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Title: fluid power presentation


1
Supply Chain/Purchasing Seminar
2
Please silence cell phones and pagers during this
program
3

James Tarabori Caterpillar Inc. Chair, Supply
Chain Management Committee
4

Eli S. Lustgarten Senior Vice President Longbow
Securities
5
(No Transcript)
6
INDUSTRIAL MARKETS 2007 AND BEYONDManaging
Through Mid-Cycle
  • Supply Chain/Purchasing Managers Seminar
  • Eli S. Lustgarten
  • Senior Vice President, Longbow Securities
  • June 6, 2007

7
New Safe Harbor/Forward-Looking Disclaimer
  • God, grant me the serenity to accept the things
    I cannot change, the courage to change the things
    I cannot accept, and the wisdom to hide the
    bodies of those people I had to kill today
    because they ticked me off. Also, help me to be
    careful of the toes I step on today, as they may
    be connected to the butt that I may have to kiss
    tomorrow.

8
2000-2005 Industrial Stocks Shift From Old
Economy Castoffs to Being In Vogue
  • Over six years ago, investor ambivalence toward
    industrial stocks and subsequent single-digit
    multiples reflected the shadow of the Federal
    Reserve and signs of an impending slowdown that
    was finally becoming visible.
  • Since the industrial stock price bottom of
    September/October 2000, most industrial stocks
    surged strong double digits through the first
    half of 2001, despite a down stock market.
  • After the traditional third-quarter jitters and
    the September 11 reaction, most industrial stocks
    performed well since the latter part of 2001.

9
SP Industrial Machinery Relative To SP 500
10
SP Construction Farm Machinery Relative to
SP 500
11
OUR PRESENTATIONS HAVE HAD A CONSISTENT
INDUSTRIAL OUTLOOK
  • In 2004, the concern was whether manufacturing
    was finally beginning to recover
  • OUR THESIS 2004 upturn in manufacturing was the
    first year of at least a three year improvement
    for the sector, lasting through 2006 and possibly
    for the Rest of The Decade
  • The only guarantee was that it wouldnt be LINEAR
  • Focus was Managing INTO Mid-Cycle
  • Despite economic strength of 1H2006, our concern
    was that the existing flat yield curve was a
    harbinger of a slowdown of the industrial sector
    6 to 9 months later.
  • Reasonable control of inventories and relatively
    easy availability of money suggest that the U.S.
    economy would avoid a recession.

12
OUTLOOK 2007
  • Non-Linear period likely began in H22006 and
    will go through at least H12007
  • Mid-Cycle means Top-Line Growth in the low to mid
    single digit range AT BEST
  • Well below double-digit gains in many industrial
    markets from mid-2004 into 2006
  • Business models of 7 to 10 top-line growth and
    12 to 15 bottom-line growth are in jeopardy
  • 7 to 10 bottom line growth during mid-cycle is
    Good
  • Drivers in Mid-Cycle For Above Average Growth
  • New products, new markets, and market share
    gains
  • ACQUISITIONS
  • Financial Engineering such as share repurchase
    programs
  • End Market Outlook Have Mostly Followed Our
    Projections
  • BetterPower Generation
  • Weakerauto, housing

13
INDUSTRIAL AMERICA ENTERS MID-CYCLE
  • Recent ISM report on business conditions show
    that the manufacturing sector accelerated in
    April. Overall, manufacturing lost momentum in
    the second half of 2006, and started 2007 in a
    less than robust fashion.
  • PMI for April 2007 was 54.7, up from 50.9 in
    March, and compares to 52.0 in February, and
    49.3 in January.
  • The PMI had averaged 50.9 for the previous 6
    months and 50.8 for the 1st quarter of 2007
    before the acceleration in April.
  • New order index of 58.5, and Production index of
    57.3 both point to moderate improvement in April
    after some stagnation in the last several months.
  • Price index of 73 means than manufacturers are
    paying higher prices on average in recent months
    than they did in March (65.5), February (59),
    January (53), December (47.5), and November
    (53.5).
  • Inventory Index of 46.3 in April, compares to
    47.5 in March, 44.6 in February, 39.9 in
    January, 48.5 in December, 49.1 in November and
    49.3 in October suggesting that inventories
    contracted for the 9h consecutive month.
  • Customer Inventories index was 47 in April and
    48 in March, down from 53 in February, 52 in
    January , 50.5 in December, 50.5 in November
    and 52 in October. This is the second month of
    decline following five months in a row of the
    index exceeding 50 indicating that customers are
    making progress in reducing the glut of
    inventories.
  • Early 2007 ISM data corresponds to a 3.1
    increase in real GDP.

