porsche on both cash flow and cash balances.

• “We need to optimize all of the cash we generate so that we’re able to continue to finance our growth ourselves, and have the confidence that if anything happens in the future that is beyond our control, we’ll always be able to survive. That’s absolutely essential.”

• Although long-term debt was readily available to a company of Porsche’s financial health, debt was clearly anathema to current management.

Attitude

• Porsche was somewhat infamous for its independent thought and occasional stubbornness when it came to disclosure and compliance with reporting requirements.

• In 2002 the company had chosen not to list on the New York Stock Exchange after the passage of the Sarbanes-Oxley Act.

• Management had also long been critical of the practice of quarterly reporting, and had, in fact, been removed from the Frankfurt exchange’s stock index in September 2002 because of its refusal to report quarterly financial results.

• Porsche also continued to report only under German accounting standards.• The compensation packages of Porsche’s senior management team were nearly

exclusively focused on current-year profitability, with no management incentives or stock option awards related to the company’s share price.

• The Porsche and Piéch families held all of the ordinary shares, which held all voting rights.

Foreign Exchange Pass Through

Market Power

• 911: Exclusive ownership of its market segment and price inelastic, but sales had been historically cyclical and heavily dependent on the disposable income of buyers.

• Boxster: Affordable and less sensitive to the business cycle but in an increasingly competitive market segment.

• Cayenne: One of the most successful product launches in history but in a competitive market segment that may shrink with rising gasoline prices.

911 Carrera 4S Cabriolet in 2003

Apr May Jun Jul Aug Sep Oct Nov Dec

EUR Price 85,900 85,900 85,900 85,900 85,900 85,900 85,900 85,900 85,900 EUR Margin (15.7%) 13,486 13,486 13,486 13,486 13,486 13,486 13,486 13,486 13,486 EUR Cost 72,414 72,414 72,414 72,414 72,414 72,414 72,414 72,414 72,414

USD/EUR Spot Rate 1.0862 1.1565 1.1676 1.1362 1.1286 1.1267 1.1714 1.1710 1.2298

Full USD Price 93,305 99,343 100,297 97,600 96,947 96,784 100,623 100,589 105,640 Target USD Price 93,200 93,200 93,200 93,200 93,200 93,200 93,200 93,200 93,200

EUR Revenue 85,804 80,588 79,822 82,028 82,580 82,719 79,563 79,590 75,785 EUR Cost 72,414 72,414 72,414 72,414 72,414 72,414 72,414 72,414 72,414 EUR Margin 13,390 8,174 7,408 9,614 10,166 10,306 7,149 7,176 3,371

15.6% 10.1% 9.3% 11.7% 12.3% 12.5% 9.0% 9.0% 4.4%

Hedging Strategy

• Natural Hedge?

• Financial Hedge?

• Exchange Rate Pass Through?

• Current Policy?