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Industrial Markets Outlook: The Search for the New Normal

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Industrial Markets Outlook: The Search for the New Normal Speech to AMT GLOBAL FORECASTING and MARKETING CONFERENCE Eli S. Lustgarten Senior Vice-President, Longbow ... – PowerPoint PPT presentation

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Title: Industrial Markets Outlook: The Search for the New Normal


1
Industrial Markets Outlook The
Search for the New Normal
  • Speech to AMT GLOBAL FORECASTING and MARKETING
    CONFERENCE
  • Eli S. Lustgarten
  • Senior Vice-President, Longbow Securities
  • OCTOBER 20, 2010

2
(No Transcript)
3
WHAT WE SAID IN 2009 APPEARS TO BE TRUE
  • OUR VIEW THERES 2010 AND THERE IS THE RECOVERY
  • 2009 SEVERE RECESSION WITH 1H09 GLOBAL ECONOMY
    REALLY UGLY
  • U.S.PMI PLUMMETTED AS DID EUROPEAN AND CHINA PMI
  • CREDIT FINANCIAL CRISES MET WITH MASSIVE
    STIMULUS PROGRAMS
  • BOTH HERE (U.S. 787B, TALF,TARP) AND
  • ABROAD (SOUTH AMERICA 775B EUROPE/AME 900b
    ASIA PACIFIC 850B)
  • RECESSION LIKELY ENDED MID 2009 FOLLOWED BY
    MODEST RECOVERY
  • 2010 MOST LIKELY A TRANSITION YEAR
  • MFG.CAPACITY UTILIZATION OF AROUND 70 WELL
    BELOW NORMAL
  • 2010 WILL FAVOR SHORT CYCLE/PRODUCTIVITY
    SPENDING
  • FASTER RECOVERY OF TECHNOLOGY,COMPONENTS AND
    CONSUMABLES
  • BULL-WHIP EFFECT IS KEY DRIVER-RECOVERY OF
    PRODUCTION AND SUPPLY CHAIN FROM VERY DEPRESSED
    LEVELS
  • 2011 ECONOMIC OUTLOOK DEPENDENT ON REAL GROWTH
    IN DEMAND
  • 2011-2012 SEARCH FOR NEW NORMAL LEVEL OF DEMAND
  • MOST MARKETS WONT RETURN TO RECENT 2006 to 2008
    PEAKS
  • 2006 WAS PEAK FOR HOUSING, AUTO, TRUCKS,
    CONSTRUCTION EQUIPMENT

4
GREAT GLOBAL RECESSION APPEARS TO BE OVER
  • Great Recession likely ended in June/July 2009
    followed by a gradual economic recovery
  • Strong growth in China, India, and Brazil
    leading global economic upturn
  • U.S. is generally positive with clear strength
    in manufacturing
  • Europe and Japan show signs of slow economic
    growth
  • Numerous concerns which may lead to volatility
    in world financial markets
  • Uncertain financial stability of Sovereign
    Nationals, particularly Greece, Portugal, Spain,
    and Ireland
  • Even in the U.S. there are rising concerns about
    Fannie/Freddie and State Financial conditions
    e.g. California, New York, Illinois
  • What is the exit path for all the
    fiscal/monetary stimulus
  • Concern over Bank exposure to commercial real
    estate
  • Domestically, economy being driven by
  • Capital goods markets leading the U.S. recovery
    with the manufacturing ISM Purchasing Managers
    Index (PMI) showing a strong V shaped recovery
  • Inventory change has become a key contributor to
    GDP growth
  • Residential markets are sluggish since
    incentives have expired
  • Sentiment has improved modestly across the U.S.
    economy
  • University of Michigan 2010 Consumer Sentiment
    survey rose to 76 in June before falling to 67.8
    in July, up to 69.8 in August, down to 68.2 in
    Sept. and 67.9 in October.
  • Small Business Optimism Index between 87 and 92
    in 1H10 (Sept. 92.9Oct 87.5)

5
CI LOAN DATA SHOWS CREDIT STANDARDS LOOSENING AS
RECESSION ENDS
CI LOAN DATA 1990 TO PRESENT

6
U.S. ISM PMI HAS SEEN A SHARP RECOVERY BUT
STARTED TO PULL BACK FROM HIGHS
U.S. ISM PMI INDEX 1992 TO PRESENT

7
EUROZONE AND CHINA PMI HAVE ALSO SEEN STRONG
RECOVERIES
EUROZONE PMI AND CHINA PMI - MARCH 2006 TO PRESENT

8
GDP REVISION SHOWED WEAKER ECONOMY BUT SAME END
TO RECESSION
  • Economy was weaker over the past three years
    driven by weaker housing and consumer spending.

Year Reported GDP Revised GDP
2007 2.1 1.9
2008 0.4 0.00
2009 -2.4 -2.6
  • But recession likely still ended in Mid-2009

QUARTER INVENTORY GDP FINAL SALES PCE
1Q09 -125.8 B -2.5 -3.9 -0.5
2Q09 -161.8 B -1.4 0.2 -1.6
3Q09 -128.2 B 1.1 0.4 2.0
4Q09 -36.7 B 2.8 2.1 0.9
9
Productivity is STRONG coming out of recessions
Date After Recession Growth
1975 2Q 6.5
1980 4Q 4.4
1983 1Q 5.1
1991 2Q 5.9
2002 1Q 7.2
2009 2Q 8.4
10
PRODUCTIVITY GAINS HAVE BEEN SIGNIFICANT SINCE
2Q09 DRIVING 2009-2010 EARNINGS SURPRISES
  • Productivity usually weak in a recession
  • Productivity improved since 2Q09 while costs
    plummeted