14
ISM Purchasing Managers Index
15
ISM Index Of Production vs. New Orders
16
ISM Price Index Input Prices Are Starting to
Rise Again
17
ISM Inventory Index
18
Sector Contributions In The Last Six U.S.
Recessions
19
Manufacturing Inventory Levels Show Liquidation
in the First Half of the Decade
20
Manufacturing Inventory/Sales RatiosDurables and
Non-durables
Source Eaton Corp.
21
Bank Lending StandardsBorrowing Remains Easy
22
2004 First Year of Industrial Recovery Fooled
Everyone
  • 2004 was the first full year of industrial
    manufacturing recovery
  • Most companies started 2004 planning an 8 to 10
    volume gain
  • Sharp acceleration of growth surprised most
    companies as some markets grew 20 to 30 or
    more
  • A rising tide lifted all boats effect as
    virtually every industrial sector participated.
  • Investment incentives such as 50 accelerated
    depreciation, which expired at year-end, made
    H204 somewhat stronger than otherwise would be
    from natural forces.
  • Industrial market drivers included strengthening
    levels of profitability and cash flow, ongoing
    postponement over the past five years of capital
    purchases, technological change, improved US
    competitiveness helped by a weakening dollar, and
    rising capacity utilization and industrial
    production.
  • Commodity prices surged as companies scrambled to
    meet rising demand.
  • Energy prices were high and went higher
    reflecting oil shocks (uncertain global
    production, terrorism), lack of spare global
    capacity, very low inventories, and growing
    global demand (U.S. and China).

23
2005 Mini-Inventory Correction, Cost Imbalances
and Hurricanes Masked Strong Industrial Economy
  • 2005 was a strong year for the Industrial economy
    despite various shocks to the sector
  • 1H2005 was characterized by a mini-inventory
    corrections as commodity prices rolled over, the
    domestic economy slowed as the impact of large
    tax cuts and investment incentives waned,
    automotive companies overproduced, and interest
    rates were rising.
  • Most companies were scrambling to meet increased
    demand in spite of supply chain shortages with
    prices rising rapidly to offset higher input
    costs, particularly material and energy.
  • Major hurricanes in the Gulf regions also
    disrupted economic activity.
  • The dollar was rising 12.5 vs. the Euro and
    14.5 vs. the Yen.

24
THE SLOWDOWN BEGAN IN Q206 AND CONTINUES TODAY
  • Q12006 GDP of 5.6 made the U.S. one of the
    fastest growing Advanced economies at that time
  • One time payback for unusually slow, hurricane
    affected Q405 GDP growth of 1.1
  • Average of the two quarters about 3.5, in line
    with the consensus view of the longer term growth
    of the U.S. economy
  • Not sustainable growth due to technicalities
    (smaller trade deficit), increased energy costs,
    and the fall-off of residential construction.
  • Q2 GDP of 2.6 (revised from 2.9 and originally
    reported as 2.5)
  • Q3 GDP was 2
  • Q4 GDP reported as 3.5--BUT WAS WAY OFF THE
    MARK!!!

25
MAJOR REVISION OF Q406 GDP SLOWDOWN CONTINUES
INTO 2007
  • Q4 GDP reported as 3.5 revised downward to 2.2,
    then increased to 2.5. Only 7th time in 30 years
    for such a major revision
  • Slower growth principally reflects updated
    inventory data
  • Business inventories increased only 22.B
    (revised from 17.3 billion) in Q4 after December
    data showed a 0.5 decline rather than a 0.6
    increase. November data was also revised to up
    1.1 rather than up 1.3.
  • BEA had estimated a 35.3 billion increase in
    inventories in Q4 compared to a 55.4 billion
    increase in Q306
  • GDP therefore was reduced by 1.16 (revised from
    1.35 p.p.) in Q4 originally BEA subtracted 0.71
    p.p. from GDP
  • Trade only boosted GDP by 1.5 p.p rather than
    1.64 p.p. as the December trade deficit widened a
    much larger than expected 5.3 to 61.2 billion.
    Annual FY2006 trade deficit was 763.6 billion or
    up 6.5 from 716.7 billion in F2005.
  • Other data revisions included
  • Consumer spending up a slightly lower 4.2 rather
    than 4.4.
  • Federal government spending up 4.6 rather than
    4.5
  • Business spending decreased 3.2 rather than
    0.4.

26
Bigger Slowdown in Q107 GDP
  • Q107 GDP reported as 1.3
  • Residential construction fell an additional 17
    reducing GDP by 0.97 BPS
  • Non-residential reported slowest quarterly growth
    since Q12004.
  • Ex-housing, GDP growth was about 2.2.
  • Upward revision Likely- But you can never tell
    what the next 2 revisions will be.
  • Construction spending was revised up in February
    and GDP data understated current strength in
    non-residential construction
  • Business outlays for equipment and software were
    up 1.9 after a 4.8 decline in Q4 tech spending
    may have been delayed due to MSFT Vista rollout
  • Inventories reduced Q107 GDP by only 0.3
    compared to a 1.2 reduction in Q4 it will be
    revised again.
  • Recent March inventory and trade data would be a
    bigger hit to Q107 GDP
  • Economy looks Like It is stabilizing
  • Consumer spending still growing at 3.8 rate
  • Production was up in March and April and looks
    healthy based on ISM data
  • Labor costs appeared to have declined in Q1.

