G o r h a m Te c h n i c a l A s s o c i a t e s , I n c . G ORHAM PMA/DER T ECHNICAL C ONFERENCE 19 th Annual Industry Conference March 20-22, 2017 San Diego, CA Daniel E. Sirvent Managing Director 949.386.7380 dsirvent@cfaw.com Corporate Finance Associates 23046 Avenida de la Carlota Laguna Hills, CA 92653 www.cfaw.com Securities offered through Corporate Finance Securities, Inc. Member FINRA|SIPC
I. Market Observations § Economic & Industry Drivers § Aftermarket in Focus § Quick Case: Zodiac Aerospace II. The Death of a Super Cycle § The Last Nail in the Coffin § When Markets Turn III. Private Equity Playbook § OEM Aftermarket | TransDigm Group, Inc. § PMA Aftermarket | Our Mystery Contestant § Strategic & Organic Growth Strictly Private & Confidential 2
Market Observations Economic & Industry Drivers Strictly Private & Confidential 3
E MERGING T HESIS | C YCLICAL A FTERMARKET R OTATION A Lot of Moving Parts, but Properly Assembled they Just Might Fly Our industry thesis for 2017 and beyond represent the intersection of a broad range of changing factors that are changing in response to the global recovery, capital markets and a near term rotation of opportunities in the aerospace & defense markets. BREXIT Insourcing Acquisitions Traffic Capacity Aftermarket Oil Strictly Private & Confidential 4
M ACRO D RIVERS C REATING H EADWINDS FOR OEM S But the broader ecosystem stands to benefit. Energy Prices ▲ Airlines ▼ Airframers ▲ Aftermarkets ▲ Passengers/Consumers ▲ MRO/FBO Exchange Rates ▲ Airlines ▼ Airframers ▲ Aftermarkets ▲ U.S. Travelers ▲ Foreign Tourism Strictly Private & Confidential 5
A IR P ASSENGER T RANSPORT IS V IBRANT AND E XPANDING Capacity & Traffic Growing 3x Faster than U.S. GDP Forecast (2.1% in 2017) Turbulence The Most Exciting Flatline You May Ever See, and Why Private Equity can’t Stop Calling You! Strictly Private & Confidential 6
A IR P ASSENGER T RAFFIC D OUBLING E VERY 15 Y EARS It’s the same chart, but it looks much better in miles! Strictly Private & Confidential 7
E VEN THE B AD N EWS H AS A S ILVER L INING “If you’re looking for a friend on Wall Street, get a dog.” – Bankers Proverb TransDigm | Friend or Foe? • Citron Research recently charged TDG as the “Valeant of the aerospace industry” • Jefferies’ equity analyst responded saying TDG was “more like the Amazon of Aerospace” The One Line from Citron’s Research that Matters Most ”If TransDigm were to operate with the same margins as • Asset Managers and Hedge Funds are all HEICO, their next closest competitor on EBITDA margin …” scrambling to figure out where the industry is headed, who’s going to win/lose viz. TDG, PMAs Remain Profitable Bright Spot and what in the world PMA has to do with all of this. Strictly Private & Confidential 8
E VERYONE W ANTS A P IECE OF THE A FTERMARKET Insourcing & Consolidation B OEING C LAWS B ACK A FTERMARKET S PARES FROM S PIRIT R OCKWELL C OLLINS ACQUIRES B/E A EROSPACE - $8.3B Reuters | Mar 31, 2016 Why Buy B/E? § Triples Rockwell’s widebody content § "Spirit's contract with Boeing allowing them to make and sell spare § Doubles Rockwell’s narrowbody content parts using Boeing intellectual property expired February 29 and will not be renewed," Boeing said in response to questions from Reuters. § Complementary Cockpit/Interiors Land Grab § Catalyze Rockwell’s ability to offer connected parts § The change marks the loss of a small but lucrative segment of Spirit's business and a potential gain for Boeing, which has been building § Develop a fully integrated aircraft automation, up its aftermarket sales to help lift profit margins, partly through communication and intelligence system its Aviall unit based in Dallas. § Aka. The Flying Internet of Things (FIoT) § Chicago-based Boeing said it was changing the longstanding licensing agreement with Spirit because it was " best positioned to support our customers with aftermarket parts and repair .” Boeing said it was "providing that support directly to customers instead of licensing suppliers to do it, in a timely manner that supports their operations and at market competitive prices ”. SAFRAN CHASING Z ODIAC A EROSPACE - $10.5B § Spirit's spares business involves