Capital Expenditure Trends: When and Where Will Firms Start Investing Again? Peter Loveridge European Manager, World Industry Service 24 th June 2009

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1 Capital Expenditure Trends: When and Where Will Firms Start Investing Again? Peter Loveridge European Manager, World Industry Service th June 009

recession Implications for selling into Business Fixed Investment Spending

2 What This Means for You Outlook for growth in E.U. sectors and industries Identify the winners and losers in the current recession Implications for selling into Business Fixed Investment Spending (CapEx) Risk of industries with Capacity Overhang Barometer of industries best positioned for Cyclical Recovery

3 Macro Economic Drivers for Industry Sales and CapEx 0% Growth in GDP and CapEx European Union 0% Growth in GDP and CapEx United States % % 0% 0% Percent Growth % 0% -% Percent Growth % 0% -% % -0% -% -% -0% -0% Real GDP Nominal GDP (Domestic Currency) Nominal CapEx (Domestic Currency) Real GDP Nominal GDP (US$) Nominal CapEx (US$)

4 Industry Pattern of Macro Economic Growth Annual Percent Growth of Sector Real Value Added European Union United States 8 8 A n n u al G ro w th (% ) Annual Growth Construction & Utilities Manufacturing Services Construction & Utilities Manufacturing Services

5 Sector Growth Outlook Ranking Annual Growth Rate of Sector Value Added in Real (Inflation Adjusted) Terms Ranked by Value Added Forecast Growth in 009, European Union European Union United States BRIC Overall GDP 0.9% -.9% 0.% 0.% -.%.6% 7.7%.%.8%. Public Sector & Education.7%.%.6%.% 7.%.% 6.8% 0.% 7.7%. Medical & Health Care.%.%.%.%.8%.% 8.9%.6%.7%. Aircraft & Spacecraft 6.% -0.%.8% -0.9% -.6%.%.8%.9% 8.%. Telecommunications.0% -0.6%.%.8%.%.6% 0.9% 6.% 7.7%. Computing and R&D Services.% -0.9%.%.7% -.9%.% 8.%.9% 6.7% 6. Consumer Oriented Industries 0.% -.% 0.% 0.8% -.%.0% 7.0%.%.6% 7. Business Services.7% -.7% 0.6%.7% -.8%.7% 8.0%.% 6.% 8. Agriculture.% -.8% -0.7%.9% -.8%.%.%.%.6% 9. Transport & Logistics (incl. equip.).% -.7% 0.% 0.6% -.%.% 9.%.% 6.9% 0. Energy Complex 0.6% -.9% -0.%.0% -.8%.%.9% 0.%.%. Media and Entertainment -0.6% -.9% -0.% -.7% -7.% 0.6%.%.8%.7%. Paper and Pulp -.6% -.7% -0.9% -.0% -.8% -0.6% 6.8%.6%.9%. Chemicals Excluding Pharma -.% -6.% -0.7% -.9% -.% 0.0%.%.9% 7.%. Banking & Finance Composite.7% -6.% -0.6% -.% -8.%.% 7.%.7% 6.%. Construction -.% -6.7% -.9% -6.6% -.% -.%.0%.6% 7.% 6. Industrial Machinery (Specialty & General).6% -6.8% -0.% -6.% -.8% -0.%.9% -.%.% 7. Metals & Related Mining Complex -.9% -8.% -.% -6.7% -.% -.6%.% -0.8%.8% 8. Electrical Industries Composite -.% -9.% -0.% 9.0% -6.8% 0.% 9.7%.% 8.7% 9. Motor Vehicles & Parts Total -.0% -.%.% -.% -6.%.% 6.% -.6%.% Accelerating Decelerating

6 Sector Growth Outlook Granular Industry Ranking Top Real Growth Performers Among 9 ISIC Industries Ranked by Forecast Growth Rate in Sales (Real, CAGR 009-) Ranking in European Union (Strongest is Ranked ) Top 0 among 9 ISIC Industries Share in Real GDP CAGR* Growth CAGR* Growth 009- U.S. Ranking in Other Regions/Countries (Strongest is Ranked ) BRIC Eastern Europe & CIS. Public Administration & Defense Health Care Services Telecommunications Aircraft & Spacecraft Education Computing and Related Services Research & Development Reproduction of Recorded Media Pipeline Transport Pharma: Drugs and Medicines * CAGR: Compound Annual Growth Rate

