Buckle Up for a Roller-Coaster Ride

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Virginia Hamilton
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1 Buckle Up for a Roller-Coaster Ride Michelle Krebs Executive Analyst

2 INVENTORY SOLUTIONS RETAIL SOLUTIONS FINANCIAL SOLUTIONS MOBILITY SOLUTIONS

3 Light Vehicle Market Outlook February 2019

4 New Vehicle Sales Forecast for COX AUTOMOTIVE FULL-YEAR FORECASTS * 16.5 Source: Cox Automotive, December

5 Vehicle Shopper Perspective Market Consideration Above 28,000,000 New Light Vehicle and MY0-4 Used Light Vehicle Demand Strong, Importance of Used Rising C O M B I N E D N E W A N D U S E D M Y 0-4 V E H I C L E M A R K E T Gently Used Share 30,000,000 25,000,000 23,483,396 25,340,876 27,153,965 28,010,306 28,106,923 28,470,622 40% 39% 20,000,000 38% 15,000,000 37% 36% 10,000,000 35% 5,000,000 34% New Vehicle Deliveries Used MY0-4 Registrations "Gently" Used Share 33% Source: Cox Automotive analysis of BEA Vehicle Deliveries, IHS Registrations 5

6 Millions Units Estimated Lease Maturities

7 Decline of Cars Not Reflected in Wholesale Market Volumes The SUV reigns supreme in new vehicle sales while cars still dominated the used car market N E W V E H I C L E S A L E S B Y C A T E G O R Y CAR PICKUP SUV VAN M A N H E I M S A L E S B Y C A T E G O R Y CAR PICKUP SUV VAN 60% 60% 50% 49% 50% 50% 40% 40% 30% 30% 30% 33% 20% 16% 20% 10% 10% 11% 5% 6% 0% % Source: Autodata, Manheim 7

Availability Gasoline Prices Tax Reform Impact Vehicle Prices

8 2019: New and Used Buying Conditions Become Less Favorable Labor Markets Consumer Confidence Product Choice Credit Availability Gasoline Prices Tax Reform Impact Vehicle Prices Inventories Equity Markets Monetary Policy Fiscal Policy Housing Market 8

9 Interest Rates and Tightening Credit 9

10 04:Q1 04:Q2 04:Q3 04:Q4 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4 15:Q1 15:Q2 15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4 17:Q1 17:Q2 17:Q3 17:Q4 18:Q1 18:Q2 18:Q3 Billions Easier Lending Supported Peak Auto Sales (LENDING EXPANDED IN Q3) Lending grew by 4.6% Y/Y in Q3 by 10% gains in subprime and 8% gains in 760+ $ volumes A U T O L O A N O R I G I N A T I O N $ B Y C R E D I T S C O R E < <620% $ % $ % $140.0 $ % $ % $ % $60.0 $40.0 $ % 5.0% $ % Source: New York Federal Reserve Consumer Credit Panel/Equifax 10

11 % Best Available Auto Rates at Seven-year High The discount rate ended 2018 up 1% while best available auto rates were up more and up 2.4% from absolute low 9 I N T E R E S T R A T E S New Auto 60 Mo New Auto 48 Mo Used Auto 36 Mo US 10 Year Treasury Fed Discount Rate Source: Bankrate.com, US Federal Reserve, Bloomberg 11

12 Subprime Penetration Varies by Brand MITSUBISHI KIA DODGE NISSAN FIAT HYUNDAI CHEVROLET JEEP BUICK VOLKSWAGEN TOYOTA FORD CHRYSLER MAZDA HONDA MINI RAM LEXUS BMW LINCOLN ACURA CADILLAC GENESIS GMC INFINITI JAGUAR AUDI MERCEDES-BENZ LAND ROVER VOLVO PORSCHE Source: Dealertrack/Cox Automotive 12

13 Trouble with Tax Refunds 13

14 Tax Reform Boosted Disposable Personal Income Lower tax rates effectively allowed average income gains to translate into equivalent gains in spending P E R C A P I T A I N C O M E A N D B U Y I N G P O W E R $60,000 $51, % $53, % $50,000 $44,488 $46,179 $40,000 $30,000 $20,000 $10,000 Unch +12% $- $(901) $(1,008) $(10,000) $(6,241) $(6,243) Income Taxes Interest Payments Buying Power Source: US Bureau of Economic Analysis Personal Income and Consumption 14

Implications of Underwithholding MORE THAN 102 MILLION FILERS RECEIVED A REFUND IN 2018 FOR 2017 TAXES Millions of households likely to be in a different position relative to tax refunds than they

