Industry Update
for
Larry H. Miller Automotive
1/19/11
Auction Industry Offers Unique Vantage Point
From Which to Assess Industry Trends

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:
Generally
speaking, markets know more
– Large: $370 billion annually at retail in the U.S.
– Inextricably
entwined with
new vehicle
market
than
the people
who
write
about them”
– More representative of the national population than the new vehicle
market
Jim Grant

Real-time pricing information
– Derived in a competitive-bid process with knowledgeable parties on both
sides of the transaction

2
A view of future supply trends into the used vehicle market
Topic outline
3

Economic environment

New and used vehicle retail markets

Wholesale used vehicle pricing and supply
The recovery:
an upward slanted “W”
The reasons why
4

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
Nonfarm Payrolls Increase by
1.1 Million in 2010
Monthly Change in Nonfarm Payrolls (in thousands)
600
400
200
0
-200
-400
-600
-800
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
5
Monthly Change In Nonfarm Payrolls
3-month moving average – in thousands
Total
Private Sector
400
200
0
-200
-400
-600
-800
n-0
a
J
8
y-0
a
M
8
p-0
e
S
8
n-0
a
J
9
y-0
a
M
9
p-0
e
S
9
n-1
a
J
0
y-1
a
M
0
p-1
e
S
0
n-1
a
J
1
Source: Bureau of Labor Statistics
6
7
8
Initial Jobless Claims Show
Signs of Improvement
Initial Jobless Claims - Four-Week Moving Average
700,000
600,000
500,000
400,000
300,000
200,000
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Source: Bureau of Labor Statistics
9
Personal Income & Wages and Salaries
Year-over-year percent change based on 3-month moving average
Personal income
Wages & salaries
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Source: Bureau of Economic Analysis
10
Retail Sales Recover from Summer Slowdown
Retail Sales, excluding motor vehicles - Monthly Percent Change - Seasonally Adjusted
2%
1%
1%
0%
-1%
-1%
-2%
Jan- Feb- Mar- Apr- May- Jun10
10
10
10
10
10
Jul10
Aug- Sep- Oct- Nov- Dec10
10
10
10
10
Source: U.S. Department of Commerce
11
Savings Rate Rises
Personal Savings as % of Disposable Personal Income
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
n-9
a
J
5
n-9
a
J
7
n-9
a
J
9
n-0
a
J
1
n-0
a
J
3
n-0
a
J
5
n-0
a
J
7
n-0
a
J
9
n-1
a
J
1
Source: Bureau of Economic Analysis
12
Household net worth dips again
in second quarter of 2010
Percent Change from Previous Quarter
0%
0%
0%
0%
0%
1
20
10
Q
1
20
08
Q
1
20
06
Q
1
20
04
Q
1
20
02
Q
1
20
00
Q
19
98
Q
1
0%
Source: Federal Reserve Board
13
Household net worth recovers, but
remains $11 trillion below its peak.
Household Net Worth – In Trillions
$70
$60
$50
$40
$30
$20
$10
14
20
10
20
05
20
00
19
95
19
90
19
85
19
80
19
75
19
70
$0
New and Used Vehicle
Retail Markets
15
New Vehicle Sales
New Car & Light-Duty Truck Sales
20
millions of units
18
16
14
12
Peak-to-troughs:
10
1973 to 1975
1978 to 1982
1986 to 1991
2000 to 2009
8
6
-24%
-33%
-23%
-41%
4
1960
1970
1980
1990
2000
2010
Source: Automotive News
16
Annual % Change in New Vehicle Sales
versus % Change in Real GDP
1960 to 2009
30%
20%
10%
Real GDP
-4%
New Vehicle Sales
40%
y = 0.0414x - 0.1153
R2 = 0.6607
1982 0%
-2%
1966
0%
2%
4%
6%
-10%
2009
-20%
-30%
Source: Automotive News & Bureau of Economic Analysis
17
8%
New Car & Light-Duty Truck Sales
Seasonally Adjusted Annual Rate - 3-Month Moving Average
19
millions of units
18
17
16
15
14
13
12
11
10
Jan-10
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-88
Jan-86
9
Source: Automotive News
18
Scrappage as % of
Vehicles in Operation
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: R.L. Polk
19
Ratio of New Vehicle Sales to
Number of Households
23%
21%
19%
17%
15%
13%
11%
9%
7%
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Automotive News & U.S. Dept. of Commerce
20
Annual Growth of Vehicles in Operation
Five-year Moving Average - In Millions
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: R.L. Polk
21
New Vehicle Sales:
Used
Vehicleperspective
Production
A long-term
New Car & Light-Duty Truck Sales
20
millions of units
18
16
14
12
10
8
6
4
1960
1970
1980
1990
2000
2010
Source: Automotive News
22
Vehicles in Operation from 2 & 3 Model
Years Past (in millions of units)
40
35
30
25
20
15
10
5
23
19
92
19
95
19
98
20
01
20
04
20
07
20
10
20
13
20
16
19
89
19
86
19
83
19
80
19
77
19
74
19
71
19
68
0
Vehicles in Operation from 6, 7, & 8
Model Years Past (in millions of units)
50
45
40
35
30
25
20
15
10
5
0
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
24
Used Vehicle Retail Sales
Millions
Total
Dealers
50
45
40
35
30
25
20
15
10
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source: CNW Marketing Research
25
Used Vehicle Sales Inherently More
Stable then New Vehicle Sales
New Vehicle Sales
Used Vehicle Sales
