Inve stme nt Pre se nta tion April 12, 2013 Jonathan Booth, CF A, - - PowerPoint PPT Presentation

April 12, 2013

Inve stme nt Pre se nta tion

CEO & FUND MANAGER

Jonathan Booth, CF A, CPA

This presentation does not constitute an offer to sell or solicitation of an offer to buy any security. Any such offer

• nly may be made pursuant to the investment partnership’s

confidential private placement memorandum and related documents.

DISCL AIME R

• Investment fund founded in 2008
• Headquartered in Baton Rouge
• Approach to investing:
• Out-of-favor stocks that are mispriced due to uncertainty
• r 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

About Booth- L air d Inve stme nt Par tne r ship

• 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

BE ST IDE A – Volkswage n (VOW3.DE )

• Down 18% from recent peak hit on February 1, 2013 after

strong run

• YTD performance vs S&P 500:

Re c e nt Pe r for manc e of VW Stoc k

$80.00 $90.00 $100.00 $110.00 $120.00 31-Dec-12 31-Jan-13 28-Feb-13 31-Mar-13 VOW S&P

• VW versus 6 largest global peers outside of Europe

VW Pr ic e vs Pe e r s

Volkswagen Peer Group Price/Earnings – TTM 3.2 15.9 Price/Earnings – TTM - Remove unusual gain from VW 5.3 15.9 Price/Book 0.9 1.7

Source: Calculated using data from Financial Times Marketsdata

Fulfills “Uncertainty or Fear” criterion

1.

Europe Sovereign Debt crisis

• 6 straight quarters of recession
• Auto industry patricularly hard hit

2.

Chinese Government Comments

• State-run media recently attacked most successful

foreign companies – Apple, Yum! Brands, and VW

• China is VW’s largest market

Why “Out- of- F avor ”?

• Top 3 automotive manufacturer in the world
• 12 Distinct Brands & 100 Factories worldwide

Volkswage n Pr

• file

Re c e nt Histor y - T r ansfor mation

Pre-2007

Reputation & Quality Issues Poor Culture Limited Growth Low Operating Margins

Transformation

New CEO – Dr. Martin Winterkorn Changing Culture – “Volkswagen Way” Ambitious Targets – Strategy 2018

• 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

“Volkswage n Way”

Four over-arching goals to be met by 2018:

1.

Become world leader in customer satisfaction and quality

2.

Increase unit sales to more than 10 million vehicles a year with above-average growth rate in major growth markets

3.

Long-term return on sales before tax of at least 8%

4.

Become top employer across all brands in all companies and in all regions – necessary to build a first class team

Str ate gy 2018

Re sults sinc e 2007 T r ansfor mation

Goal

• Customer Satisfaction
• Global Unit Sales
• Return on Sales
• Employee

Satisfaction 2007

• 8.22
• 6.2M
• 6.2%
• 84%

2012

• 8.67
• 9.3M
• 6.9%
• 90%

• Share of the Global Passenger Car Market

Gr

• wing Global Mar

ke t Shar e

9 10 11 12 13 2007 2008 2009 2010 2011 2012

9.6 10.3 11.2 11.3 12.3 12.8 Source: Volkswagen Annual Reports

• Deliveries to customers – million vehicles

Substantial Gr

• wth in De live r

ie s

5 6 7 8 9 10 2007 2008 2009 2010 2011 2012

6.2 6.3 6.3 7.2 8.3 9.3 8.4% CAGR Source: Volkswagen Annual Reports

• Sales revenue - € billion

Substantial Gr

• wth in Re ve nue

50 70 90 110 130 150 170 190 210 2007 2008 2009 2010 2011 2012

108.9 113.8 105.2 126.9 159.3 192.7 12.1% CAGR Source: Volkswagen Annual Reports

• Operating Margin versus 6 largest peers outside Europe

Industr y L e ading Ope r ating Mar gin

3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2010 2011 2012 VW Peers

Source: Morningstar

• 2 halves should be considered separately

How to Analyze Any Auto Manufac tur e r

Auto Manufacturing Captive Financing

• Common traits among major manufacturers

1.

