October 30, 2007 Capital Markets and Automotive Aftermarket ...

October 30, 2007

Capital Markets and Automotive Aftermarket Trends

2

I. BB&T Capital Markets

II. Capital Markets Update

III. Automotive Aftermarket Update

Table of Contents

I. BB&T Capital Markets

4

BB&T Capital MarketsSummary

BB&T Corporation BB&T Capital Markets Transactions

• Headquartered in Winston-Salem, NC

• Member of the S&P 500 (NYSE: BBT)

• 12th largest U.S. bank holding company based on

assets of approximately $125 billion

• Market capitalization of approximately $22 billion

• Doubled in size in the past five years

• 1,450 banking offices and 29,000 employees

• Investment banking professionals based in Richmond, VA, Washington, Boston and San Diego

• Industry focused banking teams

• Leading M&A advisor to the middle market

• More than 350 professionals

• Full-service investment banking platform

• Institutional and retail sales and trading

BB&T Capital Markets BB&T Capital Markets Offices and Client Base

BB&T Capital Markets

Locations

BB&T Capital Markets

Headquarters

Closed Transactions

108

9586

71

54

222121

-

$10

$20

$30

$40

$50

$60

20062005200420032002200120001999

-

20

40

60

80

100

120

Value Raised ($ billions) # of Transactions

5

• Leading automotive aftermarket investment banking practice on Wall Street.

BB&T Capital MarketsLeading Automotive Aftermarket Investment Banking Practice

Service & # of AAM

Firm Name Manufacturers Distributors Parts Retailers Tire Retailers Co's Covered

BB&T Capital Markets X X X X 10

Goldman Sachs & Co X X X X 9

Morgan Stanley X X X 9

Robert Baird & Co X X X 8

Credit Suisse X X X X 6

JP Morgan X X X 6

RBC Dain Rauscher Inc. X X X 6

Sidoti & Company LLC X X X 5

BMO Harris Nesbitt X X 5

Deutsche Bank X X X 5

Wachovia Securities X X X X 5

Raymond James X X 4

Morgan Keegan X X X 4

Citigroup Investment X X X 4

Friedman, Billings, Ramsey & Co. X X 4

Merrill Lynch X X X 4

A.G. Edwards & Sons X X 3

Stifel Nicolaus X X 3

Thomas Weisel Partners X X X 3

II. Capital Markets Update

7

• Private equity has and continues to radically change the M&A market and the change is “permanent”

• Deal volume will remain strong and valuations may tighten, but quality deals will always command a premium

Capital Markets UpdateKey Takeaways

8

• Since hitting a trough in 2002, M&A transaction volume has increased by 40%

Capital Markets UpdateM&A Transaction Volume

3,510

5,848

7,800 7,8099,278

11,123

8,8027,959 8,537

10,139 10,369

7,0760.0%

67.0%

33.4% 0.1%

18.8%7.3%

18.8% 2.3%

8,550

11,088

(17.2%)

19.9% 6.9%

(9.6%)(20.9%)

0

2,000

4,000

6,000

8,000

10,000

12,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD 2006 YTD 2007

M&A Transaction Volume 1995 - August 2007

9

• A key driver of the current strong M&A market is private equity group-led LBOs

Capital Markets UpdateLBO Transactions Thrive

$181

$304

$74

$13

$320

$7$21

$29 $29 $41$63

$23 $42$41

$94$137

$61

$10 $11

$200

$15

770

8371,007

503

386308

197 218270 255 228

272 277 275 306386

283

186 207

734

852

$0

$50

$100

$150

$200

$250

$300

$350

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 3Q2006

3Q2007

Val

ue o

f L

ever

aged

Buy

outs

($

in b

illio

ns)

0

150

300

450

600

750

900

1,050

1,200

Num

ber

of L

ever

aged

Buy

outs

Value of Leveraged Buyouts Number of Leveraged Buyouts

Source: Buyouts Newsletter.

Value and Number of Leveraged Buyouts ($ in billions)

10

What Has Caused the LBO Boom?

