Aar Corp. · NYSE:AIR
Aar — Investor Presentation (July 2019)
60 slides from Aar's investor presentation, Jul 17, 2019
Slide 1: Forward-Looking Statements
Forward-Looking Statements This presentation includes certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of Company management, as w
Slide 2: Agenda
Agenda Company and Strategy Market Overview and Position Operations: Parts Supply: Trading Parts Supply: OEM Solutions Repair & Engineering Integrated Solutions Digital Initiatives Financial Overview Closing Comments and Q&A
Slide 3: Company and Strategy
Company and Strategy John Holmes
Slide 4: Aviation Services Market Expert Since 1955
Aviation Services Market Expert Since 1955 Leading independent provider of aviation services to commercial and government markets NYSE: AIR $2B revenue 65 years as a market leader in aviation support Approximately 6,000 employees in over 20 countries Close-to-the-customer business model
Slide 5: Company Overview
Company Overview Integrated Solutions Flight hour-based component support Contractor logistics support (CLS) Performance-based logistics (PBL) Serviceable and OEM factory-new parts Engine solutions, management, leasing and exchange Aircraft sales and leasing Online PAARTSTM Store Parts Supply Airfra
Slide 6: Our Values
Our Values To be the best at designing and delivering technical, operational and financial solutions to enhance the efficiency and competitiveness of our commercial aviation and government customers
Slide 7: FY19 Highlights
Organic sales growth of 17% from $1.75B to $2.05B Adjusted operating income growth of 24% from $90.5M to $111.8M Adjusted EPS from continuing operations growth of 36% from $1.73 per share to $2.36 Implemented U.S. Air Force Landing Gear PBL and U.S. State Department WASS programs involving nearly 1,
Slide 8: Financial Performance ($M)
Adjusted Operating Income and Margin Revenue and Growth See the Appendix for reconciliations of non-GAAP financial measures Invested Capital and Adjusted Pretax ROIC Adjusted Diluted EPS from Continuing Operations Financial Performance ($M) $1.27 $1.45 $1.73 $2.36 14.2% 19.3% 36.4% FY16A FY17A FY18A
Slide 9: Corporate Strategy
Corporate Strategy Entrepreneurial Nimble Portfolio Drive connected businesses that reinforce collective growth prospects Expand margins through differentiated capabilities / intellectual property Utilize data and digital solutions to improve offerings and efficiency Leverage independence to offer O
Slide 10: Connected Businesses Model
Connected Businesses Model Unique Value Proposition Parts Supply Transactional data collection Exclusive relationships with OEMs and customers Inventory pooling with programs Repair & Engineering Strategic relationships with airlines Technical repair knowledge and data collection Develop parts for i
Slide 11: Differentiated Capabilities and Predictable Revenue
Differentiated Capabilities and Predictable Revenue Parts Supply Repair & Engineering Integrated Solutions Exclusive aftermarket parts supply contracts Exclusive new parts OEM distribution contracts Long-term new parts supply contracts with comm’l and gov’t customers Digital channels to market Long-
Slide 12: AAR Investment Highlights
AAR Investment Highlights 1 2 3 4 Supportive macroeconomic environment with strong global aviation aftermarket growth and robust government spending expected Leading aftermarket parts supplier distinctly positioned to benefit from market dynamics Largest independent aerospace distributor of OEM fact
Slide 13: Market Overview and Position
Market Overview and Position Chris Jessup
Slide 14: Commercial Aviation Services Market Perspective
Commercial Aviation Services Market Perspective Large and Growing Market for AAR’s Commercial Offerings Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast; Airbus Global Market Forecast Projected 10-year global air traffic CAGR of 5%, fueling fleet and aftermarket growth Fleet growt
Slide 15: Commercial Aviation Services Market Growth by Region
Commercial Aviation Services Market Growth by Region $4BN $16BN $0BN $8BN $28BN $12BN $24BN $20BN $21 2019 2029 2019 2029 2019 2019 2029 $18 10% CAGR 2019 2029 $7 2029 $27 2% CAGR $20 $24 2% CAGR $17 $24 3% CAGR $22 3% CAGR $16 Asia (ex. China) China North America Rest of world Europe Source: Oliver