27
Underlying Economic Data is Confusing at Best
  • Payroll data is misleading due to major revisions
  • April jobs 88,000 March and February revised
    down by 26,000
  • Year to date 2007 average is 129,000 compared to
    189,000 (revised up from 161,000 in 2006, 212,000
    in 2005 and 175,000 in 2004)
  • Job growth 3/05 to 12/06 increased by over 4.3
    million jobs instead of 3.3 million
  • Could be the beginning of a weak patch for the
    labor market in which job creation decelerates,
    unemployment rises and wage gains moderate.
  • Despite big trade deficit, Exports grew 14.3 in
    2006
  • Consumers proved then can handle gasoline prices
    in the 2.50 to 3.00 per gallon range.

28
INFLATION AND PRODUCTIVITY LOOK BETTER THAN
REPORTED DATA
  • Improvement likely in direction of inflation in
    2007 despite issue of rising cost pressures from
    a tight labor market
  • Corporate profit margins are still strong
  • Benefit inflation reduced to 2.9 in 2006 from
    7.2 two years ago
  • Employee cost index reported up 3.1 in 2006 Vs.
    2.5 in 2005 adjusted for productivity, labor
    costs are up 2.5 for non-farm corporations and
    only 0.5 excluding financial corporations. Did
    index decline in Q107?
  • Core inflation--- Personal Consumption
    Expenditures (CPE) up 2.1 in 2006 compared to
    2.6 for CPI and both up only about 1.6 if rent
    and rent based housing costs are excluded.
  • CPI will decline in 2007 due to housing component
    calculation
  • Productivity up 1.6 (Revised from 2.1) in 2006
    compared to 2.3 in 2005
  • Productivity rose 1.6 (revised from 3) in
    Q406 manufacturing productivity rose 2.2 in Q4
    and 4 in F2006.
  • Durable goods manufacturing productivity rose
    3.4 in Q4 and 6.2 in 2006
  • Statistic is skewed by housing data construction
    payroll only down 1.4 despite a 19.8 decline in
    residential construction in Q4 as it follows
    completion cycle.
  • Housing reduced productivity by 0.67 p.p. in
    2006.

29
CAPITAL SPENDING WEAKNESS IS BIGGEST ECONOMIC
SURPRISE AND RISK IN 2007
  • Surprise in Q4 GDP Data report was a 3.2
    (Revised from 2.4) decline in business
    investment in machinery and 4.8 decline (revised
    from 3.2) in equipment and software spending.
  • Order trends appear to remain soft in Q107
  • No clear explanations for weakness
  • Perhaps pressure to perform in conflict with
    higher capital expenditures which require
    improved prospects for demand and provide desired
    returns.
  • New orders from US manufacturers,( ex-
    semi-conductors) jumped 3.1 in March following
    revised 1.4 gain in February Q1 orders down
    1.1 from Q106.
  • Equipment and Software spending rose 1.9 in
    Q107 Was Vista Rollout the cause of Q4 decline?
  • Demand Remains relatively good both here and
    abroad
  • Inventory liquidation well underway
  • Weaker dollar enhancing export demand from
    stronger economies overseas.
  • Domestic spending ex-housing remains strong
  • Capacity utilization still at high levels
  • Profits remain strong ROE/ROA have returned to
    or exceeded historic levels of last decade
  • Balance sheets are in terrific shape.

30
The Industrial Sector Kept Rolling through Most
of 2006
  • Most investors and companies under-estimated the
    strength of the industrial economy in the first
    half of 2006.
  • Capacity utilization in manufacturing moved up to
    around 81 in June 2006 until the fourth quarter,
    a rate more than 1 above its 1972-2005 average
    of 79.8. The current fall-off in activity is
    about back to average. (April 80.2)
  • Weaker dollar helped Industrial America in 2006
    with stronger than expected exports.

31
Capacity Utilization Rates
32
CAPITAL SPENDING SHOULD STRENGTHEN IN 2007 AND
BEYOND
  • Corporate cash flow should remain strong,
    manufacturing balance sheets are still flush with
    cash.
  • Ongoing postponement of purchases and
    technological change should help spur spending as
    economic recovery resumes
  • Global markets and U.S. competitiveness overseas
    should continue, helped by the weakening dollar.
  • Capacity utilization projections
  • 2004 2005 2006 2007E 2008E
  • Average 78.0 80.0 81.8 81.5 81.8
  • Q4/Q4 79.2 80.5 81.6 81.6 81.9

