AAR Corp. (AIR) Earnings Call Transcript

[Audio Gap] of Strategic and Corporate Development. It's my pleasure to welcome you to AAR's 2023 Investor Day. Before we begin, I'd like to remind you that comments made during the presentation may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the Risk Factors section of the company's Form 10-K for the fiscal year ended May 31, 2023. In providing the forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. Certain non-GAAP financial information will be discussed during the presentation today. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in the appendix to the presentation slides. So we have an exciting agenda for you today. First, our Chairman and CEO, John Holmes, will take you through the company and our growth strategy and targets. Our Chief Commercial Officer, Chris Jessup, will go through our markets and positioning. And you'll hear from 4 of our business leaders: Sal Marino on Used Serviceable Material; Frank Landrio on Distribution. We'll take about a 10-minute break, come back, and you'll hear from Tom Hoferer on Repair and Engineering; and then Nick Gross on Integrated Solutions. We are thrilled to have 1 of Trax's co-founders, Jose Alemaida, with us today, and he and Andy Schmidt will take you through Trax and the power of the AAR-Trax combination. Our Chief Financial Officer, Sean Gillen, will discuss financial performance and capital allocation. John will wrap up, and then we will take questions. Before we jump in, we have a short video that we would like to share with you. [Presentation]

It's a feel good movie for the whole family. I'm just happy it worked. Okay. All right. Thanks, Dylan. You did an -- where did he go? An amazing job reading the forward-looking statements and introducing us all. So I'm going to kick us off here and talk a little bit about the company, the strategy, and then you'll hear it from the rest of the team. And I've been at AAR for 22 years, and I've been CEO for about 5 years. And 1 of the things, of course, that I've love doing is spending time with our employees all over the world. And we do town halls, we do different events, et cetera, but 1 of the things I do like to do the most is have lunch with brand-new employees that have just started with the company. And I did 1 of these lunches a week before last, and of course, there's lots of questions. And 1 of the questions that a woman asked me was, "So John, what do you think your legacy is going to be?" And my first reaction was, okay, it's way too early to start talking about legacy. I feel like we're just getting started. But as I thought about it, one of the things I'm most proud of, I think, about the time as CEO is the focus that we have brought to the company, the focus around our portfolio. We're going to talk about our 3 new segments a lot today, but the focus on those 3 segments: Parts Supply, Repair and Engineering and Integrated Solutions. The focus in each 1 of those segments, deciding which parts we're going to repair, which parts we're not going to repair, getting out of certain product lines, getting into certain product lines, getting deeper with fewer -- a smaller group of OEMs so that we can really become a extension of theirs in the aftermarket. AAR has meant -- for those of you that have followed the company for years, AAR has meant a lot of different things to a lot of people over the years, but we are now more focused than ever. And anything we do, anything we do, any investment that we make for organic growth or inorganic expansion is going to be around these 3 areas of focus: Parts Supply, Repair and Engineering and Integrated Solutions. And we want to underpin all of that with investments in digital technology that's going to drive more efficiency, make us stickier with the customer, and ultimately, continue to improve our margins. So we're excited about that. And by the way, I gave you essentially the entire strategy presentation on my bio slide. And by the way, yes, I'm John Holmes. Okay. Let's talk about the vision. We want to be the most respected, independent -- I'll come back to that word, independent, in a minute, provider of aviation parts and repair services in the world. And we want to create value for customers through differentiated capabilities, offerings, and we want these to result in a sustainable, unique competitive advantage. You're going to hear that word, independent, a few times throughout the day. When we say independent, we mean we are not part of an OEM like an Airbus or a Boeing, and we're not part of an airline like a Lufthansa Technik's. Many of our competitors are not independent, and we are the largest for what we do in that regard. And we think that independence is an asset. So again, most of you are familiar with the AAR story, but just to put it on 1 slide in 1 place, a quick overview. We were founded in 1951, so we've been around for decades. We've been profitable almost that entire time, and we've grown considerably. We've seen lots of cycles, and each time we go through a cycle, we come out stronger on the other side. Market cap today is around $2 billion. Our sales are around $2 billion. Of course, we're publicly traded on the New York Stock Exchange. We have about 5,000 employees. And this group of businesses, that focus group of businesses I just described, have never been more profitable. Operating margin is 7.5%, and we believe we can expand from there. We have an amazing group of customers in multiple markets. We service the commercial market, the cargo market, regional, government, and we're really proud of our customer base. And again, 4 main areas of business. I'm going to focus on 3 of them today: Parts Supply, Repair and Engineering, Integrated Solutions and Expeditionary Services. So to start this slide, I want to kick off with actually Expeditionary Services in the lower right. So Expeditionary Services is our legacy manufacturing business, and we have a leadership position in that business where we make cargo pallets, shelters and containers. It's a good business, we've been in it a long time, but it is not the area of future investment and focus. What we're going to do is focus on the other 3 segments today: Parts Supply, Integrated Solutions and Repair and Engineering. So I'll come back to Parts Supply. So in Parts Supply, 2 main areas inside of Parts Supply: Used Material and New Parts Distribution. So Used Material, we're leaders in the world in this regard. We tear down dozens of aircraft and engines and we resell the parts in the market. And this has been an area of a lot of focus, and you'll hear more about that today. In Distribution, we're the largest independent supplier or distributor of factory new parts, and we've got a unique strategy in this business. We focus on a narrow group of OEMs, and for the most part, we only do exclusive distribution relationships. When we sign up with an OEM, we are the only distributor out there selling their products in any given market. And our offering and return for that is we do not offer competing parts or competing product in a market as well. So if we represent 1 manufacturer of pumps, we're not going to represent another manufacturer of pumps in a given market. And this strategy has served us very, very well and allows us to get closer and deeper with our OEM partners in distribution to truly become an extension of theirs in the aftermarket. We have an Online PAARTS Store. This is an increasing growing channel for us in terms of where we sell parts. You'll hear more about that later. And of course, we are 24/7. We provide AOG coverage around the world to the extent that 1 of our airlines needs a part in an important situation. Repair and Engineering. We're very well known for this. We're 1 of the largest in the world for outsourced heavy maintenance. We've got 6 facilities here in North America. We've got a concentration on narrowbody and we're very proud of the network that we've built. And we work on, on average, between 700 and 1,000 aircraft a year through our facilities, and you'll hear more about that later. We also do component repair. We have 2 facilities for component repair, and we also have 1 of the most comprehensive offerings as it relates to landing your overhaul in our facility in Miami. We'll also provide engineering services. We don't really talk a lot about that, but it is an important offering. So when airlines go out and they want to reconfigure their business class cabin or change something on the aircraft, they come to us. We do the engineering work, we essentially develop the blueprints, we get them certified, and we either do that as a fee for service, or in some cases, we'll actually perform the touch labor to do the mod ourselves. And we are entering the PMA space. We have a small but growing PMA effort that you'll hear more tomorrow -- or later on today. Integrated Solutions. We service both the government and the commercial market in Integrated Solutions. And Integrated Solutions, as the name implies, basically takes our parts and inventory sourcing expertise and combines it with our repair and repair management expertise. And we put these 2 things under long-term contracts, like I said, both for government customers and for commercial customers. In the government world, they're PBL, 3PL programs. In the commercial world, we call them power-by-the-hour programs. So those are the 3 segments that we're going to talk about today. Before I go into more detail about the business, I want to touch on our culture and our values. We are extremely focused on our entrepreneurial culture and we're really proud of our culture, and that culture was underpinned by our values. I'm not going to go through every 1 of these up here, but I'll start with the first, and that is Quality First, Safety Always. We know that everything we do is ultimately involved in safety of flight, so quality and safety are top of mind for us all the time. And the last value I'll mention is at the end there, Own It. Everything we do, big or small, any small task, big task, anything we -- regardless of who you are in the company, you own your decisions, you own your actions. And of course, you can see what's in the other values in the middle there. But if you go to any 1 of our facilities, whether it's a hangar, whether it's our headquarters, whether it's a sales office in Singapore, whether it's here in this room, you will see these values everywhere. It's how we hire people, it's how we train people, it's how we evaluate people, and ultimately, we pay people in terms of their performance against these values. So very, very important to the culture of the company. And speaking of the culture of the company, I want to take just a second and talk about our corporate citizenship. When we were back here 4 years ago, we were here 4 years ago, we -- ESG wasn't as focused as it is now. But we've been doing a lot of great things for years and years and years in our communities, and I'm really proud of the things that we do today and the things that we'll continue to do. We've reported on these activities in 2 ESG reports that we've put out over the last 4 years. I'm sure you've seen them. We're proud of what's in there. We're evaluating ourselves against all the proper standards for ESG, and we intend to put out a new ESG report every 2 years. Other thing we focused on in the last 4 years is compliance. We do business all over the world. We do business with flag carriers, state-owned enterprises and dozens and dozens of countries, so compliance and making sure we are doing things right is incredibly important. And the cool thing is it's a differentiator for us in the market. Meaning when we go to a big OEM and we're going to represent them on an exclusive basis around the world, they want to make sure that our compliance standards are world-class, and they are. And that is actually a differentiator for us in the marketplace when we compete against others who don't operate in the same way, particularly in distribution. Last thing I want to mention here is that these efforts around ESG and our culture and the way we hire and treat our employees have been recognized through repeated awards, many of which just in the last year, and we're really proud of that. So you're going to hear a few key messages from the team throughout the day, and I want to just give you a preview of what those are. The first, we're going to focus on the actions that we have taken since we were last year in 2019, particularly during COVID, to streamline the business. We've exited underperforming assets, underperforming contracts. We consolidated facilities. We developed proprietary labor pipelines that we'll talk more about. And we've improved our efficiency, particularly in our hangers, and all that's adding up to improve profitability. We are operating in multiple growth areas. You'll hear from Chris Jessup in a minute about the markets that we're operating in. They're large and growing in many areas that we are still recovering from the pandemic. So by definition, there's recovery growth built in that we're excited about, and that we're participating in that. And you are seeing increased user adoption of USM. It's been around for decades. We were actually the original company that started offering used material to the commercial marketplace. But because of the OEM supply chain issues, because of the desire for airlines to work for a different source of savings, USM is achieving the broadest user adoption that we've seen. We expect to continue to take share in distribution. Our 2 largest competitors, Boeing and Airbus, are focused on other things, and we are taking share in that market and we plan to deploy capital to continue to build out distribution. We want to continue to expand our maintenance footprint. You saw the Miami expansion announcement 2 days ago. We're excited about that and working on others, and you'll hear more about the commercial value that we believe we can bring to our government customers. We want to drive continued differentiation in everything we do, most notably through investments in digital technology. We have software solutions that we've been working on ourselves. But now with the addition of Trax, we're pretty excited about what we can do there. And we want to continue to raise the bar on shareholder transparency. We want to make AAR easier to understand, and that's why we announced the new segments that we did 2 days ago. So basically, what we did here is we took Aviation Services that represented about 90% of the company and we split it up into 3: Parts Supply, Repair and Engineering and Integrated Solutions. So as you see here, Parts Supply is the largest and most profitable area. It's also the area, if we think about organic growth, that we probably have the most opportunity. Repair and Engineering, we expect to continue to grow that segment through facility expansions, like the 1 we just announced in Miami. But we also expect to be able to improve margins there through the use of technology, whether that's going paperless, whether that's employing drones and other technologies to help bring more efficiency to aircraft inspection, et cetera. We believe we can continue to expand our margins in Repair and Engineering. And Integrated Solutions. Integrated Solutions, again, commercial power-by-the-hour programs. That's been a challenge for the company over the last few years. We made great progress this past fiscal year in improving that operation, and we expect to make more progress this coming year, where we'll help margins there. And we believe growth in this business could come from not only power-by-the-hour programs in the commercial market, but also securing more government wins, and we've got a very large pipeline of government opportunities that we'll talk more about. So again, those 3 segments are the focus: Parts Supply, Repair and Engineering and Integrated Solutions. And what's so unique about AAR is not just our scale because as I mentioned, we're the largest in the world for many of the things that we do, or our independents, which we believe is an asset. But the way that these 3 businesses work together, and I want to give you a couple of examples. Our USM business, we are out in the market every day. It's a highly transactional business. We've got our finger on the pulse, literally, of what's going on in the parts business. What's coming available, what's breaking, what are the needs of the airline community, and we can use those parts internally to support our airline operations and get aircraft out of the hangars on time. We can utilize our distribution relationships to supply parts at a more cost at best basis to certain of our repair operations. Also, if you're working on 700 to 1,000 aircraft a year in your hangars, again, you can collect a lot of data about what's breaking, what's in demand, and that helps us inform what parts are going to go on the shelf. Similarly, going the other way, if we're pitching a new OEM on a distribution agreement on an exclusive basis, and OEMs always want to focus on selling the next upgraded part to an operator, or even better, just placing a competitive product. The fact that we're going to see hundreds and hundreds of aircraft in our hangar, the best time to make that upgrade or displace competitive product is when the aircraft is in maintenance. And since we're seeing hundreds of aircraft, that's another channel to market that we can offer for our OEMs. So Repair and Engineering helps drive OEM distribution. And again, being in the market, seeing what's repaired, et cetera, it helps develop a great source of data that we can use to inform PMA part development decisions. And Integrated Solution is by definition, as I said before, brings these things together. It's an outlet for repairs and it's an outlet for parts. So we'll have a version of this when we go through each 1 of the slides for each of the business units, but I want to highlight some of the key things at the company level that has changed, since we were last together in 2019. First, again, focus. We exited non-core assets, underperforming businesses, we consolidated facilities and that's coming through in our market -- in our margins. We've also developed some very important relationships with schools. We've started programs -- do you need to take that? I'm kidding. We've started programs in different schools, and we really have developed proprietary sources of talent that our competitors have not. We were doing this before the pandemic. Other people pulled back from this during pandemic. We actually leaned forward and doubled down on our efforts and have expanded the number of partnerships with schools, and we now have access to talent that our competitors don't. And this has really served us well as we've gone into this highly-competitive labor environment. I talked about technology in terms of driving improved margins and efficiency inside of our hangars, but 1 of the other things we've done in the last 4 years is bring more focus to what we do. We are now focused on narrowbody maintenance for a smaller group of customers. And why is this important? It's important because if you have thousands of mechanics coming to work every day, they need to know what they're working on and who they're working for. And it's -- if you're going to go in and you're going to work on a 737 one day and you're going to work on a 757 the next day, that drives inefficiency. If you're going to work one customer over here that has a different set of expectations versus another customer over here that has another set of expectations, that drives inefficiency. We want our people to be working on the same assets for the same customer so that they get to know again that customer's expectations. This drives quality and it drives efficiency, and you've seen that in our margin improvement. And again, on the USM side, we've added multiple sources of USM. We're going to talk about the Fortress relationship that I believe many of you are familiar, but having proprietary access and assured access to USM material like through the partnership with Fortress is really important. What's also important is signing up exclusive supply agreements with major customers like certain engine shops around the world. So now we've got assured supply from certain sources like Fortress, and we've got assured sales as we've expanded the exclusive supply agreements that we have with used parts buyers like engine shops around the world. This not only allows us to go out in the market and buy with confidence because we know we have a home for it. If we make an acquisition, we know we have a home to support an exclusive contract, but it also provides more predictability to the USM business. And of course, we want to continue to take share in our exclusive distribution business. We signed up a number of agreements in the last 4 years: Unison, Arkwin, Ontic, Northrop and Collins, and we're going to keep going. And finally, we've expanded our digital capabilities both internally, with paperless initiatives, our online PAARTS Store, but also with the acquisition of Trax, and I'm excited that you'll hear more about Trax later. All of that, of course, has added up to improve profitability. We just finished a record year. I want to make sure we -- we just finished a record year, did everybody get that? $2.86 in adjusted EPS. We are the highest margin we've ever been for this group of businesses, over 2% higher than we were the last time we were together. We're delivering stronger cash flow and more predictable cash flow and better cash conversion, and just in general, we have a better capability and a more focused set of offerings. So again, if we think about growth drivers, and you'll hear a bit of this from each of the individual presentations, but it's important to note that we are in large and growing markets and we're in an important segment of large and growing markets. The aircraft -- the recovery in the airline industry is still occurring in various places around the world, and we're participating in that. But there again, you're seeing increased USM adoption. We're the largest provider of USM in the world, and that's benefiting for us. I mentioned that we're going to continue to take share in distribution, which is great. We want to continue to expand our MRO footprint and get more efficient inside our hangars. The government world. The government continues to focus on utilizing commercial best practices to help support the current fleet in a constrained budget environment, and this is really good news for us. And a great example of that is in the past year, the government passed a law as part of the NDAA, and we worked with our friends in Congress to get this done, that requires elements of the DoD to consider USM along with buying new parts. So any time the government goes out to buy a part, they're now going to consider USM. So you're going to see more adoption of, again, commercial offerings like USM, but in the government. And Trax, of course, you'll hear more about Trax later. And I think that everybody in the room and on the line is going to be really impressed with the breadth of capabilities offered by Trax and the customers that they already serve. Trax literally does every single thing that an airline needs to run its maintenance operation. We'll go through examples of that, but it's incredibly important and powerful software. And if you think about the possibilities that opens up for AAR and what we do, it gets really exciting. We'll talk about 1 specific example, an idea that we have there today. In addition to that, we want to continue to use technology inside of our hangars. Now we're going to go paperless, partnership with Trax, but also part of our own initiatives, wearables, drones, et cetera, there's a lot of opportunity to drive efficient on the maintenance floor through technology, and that will translate into margins. And finally, PMA. We do believe the PMA has a place in our portfolio, and you'll hear that we've started some early efforts there. So this adds up to -- and again, I want to emphasize these are long-term growth targets. We define that as 3 to 5 years. We think -- we believe that we will be in the 5% to 10%, on average, annual revenue growth rate. We believe organically that as we shift the mix towards parts and continue to drive efficiency in the operations that we will see operating margin north of 10%. This will add up to annual EPS growth rate of 10% to 15%, and we want to be good stewards of capital and continue to improve our ROIC. So what's coming next? Chris Jessup is going to talk about the markets in which we operate. Sal Marino, as you heard, is going to talk about our USM leadership position. Frank Landrio is going to talk about the distribution model that is resonating with OEMs and the unique elements that we offer there. After Frank Landrio, you guys are going to need a break, so we'll take a 10-minute break. We're going to talk about the efficiencies, Tom Hoferer is going to talk about the efficiencies that we're driving inside our Repair and Engineering business. We'll talk about the Integrated Solutions programs offering, then you'll hear from Andy and Jose about Trax. Sean will talk about our financial performance, and then we'll take Q&A. So with that, I'm going to turn it over to Chris Jessup.