Slide 16: Government Aviation Services Market Perspective
Government Aviation Services Market Perspective Global defense spending at highest level since Cold War U.S. DoD spending moderating but still expect ~3-5% near-term growth International spend increasing ~5% per year U.S. Government shifting towards IDIQs and longer term contracts Increasing U.S. Go
Slide 17: AAR's Global Expertise and Reach
AAR’s Global Expertise and Reach North America HQ and warehouse near O’Hare; airframe MRO network; component and LG repair; manufacturing services UK Regional sales and Integrated Solutions offices Europe Component repair in Amsterdam; warehouse network includes Brussels and Hannover serving EMEA an
Slide 18: AAR's Strong Industry Relationships
AAR’s Strong Industry Relationships Airlines Cargo Airlines Regional Airlines OEMs Government
Slide 19: Parts Supply: Trading
Parts Supply: Trading Sal Marino
Slide 20: Trading: Key Messages
Trading: Key Messages 1 2 3 4 Largest independent aftermarket aircraft and engine parts supplier Market demand for used parts continues at record levels due to continued increase of engine shop visits Industry reputation for “Doing it Right” and “Close to the Customer” business model Expertise to ac
Slide 21: Trading: At a Glance
Trading: At a Glance Product Sales Key offerings Engine and Airframe Customers / Partners Part supply solutions Engine management Aircraft and engine sales & leasing 24/7 Aircraft-on-Ground (AOG) support Engines Airframe
Slide 22: Trading: Value Proposition
Trading: Value Proposition Customer Impact Mission Be the most sought-after supplier to airlines, MROs and leasing companies Extensive offering of aftermarket aircraft and engine parts Substantial savings over OEM prices Worldwide inventory locations Reduced inventory / lead time Understanding custo
Slide 23: Trading Case Study: Narrow-Body Engine Asset Sales and Leasing
Trading Case Study: Narrow-Body Engine Asset Sales and Leasing AAR Acquires a Used Engine AAR Contracts a Shop Work scope engine Induct engine for repair Contract Shop Disassembles Inspect/recertify parts onsite AAR routes parts out for repair Parts unrepairable and scrap Contract Shop Reassembles P
Slide 24: Trading: Strategic Growth Plan
Trading: Strategic Growth Plan Strategic Priorities Key Initiatives Grow contractual business Expand existing programs CFM56-5B/7B and V2500 opportunities Global leader in AOG services Continue to build AOG desk Enhance digital interface with customers Expand engine trading Proactively repair engine
Slide 25: Parts Supply: OEM Solutions
Parts Supply: OEM Solutions Eric Young
Slide 26: OEM Solutions: Key Messages
OEM Solutions: Key Messages 2 3 4 Differentiated system OEM-centric “sales as a service” business model Significant growth opportunities with existing AAR OEM partners 1 Well-positioned to benefit from system OEM challenges due to OEM alternatives and next-gen platform growth Largest, independent ae
Slide 27: OEM Solutions: At a Glance
OEM Solutions: At a Glance Key OEM Partners Key offerings Commercial and Government Global commercial distribution U.S. Government distribution Direct sales to foreign militaries Consumables and expendables supply chain solutions 250,000 unique part numbers sold to over 2,500 unique customers Commer
Slide 28: OEM Solutions: System OEM Value Proposition
OEM Solutions: System OEM Value Proposition OEM Impact Mission Enhance OEMs’ aftermarket growth while reducing overhead and invested capital OEM sales force multiplier Enhance strategy and sales Stock globally Reduced inventory / lead time Customer service Reduced overhead. Simplify processes Large
Slide 29: OEM Solutions Case Study: Safran Award
OEM Dynamics: Competitive PMA and surplus threats Limited stocking locations Varied sales reach among certain geographies Limited sales reach among repair shops Limited e-commerce sales capabilities Differentiated AAR Solution: Independent with platform agnostic position and no conflicts of interest
Slide 30: OEM Solutions: Strategic Growth Plan
OEM Solutions: Strategic Growth Plan Strategic Priorities Key Initiatives Expand existing OEM relationships Product lines Geographies Establish new OEM relationships Sales-as-a-service value proposition Leverage existing AAR touchpoints Develop new channels of growth Asia growth Foreign military Onl
