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Fernando Ortiz-Cañavate, Managing Director at Volkswagen Financial Services - Risk Management Effectiveness: Taking a reactive or proactive approach

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Fernando Ortiz-Cañavate, Managing Director at Volkswagen Financial Services spoke at the CFO Event May 2014

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Fernando Ortiz-Cañavate, Managing Director at Volkswagen Financial Services - Risk Management Effectiveness: Taking a reactive or proactive approach

  1. 1. Proposed Framework for Presentations Spain: The role of steering a company back towards growth Silverstone, May 2014
  2. 2. 2 22 5. Conclusion 3. Automotive strategy is changing 4. Financial approach 2. Spanish crisis: where are we going? 1. Spain: Economic comparisson
  3. 3. Spain: it has a sizable economic dimension, close to 47 Mio population, 1,1 Trio EUR economy and the 4th largest in Europe 2012 GDP: EUR 1.063 Trio How much bigger than Spain? GDP size in PPP terms (2012) 3
  4. 4. Levels of income and wealth are still lower than those prevailing in central and northen Europe 2012 GDP per capita (USD 000´s) 2012 GDP per capita (Spain = 100) 4
  5. 5. Breakdown of economic activities: Overweight in tourism, construction and autos 5
  6. 6. Foreign trade patterns: at some point, the second largest current account deficit in the world (above USA). In 2013 there were the first surplus in 15 years. 6
  7. 7. Public debt 2013 7 94% GDP
  8. 8. Public debt 2013 8
  9. 9. Public debt 2013 9 94% Spain
  10. 10. Conservative party got the biggest part of the cake! National Parliament 10
  11. 11. Financial market: equity market 11
  12. 12. There is a dual economy: landscape is dominated by micro-companies with few large multinationals 12
  13. 13. Then in 2011: the early 2000´s business model has collapsed… Construction spending in GDP (%) Immigrant population (% of total) Share of construction in creating employment Construction played a disproportionate role in the Spanish business model! 13
  14. 14. - 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 …and it brought a collapse in all activity sectors… Industrial output excluding construction Retail sales volume index Car industry Car sales back to 1986 and down a 58% from its peak ! 26 years 14
  15. 15. 15 1,5% 1,9%1,8% 2,1% 2,3%2,3% 3,0% 3,3% 3,6% 3,6% 3,8% 3,5% 3,2% 3,1% 3,0%3,1%3,0% 2,9% 2,4% 2,0% 2,0%1,9% 2,1% 1,9%1,9% 2,2% 2,7% 3,4% 3,5% 2,9%2,9% 2,7%2,8% 2,4% 1,4% 2,0% 1,00% 1,50% 2,00% 2,50% 3,00% 3,50% 4,00% 4,50% Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 FC 2013 Consumer Price Index Source: NationalStatisticsInstitute/ Bank of Spain …increasing unemployment, reducing GDP and with a high inflation
  16. 16. 16 With a significant increase in Risk Premium… 325 352 395 326 319 317 356 411 536 475 546 552 450 415 393395 350 365 377 348 5,18% 5,45% 7,09% 5,56% 5,47%5,40% 5,78%5,78% 6,12% 6,12% 6,51% 6,71% 5,70% 5,47% 5,56% 5,32% 5,40% 5,22% 4,92% 4,73% 3,82% 3,98% 4,04% 4,07% 4,06% 4,04% 4,02% 4,07% 4,07% 4,11% 4,12% 4,13% 4,10% 4,13% 4,12% 3,90% 3,85% 3,83% 3,0% 4,0% 5,0% 6,0% 7,0% 8,0% 100 150 200 250 300 350 400 450 500 550 600 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 Risk Premium GovernmentAuctions 10 years Central Government Debt Average InterestRate Source: Risk Premium and Goverment Auctions http://www.datosmacro.com/prima-riesgo/espana Source : Central GovermentDebt http://www.tesoro.es/doc/SP/home/estadistica/03.pdf 16