Date Productivity
1981 0.16
1991 0.23
2001 3.60
2008/09 3.50
Date Productivity Unit Labor Costs
2Q09 8.4 0.6
3Q09 7.0 -3.3
4Q09 6.0 -4.2
1Q10 3.9 -3.7
2Q10 -0.9 0.2
11
IMPROVED PRODUCTIVITY SEEN IN PROFITABILITY
REBOUND
  • Increased productivity evident in strong
    operating margin rebound for many companies, post
    2009 restructuring
  • Margins for many are approaching 2008 levels,
    though absolute earnings well below prior peaks
    due to lack of revenue recovery
  • In 2009 temporary (zero bonus pay-outs,
    furloughs, pay reductions, travel restrictions,
    eliminate overtime) and structural measures
    (layoffs, plant consolidations and closings,
    increased automation ) used to reduce costs
  • Structural measures will continue to offset the
    return of temporary costs savings (about 60 of
    costs).
  • Employee compensation (base wages, healthcare)
    likely outpaces inflation, hiring will be kept in
    check

12
RECESSION LIKELY OVER BUT SLOW RECOVERY UNDERWAY
3Q09 4Q09 1Q10 2Q10
Real GDP 1.6 5.0 3.7 1.7R

Inventories 1.1 2.8 2.6 0.8R
(in Billions) -128.2 -36.7 44.1 68.8R

Final Sales 0.4 2.1 1.1 0.9R
Domestic FS 1.8 0.2 1.3 4.3
Net Exports -1.4 1.9 -0.3 -3.5R
13
U.S. ECONOMIC OUTLOOK Recovery Beginning
  • REAL GDP SLOW GROWTH

  2005 2006 2007 2008 2009E 2010E 2011E
YEAR/YEAR 3.1 2.7 2.1 0.4 -2.4 2.8 2.5
4Q/4Q 0.1 2.6 2.7
  • CAPITAL SPENDING TO SLOW

  STRUCTURES EQUIPMENT AND SOFTWARE BUSINESS FIXED INVESTMENT
2004 1.1 7.7 7.3
2005 1.5 8.5 6.5
2006 9.2 7.4 2.3
2007 14.9 2.6 -2.1
2008 10.3 -2.6 -5.1
2009E -20.4 -15.3 -17.1
2010E -12.8 14.1 5.2
2011E 0.5 9.5 7.0
14
U.S. ECONOMIC OUTLOOK (CONTD)
  • MANUFACTURING OUTPUT STARTING TO RECOVER

  2005 2006 2007 2008 2009E 2010E 2011E
YEAR/YEAR 4.0 2.5 1.4 -2.2 -9.2 5.5 4.5
  • INFLATION PRESSURES FURTHER SUBSIDE

MFG IP 1Q 2Q 3Q 4Q
2008A -1.2 -5.4 -9.3 -18.1
2009A -22 -9 9 7.1
2010E 6.1 7.9 3.5 4.5
  2005 2006 2007 2008 2009A 2010E 2011E
CPI 3.0 2.7 2.7 3.8 -0.3 1.7 1.6
CORE PCE 2.3 2.3 2.4 2.4 1.7 1.1 1.3
15
IMPROVING OUTLOOK FOR GLOBAL GROWTH BUT 2011
GROWTH MODERATING
  2006 2007 2008 2009 2010E 2011E 2015E
GLOBAL GROWTH 5.1 5.2 3.0 -0.6 4.8 4.2 4.6
US 2.7 2.1 0.4 -2.4 2.6 2.3 2.4
EU 2.8 2.7 0.6 -4.1 1.7 1.5 1.7
GERMANY 3.0 2.5 1.2 -5.0 3.3 2.0 1.2
FRANCE 2.2 2.3 0.3 -2.2 1.6 1.6 2.2
ITALY 2.0 1.5 -1.3 -5.0 1.0 1.0 1.3
UK 2.9 2.6 0.5 -4.9 1.7 2.0 2.5
SPAIN 4.0 3.6 0.9 -3.6 -0.3 0.7 1.7
CENTRAL/EASTERN EUROPE 6.5 5.5 3.0 -3.7 3.7 3.3 4.0
JAPAN 2.0 2.4 -1.2 -5.2 2.8 1.5 1.7
CHINA 11.6 13.0 9.6 8.7 10.5 9.6 9.5
INDIA 9.8 9.4 7.3 5.7 9.7 8.4 8.1
RUSSIA 7.7 8.1 5.6 -7.9 4.0 4.3 5.0
MID EAST 5.7 5.6 5.1 2.4 4.1 5.1 4.8
BRAZIL 4.0 6.0 5.1 -0.2 7.5 4.1 4.1
MEXICO 4.9 3.3 1.5 -6.5 5.0 3.9 4.0
CANADA 2.9 2.5 0.4 -2.6 3.1 2.7 2.1
SOURCE IMF 1010
16
VIRTUALLY EVERY INDUSTRIAL END MARKET WAS UNDER
PRESSURE IN 2009
  • Virtually every end market faced lower demand in
    2009.
  • Housing fell over 30 to about 900,000 starts in
    2008 and is still looking for a bottom. Housing
    suffered another 40 decline in 2009 to about
    554,000 with stabilization now occurring
  • Auto outlook remained ugly with 2008 production
    about 12.6 million falling to about 8.5 million
    in 2009 as the automotive bankruptcies were
    offset by the cash for clunkers auto program.
  • Construction equipment sales and production in
    2008 were down 22 to 24 with 2009 now down at
    least another 45 to 50 as export sales wane and
    non-residential construction spending falls about
    5 (down 11 private and up 3.5 public) in 2009
    and likely a similar amount in 2010.
  • The heavy truck sector saw a decline in
    production to about 205,000 in 2008 compared to
    212,000 NAFTA shipments in 2007, while the
    decline medium truck (class 5 to 7) was 25 from
    206,000 to 157,000 units. The lack of credit, the
    recession and favorable reviews for the 2010
    engines eliminated any emissions related truck
    pre-buy with 2009 falling another 43 to about
    118,000,units with a similar decline in the
    medium truck sector. There was, however, an
    Engine pre-buy because of rising prices.
  • Global steel demand plummeted 8 in 2009 after
    falling 1 in 2008 with developed economies
    particularly hard hit -36 U.S., -26 Japan,
    -29 Germany though China, the largest producer,
    grew 14 in 2009.

