IRKUT Corporation – Investor update
August 17, 2005 Part 1
Results of operating activities and strategy Oleg Demchenko (President)
Strategy of UAC building Valery Bezverkhniy (First VP, President of UAC)
2004 Financial Results Dmitry Eliseev (VP Corporate Finance)
2 Changes in top management
New management team mandated to improve marketing, strengthen financials and position IRKUT for consolidation of the Russian aerospace sector
Previous management structure New management structure
Alexey I. Fedorov – President Alexey I. Fedorov – Chairman Oleg F. Demchenko – President Valery B. Bezverkhniy – First VP Valery B. Bezverkhniy – First VP Sergei V. Tsivilev – Senior VP
Oleg F. Demchenko – General Director Oleg F. Demchenko – General Director
Viktor A. Kobzev – General Director
Gennady S. Panatov – General Director BERIEV AIRCRAFT COMPANY BERIEV Alexey I. Fedorov – General Director AIRCRAFT COMPANY Sergei V. Tsivilev – First Deputy
Alexey I. Fedorov – Chairman
United Aircraft Valery B. Bezverkhniy – President Consortium 3 Optimization of corporate structure
The management team did a great deal in old structure and plans to continue its undertakings Last undertakings completed Recent undertakings to be completed
Acquisition of 75.46% ofYakovlev Design Bureau Sale of 10% stake to EADS (authorized by AGM) Acquisition of additional 14.6% stake in “Beriev Reequipment of workshops for production of Aircraft” aircraft components for EADS. Reorganization of Irkutsk Aviation Plant. The Establishment of JV with EADS to certify and Corporation carved out several departments of market Be-200 the plant and established 13 self-dependent enterprises, with total net income in 2004 of US$ Further improvement of financials and increase of 180 thousand. backlog Optimization of stuff, achieving year-work per Active participation in the industry consolidation employee of US$ 51 thousand in 2004. New dividend policy. Dividend payments of 10% Increasing number of BoD members to 11 of NI (IAS) and following increase up to 25%. people. (Approved by AGM) Introduction of Management Committee. Additional share issue of 12% on the threshold of deal with EADS 4 Full consolidation of the group
In 2004 Irkut acquired 75.5% in Yakovlev design bureau, In 2005 increased its stake in Beriev Airctaft IRKUT Corporation Shareholder structure
R&D units Production Marketing Management AHC “Sukhoi” 53% 13% 40% Æ 54% 100% 100%
Beriev Aircraft Irkutsk Aviation Irkut Industry (Taganrog) (Irkutsk) (Moscow)
0% Æ 75% 100% 100%
Yakovlev bureau Associated IRKUT Seaplane companies Employees Free float (Moscow) (Toulouse) 6% 28%
51% 100% 100% December 2004 - launch of Russian avionics Russian Avionics Gidroaviasalon (Zhukovsky) (St.-Petersburg) (Gelendzhik) Level 1 ADR program Foreign shareholders represent 2/3 of free float
5 Growth prospects – export potential
IRKUT –one of the leaders among Russian arms exporters
Russian arms export, 1994-2005 (US$bn) Russian arms exports by type, 2004
Air defense, 14% Land power, 6% 6.0 5.8 5.1 4.8 5.0 Aviation, 60% Navy, 20% 3.7 3.7 4.0 3.2 3.0 2.6 2.6 Top Russian arms exporters, 2004 2.0 # Company Exports, $m Exports, % of sales * 1.0 1 Sukhoi Company (JSC) 1379 92% 2 Irkut Corporation 594 92% 1997 1998 1999 2000 2001 2002 2003 2004 3 Aerospace Equipment Corporation 437 75% 4 FSUE «RAC «MiG» 380 89% 5 Ufa Motors (JSC) 337 93%
* Note: According to Russian Accounting Standards Source: Rosoboronexport Source: Inter-Regional Fund of Informational Technology 6 Growth prospects – increasing domestic demand
IRKUT is one of principal beneficiaries of increasing state defense order Military aviation accounts for about 40% of Russian defense sector production IRKUT accounts for more than 25% of Russian military aviation production and 40% of order book Russian Government to decide on three-year defense order, which helps Irkut to plan mid-term financials and backlog Russian defense order growth of 90% in 2003-2005 hedges risks of expected foreign orders decrease
Russian GDP, 2000-2005 State defense order, 2000-2005
800 12% 8 1.0% 0.9% 600 6 8% 0.8%
400 4 0.7% 4% 0.6% 200 2 0.5% 0 0% 0 0.4% 2000 2001 2002 2003 2004 2005E 2000 2001 2002 2003 2004 2005E GDP, US$b GDP growth, % US$bn As % of GDP Source: The Economist Intelligence Unit Source: Centre for Analysis of Strategies and Technologies
7 Current product line – military aviation
Our main products provide stable revenue stream for the coming years
Super manoeuvrable multi-role fighter Su-30MK Current backlog – over US$3.0 bn Estimated market size – US$146 bn through 2013 (2700 aircraft) Current status: Completion of deliveries to India, An option for deliveries instead Su-30K, Negotiations about deliveries to Thailand and Northern Africa, Works upon licensing agreement An option for additional 10 aircraft delivery
Yak-130 Advanced combat fighter jet trainer Mass production on track to commence in 2006 Estimated market size – US$19 bn through 2013 Current status: Flight trial program – 2 aircraft, Agreement on Yak-130 delivery (12 aircraft) with the Russian Air Force.