Thank you, John. Good morning, everyone. My name is Chris Jessup, Chief Commercial Officer of AAR. My tenure with AAR dates back over 21 years. I officially joined the company through the acquisition of what is now today our Miami Airframe MRO facility -- sorry. 21 years, joined the company with the acquisition of our Miami Airframe MRO facility in March of 2008. So heavy MRO tenured background, grew up through the Parts segments of AAR from there, and have been in the current role of Chief Commercial Officer now for the past 6 years. I'm going to start with a few slides on the commercial offerings and kind of how we're positioned, and we'll go into a few government slides. So when we look at where we sit today, commercially speaking, with the recovery of COVID and the pandemic, you can see that the ASMs are heavily correlated to our commercial sales. The chart on the left overlays both our commercial top line numbers for the past 6 years with available seat miles, so you can see that tight correlation that is ongoing there. With all that being said, air travel recovery still has not fully recovered. You've got the latest published reports from IATA shown at the end of May that we're at 96% of pre-COVID levels, when you look at May of '19 to May of '23. Domestic markets are up close to 10% at 9.4%, however, international markets are still lagging in the 11% range down year-over-year. So while we've seen some really nice strong recovery in the kind of air travel capacity globally, there still is more recovery to come in the next 1 to 2 years. When you look on the right-hand side, it's an important thing to point out that there is a very resilient market, when it comes to the overall air travel industry. You can see dating back to 1978 all the way through 2023. The chart here shows global available seat kilometers, and you can see even with the impacts of 9/11, financial crisis of 2008 and even what we went through in the COVID industry, there's been very strong rebounds. And so the key there is the aftermarket, where we're heavily correlated to, we're very resilient. We typically bounce back much faster than if we were heavily tied to the new aircraft OEM production cycle. When we look at what's going on in the deliveries and the aircraft retirements market, it's no surprise that the deliveries have been heavily impacted with the COVID environment, whether you're OEMs, who have been struggling with supply chain constraints, labor constraints or there's been ongoing regulatory issues that have impacted OEMs from time to time in the last few years. And you see that it's going to take until 2025 for the industry, as it currently sits today with what we know, to get back to kind of 2018 peak delivery run rate on an annualized basis. Those impacts have driven the need for an increased aftermarket parts and heavy maintenance and modification requirements on those aircraft. John touched on it briefly, but we have seen as OEMs have been challenged to keep up with the supply of new parts, typical airlines who are heavy OEM going into COVID, they opened up their eyes to used serviceable material. So during that time, we've been able to kind of leverage both our new distribution offerings, where parts were available, but we also were able to show the benefits of used serviceable material, which has been very helpful from that perspective. The other thing to keep in mind on the delivery chart is as we look at going forward, while there's strong backlog, and OEMs are doing their hardest to kind of recover everything. 75% of the aircraft that are going to be delivered over the next 10 years are going to be in that narrowbody market, which is a strong offering that you'll see resonate through all the different business unit P&L leaders as they get up here and explain all of our overview and positioning. On the right-hand side, you see how retirements have been trending. In 2020, we peaked out at a little over 800 aircraft that were retired. The originally predicted tsunami wave of aircraft retirements did not materialized, when kind of COVID hit and everyone thought we were going to be putting down a bunch of aircraft, they'd never see the light of day. As you can see, that the lowest point there was in 2021 with retirement just a little over 400 aircraft and that was the lowest time since 2007. This industry had seen that little of retirements happen. Again, assuming deliveries will scale back up in '24 and '25 to kind of pre-COVID run rate levels, we expect retirements will also kind of scale up to pre-COVID run rates as well, kind of in that 2.5% to 3% retirement range compared to the total number of aircraft in service fleets. And that will help loosen up that supply of the USM material, which you will see and hear from Sal Marino, when he gets up here to talk about that part of our business. So when you look at the commercial market overall and kind of how we're positioned, we are very excited about where we are currently sitting with our diversified portfolio of service offerings and the opportunities that are ahead of us. You can see in this chart, we finished as a global MRO industry at about an $84 billion market size. When you look at what was going on pre-COVID, back in 2019, this market was $87 billion, so you're pretty much close to recovered in '22. As we get through '23, the latest forecast has us finished as an industry, around $88 billion. So when you look at over the next kind of 3 years, growing close to $20 billion in market size, and our commercial positioning only represents $1.3 billion of that $85-ish million today, growing $20 billion, combined with the fact that these numbers are in real U.S. 2022 calendar year dollars, doesn't take into account inflation, there's plenty of opportunities for us to continue to grow. Especially when you look at the airframe heavy maintenance and modification segment, components and the engine maintenance areas, which is really where when you look at our Repair and Engineering, Integrated Solutions and Parts Supply, we are very strong positioned in all of those areas. Line maintenance doesn't really apply too much to us. While we will help out our airline customers in the MRO space, when they've got some urgent line maintenance needs, we don't play big in the kind of scheduled day-to-day line maintenance overnight check type tech support. So again, the markets that we're really strong positioned in 5-plus percent CAGR over the next few years, it has us very excited about what's to come. When we transition from the commercial space over into the government space, you just look at the global market in total, over a $2 trillion addressable market. It grew a little over 3% in 2022. You've got a combination of a lot of your foreign militaries looking to increase defense funding to deal with what's going on in today's kind of global environment, whether it's what's going on in the European region or the increasing concerns growing in the Asia Pacific region, there is a lot of increased foreign military spend happening. You take that and you combine it with what's going on with our U.S. government spending, where there's challenges at times to continue to increase that spending, but it's still an $875 billion roughly addressable market with our U.S. government. And when you look at all of that, you find the U.S. government, in particular, having to reallocate funds. There's a lot of money being spent towards developing new technologies. And so as the government is focused on those new technologies, we still have a lot of these legacy platforms still in operation. Lights are being extended. You'll hear more from Nick Gross talking about all of this. But again, it's just a very, very large market. And similar narrative to the commercial space, when you look at AAR at kind of $650 million to $700 million in global government sales as we finish FY '23 with a market of over $2 trillion, we're extremely excited about the opportunities ahead and how we're positioned in areas of growth that we see coming forward. The chart on the right-hand side, speaking to how the U.S. government is finding themselves challenged with keeping up with kind of legacy fleets and the overall readiness of those platforms, you can see an unfortunate, steady decline in both our Department of Navy and Air Force when it comes to some legacy fighter aircraft, sitting in the 40% to 50% readiness levels versus goals north of 80%. Again, we feel we're very strongly positioned to help the government out in those areas, leveraging all our experience and supporting commercial legacy platforms, so we're very excited there. Specifically to extend on that just with a few bullet points, and again, you'll hear this come out from a lot of our business unit leaders. First and foremost, are the government's heavily -- will contract on a programmatic basis. While there is some transactional activities, a large majority of how our U.S. government for militaries go about their business is contracting multiyear source programs. We feel, as the largest independent in this space, are our decades of commercial experience, support and programmatic programs, whether it's in Repair and Engineering, Integrated Solutions or Parts Supply, uniquely positions us to leverage that knowledge to be able to compete on those offerings and kind of have the experience of lessons learned over the years on multiple platforms, whether it's airframe, engines or parts, to be able to offer a strong value proposition to the government. Second there, and you'll hear Sal Marino talk about this when we get to the used serviceable material piece, we're very excited about the recent change with the Department of Defense when they're looking at those tightening budgets. They're currently in the middle of writing policy on how the various armed forces will look to utilize used serviceable material for equivalent commercial platforms that are out there today flying for U.S. airlines. So we feel we're very well positioned to be able to expand on that as well. The third bullet talks about the Captains of Industry. AAR in the last year was very successful in becoming the first independent company to achieve the status of Captains of Industry. You'll hear Nick Gross go into a lot more about that as well as Frank Landrio, but the key there is taking our new piece parts distribution and doing more with our OEM partners not only for the U.S. government, but for a lot of the expanded foreign militaries that are looking to grow the spend in those areas globally. From there, this is an overview of the map of our global expertise and reach. As you can see, we've got dots across the globe here. No surprise that within North America, you've got a heavy concentration of that. When you hear Tom Hoferer come up and speak about our Repair and Engineering segment, we've got a fairly large concentration of brick-and-mortar operations with our Airframe MRO facilities and our Landing Gear facilities. But as we expand outside of the North America market, we leverage decades of AAR's DNA in the Parts business where we've had to build a global sales team to support all that parts supply. And throughout our growth, we've leveraged that for our new Distribution as well as our Integrated Solution offerings as we look to expand globally. So I won't go through all the dots, but as you can see, we pretty much got every part of the world covered with representation from AAR. And last but not least, we are very proud of our diversified customer base globally. You can see some of our key customers, whether you're commercial, cargo, regional OEMs and/or the governments that we support, we again, span the globe when it comes to this. And when you look at our top 10 customers as an example, we've got over 15 years of tenured experience support in these customers, and we've got a lot more examples above and beyond that as well. What we typically find is when we get into a customer, a customer might know us for Parts. One customer might know us for Repair and Engineering. One might know as Integrated Solutions. As we get into an account, we do a very good job marketing our overall portfolio of offerings and looking to expand the activities that we do with those customers across all those segments. I will now turn it over to Sal Marino, who heads up our Used Serviceable Material Parts Supply part of the company. Thank you.