17
SLOW INDUSTRIAL CAPACITY UTILIZATION RECOVERY IN
2010
  • We have dug a deep hole to climb out of in 2010
    and 2011
  • Manufacturing Capacity Utilization is now in the
    Low 70s compared to more normal 78 to 80
  • Virtually Every Industrial Sector is Currently
    Over-Capacitized Globally

18
2010 WILL FAVOR SHORT-CYCLE, PRODUCTIVITY
EFFICIENCY
  • LITTLE NEED FOR CAPITAL EQUIPMENT FOR EXPANSION
    IN 2010
  • Need to absorb excess capacity
  • Only exception may be for new products
  • Production increases mostly related to end of
    inventory liquidation production level will more
    closely match end market sales
  • Smaller, lighter equipment likely to outperform
    heavy equipment which could decline through 2010
  • 2010 WILL FAVOR ENERGY EFFICIENCY, AND
    PRODUCTIVITY ENHANCEMENT
  • FASTER RECOVERY FOR TECHNOLOGY, COMPONENTS (MRO
    AND INVENTORY RESTOCKING) AND CONSUMABLES AS
    INDUSTRIAL PRODUCTION RISES
  • LENGTH OF BULLWHIP EFFECT IS KEY

19
CURRENT ECONOMIC DATA IS MIXED FOR NOW ITS
SLOWER GROWTH NOT DOUBLE DIP
  • THE POSITIVES
  • A Major upward revision in personal saving rate
    coincided with a sharp decline in overall
    financial obligations as a percentage of
    disposable income suggesting that the consumers
    are in better shape than suggested by earlier
    data
  • The savings rate peaked at 7 in 2Q09 and
    remained above 5 all year
  • 1Q10 savings rate was 5.5 2Q10 was 6.2 July
    5.7 and August 5.8
  • We are seeing decent real growth in 2Q10 GDP data
    in disposable income (4.4), excellent growth in
    exports (9.1) and business spending for
    equipment and software (24.8)
  • THE NEGATIVES
  • 2Q10 growth in housing (25.7) and state and
    local government spending (0.6) is clearly
    temporary.
  • Consumer confidence indexes are consistent with
    stagnation in real consumption
  • Housing still mired at low levels of 8 months ago
    falling back after end of new buyer incentive
    programs
  • New 26 B emergency legislation being passed to
    fund state and local governments to prevent
    /limit layoffs(16 B to fund Medicaid
    obligations and 10 B for teachers pay)
  • The current high level of inventory growth
    (68.8B ) is likely temporary
  • Poor July jobs reports with only modest August
    gains continues trend of slow recovery in
    employment

20
THE CONSUMER IS STILL RELUCTANT AND UNLIKELY TO
LEAD
  • CONSUMER SPENDING REMAINS SLUGGISH
  • PERSONAL CONSUMPTION EXPENDITURES

2008 2009 2010
1Q -0.8 -0.5 1.9
2Q 0.1 -1.6 2.2
3Q -3.5 2.0
4Q -3.3 0.9
  • LACK OF CONFIDENCE IN THE ECONOMY Even the
    FED is concerned
  • CHANGING CONSUMER SPENDING PATTERNS
  • just drop off the key, Lee, and set yourself
    free-Paul Simon
  • Apple up 94 Starbucks 61, Mercedes
    25--splurge in hi-end electrics
  • PG struggling as consumers cut back name
    brand shampoo and toothpaste
  • Dollar stores instead of Target

21
JOBS OUTLOOK NO PENT UP DEMAND ANYWHERE
  • JOBS OUTLOOK STILL GOING NOWHERE
  • Private sector gains of 64,000 in September, a
    slowdown from 93,000 in August and 117,000 in
    July
  • Overall number negative 95,000 reflecting
    159,000 decline in Government jobs of all levels
  • Flat hourly wages at 22.67
  • BUT SOFTNESS BENEATH THE SURFACE
  • Length of work-week barely budged in 6 months
  • Number working part-time continues to climb
  • 6,000 shrinkage of manufacturing jobs in Sept Vs.
    28,000 decline in August is uptick in
    Manufacturing over?
  • Unemployment at 9.6, but under-employment rises
    from 16.7 to 17.1

22
A SLOWING OF MANUFACTURING MAY LIE AHEAD
  • September PMI of 54.4 compares to 56.3 in August,
    55.5 in July, 56.2 in June, 59.7 in May, 60.4 in
    April, 59.6 in March, 56.5 in February and 58.4
    in January
  • Orders of 51.1 in Sept, 53.1 in August, 53.5 in
    July, 58.5 in June, 65.7 in May and April,
  • Production 56.5 in Sept.,59.9 in August, 57 in
    July,61.4 in June, 66.6 in May, 66.9 in April
  • Employment 56.5 in Sept.,60.4 in August, 58.6 in
    July, 57.8 in June, 59.8 (May), 58.5 (April)
  • Inventory 55.6 in Sept., 51.4 in August, 50.2 in
    July,45.8 in June, 45.6 (May), 49.4 (April)
  • Customer Inventories are still low at 42.5 in
    Sept.,43.5 August, 39 July,38 in June, 32 May
  • Ratio of Sept. production/Inventory of 1.02
    (vs.1.16 in Aug) and orders/inventory of 0.92
    (vs.1.03) continue to suggest an ISM PMI
    remaining over 50 but slowing.
  • Auto Sales are up (sensitive to incentives) but
    stabilizing resulting in likely lower 2H10
    production levels with potential for schedule
    reductions in 4Q
  • Global PMI continuing to Improve in Europe even
    with Sovereign Debt Issues Euro 10 rebound has
    quickly eliminated short-term currency advantage
    for their exports
  • China Growth continues but showing signs of
    slowing PMI rebounds to over 50 in August