  17. 17. …and it brought a collapse in all activity sectors……and a dismal in the job market… 27 % and over 56% for young people 27.0% Unemployment rate (%) Happy Spaniards around the world Massive damage across economic sectors setting Spain back 15 years 17
  18. 18. …and there are still significant inefficiencies in the current model. 18
  19. 19. …that implies significant different in the economy of the different regions. 19
  20. 20. 20 48,56 50,33 50,85 52,42 55,91 58,00 58,66 57,19 52,17 52,67 56,08 57,70 60,66 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Number of foreign tourists (Mio) There are already some indicators that are showing first green shoots after the recession Exports have increased taking the commercial balance at positive levels And tourism is at record levels. Exports Evolution (mio EUR) 46.994 48.532 38.460 43.949 54.820 54.445 61.604 0 10.000 20.000 30.000 40.000 50.000 60.000 70.000 80.000 2007 2008 2009 2010 2011 2012 2013 Exports
  21. 21. 21 2,2% 2,7% 3,4%3,5% 2,9% 2,9% 2,7% 2,8% 2,4% 1,4% 1,7% 2,1% 1,8% 1,5% 0,3% -0,1% 0,2% 0,3% 0,7% -0,50% 0,00% 0,50% 1,00% 1,50% 2,00% 2,50% 3,00% 3,50% 4,00% July 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec12 Jan 13 feb-13 mar-13 Apr13 may-13 jun-13 jul-13 ago-13 sep-13 oct-13 nov-13 dic-13 dic-13 Consumer Price Index (%) GDP Evolution (%over previous period) Consumer Price Index is still under control GDP has grown for six consecutive months.
  22. 22. But there is still a long way to say that we are completely out of recession 22 Unemployment Evolution Unemployment is still at the highest levels. Non performing Loans – Evolution (% total) Non performing loans are damaging the credit performance. And credit is at 25.1% down from its peak. Credit to individuals and to non financial corporations (Mio EUR)
  23. 23. And all activity sectors are still in recession 23 0 200.000 400.000 600.000 800.000 1.000.000 1.200.000 1.400.000 1.600.000 1.800.000 Car industry (# cars) 1994 2013 Construction is still in lowest levels Despite the last increase, Car sales back to 1994 and down a 56% from its peak Industrial output excluding construction index Wage reductions are affecting Retail Sales. Retail sales volume index 19 years
  24. 24. 4,68% 2,89% 0,70% 1,01% 1,36% 0,19% 0,29% 0,30% 0,30% 4,75% 3,05% 1,25% 1,51% 1,95% 0,54% 0,56% 0,56% 0,56% 4,54% 3,26% 2,74% 2,48% 1,76% 0,77% 1,30% 1,18% 1,18% 0,0% 1,0% 2,0% 3,0% 4,0% 5,0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 Euribor 3 months Euribor 1 Year Swap 5 years 24 Interest Rates Yield Curve – Euribor /Swap What can we expect for 2014? • Interest Rates are still under control and refinancing for good rating companies are reasonable cheap. It is expected that corporate investment will continue the good trend that has been observed in the last six months.
  25. 25. 0,2 -1,1 -2,7 -3,3 -4,6 -2,5 -0,3 1,6 4 -5 -4 -3 -2 -1 0 1 2 3 4 5 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 25 Consumer Index 2011 2012 2013 What can we expect for 2014? • Confidence of investors index has improved. CONCLUSION: We are moderately optimistic and expect a slight recovery in 2014 that will be translated into a higher level of consumption and an improvement of the financial situation of families and medium and small companies.