8 Current product line – civil aviation
Multi-functional amphibious aircraft BE-200 Current backlog – US$ 115 m Current status: Delivered 3 out of 7 aircraft to EMERCOM, negotiations for delivery to Croatia and Turkey (without European certification) and Indonesia establishment of JV with EADS to certify Be-200 in Europe and the U.S. The Italian civil protection department operates Be-200 on leasing agreement
UAV Multi-purpose unmanned aerial system Estimated market size – US$30 bn Current status: 5 aircraft in development type Talks on delivery with Indonesia
Aircraft units for Airbus Components Current backlog – US$200 m New orders – US$100 m annually after 2008 Current status: certification of production by EADS, reequipment of workshops. 9 Product line - past and future
R&D and marketing efforts are turning into revenues and income
Life cycle of the project by stage up to mass production Life cycle of the project in timing up to mass production
R&D Revenues R&D 100 700 (US$m) 90 (US$m) (US$m) 600 80 UAVs 9 70 500 60 400 Yak-130 100 50 300 265 40 Be-200 30 200 20 Su-30MK 280 100 10 0 Requirements Development Flight Active Mass 2000 2001 2002 2003 2004 2005 2006 specification type tests marketing production R&D costs Revenues Irkut has three more significant projects to finalize. R&D investments Su-30MK project is in mass production stage but Average life cycle of the project could be we continue development works on it. divided in several stages (from requirements specifications to mass R&D costs are high during the life of the project production) and decrease as average life impends to mass production Only Su-30MK project is on the latest stage of mass production Revenues are low during the life of the project and increase as average life impends to mass 10 production Current contracts – solid revenue base
Solid revenue stream from existing contracts
Overview of main current contracts, year-end 2004 2004 year-end backlog breakdown
Licensed assembly of US$1,944 m Su-30MKI in India through 2017 Su-30MKI Su-30MKM instead Su-30K Malaysia Deliveries of Su-30MKI US$600 m 13% 15% Be-200 instead of Su-30K through 2009 Share in A50 project EMERCOM Deliveries of Su-30MKM to US$455 m 4% 3% the Malaysian Government through 2008 Other Production of components US$200 m 12% for Airbus A319/320/321 through 2013 Components Share in A50 for the US$150 m EADS Russian Air Force project through 2007 5% Deliveries of 7 Be-200 to US$115 m including: Russia’s EMERCOM through 2008 Yak-130 – 2.5% Production of Yak-130 for US$94 m Su-30K modernization – 5.5% Russian Air Force through 2009 Su-27UBK modernization – 1.7%
Source: Company data 11 4.1 Strong backlog and upside from new contracts
Our backlog is strongly geared to every additional contract we sign
Year-end backlog, 2000-2004 (US$bn) International backlog comparison, 2004
5.0 300 7.0 4.4 4.5 250 6.0 4.1 3.9 4.0 5.0 3.6 200 4.0 150 3.0 3.0 100 2.0 2.0 50 1.0
0 0.0 1.0 t in ng rt aer ku BAE a rdier r Ir a b EADS Boei M b SAAB m Em 0.0 kheed Bo c o 2000 2001 2002 2003 2004 L Backlog, US$m Revenues, US$m Backlog/revenues ratio, % Source: Company data Source: Company data 12 Part 2
Results of operating activities and strategy Oleg Demchenko (President)
Strategy of UAC building Valery Bezverkhniy (First VP, President of UAC)
2004 Financial Results Dmitry Eliseev (VP Corporate Finance)
13 Structural reforms in the Russian Economy
The positive economic figures of the last years have created the basis to implement serious structural reforms in high-technology industries and the military-industrial complex as the most developed
In 2005-2008, the main attention should be paid to the reforming of the aviation industry
¾ The aviation industry simultaneously ensures key positions in national security and transportation infrastructure
¾ The scope of activities and the type of competition in the markets provide an opportunity to develop the industry as one of the world leaders