Thank you, Chris, for that introduction. I appreciate that. Good morning, New York and all those on the phone. I'm Sal Marino, responsible for our Parts Supply business in that arena for Used Serviceable Material, as you've heard a lot about it already, so very excited to talk in depth, a little bit more and thorough on it. I've been with the company for 28 years. I started off working in the engine business with AAR, and then in 2014, took off over the engineer frame and our aircraft sales and leasing business. Very honored to excited to represent this business. This is, as John mentioned earlier, 1 of the founding businesses of the company, which we refer to it a lot of times as trading as well, so it's an honor to represent the business and how we go and move forward. So we'll take a look at our offerings that we have. So as John mentioned earlier in our Parts business, a lot of it is going out acquiring aircraft, acquiring engines, dismantling them, refurbishing the parts and reselling them to a operators, lessors, MROs, parts companies as well. And it's a significant amount of savings that we provide to -- compared to buying parts from the new manufacturers. We also do -- when we do some of these acquisitions, we will take some of these assets, whether it's the aircraft itself, the engine itself, landing gears, and we'll refurbish it and we'll sell them as whole assets. We'll put them on lease, put them on lease and sell them. There's a lot of flexibility there, but it's a big piece of our business as well. And then a lot of operators or smaller, for instance, like a cargo operator looking for somebody to help them manage their fleets a little bit better and maximizing the USM, will have us manage their engine. So we'll contract with the operator. We will contract with, say, an engine shop. We will manage that engine on their behalf, and again, the goal there is to provide as much as possible from the USM side of things to keep the cost down. Those are focused platforms on the bottom with the aircraft and their respected engine types, talk a little bit more about it as we get into it and what that significance means when it comes to the volumes that we see. You can see the breakdown there, as you'll hear from Frank later, in the Distribution and the USM side of things are fairly close when it comes to our revenues. Again, our trading business or the USM business is heavily concentrated on the engine side of things and engine side of things, for those that aren't technically advanced on it. There's only so much you can do on the engine side in certain parts to repair them versus on the airframe. It becomes a lot of cases of how much you want to spend to repair that part. So again, the replacement need for parts is really heavy on the engine side of things. We're really proud to have a nice mix of focus on cargo operators, passenger operators as well as having dual role some airlines have. I'm sure you read about all of the conversions that are going on. They both had passenger campaigns as well as cargo. We do take a lot of pride. It's been said a couple of times. We do believe we're the largest independent USM globally. Here's some of our signature customers that we have. You'll hear some more about some of these as we do, as Chris mentioned, across the board. These are significant in the respects to not just the USM part of things, but the MRO distribution and et cetera. So when we talk about what we do, and we're kind of taking a little bit of a different angle here and just to understand exactly what the USM side of things and how we do the things. So there's kind of this bubble chart here that we're looking at. And if you look at that square in the middle there, this is the sweet spot. So this represents pretty much, from an engine perspective, about 75% of the fleet. And the sweet spot is about 10 to 25 years of age, and these are the focused assets and really kind of leads into how do you figure out what you want to buy? How do you figure out what's striking in the marketplace? And it's really kind of 3 things. It's robust markets. You've got over 15,000 aircraft that were produced on A320s and 737NG's which represents -- what you'll hear from me talk about the CFM56 engine 5B, 7B quite a bit, as well as the V2500s. 30,000 engines, so right there, you can see that's a very large market. And when you look at that as well, about 60% of those aircraft are 2010 and younger. So again, they're 13 years old to new, and that's going to be a marketplace for many, many, many years to come. You're talking about estimates are over 20,000 shop visits for those engines in the next 10 years. So again, robust markets, that's where to play, and that's 1 of our sweet spots. We have exclusive customers as well. Again, John had mentioned on that side of things, it's really key to lock up customers that you get basically first right and you're on the hook for making sure that you provide the parts. Engine goes in the shop, parts are required. A customer comes to you and says I need a part, and you provide it or you go out and find it. But for the most part, we already have things in the pipeline to be able to deliver those parts when they need them. And there's some nice extensions on those contracts, especially the PW2000, it's on the 757, it's a cargo operator. And we've been doing that for, I think, over 10-plus years, and we're going to be going on for another 5 or 6 more. Legacy products as well. Our specialty, PW4000. Again, this goes on 767s, 747s, largely the cargo markets. There's still aircraft being converted, and when the aircraft is being converted, you're talking another 15, 20 years that you'll still be supporting them. And again, those conversions, when they end up with the cargo operators, tend to have a lot more focus and drive on the USM side of things. So when we're sourcing assets, we're -- to give you an idea how do we go out and find things, we have industry relationships, and obviously, we have our reputation. Again, we go from operators, lessors to MROs, other parts traders that are in the industry. The cross-selling is huge. Chris had mentioned, we're talking to some of the large operators. We're always in the back of our minds thinking about how the enterprise can work through the MRO side of things, distribution and as well as USM, and whether that's selling or buying. A lot of our sales folks that are out in the world, and you saw our global map, it's really critical that they always have in their mind not only what to sell to their customer, but what else do they ask for sale. In understanding fleet transitions, understanding fleet retirements, knowing the tech teams at these airlines operators, lessors, especially if some of the lessors are smaller. Technical teams that they just farm, a lot of that work out. I don't know if most of you would know in here, nearly half of the fleet in the world is leased. Every airline owns an airplanes. In fact, you can get out of an airplane and there can be 2 leased engines from 2 different companies and landing gear could be leased from somebody. So a lot of dynamics in the world of these aircraft. Digital market platforms, you're hearing a lot about that. It's very -- we're very excited about the opportunities and things that are both from a supply standpoint as well as being able to go out and find material. And then huge -- this is 1 of the biggest things and the biggest strengths, I think, we have. We have the ability to close and we can close quickly a lot of times. A strong balance sheet that they have allows us to do those type of things, and -- but from again, you'll hear a common theme here about trust, confidence. When we say we're going to do something, we're going to do it, and we make sure that we get those deals over the line. Again, so when we're trying to figure out after we determine we've got these markets, we got the engines, the airframes, kind of 3 things that happened at that point. We have somebody kind of negotiating on the front line, trying to get pricing, understand where the market's at, where the customer is looking to try to strike their target price on a sale. We also have our product line specialists that we have broken out by like Airbus, Boeing, some private [ EGE ] in Rolls-Royce. These people that are in those positions have been in the company for over 20 years in most of those roles, so they really have an understanding of those markets. Really can get a good feel for all the engines that are airframes that they've torn down over the last couple of decades, and in understanding how the engine performs and behaves. If you're going in and you're doing an analysis, we do it by part number. You can look and say, yes, we have a 100 parts or 100 blades in the engine on this stage. Generally what we've seen, we're getting 50% yields with the engine looks like this, with the time of usage, the operating conditions that it may have been in. And so that analysis just been taking place from a financial standpoint. And then we have our tech team over here, in-house tech team. We have employees that are been over 40 years, and our technical department have seen a lot over the years both on the airframe and engine side. So they're doing the records review. They're going out in the field, they're crawling around the airplanes. They're putting borescopes into the engine so they can look at every part in the engine and see how it looks. And then all 3 of us come together and we kind of put an analysis together to come up with that number. And then once we get that, we acquire the asset. The key is every month on a monthly basis in detail, we look at how that engine is performing? How that airframe is performing? Is it what we expected to invest? Is it expected to what we would get on the yields from the parts being coming through repair? And if there's any types of concerns or whatever, we get right back on track immediately to make sure that the engine, their asset performs the way we expected it to and not wait for a surprises at the end. So our value proposition, and again, for those that aren't that familiar with the Used Serviceable Material, generally, a rule of thumb is somewhere in the 30% to 50% savings. One part could be over $1 million in some of these engines, so you can quickly see just 1 part that you go out and buy new versus going out and buy USM saves you $0.5 million, and that's just 1 part. So if you're looking at an engine that's roughly $7 million to $8 million to repair and that includes a lot of USM, 60% to 65% of that $7 million or $8 million is parts. So if you let that get out of control, that $7 million to $8 million engine could be a $12 million engine. If you just let someone go fix your engine, put all new parts in it, which at that point, a lot of those engines just become Beyond Economic Repair, BER as we call it. Doesn't make sense. You'll never get out of the asset, so it's so critical to make sure, when the engines are going through. Especially some of these engines, you got to remember are 30 to 40 years old and they're going to continue to fly for another 20 years, so putting new parts in just doesn't make sense. Again, like John had mentioned earlier, we take a lot of pride in our independence. We will work with OEMs on the really high-end side of things when they want specific kind of engines with specific operating conditions. And then, of course, we'll work with those that are very aggressive and like the alternative approach to, I just need USM. Experienced technical side, like I mentioned, the speed, flexibility of our balance sheet as well has just been so key for us. And then as I said, the common theme here is the confidence and the trust, both whether we're buying or selling. And again, the digital side of things for intelligence and transacting as we get to talk about Trax later on and the exciting things that are going on there. In this business, a lot of times, people don't even negotiate price until they see paperwork. The parts are worthless without paperwork. Absolutely worthless. Scrap value. And the idea is when you buy an aircraft, you may have 10 pallets of boxes of paperwork for the airplane. You buy an engine, you could have 20 boxes, and the manual process of going through all that, it's an old school way and it's still like that you'll continue for many, many years. However, having these opportunities with the digital solutions that we have and the capabilities and the things that we've been doing, giving availability quickly to our customers with online access to records instead of having to pile through all that or going physically somewhere, giving them the ability to go through that electronically is key, and it drives in efficiencies for AAR, that we can quickly move on to the next buy, and it drives efficiencies for our customers that they can quickly evaluate, make you an offer and transact. So really, really key. And like I said, very excited to have Trax's bolt-ons that as well to be able to help us move in the future. Can you get that slide, please -- sorry about that. So what's happened since 2019? I was excited to be up here in 2019. And we've talked about 1 of the biggest things there, our case study back then was the CFM56 5B, 7B market that, I think at the time, was 22,000 or 24,000 engines. And that was really going to be our driver moving forward, like how do we get into that marketplace in a bigger way, larger way. And one of the things we're really proud of is 1 of our partners in business, both from a -- we would sell as well as buy and support them through aviation company, FTAI Aviation Fortress. Their specialty is they basically have about 350-plus CFM56-5B, 7B engines in their portfolio. And the idea was, as -- how do you maximize the value of those assets? They primarily do leasing. But when those assets come off a wing, how do you maximize it? Would you put it through the shop or you take the parts down or take the engines down for parts, redistribute them and then maximize that? So I'll talk a little bit more about that. I've got 1 slide again to show you kind of how that flows through. I know there's generally some questions like how does that work? We'll hopefully get some clarity for you on that. Cultural change, it's been huge. There's been a lot of discussion on that from the standpoint of not -- with the supply chain things, it's caused USM. But again, the pricing, you cannot ignore it. So typically, we still struggle a little bit the USM side of things typically in the Middle East. Asia's generally been -- always been kind of a new only button in certain areas. But the world has changed, right? And we all know that, and the OEM has been very helpful with that as well. So when you have OEMs, price escalations, which some of them did last year, 15% to 17%. Great marketing tool for ARR. It's -- you can't ignore it. And in some cases, some of the OEMs did 2 price increases last year. So as that continues to develop -- and again, I'm talking about, in some cases, these are 20 or 30 to 40-year-old engines, it's really hard to say you're buying new parts on something that's aging. So again, the delay in the aircraft deliveries, like Chris Jessup mentioned, on some of the newer platforms has really helped as well. It's keeping the legacy assets flying. It's good for the MROs. It's good for distribution. It's good for the USM side of things. And we've been taking a kind of -- slide right into taking market share on that. Through the pandemic, we really focused on realigning some of the inventory, making sure that as we come out of the pandemic, as we continue to invest, we generated a lot of cash. We also deployed a lot of capital too in certain markets, seeing the supply chain probably not getting any better. In fact, I think it was starting to get better about 6 months ago and it's actually going to go in the other way again, but we continue to make investments. We are buying engines, buying airframes, getting parts refurbished, getting them on the shelf. As -- a normal turn time for a turbine blade, for instance, it used to be 30 to 40 days. It's now maybe 120 days. So we've got 5, 6, 7 engines in the pipeline at all times, and you constantly have that material on the shelf and you have it available for your customer, it goes a long way in being able to close the transaction as well as get good value for the parts that you're having. And then a big 1 here, and you'll hear from Nick Gross in the Integrated Solutions side of things, we're really excited and proud there's 2 things that you've heard a little bit already about. Chris had mentioned on the U.S. government side of things opening up the avenue for used serviceable material. A lot of aircraft we were not a commercially derivative. If you look like at a KC-46, it's basically a 767. If you look at C40s, it's a 737. There's a lot of commonality between frames and engines, so in a lot of cases, it's the exact same engine. We already do some work for Nick and his group on those side of things, so that campaign as well as whole aircraft. We've had tremendous success in the last couple of years. Government agencies need to upgrade some other older aircraft. We solicit and go out and generally, we'll be thinking that they're going to buy a new airplane from, call, the likes of Boeing. And we'll go out and take a look at the tender, see what the qualifications are. We'll go out and find an airframe, we'll go out and find engines, we'll refurbish the engines, we'll refurbish the landing gears, we'll do the mods inside the airframe, we'll paint it, put it all together, and it saves them tens of millions of dollars versus the alternative of going out and buying new assets. And we've had some really, really good success with Nick and his team. So the partnership I mentioned with FTAI. This is, in my opinion, extremely, very powerful marketing tool out there for both companies. We both got together, like you said, understanding as their fleet kept growing and their portfolio, where they're obviously very specialized in the leasing markets and acquiring assets, we're very specialized in knowing the parts and the value behind it all. Put the 2 together, and it's a powerful solution. So again, the commitment is to -- for FTAI to be able to provide, as their engines come off a lease, to provide AAR 40 engines for part-out. So FTAI maintains the ownership of the assets, AAR's contracted to basically evaluate the engines, do the technical analysis, come up with what we believe the values are based on the scenario I told you earlier about the backdrop on technical and commercial side of things. We will then contract a teardown facility to disassemble the parts. We actually asked people on site at the teardown facility, and we warehouse things there. As soon as the material comes out of the engine, the key is speed. So within 5 days, we call the hot parts, the stuff that really moves quickly, we've got those out of the engines. They're routed right off for repair, boom, they're into the cycle to be -- to get to marketplace. In the meantime, the organization, Chris Jessup's organization, the sales front, you saw the global footprint. They're out there. They're already getting the mini packs, we call it, which kind of have like the high-level details of what the engines look like. They're already hitting the customers forefront and marketing that material because before the pandemic, it was just-in-time delivery for parts. Everybody wanted a part today. They would never give you a purchase order for something a couple of months out. Completely changed. We've got some of the airlines out there that 2 things, never released to buy used material. And secondly, never even. If they did, they wanted to just in time. And now they're like, "Can I have this mini pack, and I'll give you purchase orders 3 months out? Tell me when the parts come back. Yes, but there might be -- I don't care about scraps. I just want to have my name on that." So again, a very -- dynamic in the marketplace that has changed. We don't see that changing anytime soon just because the supply chain is still going to be constrained. Even when it does start to come back on, the volumes of the shops these things are going to take place, that mentality is going to have to stay. So again, we go out and market that and we invest on the side of the repairs. Again, the fortress keeps the ownership until the end and when we go ahead and sell the parts. We'll recover our repair investment as well as a fee that -- for doing the legwork that I just described. So it's been very powerful. It gives us a consistent supply, as John had mentioned earlier, to go into a customer and say, yes, we can provide you parts on an ongoing basis, and here is why. So the 2 of us have worked very hard, companies and both publicly traded, very well represented in the marketplace, and just going into the airlines, lessors, MROs and wining business to -- with this program. So it's been very successful, when we look for many, many, many years of more success. And our growth -- last slide, our growth initiatives here. It's very exciting stuff, as I've mentioned. Some of it I've already said, but securing long-term contracts, both on the supply side and demand side, key. We've done a few of these already, very significant one with our FTAI partners. Proven to be very, very productive and for our -- especially for our customers. I mean they really need that support -- driving the USM again, we've already talked about that. The OEMs are really helping with that delayed deliveries and so forth. We talked about the USG side of things with the U.S. government. Very excited. I know Nick's going to talk further about that, give you kind of what that excitement really could look like. But again, there's tremendous opportunities there. It's wonderful what they've done with Nick and his team done with the government and opening up that door in more good things to come the next time hopefully we'll -- we have these sessions. AOG as John mentioned earlier, I mean, it's really key. I think we've all been on an airplane, you're backing off in the gate and you go back to the gate and the like, we need a part, well, let's call the hangar. Well, guess what, the hangar is calling us generally or somebody in the industry to find that part and having global warehouses around the world. We've got a large warehouse in Europe, large -- obviously, in Chicago area, in Asia and having that 24/7, somebody actually picking up the phone, somebody e-mailing. And as we move into some more of this digital side of things, trying to figure out from a customer standpoint, what we can make -- how we can make it even easier for them before somebody has to call the hangar and then somebody has to pick up the phone or e-mail. I mean that instantly being able to have that visibility from an LG standpoint. And again, I'm sure Trax is going to be able to help with some of those offerings. And that kind of ends. The thing you're having -- the end-to-end customer digital experience is kind of the ultimate goal here and making that, again, not only efficient for AAR, but efficiently for our customers that we both can transact in a very quickly way, a very efficient way as well as being accurate. And having Trax on board now. There's some great tools that we believe we can use already and that we will be implementing over the years. So -- thank you for listening to our story. We love what we do. It's a lot of excitement. There's a ton of runway ahead of us here, especially as this market continues to come back strong, and we're looking forward to being a part of that and giving you great results. So thank you very much. With that, I will pass it on to my colleague here, Mr. Frank Landrio, that's going to talk to you about distribution.