  26. 26. 26 2626 5. Conclusion 3. Automotive strategy is changing 4. Financial approach 2. Spanish crisis: where are we going? 1. Spain: Economic comparisson
  27. 27. Good products alone are no longer enough! Sustainable success for OEMs is based on several factors Strong research & development / strong production Strong presenceStrong products + + OEM = Original Equipment Manufacturers, i. e. manufacturers 27
  28. 28. Groups with greater market coverage enjoy advantages Market coverage Geographical coverage High Low Regional Global Niche players 28
  29. 29. The sustainable success of a manufacturer is also based on a powerful captive Strong Automobile Manufacturer Strong Financial Services Provider 29
  30. 30. The high volatility in many saturated markets requires a high degree of flexibility and good portfolio management 0,0 4,0 3,0 3,5 Newregistrationsinmillions 1,8 0,0 2,0 1,9 2,1 2,4 2,2 2,3 2,6 Newregistrationsinmillions 1,6 1,5 1,4 1,3 1,2 1,1 1,0 0,9 0,8 0,0 Newregistrationsinmillions 17 16 15 14 13 12 11 0 Newregistrationsinmillions 30
  31. 31. The importance of the car is continually decreasing for young and urban people Source: Next Practice 2010, Volkswagen, Young without Cars, Study 2010 Trend towards commodity with related price and volume risks Without connectivity, a car is no longer in the „relevant" set for the young/urban Ownership of a car is less relevant for young customers What is a 30-year old man interested in? Interne t Aut o Telekommunikation 2008 1998 62 Telecommunications Car 31
  32. 32. Declining loyalty to authorised workshops Workshop steering by insurers Decreasing volume & profit Cost pressure in workshops New technologies (BEV) The workshop business – vitally important for dealers – is under massive threat Ertrag Handel (in %) Sales After Sales Better vehicles Workshop business: very profitable Dealer profit (in %) Dealer turnover (in %) 32
  33. 33. Experts expect customer loyalty to authorised workshops to fall even further 1 2 3 4 5 6 7 8 Segment Ia Segment Ib Segment II Segment III Vehicle age 80 % 60 % 40 % 20 % Customer loyalty to authorised workshops Workshop revenue lost due to decreasing customer loyalty Basis: Loyalty 2008 Loyalty 2010 Loyalty 2014 33
  34. 34. The classic car dealer format is appealing for proud owners – but not for flexible users! Close 1:1 relationship between vehicle ownership and vehicle use Pay and use Mobility yesterday and today Flexible mobility solutions and services for individual mobility objectives Pay per use Mobility today and tomorrow New mobility concepts 34
  35. 35. Volume concentration on demanding commercial customers is becoming a challenge for dealerships Source: ADL; VW FS AG Major complexity to date: Differing needs of many different individual customers Major complexity tomorrow: Increasing volume concentration on fleet customers with high demands Leasing Courtesy cars Radio tax Road tolls Car registration Fuel cards Scheduled service Maintenance Tyre replacement Insurance Wear and tear Driving licence checks Long-term rental Reporting systems Fleet management Fleet advisory Legal inspection Tyre change and storage Claims management 35
  36. 36. Many customers wish to have a dealership in their city centre. Locations in industrial estates become increasingly unattractive High structural investments outside cities Audi City (virtual dealer) A4 A6 A8 Saloon Avant Quattro A1 A3 A4 A5 A6 A7 A8 Q3 Q5 Q7 TT R8 CoupéSportback S series RS series Roadster Saloon Avant Quattro CabrioletCabriolet 36
  37. 37. Captives also have specific challenges! ... for example, the over-50s pay cash! BUT: Average age of new car buyers is increasing AND: The older a customer, the less affinity to financial services Decreasing financing volume Source: VW FS AG, AutoUni 20251995 65-75 yrs. > 75 yrs.55-65 yrs. (Financing rate in %) Today, more than every second vehicle in Germany is financed 37