20%
15%
10%
5%
0%
-5%
-10%
• In 25 of the last 33 years, the absolute % change in new vehicle sales was greater than for used vehicles.
-15%
• 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
-20%
• 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.
-25%
1978
1982
1986
1990
1994
1998
2002
2006
2010
Source: Automotive News & CNW Marketing Research
26
Ratio of Used Vehicles Retailed
to New Vehicles Retailed
4.0
3.5
3.0
2.5
2.0
1.5
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
1.0
Source: Automotive News & CNW Marketing Research
27
% Change Used Units Retailed –
Same Store Basis (Publicly-traded Dealership Groups)
Weighted average for KMX *, AN, PAG, SAH, GPI, ABG, and LAD
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
2004
2005
2006
2007
2008
*KMX shifted forward one month to correspond with calendar quarter
28
2009
2010
Source: Company filings
Wholesale Supplies
29
New Vehicle Sales Into Rental &
Rental Fleet Size
Millions
New Purchases
Average Fleet Size
2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
1998
2000
2002
2004
2006
2008
2010
Source: Bobit Business Media
30
New Vehicle Sales into Rental
GM
Ford
Chrysler
850,000
750,000
650,000
550,000
450,000
350,000
250,000
150,000
50,000
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Bobit Business Media
31
Distribution of New Vehicle Sales into
Rental - Program versus Risk
Program
Risk
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Bobit Business Media & Manheim Consulting
32
Average Auction Price –
Rental Risk Units
2007
2008
2009
2010
$13,500
$13,000
$12,500
$12,000
$11,500
$11,000
$10,500
$10,000
$9,500
$9,000
$8,500
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: Manheim Consulting
33
Average Mileage –
Rental Risk Units
2007
2008
2009
2010
45,000
40,000
35,000
30,000
25,000
20,000
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: Manheim Consulting
34
New Lease Originations
Millions of Units
4.0
3.5
3.7
3.4
3.5
3.0
2.7
2.5
2.5
2.5
2.7 2.7
2.1 2.1
2.0
2.0
1.5
1.7
1.1
1.0
0.5
0.0
1998
2000
2002
2004
2006
2008
2010
Source: Manheim Consulting
35
Lease Penetration Rates
by Manufacturer
2008
2009
Nov 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%
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%
Hyundai
Source: J.D. Power and Associates
36
Ford Credit Auction Values at
Constant Third Quarter 2010 Mix
24-month leases
36-month leases
$21,000
$19,385
$19,000
$17,000
$18,860 $19,030
$18,010 $18,235
$17,820
$16,670
$16,540
$16,165 $16,235
$15,615
$15,000
$14,775
$14,675
$13,675
$13,000
$15,080
$15,545
$13,375
$11,900
Q
3
20
10
Q
2
20
10
Q
1
20
10
Q
4
20
09
Q
3
20
09
Q
2
20
09
Q
1
20
09
Q
4
20
08
20
08
Q
3
$11,000
Source: Ford Credit
37
GMAC Sales Proceeds as % of ALG –
U.S. Lease Terminations
130%
120%
110%
100%
90%
80%
70%
60%
2007Q3
2008Q3
2009Q3
2010Q3
Source: Ally
38
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
0
20 9
10
20 E
11
20 E
12
20 E
13
20 E
14
20 E
15
E
millions of units
Off-Lease Volumes –
Another Down Cycle Ahead
4.0
3.5
39
3.0
2.5
2.0
1.5
1.0
Source: Manheim Consulting
Repossession Volumes Decline in 2010
Millions of Units
2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Manheim Consulting
41
Repossession Frequency & Severity –
Ford Credit
Severity (dollars per vehicle)
Frequency (as % of contracts outstanding)
$12,000
3.5%
3.0%
$10,000
2.5%
$8,000
2.0%
$6,000
1.5%
$4,000
1.0%
$2,000
0.5%
$0
0.0%
2007
42
2008
2009
2010
Source: Ford Motor Credit
Source: GM Financial
43
Credit Default Rates
Auto Index
Bank Card Index
First Mortgage Index
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Source: S&P / Experian
44
Auto ABS Issuance (in billions)
$30
$25
$20
$15
$10
$5
$0
1Q 07
1Q 08
1Q 09
1Q 10
Source: Securities Industry and Financial Markets Association
45
New Vehicle Sales into Commercial
and Government Fleets
Thousands
Commercial
Government
1,200
1,000
800
600
400
200
0
2001
2002
2003
2004
2005
2006
2007
2008
2009 2010 e
Source: Bobit Business Media
46
New Vehicle Sales to Commercial Fleets
GM
Ford
Chrysler
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Bobit Business Media
47
What Drives Dealer Consignment Volumes
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
The Forecast:
Millions
Dealer Consigned Vehicles Sold at NAAA Member Auctions
6
5
4
3
2
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
1
Source: 1999-2009 NAAA Surveys, 20010-2015 Manheim Consulting estimate
49
Auction Volumes
Millions
Dealer
Rental-program
Rental-risk
Repos
Off-lease
All other
10
8
6
4
2
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
e
e
e
Source: Manheim Consulting
50
Manheim Used Vehicle Value Index
Concept:
A single measure of used vehicle price change that is
independent of underlying shifts in the characteristics of
vehicles being sold
Steps:
51