Reforms are generally implemented by means of creation of new market regulation and functional mechanisms, as well as a more focused usage of state investments on long-term strategic projects
The main objective is to realize the substantial potential of the aircraft building industry, which will be beneficial for: ¾ The state ¾ Customers ¾ Investors
14 The creation of the UAC – to take into account all the best
To increase competitiveness in the world market An optimal structure of To increase the efficiency of the whole system the industry To ensure financial viability of separate companies To ensure acceptable prices for customers
To stimulate the inflow of capital investments in the most promising projects and technological complexes
Objectives To stimulate quality improvement thanks to the attraction of foreign strategic Investment investors attractiveness To create clear and understandable regulation base To ensure capitalization, taking into account the interests of shareholders, investors and the state
To ensure transition to an optimized structure of assets, increasing investments in PP&E and intellectual capital
Social considerations To ensure security of the Russian transport system
Limitations Observation of the national security interests
15 The main idea of the UAC creation – simultaneous and balanced consolidation of business and assets UAC – integrator of businesses and assets
Main assets Business branches Market Brands requirements Sukhoi Civil aviation MiG Ilyushin Tupolev Competitiveness of production Irkut Industrial scope Yakovlev Transport aviation Partnership and risks sharing
Design bureaus Increase of the government (more than 5) UAVs control Control over state property
Plants (more than 8) Military aviation Government requirements
16 Interfacing of different interests
Shareholders Strategic investors and partners
Increase in revenues and net income Appropriate business valuation
Growth of capitalization Interest in independent assets
Ensure shares liquidity
Observation of shareholders rights
Government Consumers
Stable growth of cumulative production Low costs and appropriate shipment conditions
National security and defensive capacity Security of shipments and after-sale services
Rational rate of grants Grants to special groups of consumers
Control over monopolistic businesses Interest in independent assets
17 The UAC prospective structure
Holding company Management company
Transport Military Civil aviation Components and special aviation Engineering center (CA) and units Engineering center aviation (TSА) (MА)
Functional groups
Service center Service center Service center Marketing (CA) (TSA) (MA) department Leasing companies
Marketing Marketing Marketing Test-flights centers Suppliers department department department Research and development center
Assembly plant Assembly plant Assembly plant Training centers
Design Bureau Design Bureau Design Bureau Associated participants (CA) (TSA) (MA)
18 The purposes of creation of the UAC under the Decree of the President
- The main objective – “ … creation of the United Aircraft Corporation before December 1, 2006 on the basis of the major aircraft building companies’ assets…”;
- The objectives of the first stage – implementation of all the key preparatory procedures, working out and agreement of the design of the United Aircraft Corporation, the principles of its composition and management, and a detailed plan of corporate actions;
- Consolidation of aircraft building companies’ assets in a holding structure with participation of state and private capital;
- Additional objectives – creation of a team of managers, the beginning of implementation of management mechanisms corresponding to the target idea of the United Aircraft Corporation’s work in the “virtual” or “project” regime;
- Implementation of practical actions to attract investments and organize strategic partnership within the framework of a mixed (private and state) structure of the United Aircraft Corporation’s capital being created.