wing, fuselage and propulsion systems and it manufactures the parts under license from Boeing and under so-called part manufacturing approval from the Federal Aviation If nothing else, this will be fun to watch Administration. Sales of spares are less than 5 percent of Sprit's $6.6 billion in annual revenue , …but the business is important and § Standard challenges closing deals w/ governments helps supply Spirit's own repair operations with replacement parts at § low cost. Extra complexity of family shareholders seeking preferred treatment for tax purposes § Spirit supplies spares on the Boeing 737 (classic and Next-Generation § Estimated close in Early 2018??? models), 777, 767, 757 and 747 models [and] also builds spare components for multiple Airbus aircraft. § VERY interesting development if you’d like to know what the Tier I’s are thinking these days. August 31, 2006 – Boeing spins-off its aircraft parts business § Boeing sold its former Wichita operations in 2005 to shed its aircraft-parts business — seen as an expensive in-house operation with high labor costs. Strictly Private & Confidential 9
C ASE S TUDY : Z ODIAC A EROSPACE What’s the Sign for the Aftermarket? – Slide 5 of SAFRY’s M&A Deck Strictly Private & Confidential 10
C ASE S TUDY : Z ODIAC A EROSPACE Did We Mention We Love Your Aftermarket? – Slide 13 of SAFRY’s M&A Deck PMA Me A.S.A.P. Strictly Private & Confidential 11
Death of a Super Cycle Super Cycle 12 Years…that’s like 98 in airplane years! Strictly Private & Confidential 12
BREXIT ON D ISPLAY AT F ARNBOROUGH “In this business, if you don't blow your own horn, there's no music.” – Gov. Mario Cuomo http://www.cfaw.com/blog/brexit-display-farnborough-international-airshow/ Strictly Private & Confidential 13
B RITISH P OUND L OSES BOTH E NGINES OVER THE E NGLISH C HANNEL Just How Relevant are Exchange Rates Anyway? FX Rates Pre-BREXIT Post-BREXIT Current Date 6/23/16 6/24/16 3/17/17 GBP/USD 1.5000 1.3482 1.2384 % Chg ----------- -10.12% -17.44% Narrowbody List Price Proxy Price (USD) $ 100,000,000.00 $ 100,000,000.00 $ 100,000,000.00 Cost (GBP) £ 66,666,666.67 £ 74,172,971.37 £ 80,748,375.95 $ Chg ----------- £ 7,506,304.70 £ 14,081,709.28 % Chg ----------- 11.26% 21.12% Parity Price Equivalent Price (USD) $ 100,000,000.00 $ 91,856,920.34 $ 82,561,000.00 In order to sell the same number of A/C, the OEMs need to slash pricing by 17.5%. Alternately, by holding prices fixed they will face at least that much (likely more) of a reduction in volume demand. Meaning: 2017 orders could fall dramatically even from 2016 levels. Strictly Private & Confidential 14
B UT DON ’ T TAKE MY WORD FOR IT … Richard Aboulafia at Teal Group Braced for Impact 2 Years Ago. After a remarkable 12-year boom, world aircraft industry output growth sputtered to a halt in 2016. The market fell 1.2% (in constant dollars) relative to 2015, the first aggregate decline since 2003. While military demand remains robust, most civil segments are feeling the impact of negative macroeconomic and geopolitical developments. Strictly Private & Confidential 15
B REXIT W INS B EST IN S HOW AS O RDERS F OLLOW THE S TERLING Both OEMs get “Pounded” at Farnborough Airshow Orders & Commitments (Ex. Options) Boeing Airbus Combined Value 1,000 $160.00 $134.7B $93.0B 900 $140.00 $115.5B A/C Orders & Commitments 800 Value in Billions ($USD) $107.2B $120.00 700 466 $100.00 600 $53.9B 496 421 730 $61.8B 500 $80.00 115 400 $60.00 290 300 $40.00 442 200 396 331 296 $20.00 100 178 142 - $0.00 2011 2012 2013 2014 2015 2016 Paris FIA Paris FIA Paris FIA Strictly Private & Confidential 16
S ITUATION R EPORT : A IRBUS V . B OEING So where do we go from here? Commercial Aircraft Deliveries Commercial Aircraft Orders Boeing Airbus Boeing Airbus 100% 100% 90% 90% Lock-Step Deliveries 80% 80% The War Rages On Split the Market 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Book to Bill Ratios Total Effective Monthly Build Rates Boeing Airbus Boeing Airbus 70 4.5 4 60 Immediate Reactions to 3.5 1:1 Threshold 50 3 40 2.5 2 30 1.5 20 Competition Drives 1 New Discipline 10 0.5 0 0 Strictly Private & Confidential 17
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