All Manheim U.S. sales (5+ million annually)

Classify by market segment

Account for shifts in mileage

Weight to provide unchanging mix

Seasonally adjust
Manheim Used Vehicle Value Index
January 1995 = 100
125
120
115
110
105
100
95
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Source: Manheim Consulting
52
Manheim Used Vehicle Value Index –
Annual Average Percent Change
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
-8%
Source: Manheim Consulting
53
Manheim Used Vehicle Value Index –
Quarterly Percent Changes
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
1Q
97
1Q
98
1Q
99
1Q
00
1Q
01
1Q
02
1Q
03
1Q
04
1Q
05
1Q
06
1Q
07
1Q
08
1Q
09
1Q
10
1Q
96
-12%
Source: Manheim Consulting
54
New Vehicle CPI
1982-1984 = 100
150
140
130
120
110
100
90
80
70
60
50
Jan-70
Jan-80
Jan-90
Jan-00
Jan-10
Source: Bureau of Labor Statistics
55
Manheim Index versus Mix & Quality Adjusted
New Vehicle Price 3 ½ Years Prior
55%
50%
45%
40%
35%
11
10
Ja
n-
09
Ja
n-
Ja
n-
08
Ja
n-
07
Ja
n-
06
Ja
n-
05
Ja
n-
04
03
Ja
n-
02
Ja
n-
Ja
n-
01
Ja
n-
00
Ja
n-
99
Ja
n-
98
Ja
n-
97
96
Ja
n-
Ja
n-
Ja
n-
95
30%
Source: Bureau of Labor Statistics & Manheim Consulting
56
New Vehicle Inventory Count
Millions
12-month moving average
4.5
4.0
3.5
3.0
2.5
2.0
1.5
Jan-86
Jan-91
Jan-96
Jan-01
Jan-06
Jan-11
Source: Automotive News & Manheim Consulting
57
The Restructured Automotive Industry
-$10.6 B @ 17.0 M in ’05
+$4.8 B @ 11.6 M in ‘10
58
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.
59
Price Changes for Selective Market Classes
Annual Average % Change, 2009 - 2010
14%
12.5%
12%
9.5%
10%
8%
7.4%
8.8%
7.4%
6.3%
5.2%
6%
4%
2%
0%
Total
Compact
cars
Midsize
cars
Luxury
cars
Pickups SUV / CUV
Vans
Source: Manheim Consulting
60
Average Auction Price –
Fullsize SUVs
Unadjusted
Mileage & Seasonally Adjusted
$19,000
$18,000
$17,000
$16,000
$15,000
$14,000
$13,000
$12,000
$11,000
$10,000
$9,000
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Source: Manheim Consulting
61