33
BOTTOM LINE 2007 IS A MID-CYCLE ECONOMY
  • Economy slowing at close of 2006 to H12007 is
    typical of a mid-business cycle pause
    (1966,1986,1995)
  • This year will be that Mid-Cycle year where
    top-line growth falls to low to mid-single digits
    at best 7 to 10 bottom line growth is GOOD!!
  • The Industrial Sector will be a good place to be
    in 2007 and BEYOND
  • Dicey first half of 2007 weak auto, housing,
    light construction, truck, and a mini-inventory
    correction.
  • Look for improving domestic economic growth in
    H207 and beyond.
  • International growth will help as Europe and ROW
    remains robust
  • Eurozone ISM 55.4 in March and April
  • Eurozone industrial production up 4.2 in
    February
  • Global PMI was 54.1 in April , up from 52.9 in
    March
  • New Orders 56 , up from, 54.5
  • Input prices 65.8, up from 62.8

34
OUTLOOK FOR MATERIALS MOSTLY HIGHER PRICES
SHORT-TERM
  • Short-Term (3-6 month) PPI change 4 to 6

35
World-Wide Steel Production Up 12 Sequentially
in March
36
World-Wide Steel Production Up 12 Sequentially
in March
  • US up 10
  • Europe Up 14
  • CIS up 11
  • South America Up 13
  • Asia Up 12

37
High international Steel Prices and Strong
Markets Outside the U.S. Keep Import Levels
Minimal
38
Gradual Work-off of Inventories At Service
Centers Since Q406
39
Current Steel Market Status Volatility Despite
Overall Positive Trends
  • Steel capacity utilization for week ending 5/12
    was 86.4 Q207capacity utilization is averaging
    4.4 higher than Q1.
  • U.S. hot rolled prices down 2 in two week period
    ending 5/112 from 560 to 547 per ton. Scrap
    pricing fell more (10) , but a turnaround for
    scrap appears likely.
  • Significant 250 per ton differential exists
    between Russian (850 per ton) and domestic
    (640) rebar. Despite the differential, domestic
    mills have reduced prices for May (down 15/
    ton), and export opportunities are limited due to
    elevated shipping costs.
  • Significant overseas port congestion (Brazil,
    Australia) and lack of shipping assets continue
    to drive overseas freight rates to record highs.

40
Longer-Term Outlook For Materials Continued
Upward Pressures
  • Materials are in worldwide demand with uncertain
    supply growth (e.g. oil, copper)
  • Price spurts/ volatility
  • Transport bottlenecks
  • Fuel price swings
  • PPI Increases possibly 6 to 8 with higher
    spikes

41
ODDS (BARELY) STILL FAVOR A FED CUT IN H22007
  • Historically, ISM index has also been an
    indicator of FED policy
  • ISM index has been well below the levels that
    historically have signaled the end of a FED
    tightening cycle in the past (around 53).
  • April ISM increase doesnt help the rate cut
    case!
  • Weak dollar trade weight basis dollar is down
    30 from 2002 peak with a 4 decline in the past
    four months
  • Rising import prices adds to inflation pressures
  • Foreign growth prospects put pressure on global
    interest rates
  • Dollar likely in narrow trading range for now
  • Fed has eased, historically, before core consumer
    price inflation has slowed.
  • What matters most is where core inflation is
    heading
  • Outside of rents, various core inflation measures
    have not been over the Feds presumed 1-2
    preferred range
  • Other key measures are real growth, wage rate
    inflation, and housing inventories.

42
THERE WILL BE MORE MARKET UPS AND DOWNS IN 2007
43
U.S. Economy Will Continue To Grow
  • Real GDP growth remains strong
  • Year/Year 2000 3.7 2001 0.8 2002 1.6
    2003 2.7 2004 4.2 2005 3.2 2006E
    3.3 2007E 2.3 2008e 2.8
  • Q4/Q4 2000 2.1 2001 1.6 2002 0.2
    2003 3.6 2004 3.3 2005 3.1 2006E
    3.1 2007E 2.2 2008E 2.9
  • Capital Spending ? Continues To Strengthen
  • Structures Equip. Software Business
    Fixed Inv.
  • 2003 -5.6 6.4
    4.4
  • 2004 1.4 13.6
    13.2
  • 2005 1.1 8.9 6.8
  • 2006 9.0 6.5 7.2
  • 2007E 7.8 0.7 2.8
  • 2008E 8.3 5.8 6.6
  • Manufacturing output (from Industrial Production
    Report) improving
  • Year/Year 2000 4.6 2001 4.2 2002
    0.4 2003 0.0 2004 4.8 2005 3.2
    2006E 4.0 2007E 2.2 2008E 2.8
  • Q4/Q4 2000 -3.7 2001 4.0 2002
    -3.2 2003 6.5 2004 4.6 2005 3.0
    2006E 3.5 2007E 2.6 2008E 2.8
  • Inflation remains under control Consumer Price
    Index
  • 2000 3.4 2001 2.8 2002 1.6
    2003 2.3 2004 2.7 2005E 3.0 2006
    2.9 2007E 2.0 2008E 1.8
  • Corporate profits remain strong