15 Implications of Underwithholding MORE THAN 102 MILLION FILERS RECEIVED A REFUND IN 2018 FOR 2017 TAXES Millions of households likely to be in a different position relative to tax refunds than they are accustomed THE AVERAGE REFUND LAST YEAR WAS ALMOST $2,800 The average refund is likely to be smaller Consumer spending likely to be negatively impacted Consumer credit conditions likely to deteriorate Updated W4 will lead to higher withholdings and lower disposable income 15

16 Trade & Tariffs 16

17 Vehicle Prices Already Impacted by Tariffs 11 weeks of appreciation in the summer brought prices to a new equilibrium reflecting an average 2% increase in value 110.0% 3-YEAR-OLD MODEL MANHEIM MARKET REPORT INDEX BY WEEK % 100.0% 95.0% 90.0% 85.0% 80.0% Source: Manheim 17

Negative Impact of Import Tariffs Q4 2018 Q3 2018 Higher prices on all used vehicles as market adjusts 61% 60% Higher prices on imported vehicles 57% 55% Higher prices on all new vehicles as market

18 Negative Impact of Import Tariffs Q Q Higher prices on all used vehicles as market adjusts 61% 60% Higher prices on imported vehicles 57% 55% Higher prices on all new vehicles as market adjusts 40% 48% Lower (or delayed) used vehicle sales 28% 23% Lower (or delayed) new vehicle sales 26% 27% Higher prices on domestic vehicles 25% 25% Other 5% 3% No Concerns 2% 4% Q: What, if any, positive impacts would imposing tariffs on imported vehicles and parts have on your business? Please select all that apply. Dealer Sentiment Index Q

19 The US Market is Heavily Dependent on a Complex Global Supply Chain COMPOSITION OF NEW VEHICLES SOLD IN THE US BY MAJOR SEGMENTS AND MAJOR REGIONS OF ORIGIN 35.0% USA MEXICO+CANADA JAPAN SOUTH KOREA EUROPE 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% COMPACT CAR LUXURY CUV VAN PICKUP MIDSIZE CAR SUV Source: Cox Automotive estimates based on IHS Markit Registrations 19

20 Changing New Vehicle Market 20

21 Share of New Vehicle Sales Under $30,000 MSRP Declining % 47% 45% 40% 35% 34% 30% 25% 20% 15% 24% 22% 16% 19% 23% 10% 7% 6% 5% 2% 0% < $20,000 $20,000-29,999 $30,000-39,999 $40,000-49,999 $50,000+ Source: Kelley Blue Book, December

22 Share of New Vehicle Monthly Payments Over $600 Increasing The average payment on a new vehicle reached $533 in 2018 or 10.2% of median household income $ $ $ $ $ $ % 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Source: Dealertrack 22

23 Affordable Cars Outperforming other Segments Percent change in Manheim Used Vehicle Value Index year-over-year December % 6% 6.2% 6.6% 5% 4% 4.3% 3.6% 3% 2% 1% 0% 1.8% 1.1% 0.2% Industry Compact cars Midsize cars Luxury cars Pickups SUV/CUV Vans Source: Manheim 23

The US Market is Heavily Dependent on a Complex Global Supply Chain COMPOSITION OF NEW VEHICLES SOLD IN THE US BY MAJOR SEGMENTS AND MAJOR REGIONS OF ORIGIN 35.

24 The US Market is Heavily Dependent on a Complex Global Supply Chain COMPOSITION OF NEW VEHICLES SOLD IN THE US BY MAJOR SEGMENTS AND MAJOR REGIONS OF ORIGIN 35.0% USA MEXICO+CANADA JAPAN SOUTH KOREA EUROPE 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% COMPACT CAR LUXURY CUV VAN PICKUP MIDSIZE CAR SUV Source: Cox Automotive estimates based on IHS Markit Registrations 24

25 PAVING THE WAY TO THE EVOLUTION OF MOBILITY 25

26 The Cost Benefit of Ownership is Eroding Owning/Leasing a Vehicle is Becoming Too Expensive % Agree 42% 48% Source: 2018 Cox Automotive Evolution of Mobility Study 26

27 Consumer Attitudes About Vehicle Ownership Are Changing Having Transportation is Necessary, but Owning a Vehicle is Not % Agree 35% 39% Source: 2018 Cox Automotive Evolution of Mobility Study 27

28 1/3 of Consumers Are Open to New Mobility Options 33% I m open to exploring new transportation methods (vs. 67% I like to own) Source: 2018 Cox Automotive Evolution of Mobility Study 28

29 Thank You!

Curves On The Road Ahead

Curves On The Road Ahead Light Vehicle Market Outlook November 2018 Charles Chesbrough Senior Economist A g e n d a Economic Outlook and New Vehicle Sales Affordability Threat and the Used Vehicle Market