Multiple Brands

2.

Intellectual Property

3.

Quality Products

4.

Manufacturing Efficiency – driving out cost

5.

Distribution – least appreciated, among most important

Auto Manufac tur ing – Ke ys to Unde r standing

• 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, Distr ibution, Distr ibution

• 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

Distr ibution: VW Compe titive Advantage

• 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 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

Manufac tur ing E ffic ie nc y: VW Compe titive Advantage

• Modular toolkit – efficiency gains through synergies
• Non-visible parts standardized across models & brands

Modular T

• olkit

Source: Volkswagen 2013 Factbook

“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

What Compe titor s T hink of VW’s Modular T

• olkit

Source: “Volkswagen MQB could vault automaker past Toyota” Newsday February 12, 2013

• World Car Market vs VW Deliveries to Customers
• 2012 vs 2011

Outpe r for me d in E ve r y Re gion in 2012

Source: Volkswagen 2013 Investor Presentation

• Net Cash Position = €8.6B
• Total Pension = €23.9B
• (Net Debt+Pensions)/OCF = 1.99
• (Net Debt+Pensions)/Total Capital = 18.3%
• WACC = 7.8%

Auto Manufac tur ing F inanc ial Str e ngth

Impressive for manufacturer in most industries

Source: Volkswagen 2012 Annual Report

• Overall industry should continue growing worldwide
• Worldwide car industry expected to grow 15% by 2015

and 29% by 20181

• Especially emerging markets where VW is well

established – 26% growth by 2015 and 51.2% by 20181

• Continued market share gains
• Distribution advantage
• Strong capital position allows for strong brand promotion

& more local factories

• Possibly acquire another valuable brand

Gr

• wth Oppor

tunitie s

1 Source: HIS Automotive (data status: February 15, 2013)

• 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

F inanc ing Division – Ke y Me tr ic s

Source: Volkswagen 2012 Annual Report

• 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

Pe ne tr ation Rate – Sour c e of Gr

• wth

• 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

F unding for L

• ans – VW Str

e ngth

• Biggest Market Fear = European Debt Crisis
• VW based in Germany and 60% of revenue derived from Europe, so

naturally market assumes the worst

• However, 1/3 of European revenue derived from Germany, which has a

stable 5.4% unemployment rate and will not be as hard hit

• Full year consolidation of Porsche in 2013 alone adds 4% to revenue
• Financing division contracts last multiple years, so severe drop in Auto

revenue not immediately felt in Finance division

• VW well established in growth markets – 1st mover advantage in China

w/ 21% market share

• Just look at recent past – Europe vehicle deliveries declined 8.4% in 2012

while VW vehicle deliveries increased 11.8% worldwide

We ll- Run Busine ss, Gr e at T r ac k Re c or d, Solid Gr

• wth Oppor

tunity… Why So Ine xpe nsive ? – De bunking Mar ke t “F e ar s”

Basic Math Ove r c ome s E ur

• pe an

Re c e ssion F e ar s

Assumptions Impact to Total Revenue 15% Drop in Europe x 60% of Revenue (9%) 10% Growth Rest of World, excluding China x 40% of Revenue 4% Net Decline in Revenue (5%) Group Operating Margin 7.0% Net Reduction in Op Profit (3.5%) Required increase in Equity from Chinese JVs (currently 27.5% of Op Profit) 12.7% 2012 Growth in Equity from Chinese JVs 27.1%

• Low P/E indicates market expects material earnings decline

• 2nd Biggest Market Fear = Chinese Government Against VW
• Chinese state-run media attacked 3 most successful foreign

companies so far in 2013 – seen as attempt to boost domestic companies, similar to U.S. gov’t attack of Toyota

• Long History - VW was the first to move into China in 1980’s and

is well established with 2,000+ dealerships

• Further, of the 3 companies attacked by Chinese government, VW

is only one to have 50/50 JV’s with the two largest domestic companies in respective industry in China

• Major employer in China
• VW quickly responded to criticism to placate Chinese government

We ll- Run Busine ss, Gr e at T r ac k Re c or d, Solid Gr

• wth Oppor

tunity… Why So Ine xpe nsive ? – De bunking Mar ke t “F e ar s”

