SAA explores ‘The Automotive Industry through the Eyes of Financial Experts’

The online discussion featured: Steve Wybo, senior managing director of Conway MacKenzie; Justin Mirro, chairman and CEO of Kensington Capital; Doug Winget, executive vice president of Huntington National Bank; and FT Chong, managing director of PineBridge Investments.

DETROIT — On Thursday morning, the Society of Automotive Analysts (SAA) hosted a webinar titled “The Automotive Industry through the Eyes of Financial Experts.” 

The online discussion featured: Steve Wybo, senior managing director of Conway MacKenzie; Justin Mirro, chairman and CEO of Kensington Capital; Doug Winget, executive vice president of Huntington National Bank; and FT Chong, managing director of PineBridge Investments. CNBC Automotive and Airline Industry Reporter Phil LeBeau moderated the discussion.

They discussed the state of the current automotive industry and previewed some issues to look out for in the future months and the new year.

Steve Wybo of Conway MacKenzie said that this year’s seasonable adjusted annual rate (SAAR) for vehicle sales is about 14.3 million. He also said that number is 15 percent lower than 2019.

Steve Wybo, senior managing director of Conway MacKenzie (Photo: SAA webinar)

“I would characterize 2020 as remarkable,” Wybo explained. “I think back in February when COVID hit, we were talking about massive bankruptcies, shutdowns, government aid in the billions of dollars to the industry and frankly my firm being a restructuring shop, we thought we were not going to be able to keep up with demand. That did not happen thankfully. The V-shaped recovery that everybody talks about really snapped back in automotive. We were down for about 10 weeks in Q2 almost a full quarter and only being down 2.5 million units is really remarkable. We were down two and a half months, that should have been 3.5 million units of lost production. We’ve made up a million units of production by working nights and weekends and overtime. It’s very impressive and nobody could have predicted this year. Inventory levels are at about a 9-year low. The hot-selling SUVs and trucks that all of the OEMs are making makes it very difficult to buy a car. The OEMs can’t keep up. That is also very good. The automotive industry, in my opinion, did very good in coming back to work with COVID playbooks. Thankfully, we have not seen any major outbreaks at any of the OEMs or tier one facilities.”

Where are we headed for the long term outlook?

“I expect more consolidation,” Wybo answered. “With what’s going on with electrification and autonomy… automotive has gotten a lot of attention both from Wall Street and Silicon Valley. It’s an exciting industry. It takes big money to make electric cars and invest in technology where cars ultimately drive themselves some day. That requires capital. Many of the balance sheets from these larger suppliers and OEMs were not that robust. Therefore, we’re seeing consolidation and I expect that to continue. Despite the fact that we snapped back nicely, it costs money to stagger start times due to COVID and clean work stations every night. It’s more expensive to get labor today than it was a year ago. It’s more expensive to get material. We’ve seen some shortages in steel and plastic. Working capital pressure from delayed launches. We have many clients like the [Ford] Bronco and other major production lines have been delayed. OEM pressure is always there to reduce selling prices at the tier level, no different now. A very good sign for the automotive industry is all of the new product that is coming out. These are beautiful cars, highly engineered, very well put together.”

Justin Mirro, chairman and CEO of Kensington Capital (Photo: SAA webinar)

Justin Mirro of Kensington Capital said: “When we first started out, we looked at the automotive universe and we saw a $2 trillion addressable market in North America alone. There’s only 81 companies that are publicly traded for a market capital of about $600 billion. This is one of the largest, most important, highest growth businesses in the world. Investors are missing an opportunity to invest in these companies. Why are they missing an opportunity? Because these companies are staying private for a lot longer. They are being acquired by very large private equity funds and the public just doesn’t get a chance.”

He told members and other invited guests about special purpose acquisition companies, also known as SPACs, and differentiated them from traditional initial public offerings (IPOs).