Good morning, and thank you, Sal, for the great introduction. Okay. I'm Frank Landrio. I'm responsible for our distribution business. A quick background for me. I've been with AAR for 17 years, mainly in finance and operational roles. In 2012, I took on the OEM development role, which has actually helped me build the relationships that has aided to the -- some of the distribution deals that we have as well as helping AAR on the OEM side in total. Okay. From a distribution overview, key offerings, we distribute factoring new parts on behalf of component OEMs to aircraft operators, government contractors, MROs. And we have also third-party logistics and other kitting and additional services to round out our offering. As Sal mentioned, we are a part of the part supply segment. We're just a little bit more than half on the distribution side. Within distribution sales, commercial's a little bit more than half, government following that. And then we have a small percentage of BAGA, which is the business and general aviation. That is a sector that we would like to expand to, and I'll talk more about that in a couple of slides. Within the commercial sales from a fleet makeup standpoint, narrow-body is more than half with the remaining being split between wide-body and regional. As for key customers on the military side, the DLA, Defense Logistics Agency, is our #1 customer. Japanese military defense is not far behind, a JMOD. On the commercial side, major airlines like American Delta United as well as some large global MROs. Okay. So what do we do? Again, we distribute a factory new parts on behalf of our OEM partners, and that's into the commercial and also the defense market. On the commercial side, we use our global sales force, which is Chris Jessup's team here and our warehousing network that you've seen on the map, it's a global network. It makes us close to our customers and close to where the action is. Additional services such as third-party logistics and kitting services on an as-needed basis. On the government side, key supplier with the DLA and actually a step further than that. We have a strategic relationship in the captains of industry, which I'll talk about a little bit more in a couple of slides. And we also are a direct part supplier to foreign militaries. You saw in Chris' slide about all the foreign military spending that's gone up. But that foreign military is a sector also that we want to expand into. Now as for our approach, we are an extension. We look at ourselves as an extension to the OEM. So what does that really mean? So that means our goals are aligned with them. Our KPIs are defined. That knowledge that the OEMs and that a lot of airlines and customers believe that only the OEM possesses, comes over to us. We are trained. Our product line people are trained. Our salespeople are trained. We know when parts fail, how they fail and what the replacement factor's on. We work with our USM counterparts to make sure that we are delivering what the OEM is expecting, not overselling and not underselling, and that's the whole goal setting up front. We take -- data-driven approach to analyze that demand. So that is part of the whole part forecasting. Main thing on forecasting is where to put the inventory, how much inventory to buy and are we reducing lead times and again, hitting those goals that we defined upfront. As John mentioned, when we do this, our -- when we partner with an OEM, their competition is our competition. Therefore, we will not distribute a competing product line. In exchange for that, we ask for exclusivity. We go all in. And to go all in, you can't be competing us either. So that's the exclusive agreements we have. We have a high concentration of them. Okay. As for our value proposition, some of this crosses over with the approach I just said, but basically, goals define. Goals could be anything from market share, gains, global reach, fill rate improvement, whatever it is. We define them upfront. We take the data from our OEMs as well as our own ecosystems and our whether it's our integrated solutions or whatever the demand looks like. We pull all that together when we create a profile. We work with our sales teams and our product line teams to make sure that we're not overselling ourselves or underselling ourselves and make sure it's achievable. We work with the OEMs from that standpoint and from that, we build our plans. We build out stocking, our inventory plan. And again, we work with our sales force to make sure that we can execute on that. With that said, independence is probably -- you've heard it a couple of times now. Most of our component OEMs are on AAR airframe. So they're on all the competing airframes, and because we're not aligned with a particular OEM airframe or an airline, we're able to distribute right across the borders without any conflicts. So it's a great advantage for us. When it comes down to AAR's flexibility, that's also key because not every OEM has the same goal in mind. So allowing us to modify our goals and our plans is important. Many of our OEMs, we actually distribute both on the defense side and the commercial side, which is actually an important value add. So that they don't need to go find another distributor to do their defense, if we're on the commercial side or vice versa. And the overall financial strength of AAR is critical here because they know that when we sign up, we're all in and we're going to invest in and our financial strength is important to accomplishing that. Okay. Dig a little deep on the government value proposition. So our largest value add is reducing lead times, how do you reduce lead times, your stock inventory, again, data are very important, getting the data, build the plan and then strategically buying inventory and positioning it in the right spot. So I'm proud to say that as we all know, there's a lot of supply chain constraints and the OEM issues that are out there that are public. AAR's on-time delivery rate to our customer is double what the OEMs have been shipping to us. So that's a confirmation that the plan works and that we're executing. I talked about the non -- the captains of industry, so we're the only non-OEM member of that captains of industry. So what does that mean? So -- there are OEMs that have captains of industry contracts and status. What's unique about us is that we're willing to invest in the inventory add the additional services that are needed which most OEMs won't. We're willing to work on multiyear pricing contract that are multiyear, and that helps the DLA in many ways because it locks in today's dollars, even though we're shipping 2 and 3, 4 years from now from the inflationary standpoint. So why is this growth for us? So with this contract in place, what we're finding is we have OEMs that again have a contract in place, but they don't -- they're not going to do the multiyear pricing, they're not going to invest in inventory. So they're actually bidding with us. We also have OEMs that don't have a captains of industry, but this contract is somewhat unique. We could just add those part numbers and grow that way. So we're a conduit to that DLA volume. So I talked about commercial and military distribution. So many of our OEMs are even further widespread in that. They have foreign military, they have BGA, so those are critical markets for us. So the reason why we want to expand into these. And we're in these now, but we're not in any meaningful way. The reason why we want to expand to them is, again, be a one-stop shop for those OEMs, right? So sometimes they need us on the BGA side or foreign military that could lead to the defense or commercial business. So we want to be more of a one-stop shop with them. So with that said, so on the foreign military side, our focus is on the Asia Pacific region, geopolitical issues as well as increased budgets. On the BGA side. Main focus is USA. We did sign our first exclusive agreement with Collins on the De-Ice. So that puts us in that space. It's a fragmented business. It requires us to enhance our parts store, and I'll talk about that in a second. On the electronics side, this is us selling to the OEM. So we're actually exploring that. It's a growing business for us. And this is where we could use our inventory capability and our planning and partner with them on a production side how we shift to them from that standpoint, which actually in turn helps ourselves. So key achievements since last Investor Day. So we added new production -- new distribution lines. So there's two ways at a distribution line, of course. So do more with the existing OEM as well as land new OEMs, okay? And we've got a couple of examples there, Unison, Raytheon, Parker and TransDigm. We entered new markets, again, signing De-Ice Collins product line. That puts us in the BGA market space and again, looking to expand that. Increased efficiencies. We invested in our digital tools taken some manual processes, automate them, the park store that we've talked about, and we're looking to enhance that further for our next leg of growth. Expanded service offerings. We need to be a one-stop shop. We can't afford to source out anything or have an OEM do a piece of what we're looking to do. We have to be all in, and we've added some of these services, and we will add others if need be to make a complete one-stop shop. Okay, e-commerce. So this investment in digital tools, it starts out as an efficiency play, but very much turns into a growth play. So we invested in some of these manual processes that I just mentioned. We get sometimes huge as an example here, we get sometimes these huge files from quote files from our customers through a third-party data exchange in the past. It'd be a manual effort between our sales and product line people take a long time to actually respond. The hit rate was very poor. But with this auto quote functionality, which is the implementation that we've done, only funded. Those auto quotes go out. It cuts down on the response time, actually hit rate goes up and there was not a decision for them to go find an alternate part but to come out and buy ours. What that does for us, it actually frees up our people to do what they should be doing, selling more and working with the OEMs and it makes our customers easier to work with AAR. The last bullet here is the whole BGA customer base. So we talked about PAARTS store. We do that today with our distribution business. It's a growing part of how we work with our customer base, but we're going to enhance it even further in order to deal with the small operators that are out there on the BGA market or even the MROs that are out there, so that they get auto parts right online and get delivery from us and we will work on the planning with our OEMs on that. They have a lot of data. We have a lot of data, and we will look to add lines and again grow into that space. So this is an impressive chart. 300% sales growth over the last 12 years. This is just growing market share. So it's everything I've said basically in a chart. So 12 years ago, to get John credit on this one here, we came up with a distribution strategy, that was exactly what you said before, work with a couple of key OEMs on an exclusive basis and that basically started this some of the relationships that we have. You could see the trend here and we just finished with a record year. A couple of things I want to point out, you'll see Raytheon listed here numerous times and that is expanding the base, right? So you land an OEM, you execute and you continue to add new production -- new distribution lines. Then you'll see new OEMs like WoodWard on here. That's where you take that reputation that you built everything that we talked about on the value prop and you bring it to them and they understand it and then they sign you up. And then we look to now expand that. A lot of these are just one-off or a couple of product lines. So there's a lot of room for growth here. So growth initiatives. We want us to keep working on what we're working on, right? Securing new distribution lines, whether it's expanding the base or new OEMs because we're aligned with OEMs or extension of them, their competition is our competition. I mentioned that earlier. So we will look for retrofit opportunities, whatever, however they want -- this goes back to the goal setting, whatever they want in order to grow whether it's retrofit, whatever, we're there to help them out. Again, expand into foreign military budgets increasing, everything else, we're going to start with APAC, but that's an important part of, again, being more connected to our OEM partners. Same with the next one for the BGA even though that involves a little bit of investment on the tool side of it, on the digital tools. It's a compelling business case, and it's -- there's a lot of room for growth in that segment, too. And then expand the e-commerce overall. We're excited about this tracks acquisition. They bring -- it's another channel to sell parts. That's what we do. We sell parts. So we're going to tap them, work closely with them and figure out how we could bring that volume and that customer base into our fold here. So in conclusion, we had a great 12-year run. I'm actually even more excited about what the future holds and all the conversations we're having with our OEMs adding these new markets and adding the digital especially with Trax. Okay. Break.