44
CONTINUED OPTIMISM FOR GLOBAL GROWTH
  • 2005 2006E 2007E 2008E
  • GLOBAL GROWTH 4.9 5.1 4.9 4.9
  • US 3.2 3.4 2.2 2.8
  • EU 1.3 2.4 2.3 2.3
  • CENTRAL/E. EUR 5.4 5.3 5.6 4.9
  • BRAZIL 2.3 3.1 4.4 4.2
  • JAPAN 2.6 2.7 2.3 1.9
  • CHINA 10.2 10.0 10.0 9.5
  • INDIA 9.2 9.2 8.4 7.8
  • Germany 1.8 1.9
  • France 2.0 2.4
  • Italy 1.8 1.7
  • UK 2.9 2.7
  • Russia 6.4 5.9

Source IMF
45
Farm Equipment
  • Demand Should Improve in H207 and 2008

46
FARM EQUIPMENT FROM CROP SURPLUS TO TIGHT
SUPPLIES
  • U.S. grain supplies were well above normal as
    recently as 2005/06. Rising ethanol demand, lower
    plantings and global weather problems has reduced
    global carryovers to very low levels for wheat
    and corn.
  • Farm income has remained near current record
    levels for the past several years buoyed by
    government farm payments. Farmers have rebuilt
    their balance sheets and cash flow will remain
    strong.
  • Recent tax incentives helped drive 2004 purchases
    up 20 to 40 driven by the small farmer who
    could write-off 73 to 82 of equipment purchased
    in first year. Farm equipment demand has been
    relatively flat in 2005 and 2006.
  • A decent but slowing US economy, higher energy
    and interest costs, and threats of subsidy cuts
    (Bush Budget, new farm bill, WTO talks) have
    negatively impacted farmer confidence. Falling
    government payments are currently offsetting
    recent gains from higher commodity prices.

47
Corn Supply And Demand
48
Corn Supply And Demand
49
Farm Equipment Demand Should Finally Improve
50
U.S. Retail Farm Equipment SalesTwo-Wheel Drive
Tractors Over 100HP
51
Farm 2007 Outlook Seeding an Upturn
52
2007 Farm Equipment Outlook Improving
  • Moderate change in farm cash receipts likely in
    2007/2008 ( billions)

Source Deere and Co.
53
Ethanol Demand Remains a Key Driver of Growth
54
Ethanol Demand Remains a Key Driver of Growth
(contd.)
55
Corn Acres Planted Rise Substantially Corn Crop
Likely Over 12 Billion Bushels
56
2007 FARM OUTLOOK UNCERTAIN 1H07 FOLLOWED BY
UPTURN
  • Uncertain Farm Politics (Bush Budget, new farm
    bill WTO talks, European Common Agricultural
    Policies)
  • Carryovers tightening and commodity prices are
    up.
  • Ethanol does make a difference for corn, but
    government mandate for 2012 of 7.5 billion
    gallons will be far exceeded in 2008 with 11
    billion gallons likely. Will infrastructure be
    ready?
  • Bottom Line Much Higher Plantings 2007 Weather
    will be Key
  • 2007 NA Farm Equipment production likely up
    modestly
  • H107 will be somewhat soft
  • H207 improvement for large tractors and combines
    for grains (corn, wheat, soybeans), planters and
    tillage. Double-digit growth?
  • Weakness in cotton equipment, smaller tractors
    and livestock equipment
  • Further Gains likely in 2008 with 5 to 10
    improvement

57
WHAT CAN DE-RAIL THE FARM ETHANOL EXPRESS?
  • 110 plants and 5.3 billion gallons of capacity in
    2006/07 will rise to 8.5 to 9.0 billion gallons
    in 2007/08 and 10 to 11 billion gallons or more
    in 2008/09.
  • USDA now projects 3.4 billion bushels of corn for
    ethanol in 2007/08 Usage in 2008/09 rises to at
    least 4.11 billion.
  • Planted acreage projected to grow to over 90
    million acres for corn will they grow from
    there?
  • How will the market use the increased
    availability of ethanol?
  • Will the ethanol INFRASTRUCTURE be able to move
    and distribute ethanol
  • 3000 tank cars and 2000 DDG (dry distillers
    grain) hopper cars needed per one billion gallons
    of ethanol
  • 25 of corn used for ethanol comes back to the
    market as DDG for feed and is not currently
    counted in carryover calculations
  • Can railroads efficiently handle moving double
    the amount of ethanol and efficiently move the
    tank cars, DDG hoppers? What about tank storage
    capacity, loading and unloading platforms,
    forming unit trains, blending capacity, increased
    track?
  • What about water usage and impact?
  • Can ethanol complex remain profitable if lower
    oil prices and/or rising corn prices are
    sustainable trends?