(in millions) Jan Feb Mar Apr May Jun Jul Aug Sep
Auto Sales 10.8 10.36 11.8 11.8 11.6 11.1 11.56 11.47 11.73
23
HOW MUCH LONGER WILL THE BULL-WHIP EFFECT
CONTINUE
  • Domestic manufacturing plummeted in the fall of
    2008 as industrial production turned sharply
    negative
  • Capacity utilization dropped to the mid 60s from
    near 80
  • ISM PMI index plummeted to a low of 32.9 in
    December 2008
  • European PMI bottomed at 32.5 in February 2009
    China was also down significantly
  • Manufacturers underwent an unprecedented
    inventory liquidation hitting a record 162B
    annual rate in the second quarter of 2009.
  • THE BULL WHIP (Forrester Effect)
  • In heavier industries, the at least one-third
    drop in sales in most markets caused
  • Production to decline by over 50 as inventories
    were sharply reduced
  • Causing 50 to 75 or more declines in purchases
    of raw materials and components.
  • The positive BULL-WHIP effect began in late in
    2009 and with earnest in F2010
  • Industrial companies are trying to raise
    production and stabilize their supply chain much
    higher levels than the trough of 2009 but well
    below production levels of 2006 to 2008.
  • CAT flat 2010 sales would result in a 10 to 15
    production increase and a 30 to 40 increase in
    supplier purchase
  • Note CATs sales are projected to rise 25 in
    F2010.
  • It appears that the bulk of the BULL-WHIP effect
    will taper out in 2H10 most likely by the fourth
    quarter

24
SLOW CLIMB BACK TOWARD MORE NORMAL DEMAND
  • Real growth in demand will most likely be the
    driver of economic growth in 2011
  • Supply chains will likely have been stabilized by
    2011
  • Focus is to improve Factory Thru-put to reduced
    field inventories
  • Companies employ lean techniques striving to
    operate with reduced inventory levels compared to
    history
  • Impact of Government stimulus program will wane
    without a new round of incentives
  • Congress has bipartisan bill supporting extension
    of accelerated/bonus depreciation rules set to
    expire at year end 2010. Proposed 1 year
    write-off of Capital expenditures would bring
    demand forward in 2011 at expense of 2012
  • Key risk is government policy mistakes
  • Will movement to Re-Shoring effect to reduce
    the length of the global supply chain have a
    material effect?

25
2011-2012 FINDING THE NEW LEVEL OF NORMAL DEMAND
  • New more NORMAL level of demand perceived to be
    lower than end market demand realized in
    2006-2008
  • Auto unlikely to return quickly to 16 to 17
    million car sales that prevailed from 1999-2005
    perhaps 12.0 million to 14.0 million is the new
    norm
  • Housing unlikely to return quickly to 2 million
    starts New norm may be 1.3 to 1.6 million over
    the next few years with cautious funding keeping
    starts below 1 million at least through 2011.
  • Truck market likely to return to more normal
    levels of demand as early as 2011 e.g. class 8
    trucks in the 175,000 to 225,000 range. Prior
    level peaks of over 300,000 unlikely until at
    least the next emission cycle
  • Construction and mining, engines and turbines,
    railcars and other heavy equipment face a slow
    recovery through 2012 to levels likely below 2006
    to 2008
  • Steel production follows heavy equipment and
    infrastructure spending with slow recovery
    through 2012
  • Electrical markets probably resume growth post
    2010 driven by improving capital spending trends
    and the initial recovery of both residential and
    non-residential markets.
  • Energy/Alternative Energy markets await
    resolution of Government policies and priorities
    to resume growth.
  • Farm equipment end market demand growth dependent
    on global economic growth, global demand and
    weather. Growth likely in 2011 as recent global
    weather issues in the Northern Hemisphere have
    offset the risks associated with the potential of
    large global crops depressing commodity prices.

26
Farm Equipment
GLOBAL WEATHER PROBLEMS REDUCE DOWNSIDE RISKS
27
THROUGH JUNE 2010, FARM COMMODITY PRICES WERE
SOFTENING
28
SPRING DATA SUGGESTED LARGE CROPS BUT RECENT
WEATHER MAY PUSH PRICES HIGHER
Source USDA WASDE May 2010
29
FARM CASH RECEIPTS ARE STILL NEAR RECORD LEVELS
Source DEERE CO
30
ATYPICAL JULY/AUGUST 2010 WEATHER CHANGES OUTLOOK
FOR COMMODITY PRICES
  • Weather concerns about current harvest in some
    key Northern Hemisphere regions have driven
    recent global Ag commodity price significantly
    higher
  • Global wheat and coarse grain production
    according to the International Grain Council
    (IGC) has been reduced by 23 million tons from a
    previous near-record 1,782 million to 1,753
    million.
  • Grain crops have been significantly affected by
    the adverse July weather in parts of the Black
    Sea region, the EU and Canada
  • The impact has been mostly in the northern
    hemisphere wheat and barley crops in which
    projections have been lowered by 13 million and 7
    million tons respectively.
  • Reduced grain crop prospects have also reduced
    consumption forecasts, mainly feed, resulting in
    a reduced projection for 2010/2011 global
    consumption to increase 0.8 to 1,774 million
    tons. (prior forecast for 2010/11 was 1,781
    million tons, up 1.1 from 1,761 million in
    2009/10))
  • With global crop forecasts reduced more than
    consumption, 2010/2011 world carryover stocks for
    grain are now projected by the IGC to be 18
    million tons lower to 369 million tons. This is
    21 million tons below the 2009/2010 carryover of
    390 million, but FLAT with the 2008/09 carryover
    of 369 million tons.
  • Global supplies are viewed by the IGC and most Ag
    economists to be ample.

