Inve stme nt Pre se nta tion April 12, 2013
Jonathan Booth, CF A, CPA CEO & FUND MANAGER
DISCL AIME R This presentation does not constitute an offer to sell or solicitation of an offer to buy any security. Any such offer only may be made pursuant to the investment partnership’s confidential private placement memorandum and related documents.
About Booth- L air d Inve stme nt Par tne r ship • Investment fund founded in 2008 • Headquartered in Baton Rouge • Approach to investing: • Out-of-favor stocks that are mispriced due to uncertainty or fear, misunderstanding or obscurity • Conduct significant due diligence to overcome those hurdles • Invest only at a deep discount to intrinsic value • Limited to 10 to 15 best ideas
BE ST IDE A – Volkswage n (VOW3.DE ) • Volkswagen Preferred Shares – more liquid than common • Can purchase VW stock at 25% discount to current market price via Porsche SE Preferred Shares (PAH3.DE) • Represents time arbitrage opportunity – near-term fears abated by VW outperforming low expectations • Long: VOW3.DE & PAH3.DE
Re c e nt Pe r for manc e of VW Stoc k • Down 18% from recent peak hit on February 1, 2013 after strong run • YTD performance vs S&P 500: $120.00 $110.00 VOW $100.00 S&P $90.00 $80.00 31-Dec-12 31-Jan-13 28-Feb-13 31-Mar-13
VW Pr ic e vs Pe e r s • VW versus 6 largest global peers outside of Europe Volkswagen Peer Group Price/Earnings – TTM 3.2 15.9 Price/Earnings – TTM - Remove 5.3 15.9 unusual gain from VW Price/Book 0.9 1.7 Source: Calculated using data from Financial Times Marketsdata
Why “Out- of- F avor ”? Fulfills “Uncertainty or Fear” criterion Europe Sovereign Debt crisis 1. 6 straight quarters of recession • Auto industry patricularly hard hit • Chinese Government Comments 2. State-run media recently attacked most successful • foreign companies – Apple, Yum! Brands, and VW China is VW’s largest market •
Volkswage n Pr ofile • Top 3 automotive manufacturer in the world • 12 Distinct Brands & 100 Factories worldwide
Re c e nt Histor y - T r ansfor mation Pre-2007 Transformation New CEO – Dr. Martin Reputation & Quality Issues Winterkorn Poor Culture Changing Culture – “Volkswagen Way” Limited Growth Ambitious Targets – Low Operating Margins Strategy 2018
“Volkswage n Way” • Works agreement signed with union at end of 2007 • Focused on continuous improvement to avoid waste and to perfect work methods • Relies on extensive training and input from large employee base • New award-winning training facilities established • Continuous feedback resulted in significant cost savings and greater employee morale
Str ate gy 2018 Four over-arching goals to be met by 2018: Become world leader in customer satisfaction and quality 1. Increase unit sales to more than 10 million vehicles a year 2. with above-average growth rate in major growth markets Long-term return on sales before tax of at least 8% 3. Become top employer across all brands in all companies 4. and in all regions – necessary to build a first class team
Re sults sinc e 2007 T r ansfor mation Goal 2007 2012 • Customer Satisfaction • 8.22 • 8.67 • Global Unit Sales • 6.2M • 9.3M • Return on Sales • 6.2% • 6.9% • Employee • 84% • 90% Satisfaction
Gr owing Global Mar ke t Shar e • Share of the Global Passenger Car Market 13 12 11 12.8 12.3 11.3 11.2 10 10.3 9.6 9 2007 2008 2009 2010 2011 2012 Source: Volkswagen Annual Reports
Substantial Gr owth in De live r ie s • Deliveries to customers – million vehicles 10 9 8.4% CAGR 8 9.3 7 8.3 7.2 6 6.3 6.3 6.2 5 2007 2008 2009 2010 2011 2012 Source: Volkswagen Annual Reports
Substantial Gr owth in Re ve nue • Sales revenue - € billion 210 190 12.1% CAGR 170 150 130 192.7 110 159.3 90 126.9 113.8 108.9 105.2 70 50 2007 2008 2009 2010 2011 2012 Source: Volkswagen Annual Reports
Industr y L e ading Ope r ating Mar gin • Operating Margin versus 6 largest peers outside Europe 8.0% 7.0% 6.0% VW 5.0% Peers 4.0% 3.0% 2010 2011 2012 Source: Morningstar
How to Analyze Any Auto Manufac tur e r • 2 halves should be considered separately Captive Financing Auto Manufacturing
Auto Manufac tur ing – Ke ys to Unde r standing • Common traits among major manufacturers Multiple Brands 1. Intellectual Property 2. Quality Products 3. Manufacturing Efficiency – driving out cost 4. Distribution – least appreciated, among most important 5.