58
Power Generation
  • Resuming Growth

59
Recent Surge in Capacity Addition Expected To
Meet Near-Term Needs
  • Capacity additions slowed markedly as the 20th
    century came to a close
  • 1960s 180 gigawatts of capacity
  • 1970s 314 gw
  • 1980s 172 gw
  • 1990s 84 gw
  • Blame government policies and deregulation
    (1996), where power generators were no longer
    guaranteed a minimum return on invested assets or
    return on equity above their cost to generate
    power
  • Reserve margin fell under 15 at the turn of the
    decade (in 1998-2001)
  • Open access rules by the Federal Energy
    Regulatory Commission (FERC) revitalized power
    generation sector
  • 200244.4 gw 200322.7 gw
    200419.7 gw 2005A- 15.1 gw

60
Deregulation Causing Uncertainty
61
Cumulative Planned Additions to Electrical
Generation Capacity to 2010 Lots of Delays
Source DOE/ EEI
62
UTILITIES INCREASING INVESTMENT IN TRANSMISSION
63
Automotive
  • Market Has Passed Its Peak, But the Soft
    Landing is Getting Harder Every Day

64
AutomotiveWhere Are We In The Sales Cycle?
Will Demand Soften?
65
Auto Inventory Reduction Is Slow
  • Industry Inventory on the Rise
  • 12/31/2005 6/30/2006 12/31/2006 3/31/07
  • GM 71 days 73 days 80 days 86 days
  • Ford 79 79 70 days 64
  • Chrysler 86 91 74 days 68
  • Transplants 48 53 67 days 59
  • Domestic Auto Production Under Pressure
  • 2004 15.8 million Q107 Q207 FY07
  • 2005 15.75 million Detroit 3 -12 -8 -5 to
    -10
  • 2006E 15.25 million New Domestics 1 14 5
    to 10
  • 2007E 14.9 million Hi 15.3 million
  • 2008E 15.3 million Low 14.6 million

66
Rail Cars
  • Demand Will Remain Solid Supported by the Ethanol
    Craze

67
Rail Car Demand Will Stay at High Levels
  • Factors Influencing Demand
  • Size of Fleet (stable now at near 1.3 million)
  • Age of Fleet (average now 18.5 years)
  • Utilization (trips per year) rising
  • Replacement Pressures
  • Commodity Loadings (rising 1.3 per year)
  • Intermodal Growth
  • Deliveries Have Surged As Economic Growth
    Accelerated
  • 2003- 32,180
  • 2004- 46,871
  • 2005- 68,612
  • 2006E- 74,683
  • 2007E- 69,000
  • 2008E- 70,500
  • Source Economic Planning Associates

68
2006 SUPERB YEAR FOR RAIL CARS DESPITE SLOWING
ECONOMY
  • US Railroads matched or exceeded previous record
    levels for revenues, profits, and operating
    ratios.
  • Car builders received orders for 91,300 cars in
    2006
  • Assemblies totaled 74,683
  • Backlog rose from 69,400 to 85,800 by year end
    2006
  • Preponderance of Backlog (58) for ethanol tanker
    cars and DDG Equipment (hi cube hoppers)
  • Pause in coal car orders, lack of interest in box
    cars and flat cars, slow intermodal orders
    renewed interest in these in 2008.
  • Future growth from rising replacement pressures
    for boxcars, midsize and small cube hoppers, and
    multi-level flat cars stringent regulations will
    drive replacement of older cars carrying
    chemical, gas and liquid fertilizers

69
Rail Long-Term Growth Sectors
  • Key Sectors
  • Coal
  • Grain (Ethanol)
  • Chemicals
  • Motor Vehicles and Parts
  • Intermodal
  • Tanker Car Outlook
  • Doubled between 2002 (5500) and 2005 (11,563)
  • Estimates at 14,034 for 2006 17,000 in 2007 and
    19,000 in 2008
  • Source Economic Planning Associates

70
On-Highway Vehicles
  • The Emission Boom Is Over For Now

71
1997-1999 Truck Market Positives Were Clearly Not
Sustainable
  • Strong domestic economic and industrial
    production/capacity utilization growth was not
    sustainable
  • 1 change is 14,000 trucks
  • Union Pacific/UPS strike followed by Conrail/CSX
    integration problems
  • 1 change in freight from rail to truck
    represents about 15,000 trucks
  • NAFTA benefits of increased Mexico and Canadian
    trade have waned
  • Asian crisis and rising imports are near term
    offset
  • Fleet replacement cycle shortened from 4-5 years
    to 3-4 years due to
  • Increased utilization
  • Increased cash flow
  • Driver enticements
  • Prices were flat to down
  • Guaranteed residual prices
  • Guaranteed residual prices ballooned USED truck
    inventories and extended fleet replacement cycle

72
Heavy-Truck Market In 2002 Had Negative Bias, But
Pre-buy Saved The Year
  • Positives
  • Relatively stable energy prices
  • Relatively stable fuel prices
  • Low interest rates
  • Pre-buy of class 8 trucks to beat emissions
    penalty
  • Negatives
  • Lower freight tonnage
  • Higher insurance costs
  • Credit crunch!
  • Declining used truck values are now stabilizing
  • Record 4,200 truck company bankruptcies in 2001
  • October emissions requirements raise truck prices
  • Driver crunch