“Some of you are saying I don’t know what a SPAC is,” Mirro said. “How is it different from an IPO? Essentially, the SPAC is a vehicle to allow a company to become public much more quickly than a traditional initial public offering. We all know companies in Detroit that are owned by private equity firms. A lot of times these companies get acquired, they get levered up with bank leverage, they spend the next five years and pay down that debt and then they get sold and bought by someone else. In this case, we can provide permanent capital and once that’s raised they don’t have to worry about that cycle ever again. They can worry about running their business, growing their business and planning for long-term growth.”

Doug Winget of Huntington National Bank said that consumer demand for vehicles remains high. For some pickup trucks and SUVs, customers are waiting two months to receive their new vehicles.

Doug Winget, executive vice president of Huntington National Bank (Photo: SAA webinar)

“We are a top ten middle market lender to the auto supplier base,” Winglet explained. “We look at the need for analysis of OEM platforms and the importance of its supplier base to its OEM customers. PPP loan liquidity has been critical to not only the automotive supplier base but also across all middle market portfolios. We’re not seeing a pullback as Steve and Justin noted. Demand has V-backed quickly since the second quarter. We’re seeing actually our supplier base is in a active and continued production catch up mode. The consumer financial help has been critical to this as the stimulus has been deployed. Dealers are in the best financial condition that they’ve been in years. As we look at the dealer base nationally, they’re sitting on low inventory, and they have stronger gross profit and earnings than they’ve had in recent years. For certain vehicles, there is a 2-month wait for certain preference. One trend we’re seeing is the term is extending for stronger buyers.”

What are some of the issues going forward?

Winglet: “As we look at the supplier base, the supply chain has been choppy. Back up at ports especially electronics sourced from Asia. We’ve seen this been an issue with our supplier base. Margin pressure we see picking up in 2021. Suppliers are experiencing significant increases in freight rates, time delays. We see freight rates up as much as 20 percent month over month. This is generally a supply and demand issue. We’re seeing labor costs go up. Access to labor, staffing, COVID costs. We see access to labor being a key component going into 2021. Lastly, material costs…we’re starting to see increased inflation especially month to month and then over a year. Aluminum, copper, steel up significantly even month over month from November to December. We see continued demand in new truck, light truck. Fleet sales are down. With EVs coming and becoming more popular, prices are increasing.”

FT Chong, managing director of PineBridge Investments (Photo: SAA webinar)

FT Chong of PineBridge Investments said: “PineBridge Investments is a global asset manager with more than $100 million in global investments under management. You would know us by our previous name AIG Global Investments. I tend to have a more sober view of the industry and some upbeat comments. In March, we had the shutdown and the CARES Act, which was very helpful in terms of PPP. By July, the Main Street Loan Program was clarified and businesses restarted. As you know, not many people used the Main Street Loan Program. There may be a Main Street Part II coming up that might be more user friendly. We’re now in the second wave, vaccines will be approved. There’s more than 100 in development I would say. Most of them work in one form or another. Perhaps this month we’ll see a partial stimulus too.”

The managing director of PineBridge Investments said issues facing the auto supply sector include labor shortages, volumes and financing/leverage. However, he said some positive opportunities include manufacturing in Mexico and Canada, tight dealer inventories and mergers and acquisitions.

Chong: “That will be helpful because heading into next year, my own personal expectation is there’s a long and winding road ahead. There’s still a lot to go through. In the first and second quarter of next year, there will be a period of resolving. A lot of companies need to be recapitalized and undergo some sort of restructuring because of two things that Steve Wybo mentioned. One is EBITDA margin degradation and two is delayed launches. There will be some reckoning and resolving to be done in the next six months. By third quarter of next year, we’ll be through at least this pandemic.”

SAA President Scott Tappan welcomed everyone to the webinar and thanked their corporate sponsors.

Up next: The SAA will host a roundtable on 2021 vehicle introductions on January 15th. Then, the SAA Automotive Outlook Conference returns on Jan.  21, 2021.

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