31
2010 GLOBAL CROP OUTLOOK AFFECTED BY ATYPICAL
WEATHER
32
COMMODITY PRICES JUMP ON WEATHER FEARS
Corn Prices follow.
Wheat Prices Soar on Weather Fear in Northern
Hemisphere
As do Soybean Prices.
33
USDA CROP OUTLOOK TIGHTENING
Crop May 2010 July 2010 Sept 2010 Oct 2010
Wheat Carryover 997 1093 902 853
Price 4.10 - 5.10 4.20 - 5.00 4.95 - 5.65 5.20 - 5.80
Corn Carryover 1,818 1,373 1,116 902
Price 3.20 - 3.80 3.45 - 4.05 4.00 - 4.80 4.60 - 5.40
Soybean Carryover 365 360 350 265
Price 8.00 - 9.50 8.10 - 9.60 9.15-10.65 10.00 - 11.50
34
FARM EQUIPMENT OULOOK FOR 2010-2011 IS IMPROVING
2010 Outlook Modestly Improving 201
1 Outlook Now for Moderately Higher Equipment
Sales Up 5 to 15 or More Globally
Tractors Growth Combines Growth
Worldwide 0 to 5 Worldwide (0 to 5)
North America 0 to 10 North America 0 to 5
lt40HP 0 to 5
40 to 100 HP (0 to 5)
100 HP 5 to 10
Western Europe (10 to 25) Western Europe (25 to 30)
Latin America 20 to 25 Latin America 25 to 30
ROW (0 to 5) ROW (10 to 15)
35
ETHANOL MANDATE MAY BE HIGHER THAN MARKET
CONDITIONS CAN SUPPORT
  • Renewable fuels mandates per EISA 20072011 CORN
    STOCK TO USE RATIO PROJECTED AT 6.7--2ND LOWEST
    ON RECORD

36
Power Generation
STILL IN DESPERATE NEED OF AN ENERGY POLICY
37
AFTER 2 YEARS OF USAGE DECLINE..
38
RESERVE MARGINS CONTINUE TO IMPROVE
39
PLANNED CAPACITY ADDITIONS HAVE SLOWED
FUEL (in MW) 2009E 2010E 2011E 2012E 2013E
Coal 4,765 5,932 2,837 7,156 630
Natural Gas 11,388 9,950 8,804 10,208 5,191
Nuclear 1,270
Wind 9,459 2,259 1,591 25 16
Petroleum 748 568 200
Solar 145 468 375 950
Other 594 364 184 1,132 457
TOTAL 27,099 19,841 13,991 20,741 6,294
40
WIND FACES UNCERTAIN GROWTH IN 2010
  • WITH FAVORABLE STATE AND FEDERAL POLICIES
  • US wind sector on path for 165GW of installed
    capacity by 2025
  • Total wind capacity would be about 200 GW
    representing about 5 of US energy sources.
  • NEAR-TERM POLICIES CREATE UNCERTAINTY
  • Problems include Transmission congestion and fall
    electrical demand
  • Need Coordinated NATIONAL Transmission policies
    and National Renewable Energy Policy/Federal
    Energy Policy
  • BIG CAPACITY ADDITION DROP LIKELY IN 2010 FROM
    9,922MW IN 2009
  • Only 500MW installed in 1Q10
  • Only 700MW installed in 2Q10

41
CLEAN ENERGY, JOBS, AND OIL COMPANY
ACCOUNTABILITY ACT
  • NEW SENATE BILL INTRODUCED AT END OF JULY
  • NO CAP ON CARBON EMISSIONS FOR ELECTRIC POWER
    SECTOR
  • NO RENEWABLE ENERGY STANDARD (RES) WITH 15
    TARGET BY 2021
  • China wind/solar low carbon technology
    investment is currently 11.9B compared to 4.9B
    in the U.S. and 4.5B in Europe
  • 28 states and District of Columbia have RES
    targets that are higher than 15 TARGET missing
    from the Senate Bill

42
Automotive
THE UGLINESS IS OVER FOR NOW ITS JUST UGLY
43
SALES CYCLE IS IN MASSIVE DECLINE
44
(No Transcript)
45
SOURCEDESROSIERS AUTOMOTIVE CONSULTANTS
46
(No Transcript)
47
AUTO INDUSTRY FACES SOME DIFFICULT YEARS
 OE GLOBAL OEM PRODUCTION GLOBAL OEM PRODUCTION GLOBAL OEM PRODUCTION GLOBAL OEM PRODUCTION
REGION 2008 2009E 2010E
DETROIT 3 16.6 11.8 13.3
EUROPE OEM 18.6 15.9 16.9
JAPAN/ KOREA OEM 21.1 17.5 19.9
OTHER (INDIA,CHINA) 10.4 9.6 10.6

TOTAL   66.7 54.8 60.7 Source CSM
   
Year NAFTA PRODUCTION (in millions
2004 15.8
2005 15.75
2006 15.25
2007 15
2008 12.6
2009E 8.5
2010E 11.3-11.5
2011E 12-13
European build 2009 15.9 Million, -25
2010 16.9 to 17.5 Million 2011
17.5 to18.5 Million
48
SLOW RECOVERY FOR APPLIANCES
  • KEY DRIVERS HOUSING, JOBS AND CONSUMER BEHAVIOR