7 Slowest Real Sales Growth Industry Ranking Most Modest Real Growth Performers Among 9 ISIC Industries Ranked by Forecast Growth Rate in Sales (Real, CAGR 009-) Ranking in European Union (Weakest is Ranked ) Weakest 0 among 9 ISIC Industries Share in Real GDP CAGR* Growth CAGR* Growth 009- U.S. Ranking in Other Regions/Countries (Weakest is Ranked ) BRIC Eastern Europe & CIS. Motor Vehicles Iron & Steel Domestic Appliances Motorcycles, Bicycles, Transport. Equip Metals Coatings, Related Services Textiles & Apparel Wire, Cables & Batteries Structural Metal Products Wood Products (excl. Furniture) Construction * CAGR: Compound Annual Growth Rate

8 Fastest Nominal Sales Growth Industry Ranking Top Revenue Performers Among 9 ISIC Industries Ranked by Forecast Growth Rate in Sales (Nominal Domestic Currency, CAGR 009-) Ranking in European Union (Strongest is Ranked ) Top 0 among 9 ISIC Industries Share in Real GDP CAGR* Growth CAGR* Growth 009- U.S. Ranking in Other Regions/Countries (Strongest is Ranked ) BRIC Eastern Europe & CIS. Education Public Administration & Defense Health Care Services Aircraft & Spacecraft Pharma: Drugs and medicines Computing and Related Services Research & Development Telecommunications Business Services Sanitation, Trade Organizations * CAGR: Compound Annual Growth Rate

9 Which Industries Spend on CapEx in the European Union? Shares of Total CapEx Allocated by Purchasing Industry European Union % Ratio of Industry CapEx to Sales All Others 0% Infrastructure % Real Estate & Construction 0% Business Services % High-Tech Goods Basic Metals Including Metal Mining Finance & Banking Medical & Healthcare Energy Complex Public Admin & Education Wholesale & Retail 0% % 0% Infrastructure Energy Complex Medical & Healthcare High-Tech Goods All Sector European Union United States BRIC Countries

10 Which Industries Show Best Growth in Capital Expenditures? Top Investment Performers Among 9 ISIC Industries By Forecast Growth Rate in CapEx (Nominal Domestic Currency, CAGR 009-) Ranking European Union (Strongest is Ranked ) Top 0 among 9 ISIC Industries Share in Macro CapEx CAGR* Growth CAGR* Growth 009- U.S. Ranking in Other Regions/Countries (Strongest is Ranked ) BRIC Eastern Europe & CIS. Coal Mining Oil & Gas Mining Water Transport Education Health Care Services Public Administration & Defense Receivers, Players, Sound Systems Business Services Engines & Turbines Pharma: Drugs and medicines * CAGR: Compound Annual Growth Rate

11 Which Sectors Will Allow the U.S. and BRIC Countries to Lead Global Growth into 00? Which Industries Are Best Positioned* for Recovery? Which Industries Are Worst Positioned* for Recovery? Metals West Europe Pharma, Health Care, Medical Equipment Business Services, Research & Development Agricultural & Metallurgy Machinery; Machinery for Mining and Construction Aircraft & Aerospace Food, Beverages, Tobacco Wholesale Trade West Europe World Pharma & Health Care Computers and Electronics, Electric Motors, Generators, Electricity Distribution & Control Aircraft & Aerospace Food, Beverages, Tobacco Sanitation, Trade Organizations, Education, Public Sector & Defense Energy Mining World Energy Mining Refined Petroleum, Synthetic Resins, Basic Industrial Chemicals Basic Industrial Chemicals, Refined Petroleum Metals Autos Autos *Rankings based upon Forecast Growth in Sales, Profits, Margins, Pricing Power, CapEx, Free Cash Flow, Return on Invested Capital and Capacity Utilization