Slide 31: Repair & Engineering
Repair & Engineering Brian Sartain
Slide 32: Repair & Engineering: Key Messages
Repair & Engineering: Key Messages 1 2 3 4 Unique breadth of capabilities across all major platforms Largest MRO network in the Americas leveraging the AAR portfolio Industry leading Career Pathway Programs developing the most qualified workforce Generating intellectual property in MRO
Slide 33: Repair & Engineering: Overview
Repair & Engineering: Overview Oklahoma City Narrow body & regional MRO 300,000 SF Narrow & wide body MRO 1.1 million SF Indianapolis Narrow & wide body MRO 226,000 SF Landing gear MRO 150,000 SF Miami Duluth Narrow & wide body MRO 200,000 SF Rockford Trois-Rivières Narrow body & regional MRO 150,00
Slide 34: Repair & Engineering: Value Proposition
Repair & Engineering: Value Proposition Customer Impact Mission Provide cost-effective, independent third party MRO service for airframe and landing gear Large flexible network Customer focused solutions that leverage AAR capabilities Independently developed proprietary repairs Flexible solutions pr
Slide 35: Repair & Engineering Case Study: Leveraging the AAR Portfolio
Repair & Engineering Case Study: Leveraging the AAR Portfolio Integrated portfolio of services as a competitive advantage Our portfolio of services offers unique value proposition Engine surplus High value landing gear assets Engineering services Deep customer relationships as an airframe MRO Combin
Slide 36: Repair & Engineering Case Study: Hangar Technology
Repair & Engineering Case Study: Hangar Technology Explore utilization of emerging technology in MRO facilities to drive efficiencies Augmented reality (AR) Remote expert / leverage skilled labor pool Remote collaboration with engineers Reduce potential quality escapes Drones Reduce induction time C
Slide 37: Repair & Engineering: Strategic Growth Plan
Repair & Engineering: Strategic Growth Plan Strategic Priorities Key Initiatives Leverage AAR portfolio as a competitive advantage Services as value with partner airlines Flexible network delivering all AAR solutions Only company with this breadth of offerings Maximize customer profitability Digital
Slide 38: Integrated Solutions
Integrated Solutions Nick Gross
Slide 39: Integrated Solutions: Key Messages
Integrated Solutions: Key Messages 1 2 3 4 Image placeholder Image placeholder Image placehoder Largest independent provider of component support services Global footprint supporting 46 discrete commercial and government fleet types Integrator of AAR and third-party services to government and commer
Slide 40: Integrated Solutions: At a Glance
Integrated Solutions: At a Glance Commercial: Flight-hour-based component support Government: Contractor Logistics Support, supply chain management 250,000 repair transactions “Tailored, deployable, scalable” Supply Management Aggregated and leveraged company-wide spend Center-led with on-site coord
Slide 41: Integrated Solutions: Value Proposition
Integrated Solutions: Value Proposition Customer Impact Mission Premier provider of global aviation sustainment services, leveraging the full spectrum of AAR’s capabilities with a strong commitment to “Doing it Right” Close to the customer business model Proactively ensures uninterrupted support and
Slide 42: Integrated Solutions Case Study: USAF Landing Gear PBL Transition
Vendor Capability Enhancement Piece Part Optimization & Traceability Real-time Transparency & Metric Tracking Increased Asset Availability Worldwide Revitalize Increase approved sources and competition amidst obsolete supply chain Develop technology and capability to sustain product lines for 15 yea
Slide 43: Integrated Solutions: Strategic Growth Plan
Integrated Solutions: Strategic Growth Plan Strategic Priorities Key Initiatives Market leading provider of Contractor Logistics Support to the USG Leverage and build past performance record Identify, develop and retain top talent with direct platform knowledge Build on existing IDIQs Enhance and gr
Slide 44: Digital Initiatives
Digital Initiatives John Holmes
Slide 45: Digital Strategy
Digital Strategy Transform the way AAR interacts with and serves its customers Develop, market and sell new standalone services Support existing AAR products and services eCommerce: Buy, sell, exchange and repair parts Asset & Data Sharing: Pool assets, share data, open source analytical tools Mobil