73
U.S. Long Haul Truck Freight TonmilesGrowth
Turns Positive
74
Class 8 Heavy-Duty Diesel Truck DemandA Return
To Normal Levels?
2006E 378,000 2007E 217,000
Source ACT/FTR
75
The Cyclical Truck Boom Of 2004-2010
  • Driven by normal cyclical economic recovery,
    assuming sustained 3 domestic GDP growth
  • Exacerbated by fear of 2007 emissions, causing
    rational truck owners to dramatically reduce
    fleet age as much as possible by 1/1/07
  • Freight decline in 2006 of 2.8 may mean that the
    trucking industry overbought by as much as
    110,000 trucks in 2006 will the excess affect
    2007?
  • Heavy truck demand will fall at least 40 to 50
    Q1 may be weakest for engine producers (2007
    trucks with 2006 engines) and Q2 Weakest for
    truck assemblers. Medium trucks will also see a
    20 to 25 decline in 2007.
  • Domestic market appears weaker than expected
    though overall activity is somewhat masked by
    shipments to Mexico and Export.
  • Current environment is characterized by weak
    freight and weak pricing
  • U-Shaped recovery for trucks at best
  • The engines that fleets hate in 2007 will
    hopefully be loved in 2008 and 2009 2007 engines
    are 2002 engines with added filtration. 2010
    emissions standards are very stringent and
    difficult, causing material engine and truck
    re-designs.

76
Medium (class 5-7) Truck Production Will Also
Fall
  • 2008E 230,000-235,000
  • 2007E 210,000
  • 2006A 265,422
  • 2005A 244,831

77
Commercial Aerospace
  • The Recovery Has Begun To Strengthen

78
Aerospace Key Drivers Outlook
79
Commercial Recovery
  • Worldwide Flight Hour Growth- strengthening in
    07
  • 2004 10
  • 2005 8
  • 2006E 4
  • 2007E 5 to 6
  • Airbus and Boeing Deliveries Up
  • 2004 3
  • 2005 10
  • 2006E 25.4
  • 2007E 8
  • 2008E 11
  • Pipeline for 787, 747-8, A380 and 737 strong but
    stretching

80
Large Aircraft Delivery Forecast
Source Volvo Aero
81
Aerospace Outlook Remains Positive
82
Fluid Power
  • Inventory Levels and Construction Markets Are Key

83
Fluid Power Industry
84
Construction Equipment
  • NA Industry Peaked in Q206But Construction
    Spending Will Remain at High Levels

85
Sustained NA Construction Activity As
Non-Residential Offsets Housing Decline
  • 2002 A good year for all except non-residential
  • Housing was very strong at 1.71 million starts up
    from 1.6 million benefitting from higher incomes,
    lower mortgage rates and household asset
    diversification.
  • Non-residential activity remained very weak
    reflecting high office vacancies, consolidating
    retail sector, and weak idustrial plant
    construction exacerbated by 09/11.
  • 2003 Total construction remained strong
  • Both residential (1.85 million starts) and public
    construction were healthy
  • Non-residential continued to decline
  • 2004 Modest growth as non-residential spending
    finally turns up 3-4 (mostly price).
    Residential stays surprisingly strong at 1.95
    million starts, as expected H2 fade never
    materializes.
  • 2005 Residential was expected to decline, but
    sector remained resilient as housing starts
    actually rose to 2.07 million. Nonresidential
    continued to recover rising 6.4.
  • 2006/07/08 Housing starts declined 12 to 1.82
    million and will likely fall another 17.5 to
    perhaps 1.50 million in 2007 before recovering
    about 10 to 1.65 million in 2008
    Non-residential construction should continue to
    grow about 8 to 12 in 2007 led by energy and
    power, hospitals and lodging 2008 looks somewhat
    slower

86
Shifting Construction Market Mix
  • Total (Trillion 1 SAAR) 2006 03/07
  • 1.20 1.19
  • of Total
  • Private Residential 53 48
  • New SF 35 28
  • New MF 3 5
  • Improvements 13 15
  • Private Non-Res 24 28
  • Public 22 24

87
Current Housing Outlook Still Weak
  • Housing starts of 1.518 million in March 2007
    were 0.8 above February (revised) but 23 below
    March 2006 rate of 1.972 million
  • Single family starts down 24.6 in March 2007
    maintains similar monthly trends
  • Multi-family starts down 18.4 in March 2007
  • Housing permits of 1.544 million were down 25.9
    in March 2007 (Y/Y) December was down 24
  • Single family permits were down 28.4 in March
    2007 compares to down 29 in December
  • Multi-family permits were down 19.9 in March
    compares to down 7 in December.