Thanks, Frank. With that, we'll take a 10-minute break, and we'll come back and we'll hear about Integrated solutions, repair and engineering and Trax. Thanks. [Break]

Okay. We'll get started. So welcome back from break. I guess I said, thank you for coming back from break. It's now the job of me and my colleagues to make sure you're happy with that decision. So we'll get going. So Repair & Engineering. So my name is Tom Hoferer. I joined -- in contrast to my colleagues, they've talked about their years of experience AAR. Today is my 2-month anniversary. So I wish that meant I was just out of college, but I'm obviously not. So 30 years of aviation experience, so I came from GE Aerospace. I got to know John, the team and AAR from the relationship that you've heard Unison mentioned previously a couple of times, also did 22 years in the Air International Guard, and again, culminated my GE experience at Unison. So enough about me. Let's get to Repair & Engineering because I've got some really cool stuff to talk about. So what do we do? First of all, we are the #1 independent MRO in North America. We do airframe heavy maintenance. You can see in the pie chart -- chart on the right, that's the bulk of our sales, right? About 2/3 of our sales comes from our airframe heavy maintenance. In addition to that, we do landing gear overhaul, we do it in Miami facility separate from our hanger. We do component repair here, I guess, somewhat locally in Long Island also in Amsterdam. In 2-year Mods, engineering design, all the way through certification, STC certification. And John talked about our PMA parts. So a new business we're starting. A lot to talk about there, and I'll get to that here in a few slides. So that's manufacturing, engineering. But beyond that, the other key activity is the war on talent, right? So managing relationships with our 8 Eagle Career Pathways. Sorry, I'll talk a lot more about that. But this is about bolstering our labor pipeline, right? If we don't have quality, reliable labor that we can retain and keep and continue to grow, we'll be in a really bad place. So labor is very important for us, not unlike anyone else in the aviation industry, but we are leading the industry in several programs that we're running, to make sure that, that doesn't become a bigger problem for us. You can see this breakdown to commercial and government, and then we are anchored on those key customers to the right, some really big names in the industry. We're focused on them, and I'll talk a lot more about what that means from an operational standpoint. And then the U.S. Air Force, U.S. Navy of course. So what do we do? Airframe MRO. 6 hangars, Miami, Oklahoma City, Indianapolis, Rockford, Illinois, in the United States. We also have 2 MRO hangar facilities in Canada, Trout Riveria-- that's 3 rivers, no need you to do google translate and Windsor, Canada. So all in North America, heavy checks, we do roughly every 2 years for those -- for our customers, but we're really nose-to-tail, right? Things happen in aviation, right? Hail damage, ramp damage. We get quite a bit of drop in. So we're nose-to-tail lines of maintenance at all those facilities. We support primarily narrow-body Airbus, right, focused on Airbus and Boeing, as you say. So narrow-body. And then we also do work on regional aircraft with Embraer 175. Moving down the screen, landing gear, full service, repair on landing gear, wheels and brakes on pretty much every commercial government aircraft type you could think of. We also do a lot of internal -- our special processes are in-house right so that insulates us from the noise, if you will, on supply chain, also allows us to maintain our cost of these special processes that are -- that our competitors have to farm out. Component repair. We do Component Repair again here in Long Island, also in Amsterdam, we have 15,000 components ranging from APUs to starters to valves. And as you can see, quite the list there. So a lot of work being done with component repair and then filing engineering, which really covers 2 pieces of engineering, one, engineering services, which you've heard us talk about in the past. So that's our team that does design integration cabin mods, galley reconfigurations, what have you, and takes it all the way through certification. And then PMA parts development. Again, this team right now working on candidate identification. As I'm sure you all know, there is not a shortage of ideas -- candidates that we and our customers would want to do PMA, but we've always got to balance that with Frank's business with our OEM customers, right? We're not going to do anything that conflicts or infringes, if you will, on the importance of those OEM relationships. It's a key factor in deciding what we're going to do PMA on. Okay, so this is the facility overview. We talked about the hangar sites. We have over 12 sites, 3,300 employees. I'm not going to bore you with all the small print on the bottom, but whether the takeaway is this. John talked about focus. I translate that being kind of a lean guy to standard work, right? Standard work on Narrow-body aircraft, right? It helps you improve your safety, helps improve quality, post to improve delivery and helps you reduce your cost, right? So those things are all great benefits out of an operation where safety, quality, delivery and cost or how we are successful. So I think John said, "Hey, an employee that comes in and knows he or she is going to work on a narrow-body day in and day out for that customer, makes things a lot easier, right, at least to a lean operation. So our value prop, 6 main tenants of that, a large network. I talked about the network of 6 hangar sites gives us flexibility with our customers, again, with a smaller group of anchor or strategic customers, we can be responsive to their needs. Again, things happen, right? Customers need different things that weren't planned. We can adjust with them, flex to them. We're doing it today with the increase in demand, with the crazy weather you see in different parts around the country. We can react to that with our flexibility with, again, a smaller group of customers with a focus on narrow-body. Vertical capability is creating one stop-shop. So I talked about how we do that with Landing gear. But beyond the Landing Gear and the special processes that we do in-house, even at hangars, we do our own composite work. So again, insulate ourselves from the northern supply chain, manage cost. Quality workforce. Again, this is something we think about every day. It is something we got to keep our finger on the pulse of. I'm going to talk in a few slides here about what we're doing in regards to that. But we're proud of the workforce we have. We have about a 75% retention rate. It's good, not great. I'd say it's really good for this MR in the MRO world, but there's a lot of competition out there for our people. Innovative design, PMA parts solutions I talked about that with our engineering work in Indianapolis and Singapore and then our PMA parts, which I'll talk about a lot more here in a couple of slides. Digital. So Frank, Sal talked about what they're doing in their business in terms of digital technology. Repair & Engineering is no different. I'm going to share with you a really exciting project that we're doing around paperless MRO -- if you've ever been through an airframe MRO, you know it is insanely manual. There's an insane amount of paper. We're working on a paperless MRO project, the first one in the industry, share a little more about that here in a couple of slides. And then material sourcing from AA part supply, again, my friend Sal and Frank, we leverage our internal colleagues to get parts when we need them. But beyond that, the team has done a really good job in the past probably a year or so, 6 months a year of consolidating the buy that we do across hangars, right? And I know it sounds simple. But if you buy the same widget in Miami, Oklahoma City and Rockford, you really ought to buy it one time and get that cost benefit, get that delivery benefit from a very stressed supply chain. So a lot going on there. Since 2019, so the skilled workforce, I talked about our retention rate. Again, this is literally a daily battle, if you will, and make sure we stay focused on this. It is incredibly important to our success. Optimizing the footprint. So during COVID, we divested of our Duluth MRO facility and grew Rockford from literally 50 employees to over 300, I think, now. So that's the optimized footprint. Rationalizing product lines really takes me to bullet 3, again, back to that focusing on standard work, narrow-body airframes in key anchor customers. And then fourth, safety, quality first, safety always. John said at the beginning, it is part of our ethos, right? And we're really proud of the fact that AAR was the first corporate level approved safety management system by the FAA and subsequently by EASA TCCA. So following that, we implemented at 6 hangars. So what does that mean? It means that if we have a safety, quality, compliance type issue at any of our sites, that issue is known literally instantaneously within our digital system by everyone, so you can contain the issue and then you drive recalls corrective action where it happened, but that's all shared with everybody across the entire business. So we're not getting repeat safety quality issues across the business because we're not talking. We're communicating every day, review all the open issues every week, every month. So safety and nothing more important than that. All right. Let's talk about people. So workforce development. I mentioned this Eagle Career Pathway program. That's really the center of multiple programs that are going on. I can't take around the whole circle there, but I will highlight a few. So being embedded on the military of skill bridge is very important to me. We tapped into veterans that are exiting their service and try to get them into AAR right great experience, great background. Legislative initiatives. This is really important, local, state, federal level, ensuring that our legislators are talking about funding at their respective levels to make sure that we're funding training programs that allow us to go into schools, talk about aviation as a career, get kids interested in it and create that pipeline. It might not result in someone walking the door tomorrow or next year. But the reality is, I was listening to an aviation week MRO podcast, the average age of the AMT technicians in the United States is 54 years old. That's a problem for all of us, right? So you got to create that pipeline now. So that we have labor in the next 5, 10 years. Then the other one I'll highlight is our state grant program. So we're just finishing up a $5.2 million grant from the State of Illinois, which again has enabled that growth I talked about in our Rockford facility. And we're super excited to announce about maybe 2, 3 weeks ago that we received a grant from the State of Indiana for $4.5 billion. So we use those dollars. There's very few dollars left of that $5.2 million, and I'm sure we'll use every bit of that $4.5 billion to make sure that we're doing again, all the right things that we need to continue to grow the future of labor in Indiana, specifically for Indianapolis, but really across the entire business. All right. Super exciting news this week. I think we had maybe 2 or 3 press releases on this. We're so excited. Barry couldn't quit typing up press releases, but for a good reason, right? So expanding our Miami footprint from 9 base to 12 base, right? Easy in math, 33% up. Most importantly, 250 new jobs in that area. And customer commitments. So look, there's an equation to doing this, right? You got to have the local support of the airport, Miami Dade in this case. You've got to have support of local legislators. The Mayor of Miami was very instrumental in our discussions and then third you have to have customer commitment, right? We, as a, I guess, business can't commit to this kind of investment without knowing we have customers to back it until those days up for years. Chris and his team were able to secure a long-term commitment from United Airlines through 2030 to make sure that when we build these 3 new base, there's going to be planes in them, right, and generating new business for AAR and serving a customer need. United's has got the demand for it. So we're going to break ground here in Q2. It's not a small investment of $50 million. So a big decision for us to be met to get across the finish line. But most importantly, what I really want to leave you with is -- this is the first right? So that equation I talked about, local airports, legislators, customer commitment. Stay tuned to your laptops. We're working on a couple more that are coming just like this. And great reason to be excited about our growth. It's going to be awesome. Paperless. Again, I talked about just the amount of paper in an MRO hangar is ridiculous. So we're working on this. We're running through a couple of pilots is with any software development, digital project, you launch and you learn a ton, right? And then you make changes. So that's where we are with this. The complexity of this is -- it's new for everybody, right? Again, we are we're at the tip of the spear in the meaning we're working with customer quality departments, working with the FAA. So this will require us to run dual processes as we launch this, meaning we'll have to continue to be manual while we're showing that we can do digital. So moving as fast as we can. It's not easy because this is changing the industry. But we're leading it and we're going to make this happen because huge opportunities in terms of efficiencies in our shop, as you can imagine, and cost to help us meet our margin expansion goals. PMA. All right. So this is part of our strategy that is really, I'd say, it's still at the beginning stages, right? This is about us looking at how can we do PMA, that helps us reduce our internal cost, okay? So that's where we are now. Again, no shortage of a list of ideas or candidates, but we got to make sure we're not doing something in conflict with our other OEM relationships, okay? We've got a team stood up, got a leader of that team. So we're resourcing it, we're funding it. Again, balancing it with a lot of optimism, a lot of bullish behavior from the team of what they want to do. We've got a balance of what makes sense for AAR. But where it wants to go, where we want it to go is to eventually partner with customers who also want PMA, and help them -- help them help us or I guess hope help you -- let me help you. But we'll get one way another. We'll do it together. How is that -- but the point is, we want customers to provide that pool of, hey, this PMA is -- this part is a problem for us, right? The cost is an issue, the delivery is an issue, can you PMA this? That will allow us to really take this PMA business to a whole different level in the next 5, 10 years. So super excited about this opportunity. So in other words, at $10.3, the future is so bright. I got to wear shades. Unbelievably cool stuff going on in Repair & Engineering. We're going to keep expanding Airframe MRO. Like I said, Miami is just the beginning of the story. Paperless is just the beginning of our digital investment. John briefly mentioned drones this is vay cool stuff, drones flying around the airplane doing the surface inspections. Eagle Career Pathways program, like I said, labor -- it's something I go ahead and wake up thinking about. So we'll keep working at -- we're leading the industry on these programs. We'll continue to stay in the lead. PMA parts initiative, talked about that. And then the final one on repair. I talked at the very beginning, hopefully, you remember, about 15,000 different component repairs we do. The playbook that Frank talked about in terms of distribution, focused on a few -- a select group of OEMs. The playbook that we ran on airframe MRO focus on a small select group of strategic customers. We're going to do the same thing on component repair. I don't know that 15,000 repairs is the right number. I don't know, 7,000 is. I know that we got to focus on customers that want our product and where we can be the best of delivering it. So that will help us meet our mission. We're the #1 independent MRO today. We're going to stay that way. So that's your time. I will now introduce Nick Gross.