19 Proposed Stages of UAC creation
2005 - 2006 2006 - 2007 2007 - First stage Second stage Third stage
Development of legal framework Creation of the target corporate Capitalization and attraction of Formulation of a detailed structure private and institutional mechanism of integration Objectives Integration of management Consolidation of management
Creation of coordinating Structure based on business- authorities units’ principle Selection and consolidation of Shareholders’ equity and up-to- Business projects based on the target date ways of investments structure structure of businesses Creation of a holding structure based on core assets
Maintaining the current structure Transformation of assets until final solutions on structure consolidation are worked out Assets Attraction of strategic investments Appraisal, estimation of the structure Transfer to technological market value and mechanisms for cooperation its enhancement
20 UAC creation scheme
1st stage 2nd stage 3rd stage
RAS «MiG» Incorporation 100% JSC «MiG» (FGUP) Private companies State (Irkut, etc) Incorporation 100 % «KAPO» (FGUP) JSC «KAPO» >50 %
25,5% JSC «KNAAPO» 100% JSC «AHC «Sukhoi» JSC «UAC»* JSC «UAC»** JSC «UAC»*** JSC «NAPO» 25,5%
90% JSC «Tupolev»
86% JSC «MAK Ilyushin» Organization structure with State Shares from several business units: 38% new share issue (civil, military, JSC «IFC» transport and other) 58% JSC «FLC»
2005 2006 2007 - 2008
21 Key changes in aviation sector’s structure
Target structure version Prospective changes
Capitalization of the parent company Business units are profit-centers Transformation of the government’s functions, gradual The parent company is the center of cash-flow consolidation abandonment of “direct management” of aircraft Private shareholders Portfolio industry Government (strategic) investors Transfer to a new market-oriented business-model >50% >25% <25%
UAC Parent Company Enhancement of private capital role in aircraft industry
100% >75% >75% Transfer from a complete production cycle to product- BU – Military and-technology specialization and cooperation BU – BU – transport <25% Military aviation Civil aviation and special Focus on key projects, reduction of internal competition aviation Capitalization of the company, capacities’ 100% 100% >50% modernization, efficiency upgrading Venture BU – <50% Engineering Change in approach to decision-making – “investor businesses Units and center succeeds manager” (UAVs, etc) components
Unrestricted
Separate projects 22 Nonprofit partnership “UAC” – the first practical step
NPP “UAC” Participants
Manages the project and coordinates the Participate in the management of NPP “UAC” participants in the process of creation of UAC Retain independence in their business corporate structure activities on the first stage Secures the decision-making process on the Secure necessary resources for following issues: implementation of corporate reorganization ¾ Working-out of UAC strategy Involvement of rather large number of ¾ Working-out of different versions of specialists and managers into the project is prospective technological structure crucial to secure the quality and timeframes of decision-making ¾ Development and implementation of corporate and organization UAC Coordination of the project on the first stage: managing patterns at all stages ¾ The Ministry of Industry and Energy ¾ The Federal Agency for Industry ¾ Actuation of amendments to legislation and regulatory control in aircraft industry ¾ Non-profit partnership “UAC”
23 New vistas for Irkut due to creation of UAC
Order book increasing : Gaining access to the order book and solutions for the Russian domestic market Development of relations with the leading partners worldwide Extension of orders’ structure in the context of international industrial cooperation Elimination of artificial competition for domestic orders Growth of marketing system’s and sales’ efficiency + Enhancement of efficiency: Access to more up-to-date technologies Opportunities of gaining cheaper and higher-quality resources Cutting costs for deliveries + Additional investing mechanisms: Government investments in promising technologies and projects Growth of capitalization and investment-attracting base Amendments to the regulatory legislation for aircraft industry + Long-term competitiveness: Personnel training and upgrading its skills Integration of promising R&D and development of engineering base Participation in long-term programs Global (in terms of the industry) diversification and reduction of circularity = Growth of the value and investment attraction of the company