• Auto Manufacturing and Finance valued separately
• Upside and Downside valuation calculated for each
• Upside assumptions – modest revenue growth in near-

term, modestly improving margins, significant increase in capital investment

• Downside assumptions – significant decline in revenue

next three years, declining margins, still signficant increase in capital investment

Intr insic Value - Assumptions

• Potential upside 10x greater than potential downside

Intr insic Value - Calc ulation

Division Upside Downside Auto Manufacturing €237.35 €115.98 Financing €37.96 €24.92 Total €275.31 €140.90 Current Preferred Stock Price – 4/9/13 €152.00 €152.00 Potential Gain/(Loss) 81.1% (7.3%)

• Porsche SE sold Porsche brand & operating business to VW

in July 2012

• All that remains at Porsche SE is €2B in net cash and a 32.2%
• wnership stake in VW
• 51% voting rights in VW

Pur c hase at 25% disc ount to c ur r e nt stoc k pr ic e via Por sc he SE

• Ferdinand Porsche founded VW and Porsche
• Ferdinand Piech, grandson of Ferdinand Porsche, is the

chairman of VW and on Porsche Supervisory Board

• Dr. Martin Winterkorn is CEO of both VW and Porsche
• Employ 33 people & pay them €14M/year, which is

significantly less than annual dividend receipt and interest income

Por sc he SE : F amily Offic e of F e r dinand Por sc he De sc e ndants

Por sc he Available at a Disc ount

32.2% of VW at prices on 4/9/12 €22.2B + €2B net cash €2.0B Total Net Asset Value on 4/9/12 €24.2B Current Market Cap of Porsche €17.6B Discount to Net Asset Value 27.7%

• Lawsuits brought against Porsche stemming from attempt to

buy VW in 2008

• Lawsuits filed in U.S., Germany, and UK by hedge funds

that lost money –

• Lawsuits totally ~€4 to €5B in damages
• Every single court has ruled in Porsche’s favor last 4 years –

appeals pending

• High probability company will settle for much smaller

amount

• Yet market is pricing in full potential cost of lawsuit

Why the Disc ount?

• Like any family office, want more than one investment
• Looking for mid-size acquisition in auto value chain, likely

based in Euripe

• Obviously understand auto industry and likely to make

prudent decision

• Also, should benefit from suppressed prices in Europe
• As a result, cash is likely worth more than what is on

balance sheet since future investment should yield higher return than pure cash

• Essentially a free option on whatever business Porsche buys

Inte nde d Use of Cash

• Buying 32.2% of VW plus cash at a 27% discount
• Free option on expected future acquisition of separate business

Pote ntial Re tur n

Division Upside Downside 32.2% of VW Valuation €134.53 €68.90 Add Cash/Share €6.53 (€9.80) Total €141.06 €59.10 Current Preferred Stock Price – 4/9/13 €56.55 €56.55 Potential Gain/(Loss) 149.4% 4.5%

• Volkswagen undervalued due to over-reaction to European

debt crisis, Chinese government commentary

• Presents time arbitrage opportunity for long-term investors
• Turnaround started in 2007 highly successful to-date yet

under-appreciated by the market

• Stock trading at significant discount to intrinsic value - even

using modest assumptions - with limited downside

• Well-run company generating returns on capital well in

excess of cost capital – content to own for many years

• Can purchase VW stock at a 25% discount via Porsche

preferred shares & get free option on future acquisition

Summar y

CEO & FUND MANAGER

Jonathan Booth, CF A, CPA

Contac t Infor mation

Booth-Laird Investment Partnership 9005 Westlake Avenue Baton Rouge, LA 70810 (225) 767-1439 Jonathan Booth, CFA, CPA Chief Executive Officer Cell: (225) 978-1532 jonathan.booth@boothlaird.com Website: www.boothlaird.com Blog: www.boothlaird.com/boothlairdblog/ Twitter: http://twitter.com/#!/BoothLaird Kevin Laird, CPA President & Chief Operating Officer Cell: (225) 229-6567 kevin.laird@boothlaird.com