12 Rising Capacity Overhang Threatens Key European Industries Capacity Overhang is the ratio of capital stock to sales, divided by its -year historical average -- A rising ratio indicates capacity out of line with demand Rising Capacity Overhang threatens buyers of Industrial (CapEx) equipment Autos and Chemicals face a migration of demand and production; Metals and Energy additionally face commodity price volatility Communication electronics additionally hit by retrenchment of European and U.S. Consumers 007 % Change Capacity Overhang in West Europe (9 Industries) 007 Capacity Overhang Measure 009 Capacity Overhang in West Europe (9 Industries) 0 0 Non-Ferrous Metals 00 Iron & Steel 00 Fertilizers Basic Chemicals 007: None in *High Risk Area Synthetic Fibers 0 Motor Vehicles 0 Communication 0 Receivers, Players % Change 0 00 Refined Petroleum Oil & Gas Mining 009 Capacity Overhang Measure Coal Mining *High Risk indicates Industries with a Capacity Overhang Measure over. and Rising

13 Introducing a Barometer Factors Comprising the Barometer of Best Positioned For Recovery (BPFR) Among Industries. Capital Efficiency factors show which industries maintain CapEx to be well-positioned for the cyclical recovery; which generate funding from internal cash flows; and which achieve a healthy return on investments while keeping capacity in line with underlying demand Growth in CapEx and Free Cash Flow During Recession High Return on Invested Capital Low Risk of Capacity Overhang. Forecast Growth and Profits factors show which industries are expected to maintain pricing power and protect profit margins, in addition to enjoying relatively better growth of sales volumes Forecast Growth in Real Sales, Nominal Profits Forecast Pricing Strength Forecast Change in Profit Margins

14 Which Industries Are Best Positioned for Cyclical Recovery in Western Europe?. Pharma: Drugs and Medicine. Medical & Measuring Equipment. Health Care Services. Business Services. Agricultural Machinery 6. Aircraft and Spacecraft 7. Research and Development 8. Food 9. Special Industrial Machinery 0. Wholesale Trade Top BPFR Performers in Western Europe BPFR Ranking (Strongest is Ranked, Ranked over 9 ISIC Industries). Metallurgy Machinery & Casting. Optical & Photographic Machinery Ranking in BPFR Categories Growth & Profits (Strongest is Ranked ) Capital Efficiency 0 0 9

15 Which Industries Are Worst Positioned for Cyclical Recovery in Western Europe? Bottom BPFR Performers in Western Europe. Non-Ferrous Metals. Refined Petroleum & Related. Uranium Mining. Oil and Gas Mining. Synthetic Resins 6. Coal Mining 7. Basic Industrial Chemicals 8. Leasing of Machinery & Equipment 9. Iron and Steel 0. Synthetic Fibers. Motor Vehicles BPFR Ranking (Weakest is Ranked, Ranked over 9 ISIC Industries). Parts for Motor Vehicles Ranking in BPFR Categories (Weakest is Ranked ) Growth & Profits Capital Efficiency

16 Global Summary of Industry Winners and Losers Massive fiscal stimuli across the world boosts the contra-cyclical public sector, as well as defense and education Construction, Infrastructure and Electronics Industries will see the fastest growth in the BRIC and other Emerging Market countries Business CapEx in the U.S. and Europe will lag behind overall economic recovery, with spending on IT and Transportation Equipment recovering prior to Housing or Construction Capacity Overhang threatens spending from industries that traditionally purchase capital equipment (Autos, Metals, Energy, Petro-Chemicals) Sectors in U.S. and Europe with Healthier Sales and Buying Patterns include Health Care, Telecoms, Business & Technology Services Financial services may finally hit bottom and stabilize this year, but recovery will be slow

17 Thank you Peter Loveridge European Manager, World Industry Service

World Industry Outlook: Which Industries Gain and Which Lose in a Slowing Global Economy? Mark Killion, CFA Managing Director World Industry Service

World Industry Outlook: Which Industries Gain and Which Lose in a Slowing Global Economy? Mark Killion, CFA Managing Director World Industry Service Agenda Outlook for Industry Sales and CapEx Ranking