1. Historically Loose Credit Markets

• Pay more and still get required return on equity (ROE)

2. Lower required investor returns

• More money chasing deals

3. Institutionalization of private companies

• Private companies more liquid than ever

Capital Markets Update

11

• Leverage multiples in LBO transactions remain at historical highs

– Higher debt allows PE firms to pay more

Capital Markets UpdateLeverage Multiples Improve Returns

Source: S&P's LCD

4.0x3.2x 3.2x 3.2x

2.7x 2.5x 2.8x3.2x 3.5x

4.0x3.5x

1.7x

2.2x1.5x

1.0x1.5x 1.5x

1.8x1.6x

1.8x1.6x

1.7x

5.7x5.4x

4.7x4.2x 4.1x 4.0x

4.6x 4.8x5.3x

5.6x5.2x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Sep-07

Sr Debt / EBITDA Sub. Debt / EBITDA

Average Debt Multiples of Highly Leveraged Loans ( > $50mm)

12

• Private equity firms have raised record levels of capital that will be “put to work”

– Excess supply of “acquisition capital” has reduced PE firms required return on equity

Capital Markets UpdatePrivate Equity Fund Raising


$23$35

$55 $54$36

$184$198

$139

$216

$18

$42

$5 $6 $10

$43

$21$12

$0

$25

$50

$75

$100

$125

$150

$175

$200

$225

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 3Q2006

3Q2007

Total Private Equity Capital Raised ($ in billions)

13

• Liquidity of privately held companies has increased significantly in the last 10 years

• Trading private companies among private equity firms is common today

• Think about private companies as income producing assets like commercial real estate

Capital Markets UpdateInstitutionalization of Private Companies


14

• The result has been generally increasing valuations since 2002

Capital Markets UpdateValuation Multiples

(1) Source: FactSet Mergerstat, LLCExcludes negative EV/EBITDA multiples and multiples larger than 25.0x

Median EV/EBITDA Multiples(1)

11.1

x

10.2

x

9.4x

8.9x

10.3

x

8.3x

9.2x

11.5

x

11.4

x

10.5

x

12.2

x

11.3

x

10.3

x

11.1

x

8.7x 9.0x

11.1

x

11.4

x

11.8

x

11.9

x

8.4x

9.5x

8.1x

9.0x

8.2x

7.7x

6.9x

6.9x 7.

7x

8.9x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Under $250 Million $250 - $499 Million Over $500 Million

Med

ian

EV

/EB

ITD

A M

ult

iple

Mu

ltip

le

35.6%

37.8%

27.2%44.2%

26.1%30.4%

44.2% 28.1% 24.2% 41.7%

15

• Highway Trucking Co. is looking at strategic alternatives for its business, including a possible sale

• How much money will Highway Trucking Co. get and who will buy it??

Current

Year Year 1 Year 2 Year 3 Year 4 Year 5

Y-o-Y

Growth

Revenue $50.0 $52.5 $55.1 $57.9 $60.8 $63.8 5.0%

Gross Profit 28.5 29.9 31.4 33.0 34.6 36.4 5.0%

EBITDA 8.2 8.6 9.0 9.5 10.0 10.5 5.0%

Capital Markets UpdateA Case Study

16

• 50% Equity

• 50% Debt

Purchase Price: $42.0“Multiple of EBITDA”: 5.1x

Equity Investment: $21.0 (50%)