Slide 46: Selected Digital Offerings
Selected Digital Offerings PAARTSTM Store E-commerce portal AIRvolutionTM Parts repair management software >1 million parts available online Factory-new parts from >30 OEMs Overhauled, serviceable and repairable parts Immediate purchase and checkout Cloud-based solution for aircraft component repair
Slide 47: Financial Overview
Financial Overview Sean Gillen
Slide 48: Key Messages
1 2 3 4 Strong historical performance and continued supportive macroeconomic environment Continued opportunity for growth, new business wins and increased market penetration Disciplined capital allocation framework and strong balance sheet expected to drive shareholder value Continued growth expecte
Slide 49: Historical Financial Performance ($M)
Historical Financial Performance ($M) Adjusted Operating Income and Margin Revenue and Growth See the Appendix for reconciliations of non-GAAP financial measures Invested Capital and Adjusted Pretax ROIC Adjusted Diluted EPS from Continuing Operations $1.27 $1.45 $1.73 $2.36 14.2% 19.3% 36.4% FY16A
Slide 50: Key Long-Term Financial Targets
Organic sales growth of 5%-10% Earnings per share growth of 10%-12% SG&A as % of sales to 10% or less Year-over-year improvement in working capital turnover and ROIC Max leverage of 3.5x EBITDA Key Long-Term Financial Targets
Slide 51: Capital Allocation Framework
Current leverage of 0.7x net debt / Adjusted EBITDA; S&P BB+ credit rating Maintain conservative, low cost and flexible balance sheet Max leverage ratio of 3.5x EBITDA Support new business wins in Parts Supply and Integrated Solutions Investment in attractive assets for Parts Supply, especially Engi
Slide 52: M&A Approach
M&A Approach Strategic Focus Areas Value-added / IP-enabled parts platforms Differentiated component repair capability Enhanced scale and OEM relationships in distribution Integrated Solutions scale and gov’t past performance Unique digital / data tools Criteria Accelerates strategic priorities vs.
Slide 53: FY20 – Financial Guidance
FY20 – Financial Guidance P&L Metrics FY20 Guidance Sales $2.1 to $2.2 Billion Diluted EPS $2.45 – $2.65 Other Metrics SG&A % of Sales ~ 10.5% Effective Tax Rate 24%
Slide 54: Closing Comments
Closing Comments John Holmes
Slide 55: Summary
Summary End markets healthy and growing Unique combination of integrated aftermarket offerings $10.2B business development pipeline Talented and motivated leadership team Strong balance sheet Continuing to execute on strategy to drive margins and scale Leading Independent Aviation Services Provider
Slide 56: Summary
Summary +» End markets healthy and growing + Unique combination of integrated aftermarket offerings + $10.2B business development pipeline + Talented and motivated leadership team * Strong balance sheet * Continuing to execute on strategy to drive margins and scale Leading Independent Avi in Service
Slide 57: Non-GAAP Financial Measures
Non-GAAP Financial Measures Adjusted operating income, adjusted diluted earnings per share from continuing operations, adjusted return on invested capital, adjusted EBITDA, and net debt are “non-GAAP financial measures” as defined in Regulation G of the Securities Exchange Act of 1934, as amended (t
Slide 58: Non-GAAP Financial Measures
Non-GAAP Financial Measures Adjusted Diluted EPS from Continuing Operations FY2016 FY2017 FY2018 FY2019 Diluted EPS from continuing operations 1.30 $ 1.51 $ 2.11 $ 2.40 $ Deferred tax re-measurement from Tax Reform - - (0.41) - State income tax benefit - - (0.06) (0.15) Recognition of previously res
Slide 59: Non-GAAP Financial Measures (Cont'd)
Non-GAAP Financial Measures (Cont’d) Adjusted EBITDA FY2019 (in millions) Net income 7.5 $ Loss from discontinued operations 76.6 Income tax expense 4.9 Other expense, net 0.8 Interest expense, net 8.5 Depreciation and intangible amortization 42.8 Customer bankruptcy charge 12.4 Severance charges 0.
Slide 60: Non-GAAP Financial Measures (Cont'd)
Non-GAAP Financial Measures (Cont'd) Adjusted EBITDA (ion) lose from dcontinued operations Other expense net Depreciation andintangble amortization Customer bankrupty charge Severance cares Faclity repositioning oss Stodk-based compensation ‘Adjusted B1T08 Net Debt to Adjusted EBITDA 5/31/2019] (inn