88
Housing Outlook Stabilizing in Late 2007
  • Single Family no end in sight to decline in
    permits, starts, or spending
  • Unsold inventory still high
  • Dont expect upturn before late 2007
  • Multi-Family Rentals may keep multi-family
    spending about leveling 2007
  • Condo sales, starts and permits as bad or worse
    than single family

89
NON-RESIDENTIAL CONSTRUCTION SPENDING WILL REMAIN
STRONG
90
Q107 Construction Equipment Weak in NA Offset by
International Strength
91
Construction Equipment Remains at High Levels
92
Booming Material Handling Sales May Cool a Bit in
2007
  • Aerial Work Platform sales surged in 2005 up 85
    for scissor lifts and 42 for boom lifts
  • 2004 2005 2006E 2007E 06/05 07/06
  • AWP Scissor Lifts 27,400
    50,200 60,000 57,000 20 -5
  • Telehandler sales jumped 62 in 2005
  • 2004 2005 2006E 2007E 06/05 07/06
  • Telehandlers 13,300
    21,600 24,000 21,500 11 -10
  • Crane sales should continue to improve
  • 2004 2005 2006E 2007E 06/05 07/06
  • RT Hydraulic Cranes 730
    950 1100 1200 16 10
  • Key in 2007 Aging rental fleets have been
    updated
  • Source Yengst Associates Longbow Securities
    estimates

93
Non-Residential Construction Strong 2007 but
2008 Could Slow
  • Educational
  • Falling primary school, rising high school and
    college and continuing ed
  • K-12 spending affected by property taxes and
    houses losing value
  • Commercial
  • Neighborhood retail follows housing other follow
    home sales and
  • remodeling
  • Highway
  • Depends on fuel tax receipts and local cash
    positions of municipalities.
  • Office
  • Vulnerable to reduced demand for real estate
    agents, mortgage brokers
  • and title companies
  • Also hurting the market are a wave of mergers
    between larger firms.

94
Non-Residential Construction Strong 2007 but
2008 Could Slow (contd.)
  • Healthcare
  • Budget constraints, decline of employer funded
    health care may slow
  • hospital demand.
  • Power
  • Private electric power has ended 5 year- long
    building slump.
  • There are over 100 plants being designed wind
    power is growing fast off a small base
  • Politics , siting and regulation (EPA) problems
    and energy legislation (light bulbs) could affect
    timing
  • Manufacturing
  • Less Auto, pharma and more export-oriented
    plants for foreign companies, long lead times
    items for refineries, mining, cement, aircraft
    and heavy equipment

95
Non-Residential Construction Strong 2007 but
2008 Could Slow (contd.)
  • Transportation Facilities
  • Driven by growth in freight
  • Lodging
  • Growth in business, leisure and foreign travelers
  • Sewage and Water
  • Driven by home building, state and local
    regulation and permits.
  • Bottom Line Perhaps 4 to 7 growth in 2008 for
    non-residential construction

96
Appliance Industry
  • Appliance Outlook New Products and Positive Mix
    Drive Gains

97
Drivers of Appliance Industry
  • Industry Shipments tied to aggregate economic
    data
  • Volatility related to new construction, existing
    home sales and unemployment rate.
  • Replacement demand and home improvement growth
    has dampened cyclicality
  • Appliances are TV stars
  • Cooking shows make every meal an event
  • High-end appliances set the stage
  • Market incentives help drive appliance sales
  • Energy star appliances2002 15 2005 32
  • Consumers really care about energy efficient
    appliances
  • Government regulations
  • US and Foreign companies Building Appliance
    Plants in the US
  • BSH Home Appliances Haier, Fisher and Paykel
  • Viking Range Corp.
  • Whirlpool, Amana, GE

98
Appliance Sales Show Steady Growth Across All
Major Categories Over the Last Decade
99
New Models Drive 2006 Sales with 2 to 5 Higher
Price Points
  • Our 2006 surveys indicated sales at retailers
    were driven by high end appliances selling well
  • 3 door refrigerators
  • Front load washers
  • Convection style cooking
  • Stainless steel
  • Substantial new model roll-out with price points
    up 2 to 5
  • 2006 sales were relatively flat (all appliances
    up 1.3 AHAM 6 down 0.7)
  • 2007 will start off slowly with H107 down about
    5.

100
2006-07 Outlook Slowing Growth, Upscale Mix and
More New Products
  • 2006 was about flat (down from 2 to 4 growth
    assumption earlier in year) in unit volume as
    housing decline (20 of demand) and the economic
    slowdown took their toll in the second half of
    the year.
  • The mix-driven trend of ascending ASPs that has
    been in place for the past 3-4 years continues to
    drive higher revenues.
  • In 2006, HVAC demand reflected new SEER 13 rules
    for energy efficient products most fluid power
    companies selling components to this market saw
    very strong demand through mid-year as
    manufacturers shifted to higher efficiency
    products. This change is over.
  • 2007 will be a tougher year as housing weakens
    further in the mid-cycle economy.
  • 2007 Volume likely down 2 to 3 with a weaker
    first half (down 5)
  • New products will remain key.

101
INDUSTRIAL MARKETS 2007 AND BEYONDManaging
Through Mid-Cycle
  • Supply Chain/Purchasing Managers Seminar
  • Eli S. Lustgarten
  • Senior Vice President, Longbow Securities
  • June 6, 2007
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