Borrowed Debt: $21.0 (50%)Debt as Multiple of EBITDA: 2.6x

5-year Return on Equity: 20.0%

Current


Y-o-Y

Growth

Revenue $50.0 $52.5 $55.1 $57.9 $60.8 $63.8 5.0%

Gross Profit 28.5 29.9 31.4 33.0 34.6 36.4 5.0%

EBITDA 8.2 8.6 9.0 9.5 10.0 10.5 5.0%

Capital Markets UpdateCase 1: Scenario 1

17

• 25% Equity

• 75% Debt





Current


Y-o-Y

Growth

Revenue $50.0 $52.5 $55.1 $57.9 $60.8 $63.8 5.0%

Gross Profit 28.5 29.9 31.4 33.0 34.6 36.4 5.0%

EBITDA 8.2 8.6 9.0 9.5 10.0 10.5 5.0%


18

• Leverage “supercharges” equity returns and enables higher prices

– Scenario I Equity = 50%; Debt = 50%

– Scenario II Equity = 25%; Debt = 75%

Purchase Price

Equity Investment

Borrowed Debt 21.0 40.1

21.0 13.4

$ 42.0 $ 53.5

Scenario IScenario I Scenario IIScenario II

Return on Equity (5-years) 20.0% 20.0% Return on Equity (5-years) 20.0% 20.0%

Capital Markets UpdateLeverage Summary Concepts

19

• Impact on prices of lower required return on equity





Current


Y-o-Y

Growth

Revenue $50.0 $52.5 $55.1 $57.9 $60.8 $63.8 5.0%

Gross Profit 28.5 29.9 31.4 33.0 34.6 36.4 5.0%

EBITDA 8.2 8.6 9.0 9.5 10.0 10.5 5.0%


20





Current


Y-o-Y

Growth

Revenue $50.0 $52.5 $55.1 $57.9 $60.8 $63.8 5.0%

Gross Profit 28.5 29.9 31.4 33.0 34.6 36.4 5.0%

EBITDA 8.2 8.6 9.0 9.5 10.0 10.5 5.0%


• Impact on prices of lower required return on equity

21

• Scenario I $13.4 million Equity and 20.0% Return

• Scenario II $16.5 million Equity and 15.0% Return

Purchase Price

Equity Investment

Borrowed Debt 40.1 40.1

13.4 16.5

$ 53.5 $ 56.6

Scenario IScenario I Scenario IIScenario II

Return on Equity (5-years) 20.0% 15.0% Return on Equity (5-years) 20.0% 15.0%

Capital Markets UpdateLeverage Summary Concepts

22

• With the recent developments in the credit markets and the resulting lack of liquidity, it is uncertain whether the strong volume of M&A transactions seen over the past 24 months will continue

Impacts of credit crunch will likely be:

• More equity and less debt will lead to lower valuations

• Lower PEG valuations will result in a re-emergence of the strategic buyer

• Middle market M&A will be significantly more insulated than larger transactions

– Smaller deals don’t require syndication

• Quality deals will still receive premium valuation

Capital Markets UpdateRecent Developments

III. Automotive Aftermarket Update

24

• After a slow start to September, October is picking up, but certain geographic areas remain weak

• Retailers are trying to follow the growth to DIFM

• Retailers aggressively seeking direct sourcing opportunities

Automotive Aftermarket UpdateKey Takeaways

25

• After a slow beginning to September we are seeing acceleration in October and we are beginning to hear some cautious optimism, despite up-tick in gas prices

• Regional performance differences exist

• We believe the deferral of routine maintenance that began in early 2006 has spurred significant reductions in discretionary automotive maintenance

• However, our outlook is cautiously optimistic for the remainder of Q4 and into 2008 as this trend reverses and the macro economic environment stabilizes

Automotive Aftermarket UpdateCurrent Market Environment

26

4.7%

2.4%3.3%

1.3% 1.2% 0.7%2.0%

1.0%

4.3%3.5%

1.6% 1.4%

3.0%

(1.9%)

0.0%0.9%

5.0%

2.3%

(0.6%)

10.3% 10.3%

13.5%

12.0%10.8% 11.2% 11.3%

10.5%

8.6%

15.9%

4.4%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Q2'05 Q3'05 Q4'05 Q1'06 Q2'06 Q3'06 Q4'06 Q1'07 Q2'07 Q3'07

Dual Marketers Professional Installers Collision Distributors

• Excluding Midas, same-store-sales trends were better than expected for Q3

– Monro +2%; O’Reilly +4.3%; LKQ +15.9%; Midas -3.9%


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 resultsQuarters adjusted for calendar year.