49
KEY DRIVERS OF APPLIANCE SALES
  • New housing completions
  • Existing home sales
  • Unemployment rate
  • Growth in replacement demand
  • Consumer spending and income

50
STATE OF THE APPLIANCE INDUSTRY 2009
  • CORE APPLIANCES 36,848,000 TOTAL UNITS
  • REFRIGERATION 28.3 COOKING
    17.1
  • LAUNDRY 39.9 DISHWASHERS
    14.7
  • DOLLAR VALUES
  • REFRIGERATION 8.2B
  • SIDE BY SIDE 2.5B TOP FREEZER 2.6B
  • BOTTOM FREEZER 2.4B FREEZER 0.7B
  • LAUNDRY 8.1B
  • WASHERS 4.6B DRYERS
    3.5B
  • COOKING 4.9B
  • DISHWASHERS 2.4B

51
AHAM DATA STILL HISTORICALLY WEAK
52
RECESSIONS IMPACT APPLIANCE DEMAND
  • Core Appliance Sales Decline in Recessions
  • 1970 -2.8 1988-91 -7.2
  • 1974-75 -28.5 2000-01 -0.5
  • 1979-82 -25.5 2006-09 -22.2
  • Appliance Sales Improving Since Early 2009
  • Sales surged in November 2009 (Black Friday) and
  • April 2010 (Cash for Appliances)
  • 2010 Sales are UP 6.2 YTD
  • Refrigerators 15.4 led by side by side up 13.3
    and bottom freezer up 45.6
  • Cooking up 6
  • Laundry up 1.8 led by Front Loaders up 4.3
  • Dishwashers up 7.4

53
MODEST GAINS FOR APPLIANCES IN 2010-11
  • Key Near-Term Factors
  • Housing Outlook
  • 2009-550,000
  • 2010E 600,000-650,000
  • 2011E 850,000 to 900,000 May be a Stretch
    750,000-800,000 more likely
  • Jobs---Slow Recovery
  • Consumer Behavior
  • New Construction used to be 20 of Market Now 8
  • Outlook is for Modest Gains
  • 2009A 2010E 2011E
  • -8.2 3 to 5 3 to 8

54
BRAND SHARES ARE CHANGING
  • WHIRLPOOL LARGEST MARKET SHARE
  • Whirlpool 34 LG
    7 Other 7
  • Kenmore 19 Samsung
    4
  • GE 18 Electrolux
    11
  • THE FOREIGNERS ARE COMING
  • 1H2010 STRONGEST
    PRODUCT
  • LG 7.7 Front Load
    24.7
  • Samsung 4.8 Bottom Freezer
    21.8
  • Bosch 1.9 Dishwasher
    7.2
  • Haier 0.5 Compact Refrig
    5.9

55
TECHNOLOGY AND DESIGN MATTER
  • Stainless Steel Keeps Growing
  • YTD 2010 29.5 2005 21.8
  • 2009 28.0 2004 17.3
  • 2008 27.0 2003 13.4
  • 2007 26.8 2002 8.5
  • 2006 24.5 2001 5.2
  • AS Does Energy Star Sales
  • YTD 2010 76.3
  • 2009 54.5
  • 2008 45.1
  • 2007 40.2

56
ON HIGHWAY VEHICLES
  • Will the Slow Recovery Gain Steam in 2011?

57
US TRUCK FREIGHT MOVEMENT IN MODERATE RECOVERY
58
2010-PRE-BUY WAS ONLY FOR ENGINES
  • Companies BUY TRUCKS TO MOVE FREIGHT
  • Pre-buy of trucks unnecessary You dont move
    freight in a recession!
  • Weak economy kept freight demand soft for most of
    the year
  • Current equipment in good condition though
    average fleet age was creeping up at 6.2 years.
    Age doesnt matter if you are not moving freight!
  • Plenty of capacity available USED TRUCK PRICES
    VERY WEAK
  • Used capacity came to market as companies fail
    failure rate was 1,000 companies per quarter
    freeing 40,000 trucks
  • Potentially more favorable economics for 2010
    engines compared to 2007 if increase in fuel
    economy is correct
  • 2010 Truck Prices are up substantially
  • Volvo 9,600
  • Daimler-Benz w/ Cummins Engines up 6,700 to
    7,300 with Detroit Diesel Big Bore 9,000
  • Navistar 6000 (MaxxForce 7,DT, 9 10) to 8,000
    (MaxxForce 11,13)

59
Class 8 Heavy-Duty Diesel Truck DemandA Return
To Normal Levels?
2007 212,000
2008 205,000
2009a 118,400
2010E 140,000-150,000 (We are at 145,000)
2011E 175,000-225,000 (We are at 195,000)
Source ACT/FTR
60
Economic Environment for Trucking Improving
  • Domestic economic environment improving with
    rising industrial production
  • Total freight ton-miles declined about 2.9 in
    2008 and near 8 for all of 2009
  • Look for growth of at least 2.5 to 3 in 2010
    and about 4 or more in 2011
  • Truck ton-miles down about 5.7 in 2008 and about
    9.5 in 2009
  • Likely to rise near 4 in 2010 and 5 to 6 in
    2011.

61
Roadmap to Equipment Demand Recovery
  • Growth in freight tonnage
  • increases for Used trucks/New trucks with 2009
    engines which cost less than new 2010 engines
  • Truck Production in 1Q10 remained strong
    reflecting inventory Turned positive on a YOY
    basis in 1H10
  • Existing stock will handle freight upturn
  • Demand of pre-2010 engines (2010Trucks, 2009
    engines)
  • Transition from old engines to 2010 engines will
    likely begin late 2Q10 AT THE EARLIEST
  • Economic recovery, increased truck capacity
    utilization, and improving trucker bottom-line
    will translate into replacement of aging
    equipment in 2011-2012.