  38. 38. Increasing regulation also affects automotive financial services providers… Captives Stricter regulation of financial services §§ § § § §§ § § § § Universal banks Insurance companies Trigger Political reaction Target Collateral damage 38
  39. 39. … and creates great challenges for them! End 2014Pre 2010 Number of employees engaged in meeting legal requirements Increasing regulation + 140% 39
  40. 40. And where do we go from here? 40
  41. 41. • Long-term rental • Short-term rental • Micro-rental (car sharing) Rentals 1. Extended product range necessary! Offer solutions with a board range of products • Accounts • Instalment credits • Investments • New mobility offers Direct bank • Automotive • Credit protection insurance • Industry InsuranceServices • Inspection service • Maintenance packages • Maintenance and repair Leasing • Finance leasing • Operating leasing • Fuel • Tyres • Reporting Fleet mgmt.Bank • Customer financing • Dealer financing • Factoring Risk taking and risk management as core competence 41
  42. 42. 2. Role change needed! From pure sale promotion to customer and car relationship manager Joe Bloggs VSSZZZ 1PZCR 07913 2 CRM² = Customer Relationship Management Car Relationship Management x Student 1st job Young family Family Post- family Pension Company car 1-year- old car 3-year- old UC 5-year- old UC 8-year- old UC … UC = used car 42
  43. 43. 3. Global orientation necessary! Concentration on home market and "cherry picking" are not enough Global orientation 43
  44. 44. And where do we go from here? Broad product range Worldwide deploymentLife cycle management 44
  45. 45. Establish three strategic pillars! Broad product range Worldwide deploymentLife cycle management 45
  46. 46. What we then also have is: Broad product range Worldwide deploymentLife cycle managementWin WinWin 46
  47. 47. To excite the customer: size matters! … conviently from one single provider! The right product package… … at any time… … at the desired place… 47
  48. 48. 4848 5. Conclusion 3. Automotive strategy is changing 4. Financial approach 2. Spanish crisis: where are we going? 1. Spain: Economic comparisson
  49. 49. % Penetration 20,0 23,9 27,4 29,4 33,9 35,1 44,1 51,8 0 5 10 15 20 25 30 35 40 45 50 55 60 2006 2007 2008 2009 2010 2011 2012 2013 1.005,3 951,2 639,8 666,9 494,9 396,1 356,3 379,5 1.634,6 1.614,8 1.161,2 952,8 982,0 810,0 699,6 722,7 0 500 1.000 1.500 2.000 2006 2007 2008 2009 2010 2011 2012 2013 Private Market Total Market Sales (Tsd. Vehicles) Passengers Cars- 56% + 159% 49 In a very complicated environment
  50. 50. 215,1 225,0 227,0 231,3 264,5 285,2 306,2 297,2 86,0 69,1 61,7 65,8 65,7 69,5 44,7 80,9 215,1 225,0 313,0 300,4 326,1 351,0 416,6 447,6 2006 2007 2008 2009 2010 2011 2012 2013 Finance+Leasing Insurance Services New Contracts (Tsd. Units) Total Portfolio (Tsd. Units) 73,2 86,3 74,0 67,8 90,7 83,5 89,9 105,3 0,0 0,0 111,3 92,7 165,7 110,0 116,2 127,5 26,7 32,7 37,6 73,2 86,3 185,3 160,5 256,4 220,2 238,9 270,5 2006 2007 2008 2009 2010 2011 2012 2013 Finance+Leasing Insurance Services 50 VWFS Spain has diversified its products and services growing in a depressed market with a different business plan
  51. 51. 51 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 FGA CAPITAL SPAIN BANSABADEL L FINCOM FINCONSUM TOYOTA KREDITBANK BANCO CETELEM BMW BANK GMBH BANQUE PSA FINANCE RCI Banque Suc en España BBVA CONSUMER FINANCE SANTANDER CONSUMER FINANCE VOLKSWAGE N FINANCE Dec 2013 Dec 2012 Source: ASNEF TOTAL Credit Investment €: Competitors Volkswagen Finance has become market leader in customer credit for Automotive Industry (New Cars + Used Cars). At December 2013 cumulative growth of VW Finance is 10,1% compared to 2012. +10,1% -2,9% -1,5% +20,6% -14,5% +14,6% +30,9% +4,9% +6,5% 2,2% +38,6% And become market leader above other general financial institutions
  52. 52. VW FS AG | Investor Update Thank you very much!52

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