Automotive Aftermarket Update Current Market Environment Dual Marketers includes AZO, AAP, CAO, ORLY; Service shops includes MDS, MNRO. Collision Distributors includes LKQX and KEYS through Q2’07 and only LKQ for Q3’07. As of 10/26/07, only ORLY, LKQ, MDS, and MNRO reported Q3’07 results Quarters adjusted for calendar year.
In general aftermarket valuations have dipped in Q3’07, but most segments remain at or above historical valuations
Automotive Aftermarket Update Current Market Environment Historical TEV / EBITDA Ratio By Segment Manufacturers include: ATAC, CTB, SNA, MPAA, PLI, DORM, SMP, TEN. Professional Installers include: MDS, MNRO. Dual Marketers include: AAP, AZO, CAO, ORLY, PBY, GPC, UNS. Collision Parts Distributors include: LKQX (went public in 2003)
Automotive Aftermarket Update Current Market Environment
Year-to-date, manufacturers and collision focused companies are outperforming the S&P 500; other segments are lagging
Manufacturers Collision Professional Installers Dual Marketers As of 10/25/07 S&P 500
To continue to drive top-line growth, DIY focused retailers are repositioning their business model for DIFM distribution growth
Automotive Aftermarket Update DIY to DIFM “ I think clearly we have the greatest opportunity on Commercial. We have 13% market share on DIY, 1.3% on Commercial. We have a tremendous long-term opportunity in Commercial and a tremendous long-term opportunity in DIY, but we have a more mature model in DIY than we do in Commercial.” September 18, 2007 “ We are increasing our commercial focus to take greater advantage of the full potential of the large and growing commercial market. We believe that over the last few quarters we've missed meaningful opportunities to drive our commercial sales, and as a result, our comp growth in this area has slowed.” August 9, 2007
Commercial distribution segment is highly fragmented and growing faster than retail distribution
Automotive Aftermarket Update O’Reilly and AutoZone Case Study Same Store Sales Long Term Earnings Growth Rate Source: CapitalIQ. Represents consensus estimate. AutoZone Footprint Source: Company website. O'Reilly Footprint Source: Company website.
In addition to top line growth, parts distributors are looking to increase direct sourcing to reduce costs and grow earnings
Currently, most dual marketers have only a small percentage (5-10%) – but expect this to increase over time
Parts coverage, quality and fill rates are no longer such obstacles
Profit improvement should be a direct result – with greater benefit to the first movers
Automotive Aftermarket Update Direct Sourcing “ We use a combination of private label, and prominent national brands to offer a better-best, or in some cases a good-better-best strategy across key categories. This allows us to take advantage of the gross margin opportunities that come from importing products from lower cost countries where some of the aftermarket products are being manufactured.” April 25, 2007 “ We also believe that we have significant opportunity in direct importing over time…We began it in earnest about two years ago…and we are working now on our parts area as the quality in China becomes acceptable to bring in more product.” March 6, 2007
Automotive Aftermarket Update Direct Sourcing Average Hourly Compensation Costs of Manufacturing Workers Source: Bureau of Labor Statistics, Monthly Labor Review – August 2005. Notes: U.S. Indexed at 100; NIE’s are the newly industrialized economies of Hong Kong, Korea, Singapore, and Taiwan; EU(15) are the European Union member countries prior to the expansion to 25 countries on May 1, 2004. Data from 2002.
BBTCM's annual party during Automotive Aftermarket Industry Week in Las Vegas BB&T Sponsors the #2 Car in the NASCAR Busch Series Member Jonathan Carey BB&T Capital Markets (617) 316-1336 [email_address]