27

• In general aftermarket valuations have dipped in Q3’07, but most segments remain at or above historical valuations


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)

0.0x

5.0x

10.0x

15.0x

20.0x

LT

M 9

/02

LT

M 1

2/02

LT

M 3

/03

LT

M 6

/03

LT

M 9

/03

LT

M 1

2/03

LT

M 3

/04

LT

M 6

/04

LT

M 9

/04

LT

M 1

2/04

LT

M 3

/05

LT

M 6

/05

LT

M 9

/05

LT

M 1

2/05

LT

M 3

/06

LT

M 6

/06

LT

M 9

/06

LT

M 1

2/06

LT

M 3

/07

LT

M 6

/07

LT

M 9

/07

Collision Distributors Professional Installers Dual Marketers Manufacturers

28


(45.8%)

(37.3%)

(21.8%)

4.9%

14.5%

21.0%

37.2%

48.7%

52.1%

59.7%

(28.1%)

(2.8%)

27.1%

72.2%

(38.7%)

(4.3%)

(4.3%)

2.7%

3.6%

6.1%

6.5%

(60.0%) (40.0%) (20.0%) 0.0% 20.0% 40.0% 60.0% 80.0%

Standard Motor Products Inc.

Proliance International, Inc.

Motorcar Parts of America Inc.

Snap-on Inc.

PPG Industries Inc.

Tenneco Inc.

Dorman Products, Inc.

Federal-Mogul Corp.

Cooper Tire & Rubber Co.

Aftermarket Technology Corp.

Midas Inc.

Monro Muffler Brake Inc.

Copart Inc.

LKQ Corp.

CSK Auto Corp.

Pep Boys - Manny, Moe & Jack

Advance Auto Parts Inc.

O'Reilly Automotive Inc.

Genuine Parts Co.

Uni-Select Inc.

AutoZone Inc.

• 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 10/25/07S&P 500S&P 500

29

• To continue to drive top-line growth, DIY focused retailers are repositioning their business model for DIFM distribution growth

Automotive Aftermarket UpdateDIY 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

30

Automotive Aftermarket UpdateCommercial Distribution - Highly Fragmented, Faster Growth

Retail Distribution: $32 billion

1% - 2% Growth

Other: 54%

Commercial Distribution:$54 billion

4% - 6% Growth

Napa (GPC)Carquest (GPI)

AdvanceUni-SelectAutozone

O'ReillyParts Depot

CSK

Other: 83%

Pep BoysCSK

O'Reilly

AutoZone

AdvanceWal-Mart

Other: 54%

• Commercial distribution segment is highly fragmented and growing faster than retail distribution

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Automotive Aftermarket UpdateCommercial Distribution – Higher Valuation

DIY DIFM

1% - 2% organic growth

4% - 6% organic growth

DIY DIFM

Company TEV / EBITDA Company TEV / EBITDA

Advance Auto Parts Inc. 7.2x Genuine Parts Co. 9.8x

AutoZone Inc. 8.5x O'Reilly Automotive Inc. 10.5x

CSK Auto Corp. 8.5x Uni-Select Inc. 8.3x

Mean 8.1x 9.5xSource: BB&T Capital Markets, SEC Filings, CapitalIQ.

• Faster growth leads to higher valuations

32

Automotive Aftermarket UpdateO’Reilly and AutoZone Case Study

Same Store SalesLong Term Earnings Growth Rate

12.2%

17.4%

0.0%

5.0%

10.0%

15.0%

20.0%

AZO ORLY

Source: CapitalIQ. Represents consensus estimate.

AutoZone Footprint

Source: Company website.

O'Reilly Footprint

Source: Company website.

0.3%

(0.3%) (0.2%)

2.1%

6.8%

2.0%

4.3%

NA

(1.0%)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

FQ-3 FQ-2 FQ-1 FQ

AZO ORLY

33

Automotive Aftermarket UpdateDirect Sourcing

• 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

“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

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Automotive Aftermarket UpdateDirect Sourcing

Average Hourly Compensation Costs of Manufacturing Workers

0

10

20

30

40

50

60

70

80

90

100

UnitedStates

China Brazil Mexico EU(15) Japan Asian NIE's

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.

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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 CareyBB&T Capital Markets

(617) [email protected]

October 30, 2007 Capital Markets and Automotive Aftermarket ...

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