62
TRUCK SECTOR SHOULD LEAD INDUSTRIAL MARKET
GROWTH IN 2011
  • Why do you a buy a truck? The answer, to Move
    Freight (Class 8) or for the Delivery of
    goods/services and support a business (Class 4
    to 7). Economic growth will drive an increase in
    truck demand
  • Truck tonnage continues to grow Excess capacity
    still exists in the industry driver shortage is
    a key to the level of future demand
  • Large fleets are now making money and have access
    to capital medium/small fleets are still having
    a hard time getting capital
  • Recent surge in orders is for near-term
    production 3Q2010 has about 8,800 unfilled slots
    on a production schedule of about 39,000 and
    4Q2010 has 24,900 unfilled slots on a 39,600
    production schedule. Monthly orders of only 8,400
    needed to fill the remaining slots in 2010. BUT,
    most of early 2011 production schedule needs to
    be filled
  • WATCH October and November orders for Key to 2011
  • Economic slowdown may not sustain future strong
    order activity favoring perhaps a more
    conservative increase next year

63
NAFTA Truck Production Forecast
  • DEFENSE OUTLOOK IS AS UNCERTAIN AS IT HAS EVER
    BEEN IN HISTORY!

Year Class 8 Medium Truck Trailers
2006 376,000 274,000 303,000
2007 212,000 206,000 229,000
2008 205,000 157,000 155,000
2009 118,400 97,700 78,000
2010E 145,000 110,000 110,000
2011E 195,000 170,000 150,000
2012E 250,000 205,000 210,000
64
Non-Truck Diesel Engine Sales May Benefit From a
Modest Pre-Buy in 2010
  • Off the road and other segments face new
    emissions mandates
  • Interim Tier 4 (2011) which is similar to Truck
    2007 when prices rose 4,000 to 6,000-
  • Phased in requirements starting with over 174HP
    in 2011
  • Credits will be used for some models
  • Final Tier 4 (2014) which is similar to Truck
    2010 when prices rose 8,000 to 10,000
  • Europe (Euro 4, Euro 5 and Euro 6) and Emerging
    Markets have similar standards going into place
  • CAT has warned industry to expect up to 14,000
    in higher prices between 2011 and 2014 which will
    be phased in over the period

65
Fluid Power
  • DIFFICULT 2009 THE BULL-WHIP DRIVES 2010

66
AUGUST 2010 FLUID POWER SURVEY BULL-WHIP
ENTERING LATER STAGE
  • YEAR OVER YEAR DEMAND STABILIZING AT HIGH LEVELS
  • YoY demand growth now flat for a majority of
    contacts
  • Certain industries are better including
    agriculture, food processing, mining and
    manufacturing
  • MRO remains steady project activity is mixed

67
AUGUST 2010 FLUID POWER SURVEY YOY DEMAND
STABILIZING AT HIGH LEVELS
  •  

68
BULL-WHIP ENTERING LATER STAGE
  • SEQUENTIAL DEMAND FALLS LARGELY FLAT
  • Contacts report that they were generally busier
    during the late spring and earlier summer months
    and have now experienced somewhat of a decline.
  • Agriculture according to the majority of
    contacts is responsible for a large part of their
    demand.
  • Construction and mining equipment demand seems to
    have slowed a bit it is still showing some
    strength
  • Demand from the food processing industry is still
    doing well contacts expect more demand from
    harvest season
  • PRICING REMAINS STRONGWITH YEAR OVER YEAR GAINS
    OF ABOUT 3 TO 5

69
SEQUENTIAL DEMAND FALLS, NOW LARGELY FLAT
70
SALES OUTLOOK NEUTRAL
  • DEMAND SHOULD STAY AT OR NEAR CURRENT LEVELS
  • The outlook is largely neutral, in part due to
    economic and political uncertainty.
  • Contacts are also not seeing such robust demand
    this quarter.
  • Certain industries do seem to be seeing stronger
    demand such as agriculture and excavator
    equipment.
  • However, a source at a cold drawer in the Great
    Lakes region "I just got the fourth-quarter
    forecast for Caterpillar (Inc.). Their forecast
    is coming way down. They're looking to go a
    little quiet. Some customers are full-speed
    ahead," although some never got out of the
    recession (AMM 9/10).

71
SALES OUTLOOK DEMAND SHOULD STAY AT OR NEAR
CURRENT LEVELS
72
(No Transcript)
73
CONSTRUCTION EQUIPMENT
  • RECOVERY IS ON THE HORIZON