Good morning, everyone. I am Nick Gross, and I have the pleasure to lead and present the integrated solutions business unit today. So you've heard a lot from my colleagues about all the great vast capabilities that AAR provides and our group really integrates those into comprehensive solutions for government and commercial customers. Our key offerings on the commercial side are powered by the hour and repair by the hour component support. And then on the government side, it's everything around that term, contractor logistics support, which spans supply chain, maintenance and even in some cases, flight operations. Our business mix is about inverse to total AAR. We're about 70% government and 30% commercial. But across both sets of business is we have really focused on a core set of platforms that are globally prevalent and will be relevant for many years to come. Our customers on the government side or -- I mean the government, right? I mean Department of Defense, Department of State, Department of Energy, many of our allied foreign partners. And then on the commercial side, we support many of the marquee airlines, Air Canada or New Zealand, flydubai and many other operators globally. One thing I want to point out is kind of how we're contracted. So we're called integrated solutions. It's a fancy term we came up that sounds better than programs, I guess, but really were programs. All of our work is done under that program. So longer-term programs. Our average tenure is about 5 years or longer. We have some programs that extend past 10 years and that gives us a tremendous amount of visibility frankly and predictability into our business. And realistically, as long as our contracts are performing as expected, this should deliver -- this business unit should deliver a no annuity year-over-year. So again, we integrate or bring together a -- deliver a comprehensive set of services and solutions to our customers worldwide. All these functions on the slide really integrate and kind of blend together. So I'm going to talk about them a bit more holistically -- but if we go back to that broad umbrella, again, of contractor logistics support, which is supply chain maintenance and operations. Everything we do enables some aspect of that. Now how we go to market, how we support that the level of support is different amongst the different groups. For example, on the government side, we touch that entire value chain, right? The full continuum to support. We can offer that service or that capability on a very individualized basis or wrap them together into more comprehensive solutions. On the commercial side, we primarily focus or really only focus on supply chain enhancement, again, through our power by the hour and repair by the hour solutions. One thing I do want to point out is while you say government commercial, it's kind of different markets, they are different end markets. We do support different customers, but how we operate is actually pretty similar. If you think about how we would operate a commercial power by the hour contract for a commercial airline, it is very similar to how we would operate a performance-based logistics contract for the DoD. So a lot of the functions and operations are similar amongst the group. Supply chain does account for the majority of what we do in the majority of our business and that ranges from everything from 3PL operations where we are managing warehouses for customers in accordance with their SOPs, their systems, whatever it may be to more advanced PBLs or PBH type contracts where we take over the entire supply chain and we're responsible for a point of use availability basically to our customers worldwide. I realize we have a lot of acronyms in this business. So I'm trying my best to spell them out. So please raise your hand if you want me to spell this out. But we think -- as someone mentioned GOCO and COCO earlier, right? And government, we have a lot of acronyms. But -- we think we're at our best when we can really take control of that entire supply chain, enhance the supply chain over time and create value for our customers long term. A fantastic example of this is -- many may be aware if you follow us, we were at a landing gear PBL contract a few years back where we took over responsibility for the entire supply chain for the KC-135, C-130 and E3 Landing Gear systems. These are very, very old aircraft. They had a very, very old supply chain with numerous constraints. In the course of our time on that contract, we've been able to reduce [ my CAPS ], which is the commercial version of -- or the military version of an AOG by 92%, back orders by 93%. And we were actually recognized and awarded -- recognized for effort on that contract and awarded the Secretary of Defense PBL a year award 2 years ago for our efforts on that contract. Many of our contracts also include a maintenance component and that does include Line Maintenance We're working on a Line Maintenance as I know Chris said, we don't really plan the commercial side but we do on the military side, where we're working on aircraft basically around the world for our customers up to traditional depot-level maintenance which are surely known for. It's important to note that we do a lot of our work organically. However, the fantastic and great thing about AAR is we're able to tap into other businesses. And in this case, for example, the depot work we utilized Tom and his group to do a lot of the depot maintenance as part of our integrated offerings to our government customer. At the end of the day, though, all of our solutions work to or aim to increase readiness and decrease the cost for our customers. Our mission at Integrated Solutions is to be the leading independent provider of aftermarket sustainment services, and that's leveraging the full spectrum of AAR's capabilities. Our end goal is not only provide exceptional service, but it's also to make it as easy as possible for customers to work with us. And that mindset really guides our operating philosophy. Every program is a little bit different, but understanding our customers' problems and solving those problems is ultimately how we add value. Again, every program is different. So how that value is created a little bit different, it's a little bit different, but there are fundamental themes that underline or basically contribute to everything we do. The first is our blend of commercial and government. Our position in the commercial and government markets brings us unique perspective and our operating philosophy that very few others have. The term commercial best practice has been around forever, but frankly, it's widely overused in the government space. A lot of people like to say that term have frankly never done any true commercial work. We grew up in the commercial industry. We grew up in that commercial pedigree. Everything we do, every approach we have is with the commercial mindset and our ability to tap into the best of both of those worlds and offer our customers, whether it be a government customer or a commercial customer, a unique tailored solution that blends both of those pieces together as a true competitive advantage. Again, our ability to tap in to sell in the used service material group or frank the distribution, Tom and, repair and engineering allows us to offer solutions, frankly, that no one else quite can. Our close to the customer and global presence is a critical component to what we do at every hour and every day, 1 of our employees are supporting our customers. We are time zone agnostic. We're routinely pass work off between different offices to make sure that we meet those 24/7 requirements of our customers. Not only do we operate locally, but we stock locally. We forward stock position or forward stock close to our customers to meet their changing needs, reduce overall lead times and improve service levels and ultimately improve customer satisfaction as well. While every program is a little bit different, our strength is being able to develop tailored global, deployable, scalable solutions for our customers anywhere they may be. Our role as an independent is important because it allows us to be OEM agnostic and really deliver the best possible solution for that particular customer's need. Again, if we think about legacy aircraft, we specialize in supporting legacy aircraft through their user or owner to find end-of-service life. And this requires us to create innovative and enduring supply chain and engineering solutions to mitigate obsolescence. And at the same -- or make sure that we deliver the right part at the right time. And many times, it is far past when the OEM has decided to shift their focus to new and emerging platforms. So if we think and reflect on the last few years since we last met, there are a few achievements I did want to highlight. AAR has traditionally been known for our support in the commercially driven market, and rightfully so, we do so much of it. But we have continued to push further and further into supporting traditional military aircraft. One great example of that is the stand up of our F-16 depot in Poland, which I'll speak a little bit more about. But here, we saw an opportunity to support an underserved market that fit very well with an AAR operating philosophy. Another thing I want to highlight, and you've heard a lot about the NDAA, but the FY '23 National Defense Authorization Act and the legislation that directed the acquisition and use of used service material we have been -- if we go back and this is something that I think we've been passionate about for a decade, if not longer, about trying to encourage the DoD to utilize USM in a more robust fashion. We have worked closely with our elected officials, frankly, in the services to educate them on the benefits of USM and we are extremely pleased that, that became part of the legislation this last past year. And that change of mindset is not only at the part level but at the whole end system level. And you've heard Sal talk a little bit about this, but we're seeing this change in mindset to where government end users are starting to consider used alternatives. In the last 2 years, we have sourced, acquired, modified and sold 6 whole aircraft to different government end users. Each one of those is a little bit different, but they all demonstrated the power of the aftermarket in the sense that in every single case, used alternative provided a lifetime or lifespan longer than customer requirements delivered significant cost savings and greatly reduced lead times versus new alternatives. And there's very few if any other companies out there that can provide that turnkey. And if you think about they can go outsource, evaluate, acquire aircraft engines, land at your systems can modify those aircraft, maintain those aircraft and then deliver them in very -- in accordance with very strict government requirements. Again, this is something, I think, that's unique to AAR, and one thing I do want to point out to is we don't believe this is a point in time. We do believe the specific market will be enduring. And then finally, like many others on the commercial side, the pandemic really caused us to go and examine how we supported the commercial PBH market. Prior to the pandemic, that market had become hypercompetitive, subsequently driving down prices and ultimately, margins as well. So as we looked at our portfolio business, we rationalized our portfolio and book of business around fleets that we knew and customers and contracts that we knew in light. By rationalizing around the core set of fleets of aircraft that we knew and ones that we had inventory position on, it allowed us to better refine our operational process to support them. Now we are still one of the largest PBH providers worldwide, but we are much more focused and thus more profitable. And as we look to go forward, frankly, we're much more selective on the type of opportunities that we want to pursue in that market. I did want to highlight, I mentioned the F-16 depot in Poland. And this is, I think, a great example that ties to exactly some of the things we've talked about the last few years about pushing more into that kind of military specific support. But we stood up to step in support or to support a contract that we won for the Air Force to support their European fleet of F-16s. Now if we go back a few years, we saw a gap and frankly, a huge opportunity as more companies shifted focus to the new and next-generation aircraft. At the same time, you had the U.S. government commit to the F-16 well into the 2040s, if not beyond, we saw supportability gap. That is exactly the type of environment that AAR thrives in. We combined our extensive depot experience with our knowledge on the airframe gained through our component repair facilities and created innovative solution that could support the Air Force's need long term. In a short months, we stood up full operations there. We currently have or will have our seventh aircraft inducted and we expect to be 12 by the end of the year. More importantly, we expect customer demand to be strong for this over the course of that 10-year contract. Again, this is important because it's tied to our strategy to get into the more military specific airframes but to support this, we had to build an infrastructure of subject matter experts across a wide variety of technical engineering and Artisan functions to support these operations. And that's important for us because it gave us the capability and capacity to continue to grow, frankly, and add more government work and foreign end users. That's -- we believe and our desire is for this location to actually be our regional center for F-16 maintenance and training going forward. A lot of talk about the NDAA. So -- but I do think it's important because we've mentioned it and how great it is, but I do think it's important, and I want to add a little bit more color on exactly what this means for us as an opportunity. What you've heard Sal and John and many people talked about used service material across the commercial industry, the use of USM and commercial aircraft and engines is commonplace. Sal and his team are market leaders there. But unfortunately, it has not been that widespread across the DoD. The FY '23 NDAA changes that, and directs the services, specifically the Air Force and Navy to develop policies and procedures for the use of used of service and material and all commercial derivative aircraft and engines. I put this chart in here so you can see this is not all the linkage between the 2. But if you look at the linkage between the commercial derivative and the military aircraft and engines, I do want to point out that, that whole list right there are products that AAR knows very, very well. And frankly, product lines that Sal and his team support very robustly in the commercial marketplace. We conservatively estimate this to be a $200 million-plus annual market that because of our leadership in the commercial marketplace, we believe we're very well positioned for. Frankly, we're already seeing some of the impact of this legislation. If you talk -- someone mentioned the KC-46, but the Air Force recently awarded a contract to support the provisioning of the initial spares to support the ramp-up of KC-46 as part of that, they allowed USM as a source of supply, which was unique. AAR was awarded a seat on that IDIQ and we're in staring to see task orders to be released. We also expect the DLA in some fashion to be involved either in the procurement and stocking of USM, and because of our operations, our performance of the DLA Frank mentioned, we believe we're also very, very well positioned should that become a reality. So as we look to go forward, we are energized and optimistic, frankly, about the opportunities ahead. There are a few key critical components to our growth that I do want to just briefly discuss. First and foremost, we're programs. We have to continue to secure long-term commercial and government contracts. On the commercial side, the market for PBH services remains high. Frankly, we didn't know how that would be with the pandemic, but coming out of it, that market is still extremely high, and we still remain a key player in that market. While we have rationalized our portfolio of business around a core group of fleets, the fleets that we are supporting are some of the most relevant current or most prevalent, excuse me, currently in service. And our role as an independent is important because it allows us to aggregate without restriction. On the government side, we continue to maintain a market-leading position supporting commercially durative aircraft and continue to push further and further into military-specific airframes. While we have been successful, such as the F-16 and some others, we need to continue to add size and scale and leverage the capabilities and the experience that we're gaining on that program and others to really springboard us to other platforms and other capability sets. Spoke a lot about USM. And now that the legislation is passed, now we have to make sure this becomes a reality and all the great things that we believe will happen will happen. And we've been working very hard -- and the teams are working very hard with our government stakeholders and service members to educate them on what exactly USM is and how best to use USM. You'd be amazed how many people don't even understand what that means and how best to use it. So we've been educating them on -- where there are opportunities, frankly, to use USM and how to implement that as a source of supply. A lot of my colleagues talked about government, right? I think Sal had a piece on -- one of his key growth items as try to expand more on what he's airframes frames. Tom's talking about his piece of the government. And frankly, no one brings together all the pieces of aviation, quite like AAR does, and our ability to combine those into comprehensive offerings to support government and commercial programs and government commercial end users, is something that no one else can do. That is a true competitive advantage for us. And if we look over the last few years, what we've been able to do to bring these other pieces of AAR, which are traditionally not played in that government mark has been pretty remarkable. And frankly, we see tremendous opportunity for that going forward. And that not only creates obviously opportunities for integrated solution, but broader internal opportunities, which creates a more competitive and profitable total AAR. I will digress 1 piece here and say that for me, that's okay. John has said all those awards that we had in the front, and I think they're great. But as a leader of this organization, leaders of business, I don't think I've ever worked for a place. We've had such a cohesive leadership team. A lot to do to John and the culture he's created that every day comes in, does not worry about their individual P&Ls, but was always concerned about what is best for AAR, and that is such a refreshing place to work, and I truly appreciate it. Finally -- yes, Finally, one thing I'll say is that -- and I won't say too, it's funny because we all have this track piece on here and I swear this is not planned, but we are really excited about the Trax acquisition. On the government side, you may have -- you will see, sorry because they're going to come up next. They are a logo. We've actually used Trax in a couple of our government CLS programs. And in fact, we believe their functionality is very well suited for what we do on the government side. In fact, even prior to the acquisition, we have been working with Trax like a partnership to help enhance their product to be more suited for that traditional government type work. But at the end of the day, we'll continue to invest on both commercial and government and products and services that give our customers that access to real-time data and enhance visibility to give them, frankly, unparalleled visibility into our operations and their operations the client-facing products that we've created and will continue to be a differentiator for AAR. So again, I'm excited. I believe we built a very, very strong foundation of key contracts, marquee customers and top talent propellers forward. Thank you for your time, and I'd like to introduce Trax on Jose -- or excuse me, Andy and Jose from Trax. Thanks.

Good morning, everybody. My name is Andrew Schmidt. And before I introduce myself, I'd like to introduce Jose and by the way, Jose is a cool-looking guy, if I can get this to work, on the left side of the page on the boring looking guy on the right side of the page. Jose is the founder of and CEO of Trax. Delighted to have him here. This is a courtship that has been going on for about 10 years. We've talked -- this is John, myself and Jose have had many dinners. We've had many meetings. We've had many outings and have gotten to know each other. A lot of our conversations, of course, are around software, mobile computing and AI and the transformative power that the 3 of them have in aviation aftermarket services. We've also, and this is a fun conversation. I really talked about the transformative power that a combination of AAR and Trax could have on both AERs customers, Trax's customers in the industry together. So the synergy being the combination of software, Trax and hardware, AAR. So it's something we're going to talk about here is why does this make sense? What's the synergy between the 2 companies. Glad to have you here.

Thank you very much.