Distr ibution, Distr ibution, Distr ibution • Key for any differentiated (non-commodity) manufacturer • Doesn’t matter how great your product is if no one can find it • Expansive, intelligent distribution is vital for gaining market share • For auto manufacturers, that means a strong dealer network
Distr ibution: VW Compe titive Advantage • 20,000 dealerships worldwide exclusive to Volkswagen brands • Plan to add an additional 1,500 over the medium-term • Over 2,000 dealerships in China alone • Plan to increase to 3,000 • Growth plan in every market involves heavy investment in expanding dealer network
Manufac tur ing E ffic ie nc y • Constant drive to reduce costs in highly competitive industry • Industry trend – consolidate multiple models to fewer platforms • Interchangeable parts • Less complexity • Large order sizes = bulk discounts • Reduced design and engineering time
Manufac tur ing E ffic ie nc y: VW Compe titive Advantage • VW has been the leader in reducing platforms and increasing use of modular parts for years • Evolution of breakthroughs in auto manufacturing efficiency: • Assembly Line – Ford • Just-in-Time – Toyota • Lean Manufacturing – Toyota • Modular Toolkit - Volkswagen
Modular T oolkit • Modular toolkit – efficiency gains through synergies • Non-visible parts standardized across models & brands Source: Volkswagen 2013 Factbook
What Compe titor s T hink of VW’s Modular T oolkit “They had the same engines, the same clutches, the same ventilation - all identical parts. It was a level of commonality that didn’t exist atRenault-Nissan.“ - Renault-Nissan Executive in 2007 “They were a little dumbstruck by the realization that there was a whole new world out there - and their development was 10 years behind,” - Participant at demonstration for Peugeot Board in 2011 “There’s no doubt we have fallen behind. We have not even begun to make the fundamental structural changes that VW has” in designing and applying flexible vehicle platforms. - Toyota Executive in 2012 Source: “Volkswagen MQB could vault automaker past Toyota” Newsday February 12, 2013
Outpe r for me d in E ve r y Re gion in 2012 • World Car Market vs VW Deliveries to Customers • 2012 vs 2011 Source: Volkswagen 2013 Investor Presentation
Auto Manufac tur ing F inanc ial Str e ngth • Net Cash Position = €8.6B • Total Pension = €23.9B • (Net Debt+Pensions)/OCF = 1.99 Impressive for • (Net Debt+Pensions)/Total Capital = 18.3% manufacturer in most industries • WACC = 7.8% Source: Volkswagen 2012 Annual Report
Gr owth Oppor tunitie s • Overall industry should continue growing worldwide • Worldwide car industry expected to grow 15% by 2015 and 29% by 2018 1 • Especially emerging markets where VW is well established – 26% growth by 2015 and 51.2% by 2018 1 • Continued market share gains • Distribution advantage • Strong capital position allows for strong brand promotion & more local factories • Possibly acquire another valuable brand 1 Source: HIS Automotive (data status: February 15, 2013)
F inanc ing Division – Ke y Me tr ic s • Penetration Rate - % of auto sales financed by company • ~30% company-wide • Riskiness of loan portfolio • Low risk with low average interest rate ~7.5% • Sources of funds to finance loans • Capital Markets & wholly-owned bank Source: Volkswagen 2012 Annual Report
Pe ne tr ation Rate – Sour c e of Gr owth • Benefits of High Penetration Rate • More transactions closed • Increased customer loyalty • High penetration rate in established countries • Very low penetration rate in emerging markets • Concerted effort to increase, particularly in China
F unding for L oans – VW Str e ngth • Strong credit ratings • Investment grade with positive outlook from both S&P and Moody’s • 22% of funding from wholly-owned banking operation in Germany • Over 1M customers – one of largest banks in Germany • Depositers traditionally cheapest form of financing • Well capitalized – easily meet capital retention requirements
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