74
2009 CONSTRUCTION DEMAND WAS VERY WEAK
CONSTRUCTION EQUIPMENT   CHANGE 2009/08E
LIGHT EQUIPMENT WORLDWIDE LIGHT EQUIPMENT WORLDWIDE -45
o   North America -49
o   Western Europe -49
o   Latin America -54
o   Rest of World -36
HEAVY EQUIPMENT WORLDWIDE HEAVY EQUIPMENT WORLDWIDE -30
o   North America -47
o   Western America -56
o   Latin America -56
o   Rest of World   -14
Source CNH Caterpillar, Deere, Terex, LBR Forecasts Source CNH Caterpillar, Deere, Terex, LBR Forecasts Source CNH Caterpillar, Deere, Terex, LBR Forecasts
75
1H10 CONSTRUCTION EQUIPMENT SALES WERE DRIVEN
FROM DEMAND ABROAD
Light Equipment 1H10
Worldwide 33
North America 7
Western Europe 10
Latin America 98
ROW 69
1H10 Detail Light Heavy
Brazil 106 162
Argentina 136 120
Australia/NZ 137 98
CIS 264 207
China 95 102
Turkey 244 393
South Africa 142 44
Heavy Equipment 1H10
North America -1
Western Europe 1
Latin America 126
ROW 97
Source CNH, CAT, DE, LBR
76
OUTLOOK FOR 2H10 AND 2011 IS IMPROVING
  • The environment for construction activity for the
    rest of 2010 and 2011 will improve over 2009,
    but be less than robust
  • Key is financing availability institutions will
    likely to be reluctant to rapidly expand
    availability
  • Defining government rules for stimulus programs
    will determine the success of getting stimulus
    dollars into this sector
  • Housing will likely show improvement over the
    next two years rising from about 550,00 starts in
    2009 to perhaps 600,000 to 650,000 plus in 2010
    and perhaps 750,000-800,000 or more (WE HOPE) in
    2011.
  • The NAHB recent forecast of housing starts for
    2010 of 656,000 (recently lowered to 632,000 and
    now 610,000), up from 554,000 in 2009 is no
    longer viewed as extremely conservative.
  • NAHB 2011 forecast of 871,000 (was 906,000) for
    2011 is less certain today. Perhaps 750,000 to
    800,000 is more likely.
  • Non- residential construction is expected to fall
    10 to 20 in 2010 and perhaps stabilize in 2011
    before resuming growth sometime that year.
  • Infrastructure spending will likely be relatively
    flat into 2011 or at least until a new Highway
    Bill is passed. History suggests that growth will
    resume about a year after the new Highway Bill
    has been funded
  • New short-term 50B infrastructure proposal on
    horizon to stimulate economy and jobs growth.
  • For 2011 we expect at least a mid-single digit
    gain in construction spending led by residential
    spending and a modest turnaround in the
    non-residential sector (up 3 to 10).
  • By 2012, new legislation should relieve the
    bottlenecks in infrastructure and other public
    works markets leading to vastly improve activity.

77
EMERGING MARKETS LEAD 2010 CONSTRUCTION EQUIPMENT
RECOVERY
Light Equipment Change
Worldwide 20 to 25
North America 5 to 10
Western Europe 0 to 5
Latin America 60 to 70
ROW 30 to 35
Heavy Equipment Change
Worldwide 30 to 35
North America 0 to 5
Western Europe -5 to 0
Latin America 60 to 65
ROW 40 to 45
Source CNH, CAT, DE, LBR
78
DOMESTIC CONTRUCTION EQUIPMENT DEMAND DRIVEN BY
EXPORTS AND END OF INVENTORY LIQUIDATION
  • DOMESTIC Construction equipment end market demand
    in F2010 looks up modestly in F2010.
  • Production will increase 20 to 30 or more due
    to the end of inventory liquidation and exports
    which will allow OEMs to produce at or near
    retail demand.
  • The domestic upturn will initially favor smaller
    to medium equipment (more units, less dollars)
    which has been declining for the past three to
    four years.
  • Equipment for rental companies will likely see an
    upturn in demand as contractors may favor rental
    rather than outright purchases
  • Heavy equipment demand will likely be soft in
    F2010
  • Global Mining equipment demand has fully
    recovered because of demand from emerging
    markets.
  • F2011 will likely be a better year for all
    classes of machines with sales and production
    rising at least double-digits (10 to 15)
    assuming sustained growth in the global economy.
  • Global mining equipment demand up 10 to 20 in
    2011 and perhaps an additional 10 to 15 in
    2012.

79
2012 REPLACEMENT MARKET KEY TO NA DEMAND
  • Current Sales in NA Well Below Replacement Levels
    even at current level of construction activity
  • Classic Recovery Signs
  • Used Equipment Prices are Rising
  • Rental Fleets Expanding
  • (CATs rental fleets are down 40 and aging)
  • Aftermarket demand improving
  • With More Normal Industry Activity, Construction
    Equipment demand should rise materially

80
Machine Tools
  • SURPRISINGLY STRONG RECOVERY IN 2010

81
MACHINE TOOLS A SURPRISINGLY STRONG REBOUND
  • STRONG UPTURN IN 2010 AFTER 58 DECLINE LAST
    YEAR WITH METALCUTTING DOWN 61
  • UPTURN DRIVEN BY BIG STEP UP IN FOREIGN DIRECT
    INVESTMENT, AND A DOUBLING OF SPENDING BY
    AEROSPACE AND CONSTRUCTION EQUIPMENT COMPANIES

82
REBOUNDING OFF DEEP TROUGH, BUT ONLY APPROACHING
2005-LEVELS
83
MACHINE TOOLS A SURPRISINGLY STRONG REBOUND
  • Machine tool markets should still see reasonably
    strong growth into 2011 as they climb out of deep
    hole but still may not even be at 2006 levels
    until 2012

2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E
Metalcutting 2,369 1,906 1,737 2,775 2,935 3,703 3,982 3,897 1510 2575 3,220
Ch -33 -20 -9 60 6 26 7.5 -2.1 -61 70.5 25

Metalforming 347 345 295 366 397 395 441 501 236 170 205
Ch -45 0.5 -15 24 8 -0.5 12 13.5 -53 -28.0 21

Total 2,716 2,251 2032 3,143 3,332 4,098 4,423 4,398 1,746 2.745 3,425
Ch -35 -17 -10 55 6 23 8 -0.5 -60 57 25
84
Industrial Markets Outlook The Search for the
New Normal
Speech to the AMT GLOBAL FORECASTING AND
MARKETING CONFERENCE Eli S. Lustgarten Senior
Vice-President, Longbow Securities OCTOBER 20 ,
2010
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