We're here. So a little bit background on Jose founded the company in 1997. That was a long time ago. At that time, computers were run on green screens. There were no graphics. Can you believe that? No graphics. It was just a screen and a bunch of text. Jose being the innovator that he was back then actually tried to commit somebody else to do this. They wanted to do it. So Jose said, why don't we come up with Windows-based software for aircraft maintenance, way ahead of his time. And so Jose, thinking that was a good idea, quit his day job. He was a programmer one-off, he formed tracks and then he started coding. And he still codes to this day. He was showing me code yesterday, which was a little bit scary. So he's quite good he does the debugging for the company. So Jose founded the company actually did roll out in 1998, the first version of Track it was fully windows based was ahead of its time. He quickly built a customer base for the bankers in the room, he did not require any external capital. So we funded the company from the beginning. Well, it didn't require much funding since in a very small place. But anyways, the company formed gained momentum very quickly. everybody like the intuitive user interface, particularly small and midsized airlines as well, who found his software much easier to implement much more economical to implement than some of the other bigger solutions that were out there today. So continuing to innovate after releasing the 12th version of Trax whose began working on the industry's first 100% cloud-based MRO ERP. -- meaning you didn't need to have a big data center, you didn't need to store your information in a proprietary center. You could basically store all the information associated with doing maintenance. -- on the cloud, you can access it readily, you can access the software readily. So we launched that product in 2015. -- in while building MRO, he began pursuing building complementary apps, mobile apps that would work with Mr. And as he started building those apps, he kept coming up with new ideas. So -- we need an app for a mechanic. We need an app for somebody in a store room. We need an app for somebody in QA and ended up designing 16, what's at 16 different apps today. at a role base. So now a mechanic comes in, they don't need to go through 6 screens on a laptop or a desktop to figure out what they need to do. They fire up the device. It tells them exactly what they need to do for the day. If they're working in a store room, they don't need to print out a list of things that they need to pick. They fire up the -- in that case, the iPhone, and it tells them exactly what parts they need to pick and where they need to go. So that innovative product came out in 2016, started off, I think, with about 12 different apps up to 16 today and building an app today. So his latest innovation, and this is something he started working on before we purchased the company is automating maintenance. So taking AI, machine learning and not making that the product but taking that and embedding it into the software. So he's working on a suite of new products that are AI based. It will be a Pro series of products that we hope to be in rolling out later in AAR's fiscal year and again, probably roll them out 1 at a time. They'll bolt on to eMRO. They'll bolt-on and work with e-mobility. Not sure if they're going to bolt on to Trax, legacy Trax or not at this point in time. So an innovator in terms of myself, we'll do this very quickly. I started off as a flight test engineer went to business school like many people did. We wanted to transition careers. The first half of my postgraduate school career was spent in consulting. I was a partner with A.T. Kearney, was also a partner with Oliver Wyman. The second half of my career is when I got into investment banking and private equity and working with John Holmes at AAR. So I was at AAR from 2010 to 2018. And then recently came back after the acquisition of Trax. In terms of the company, John mentioned this earlier, but just important to note the breadth of what Trax does. So Trax's software supports 100% of what an airline in MRO government and defense aircraft operator needs to do to maintain their aircraft and maintain all of the components that are required to fly and support those aircraft. So software does 100% of what an airline needs to do to maintain its aircraft. The reason I say this is big customized legacy ERP systems will do this. There are a couple of Trax's competitors that can do pretty much everything, maybe 1 or 2, but there are a lot of different software companies out there today. And what we are beginning to see is a consolidation in this marketplace. So to be a player, you have to be able to do everything, just doing 1 thing or 2 things, isn't going to cut it anymore. The integration cost is too high. So moving on here. So let's -- so that's the quick overview of Trax's software, and Jose is going to go through that in more detail. So then looking specifically at Trax, so it supports commercial airlines. It does have some government and defense customers. It's working with the FAA today. It does have some OEM customers that support government programs. And it, of course, works with MROs AAR as a customer. So being a technic is a customer, SIC is a customer, Turkish Tech as a customer. 138 customers, 35 countries, average tenure of its customer is 10 years. Its products, of course, ensure that an airline is compliant, they can get their work done and then an MRO can get their work done, but they also increase the efficiency of maintenance processes, increase the efficiencies of the mechanics, the store room clerks, the engineers and so on. In addition, the software helps maximize the utilization of assets could be aircraft, inventory people to maximize the utilization of people and ground support equipment and so on. The software creates the system of record for an airline. For anybody who owns the aircraft, this is key. It's a system of record. It's important that you know where all your parts are, where they came from, what their history is. Trax system allows their customers to do that, based in Miami 110 employees. Over on the right, I talked a lot about this already, 3 core products, eMRO,, e-mobility and Trax which is the initial product. eMRO 21 modules, e-mobility as I mentioned 16 apps and growing. In addition to those 3 core products, Trax offer services to help their customers implement, to help their customers get the most out of the software. They support the software 24/7, customer has a question, they can write it in a log, they can e-mail, they can call, get in touch with Trax on a whole bunch of different ways. And they also customize the application for a customer if they have a special process that they want to support or a special look and feel that they want to have. Last service to note here is hosting. Trax started hosting its software in 2014. This has been a high-growth product for the company. And the reason is, as Trax's customers have moved off and out of their data centers and into the cloud, some of them have used third-party cloud hosting services. It hasn't gone well. So in addition to hosting the software, you have to maintain all the interfaces with other software applications that interface with Trax's like SAP for finance, you might have an HR application that needs to interface with Trax. What customers have found is when Trax host them, they also take care of those interfaces. So if something happens with an interface where it's upgraded, et cetera, Trax can handle a little bit better. So over the last 3 years, in particular, it's been a high-growth item for us. So then looking at competitive advantages, it's web-based, you can access it anywhere, your data stored in the cloud, secure, easily accessible. It's mobile in roll base, make sure workers more efficient, supports paperless operations. We've talked about that a couple of different times. Trax implemented its first paperless operation at an MRO in 2016. It implemented its first paperless airline, reads 100% paperless, didn't have any printers and the hangers didn't have any printers with the engineers, 100% that was implemented in 2018. So it's installed, it's mobile apps at 26 different customers. Not all of those customers are 100% paperless, but many of them are. And then it has offline capability. So a key part of being paperless is this needs to work when you're not connected to the Internet -- needs to work when you're not connected to the Internet. So it's used on aircraft by pilots. It's used on aircraft by flight attendance, it has to work, if their Internet service goes down. Same thing with mechanics. If mechanics are in an airplane, if your storeroom clerk and you don't have access, you can still use your app, you do your work when it gets back online, everything syncs up. So that's the product. And Jose?

Okay. Well, thank you, Andy, for your introduction. And again, I'm very, very excited about our partnership. We call it a partnership because we know each other for so long that it's -- it's a good feeling to be here between AAR and Trax. Again, we call it when hardware met software. And this is how we always talked about this, hardware, software. Again, normally, I apologize because my presentation is going to be a little bit boring. It's a techy presentation I brought it in, but there are 2 groups of people that normally don't find me boring. They're programmers and financial people because they know the profit margins that software leaves behind. So I do get that -- that today, I want the job cart because normally, I go to sleep, but I'm -- and I'll wait here. But again, I'm going to make it very painless for you today. So again, like Andy had said, eMRO, the center of our universe, 21 modules, again, modern -- since day 1, this is what I always want to be ahead of my competition. And I see here a little bit way ahead as we are today. Again, from EDI purchasing, material management, technical records, engineering, planning, QA, production, financial management. We do it all. When an airline or an MRO comes to us we are everything in that organization, which makes us extremely sticky. That's why we're there for so many years. Again, development time, as you know, on any products takes time. But once you get it out to the field, it becomes -- we become the heart of that organization. And we'll hear names as we're going in the next slide and what our future and how we see our partnership with an AAR benefiting not just them, us because as being an enormous player in the industry, we needed that to take us to the next level. Again, as we see here, all of those 21 modules and eMRO also interact with something that nobody has in the industry even today. We started 6 years ago with mobility, off-line capabilities. We were the first ones to do this in the industry. We thought, hey, our competitors are going to come back after us. Well, if it happened the same thing as our e-mobility, eMRO platform. When we said we're going 100% cloud, we thought the major competitors are going to do that. No, they're still doing what I did 20 years ago. Windows-based systems, and they're trying to patch it up. But again, this gives us the advantage. We are the only stand-alone software in this industry. You guys AAR was the only stand-alone company. It makes perfect sense our synergies between both companies and our people work great together. Second, all our apps are optimized for paperless operations, like John -- Andy said, "Hey, we've been doing this for a long time. And we are embedded in 138 airlines worldwide, 35 countries, as you'll see on the next slide. And third, like I said, our competitors are now promising this type of software in the future. We've been added already, the next generation of projects 6 years ahead on all of those areas. I'm going to talk a little bit about all of this side of there because we're very proud. Why? Nobody has the suite today in this industry. This is what we are today. This is how we've been tracked, innovation. We're starting on AI now. So starting with this task control. The paperless task tool that a mechanic will use in the hangar, basically, they can be offline. We have case studies where Sabena does military work, no Internet, no place to do anything, but they need to be offline while they're working in that self network, and that's self hanger. Again, [ Cana ] can do all his work. When they get out of that hanger will connect. That's what offline online technology will do for our customers. Again, that mechanic has all access to materials, tools, documentation, engineering support, everything on there. AAR dots. Again, documentation off-line to be able to bring not just 1 vendor, all the vendors, all the OEMs, component aircraft under one app. This is what we do today. The ability to just press a button and look at, "hey, this is what my IPC parts are, hit another button and request that part." So all within the manual. Again, nobody else does that. Visual check, the ability to do -- with RFID technology, check our emergency equipments on our aircraft. That used to take hours, somebody would go check all your life best -- all of the emergency equipment. Now we can do that with RF technology in minutes. Line control, ability to manage all aspects of maintenance for line maintenance and all off-line capability. And the one that Sal talked about tons of paper content control. Again, content control is what we're doing in the background. Since we are the center of everything when an 8130 comes in, we have. When a ESA form comes in, we have it. When a pass [ flight ] gets accomplished, we have it. So what does this do? Well, all of that electronic data at a certain time, you're going to return that aircraft, we have all that electronic data. And we put it out on ATA spec standards. So the leasing company will now transfer this information to the next operator very easily, easy stock, warehouse management using RFID technology, production control, able to manage all your hanger operations automatically in the system, materials, mechanic, inspectors, any nonroutine shot control, the ability to go and do all of those repairs real time and communicate to your production control, "hey, that component you have out there, is it going to be on time or not." So you can reschedule your work or not. Customer portal, again, our MRO customers want to be able to see automatically, "hey, I'm a customer, I want to be able to look at what's going on with my aircraft? Is it on time? " Do I require to authorize any additional work, any additional material. All of that is captured electronically. So later on, if there's a delay in the process, "hey, you did not go and authorize this component to be bought." All of those processes are being captured. In the cockpit, "hey, we go now to the pilot, and we know all the log books automatically. We take that electronically. And electronically, we send it to our eMRO system, the same thing with cabin. So what is this help? "hey, I'm on the air. I send this out. By the time that aircraft lands I have a crew there, waiting with the right parts, the right skill to be able to fix that progress -- problem. The same thing with the cabin. I may have an RF -- something wrong in the cabin. I will have that person with that particular part already waiting before that aircraft even lands. So again, this is where our entire suites of mobility is ahead of the game. No one has it today, and that's why we're really proud of it. And again, I cut it down. So I would not bore you guys. But again, you see what we can do with it. So now in a software company, as some people say, I don't go with that. Our profit margins, of course, since we're copying. We only develop it once. Now we're able to sell it multi-times, our profit margins every time we sell this increase. Someone said to me one day you're printing money. No, we're not. But it is -- the concept is of all of this. And again, all of this information all in one source of data. So keep that in mind. So for the customer you don't have to go to 10 different systems. Everything you see is there. And again, these are my achievements, and this is what I want to get into. So again, 138 customers in 35 countries. So this is what we've done by ourselves. And again, I will end up at that graph pretty fast because it is amazing what we can do together with AAR. As we have here 5,000 aircraft we manage just for airlines, for MRO CAMO it's probably double that. Again, 62,000 users worldwide, [ 85 ] of those deal just with purchasing and logistics that deal with that type of business. But again, we have names there that you may recognize even -- by the way, AAR has been our customer since 2009. So we have, like I said, very sticky customers. There's some there. They've been there Qatar over 26 years with us. So again, very sticky software in the business. But what I want you to look at is the diagram on your right. That particular item, the gray area is where we are combining our efforts with AAR. Over 50%, although we are the leaders in this segment today, as you can see, but 50% of those customers are today don't have -- they will have legacy systems. And the great thing about them is they're Tier 1 organizations, they're the Americans, they're the Delta, they're the United. They're the BAs, the Air France, they're all using technology from the AIMS and they have gotten to the end of their life. They've been using Sceptre, they've been using Merlin, they've been using SAP. All of those softwares are outdating. And today, I just went through a couple of names. 50% of those customers will need software. But again, Tier 1 organizations need Tier 1 backing to be able to do all of this. And again, looking at what we are going to do together and bring both ecosystems, we need that for those type of organizations to be able to look at their services and hit a button like we do today and be able to purchase by services all in one click. So -- and we'll talk a little bit more about that in the next couple of slides.

Okay. Thanks, Jose. You can feel the energy. By the way, they just did a webinar on all 16 of their mobility apps.

It's by the way the e-mails are coming in within the thousands. This is how -- that's why I get excited about it, is nobody has it. I saw the future. And I didn't know -- I thought everybody was following -- and now we know, no, no one was following us so I got 6 years' advantage on everyone.

All right. So through the transaction, the key here is, right, combining the software of Trax with what we're terming the hardware, of AAR and use that to transform an industry. So there are precedents where software and hardware have been combined to create something new.

I was the one -- this is where hardware meets software. And that was something I came up with or we were talking about it. So it's not something new. But in this industry, it's the first time that it's done. It makes sense and being a leader in this software business, it makes sense to tie yourself up with a leader in the spares and components and service area.

Okay. So what that means for us is what we want to do is on the Trax software, on the Trax desktop, seamlessly integrate parts distribution, seamlessly integrate specific maintenance services. So when an airline -- somebody in an airline goes to buy a part today, they have to issue RFQs in many cases. They'll go to somebody like an Aero Exchange, they'll go to somebody like a parts base, to somebody like an ILS, they'll send out a request for quote.

And by the way, we do this today, using Spec 2000 because we use all of those EDI, it's a hit and miss. They send this out. It may come back in an hour. It may come back in a day or not come back at all. This is not what we want to be. This is where the next generation of bringing AAR's hardware and our software together, there is no reason to do this archaic old technology ways of doing business today.

Right. So what we want to do is have it all integrated on the Trax desktop. So when a buyer comes in, today, they have a screen of things that they need to do. These are the parts that you need to procure. And some of the markups that we've already done over on the right side is a little button that says, push on this, if you want to find out who the suppliers are that have the part. You click on it and the price could be there or there could be a button to request a quote. But the idea is how those suppliers earn their way on the screen is key. This is where the hardware part comes in. So what we want to do is build a trusted supplier network -- so any supplier that's on that button has to earn their way there. So they actually have to have the part. They actually have to if they're going to promise a delivery time, which is going to be required for an AOG product, they actually have to have a track record of delivering the parts on time.

And documentation. Keep in mind that this is one of the things that came up here. You need to see the electronic 8130 or ESA form. If not, that part is worthless to that airline. You get it there. Paper working there, you might just throw it away. It does not meet approval. So keep that in mind. We need to do all of those checklists. We need to see it before I hit I'm going to buy that part. I buy that part, all of those items, I expect that. I don't get that expectation met, I'm going to do --[ rake ] you. And again, everyone in the marketplace. And again, starting with those 138 airlines that are using this system will know what happened.

Right. And so then the next piece of this is pricing. So in some cases, and Sal knows this well, you can price your part, you can publish it in some cases, suppliers don't want to do that. They want you to request a quote -- so the other part of this is just the responsiveness to the quote. So the suppliers are going to be related or rated on how quickly they respond to a quote. Key to point out, we'll build the infrastructure for the ecosystem. However, it's Trax's customers that decide who's in the ecosystem, which suppliers do they want to have in the ecosystem. So it comes back to what Jose was saying about the ratings. If they have the parts when they say they have the parts, they get a higher rating. If they deliver when they say they deliver, they're going to get a higher rating. If they're responsive with pricing, they get a high rating. And it's the suppliers or Trax's customers who decide what ratings are high enough to earn their way on. Key part of this also is a little bit of curation. So to build a trusted supplier network, we will curate the network, we'll curate it. So certainly, it's the customers, Trax's customers' decision, who is in, who is out, but we want to make sure the quality of the ratings, the quality of the data is positive. So that's kind of the vision for what we want to build, enhances an intended solution. It's powerful. And again, the key is curation. The key is integrating into the software, all the power of a supply chain, and we do that through using the knowledge and the expertise of AAR. The other key point here is it's open, it's open. So it's not just for AAR parts and services, it's for other OEM and MRO parts and services. So -- that's kind of what we're doing. That's sort of the vision for building it.

Okay. And one example of this parts new ecosystem. By the way, this is just one because AAR does not just do sell parts. They do services. So one example is of this ecosystem is fewer cross -- fewer delays for aircraft, giving the airline and MRO real accurate part information, like he said, price, lead time. All of those things, paperwork. We need all of that for a part to be a good transaction. This is where AAR working as a partner will make this a reality. So this is something that now we can do, create that ecosystem. And of course, working with hardware, the software, everything will be integrated, it would become a reality. Our customers have been asking for this for years, but now has -- this is the possibility to do -- we're doing Amazon okay? So again, very simple. We're doing a buy now button, all of that information will come true. We call it the easy button or no more AOG. We know when an AOG desk comes in. What do they do? They start calling, they start sending e-mails, "hey, how great would it be that you're in a software and you can say, hey, yes, this -- I can see the vendors rating and say, "hey, this guy has done this all so many times, and he has delivered on this or not. Why am I going to take this AOG risk on a somebody that has not performed. Price is not an issue today, it's performance. So again, seeing all that concept and bringing this to life, again, is bringing what we do today in Amazon and Apple Store, bringing it to the aviation industry, bringing real-time buying of materials and real information for that end user. Again, with the power of 138 airlines and MROs that use tracks today, this is something that is very easy to do for us because now we have the marriage of the hardware. Before we could do it, we could create it. But guess what, if we don't have this synergy, it would not happen.

Okay. Good. All right. So to wrap things up. Thanks, Jose. Growth initiatives. First one is somewhat boring, but it's critical to grow Trax. Trax privately held company, has grown very rapidly. We're investing in infrastructure. Key investments are in quality, customer support and accounting. So boring stuff been working on that since actually prior to the closure of the transaction. The second key thing that we're working on is actually building the products that we just talked to you about today. And we just gave you one example of the trusted supplier network in the buy-now button. We have some other things that we're going to co-create over the next year. In addition, talked about AI. We actually want to finish some of those products. Again, it's going to be a Trax pro-series of products focused on specific activities in maintenance that can be safely automated using AI and machine learning. So we hope to be rolling those out at the end of AAR's fiscal year. And then the last thing that we want to do is look at expanding into services. So as I've been talking with Trax customers, as we've talked internally about this, going paperless, going digital is hard. It's hard. There are consulting firms out there that can help some of these customers go paperless. But at the end of the day, it's the guys who built the software who can best help them go digital and be paperless. So what we're looking to do is expand in the service areas that will help Trax's customers, go paperless and be digital a little bit quicker. So that's it. I appreciate it. I'll turn this over to Sean.

All right. Thanks, guys. So good morning. My name is Sean Gillen, I'm the CFO at AAR. I've been with the company for a little over 4 years, and I'm excited to talk about our financial results in some more detail today. So jumping in. On this slide, you see our financial performance over the most recent 6 fiscal years from sales, operating margin, EPS and net debt to adjusted EBITDA. Two things to call out on this page. Number 1, you can see the impact that COVID had on our financial results in the middle of this period, specifically in FY '20 and FY '21, a decline in the top line and a corresponding decline in profitability. Number 2, and more importantly, what you see on this page is how we performed since coming out of COVID. And I will call out is that you see the sales recovery, which has been relatively modest on an overall basis. It's a 5% CAGR from COVID FY '21 to our most recent fiscal year. On that 5% CAGR in top line, we have more than doubled our operating profit and more than doubled our EPS and how have we done that? It's by driving improvement in margin that you see on this page, finishing last year at 7.5% operating margin. More on that on another page. Last on this page, net debt to adjusted EBITDA, tend to manage the company from a conservative standpoint on leverage. And I think we're very proud of how we were able to perform in COVID, even though the significant decline in profitability you see on the page. We were able to reduce our net debt to adjusted EBITDA over that period, putting the company in a really strong position as we pursue all the growth opportunities that we've talked about here today. So at 1.1x the fiscal year we just closed out, and that's after the Trax acquisition, which closed in Q4. So let's go into a little bit more detail on this. And what you see on this page is our quarterly operating margin and adjusted EPS over the past 4 years. And to me, the headline says it all. Actions taken have yielded consistent financial improvement. So what actions did we take? You can see that on the right side of the page. We consolidated our footprint. We did close 2 facilities during this time period. We exited underperforming product lines and contracts, took COVID as an opportunity to accelerate actions that were already in works or would have taken longer to complete. We did sell a loss-making unprofitable business during this time period as well, again, exiting businesses that aren't core and are underperforming. We had a series of overhead reductions over this time period. And then importantly, we use this market dislocation and our relative strength to take share. We did this in USM, we did this in distribution, and we did this in MRO. We've also added differentiated capability, both organically as well as through the acquisition of Trax. All that together comes together on the left side of the page, and you can see this consistent improvement in operating margin, which flows down to an improvement in EPS. So let's take a step back. To me, again, this is the proof point of all of that work and all of those actions. What you see on this page are FY '19 financial results compared to our FY '23 financial results. On sales that are still 3% below pre-COVID, our operating profit is up 30%, and our EPS is up 17%, again driven by the expansion in operating margin, you see the 190 basis point expansion in operating margin even though sales are still below pre-COVID levels. And where do we think we can -- this can go? You heard John talk about at the beginning of the presentation, our long-term 3- to 5-year financial goals from a sales perspective, we are seeking to drive 5% to 10% per year sales growth. We're looking to get our operating margin from the 7.5% up to 9 or 10 plus percent. And all of that -- both of those together will drive EPS of 10% to 15% growth per year. So how will we achieve that? How we allocate capital will help us achieve those financial targets. And this is our framework for how we think about allocating capital. Number 1, maintaining that flexible balance sheet, which will enable us to drive organic investment, pursue acquisitions and return capital to shareholders pausing a moment on each. Flexible balance sheet, maintain that conservative leverage that we have, kind of target net leverage ratio of 1x to 2x EBITDA, max leverage ratio of 3.5x on the back of an acquisition. If that were to happen, we would seek to get back to that target net leverage of 1x to 2x. Investing in the business. You've heard a lot of opportunity today from each of the businesses on investing in the business to drive growth. and we're going to support new business wins in Parts Supply, specifically via inventory as we source to use serviceable material. And as we win new distribution lines, the investment in those comes in inventory. In the MRO, we're looking to expand the airframe, very excited about the Miami expansion we announced today, and we see additional opportunity to expand the footprint in airframe. Additionally, new component repair capabilities in the other parts of MRO. And then lastly, developing PMA products. We're in the early innings. We have put resources behind that. There's a team in place. There's a pipeline, they're working against and we're excited about them taking that portfolio and starting to deliver results. Looking to opportunistic acquisitions. On the next page, I'll go into a little bit more on those strategic filters and financial criteria. But anything we do will be in the core of what AAR is, parts, repair and integrated solutions and always looking to increase the intellectual property in the portfolio like we did with Trax. And then finally, on return of capital to shareholders. We did initiate a $150 million share repurchase back in December of '21. We've been active on that share repurchase program. We've deployed $92 million of the $150 million, leaving $58 million remaining. And we'll continue to evaluate the usage of that and potential expansion of the share repurchase based on alternative opportunities. I will say based on where leverage is and the cash flow profile of the company, we do have the flexibility to pursue they allocate capital across all 3 of these areas. So pausing on M&A. So what are the strategic focus areas and what are the financial criteria we put against that. You shouldn't be surprised to hear that the strategic focus areas are in the core. It's parts, it's MRO and its integrated solutions, specifically, what does that mean? In parts, we're looking to add value-add or to IP-enabled platforms. And in distribution, if we can expand our relationship with customers, our product lines and our OEM relationships via acquisition, we would look to do that. In MRO, it's doing 1 of 2 things or both. It's adding differentiation to our offering, higher-margin offering and is potentially increasing the scale of our offering across airframe and component repair. In Integrated Solutions, we would be looking to add to our government past performance. And what that means is not only if you were to acquire a business, does it come with the contracts that it brings but you also get that past performance, which allows you to have a higher win rate on things that we're bidding. And as we've talked about, we have an active pipeline. So any M&A would just be additive to that. And then lastly, similar to Trax if we can acquire new digital or data tools that are specific to the aviation aftermarket, that's an area of interest to us. The criteria we put against those strategic areas, one, can we accelerate our strategic priorities versus organic tactics said differently, can we move quicker via acquisition than we can organically. Anything we buy will be growth and/or margin accretive to the core business, improving the overall portfolio. And the after tax, the rate of return will exceed the cost of capital. And as I mentioned from a balance sheet perspective, flexibility to go up to 3.5x net debt to EBITDA would seek to delever after that. But we have a fair amount of financial flexibility. If something fit the bill, we have the flexibility to pursue it. So bringing that together, finally, key messages. You've heard a lot of this here today. But number 1, we got a focused portfolio. It's focused on the aviation aftermarket, which Chris Jessup talked about, is a very good place to be. We expect that market to continue to grow, and we expect to continue to take market share in that market. Our operating margin has significantly improved. As I've talked about, and as I just mentioned, the strong balance sheet enables capital allocation across high-return organic investments, acquisitions and allocating capital to share repurchase. You bring all that together, what does it mean? continued growth, margin expansion and capital allocation, we expect will drive improving and continuing to improve shareholder value. With that, I'll turn it over to our Chairman and CEO, John Holmes.

Okay. Wrap it up here with some Q&A. Key takeaways, I'm not going to belabor to these. I think you've got the point. So I just again want to highlight and say how proud I am of the team to deliver the margin expansion and the profitability expansion that you've seen over the last couple of years, which is particularly remarkable in an inflationary environment to continue to drive margin expansion when you've got costs going up is really a testament to the execution ability of the team. As you've heard, large and growing markets, we've got multiple levers to continue to take share. We want to continue that margin expansion, and you've heard a number of ways that we intend to do that. The overall market that we're in has a history of being resilient. You can see that now never before has there been a better example of going through a very difficult time in aviation like we went through in COVID. And now you're hearing from every airline, including those that announced yesterday, just the demand is stronger than ever. And finally, as you heard from Sean, we've got a very strong balance sheet. We manage this company conservatively, and we're one of few aviation companies that emerge from COVID, but actually less net debt and better flexibility than we did before. So we're proud of all of that. And like I said, we intend to keep going. And with that, we will roll to questions. All right. Rob, you told me you had a pilot questions. Let's go. 104 slides, we didn't answer them all, okay.

Sean, quick question for you. But when we think about this margin target, this 9% to 10%, how does that look for each of the businesses?

Yes. And I will also mention that we have -- just yesterday, we put an 8-K out showing our new segmentation. So we are now reporting this financial detail by segment. So I think what it means from a margin expansion is we're going to have a couple of things. We're going to have a mix shift towards parts. That really is the fastest-growing part of the business, and it's the highest margin part of the business. So as that grows, we'll see a natural benefit to parts, which will help drive that margin expansion. And then within MRO, as you talked about here today, the digital initiatives around paperless, increasing the efficiency of the hangers that will help us drive margin improvement. And then PMA, which is still in the early stages as that ramps up, which will take a little bit of time, we would expect that, of course, comes with a much higher margin profile. And then the other piece, obviously, is Trax you heard it here today, a growing business and the highest margin activity within the company.

So I don't mean to try to get specific and you did say revenues will grow at different rates. But simplistically, should we be adding 200 basis points to each segment to get to the target, something like that?

7.5, yes.

I was going to say, again, it's slightly way towards parts in that regard. And again, as the tracks in digital offerings expand tracks, we announced it when we acquired the business, 35% operating margin business as we build it out. And obviously, between Andy and Jose, you can tell there's a lot of enthusiasm there about the opportunities that exist. So that sits an integrated solution, so that would have a disproportionate impact on just integrated solutions over time.

Okay. And John, I don't know if this is for you or for someone else. When do the LEAP and GTF parts start to come into the system? And what happens there, is that accretive? Is it dilutive? What's the time frame?

That's a great question for Sal Marino.

Yes, that's a great question actually. I mean, obviously, those engines have teething problems still today. Some of those parts that are still being replaced with new material. You look back -- you look out in the future and when you start to see the curve start to decrease on what the current NGs and the CEOs today on the 320s is somewhere around 2028, You start to see more of the inputs on the LEAP and the GTF so to say. So as things continue with those assets, we still look at them as more of an airframe maybe play right now just because of all the teething issues with the engines, but later in the '20s is when maybe you start to see opening up with where we'd be playing in that market.

Okay. And then just -- I'll stop after this one. But Frank, for you, in Chart 44, I don't think you bring it up, but this is the 300% growth chart.