24 Part 3
Results of operating activities and strategy Oleg Demchenko (President)
Strategy of UAC building Valery Bezverkhniy (First VP, President of UAC)
2004 Financial Results Dmitry Eliseev (VP Corporate Finance)
25 2004 Main financial indicators
USD million 2004 2003 2002 IFRS IFRS US GAAP Revenues 621.9 522.0 528.5 Cost of Goods Sold 330.7 315.1 343.9 Gross profit 291.2 206.9 184.6 Gross margin 47% 40% 35% Operating expenses 142.6 131.7 96.2 Operating income 148.5 75.3 88.4 Operating margin 24% 14% 17% DD&A 17.3 16.4 14.4 EBITDA 165.8 91.7 102.8 EBITDA margin 27% 18% 19% EBIT 145.6 65.5 81.9 Interest expenses 58.1 65.1 72.6 Other financing 2.9 9.8 6.5 expenses Income tax -20.2 0.6 -17.4 Net income 68.4 1.8 -7.8 Net income margin 11.0% 0.3% -1.5%
26 Turnaround of financial performance
Revenues, 2000-2004 (US$m) EBITDA, 2000-2004 (US$m) 700 160 30% 622 600 528 522 500 120 25% 400 308 80 20% 300 244 200 40 15% 100 0 0 10% 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 A 26% CAGR in sales in 2000-04 EBITDA, US$m EBITDA margin, % International Net income margin comparison, 2004 International EBITDA margin comparison, 2004 12% 11% 11% 28% 27% 10% 24% 17% 8% 20% 15% 6% 16% 6% 10% 4% 4% 12% 8% 4% 3% 7% 7% 8% 5% 2% 4% 0% -3% 0% 0% ng ut ut i rtin er k ing rtin er -2% k a Ir BAE a Ir SAAB EADS BAE SAAB Boe EADS Boe Embraer ed M Embraer ed M e e Bombardi Bombardi Lockh Source: Company data and companies annual reports Lockh 27 R&D investments and Capex breakdown
R&D investments, 2004 (US$m) Capex, 2004 (US$m)
100 90 11 80 50 45,6 70 40 34,8 60 30 50 30 25,6 40 79 11 30 20 15 12 41 20 36 10 10 15 0 0 2001 2002 2003 2004 2001 2002 2003 2004 (IFRS) Capex R&D in COGS R&D in fundamental costs
R&D costs increase up to 2003 rode on works on Su-30MK project Су-30МК (this project continues but to a lesser degree), and on Be-200 project In 2004 we started to decrease both R&D and capital expenditures, which will positively influence our financial statements in future
28 Cash flow analysis
First ever year of positive free cash flow – US$131 million in 2004
Cash flow analysis, 2003 (US$m) Cash flow analysis, 2004 (US$m) 10 (60) Repayment of loan, 200 200 189 sales of estate 175 175 150 150 (26) 72 131 125 (54) 108 (11) (71) 125 100 100 75 75 59 50 (46) 50 Acquisition 25 (17) (25) 25 of Yakovlev 0 (6) 9 0 (25) (25) F e st ns s s F e st ns s s re o CF re o CF gC ti tem off gC ti tem off n hang te Capex n hang te Capex i c In ff i e- i c In ff i e- o Free o Free erat C l. on erat l. on W Acquisi xc WC Acquisi xc Op One- e Op One- e
FCF FCF * Operating cash flow before changing in working capital and provisions * Operating cash flow before changing in working capital and provisions
Source: Company data Source: Company data 29 Net debt and interest expense
Net debt reduced to US$407 million and cost of borrowing cut significantly
Net debt, 2001-2004 (US$m) Weighted average interest rate
15.9% 600 583 16% 565 13.7% 522 14% 500 512 471 12% 11.6% 400 382 407 9.8% 10% 8.5% 300 8% 201 2000 2001 2002 2003 2004 200 181 115 94 100 72 Net financing costs, 2002-2004 (US$m)
0 80 73 74 70 AAP AAP 61 AAP IFRS G G G 04 0 60 2 01 US 02 US 03 US 0 0 0 50 2 2 2 Debt Cash and ST investments 40 Net debt 2002 2003 2004 Source: Company data Source: Company data 30 Debt portfolio structure
Debt portfolio structure matches business profile and share of long-term is rising
Debt portfolio by maturity, year-end Debt portfolio by currency, year-end
600 600
104 450 245 450 326 148 250 366 259 300 300
266 178 374 150 150 258 201 199 72 94 0 0 2002 2003 2004 2002 2003 2004 Long-term debt Rb borrowings Current portion of long-term debt Short-term debt US$ borrowings
Source: Company data Source: Company data 31 Debt structure (continued)
Further debt portfolio optimization is underway
New debt instruments: $90-100 million 3-year syndicated loan (April 2005), ruble bond A03 (September 2005)
Target debt ratios: debt / sales 0.5; debt / EBITDA 3.5-4.0 6 5,58 Credit line with Sberbank for 5 years 5 4,58 Possible credit line with Amsterdam Trade Bank for 3 years 4 Possible credit limit with Vneshtorgbank 3 2,45 2 0,9 1 0,7 1 0 2002 2003 2004 2002 2003 2004 Short-term debt 201 72 94 Net debt / Sales Net debt / EBITDA Bank loans 106 65 35 Bond issue 68 7 57 10,00 8,99 Other loans 27 0 2 8,00 Current portion of long-term debt 259 266 178 6,00 Net cash Bank loans 259 266 178 4,00 2,27 2,45 Long-term debt 104 245 250 1,48 2,00 Bank loans 104 194 250 -8,07 -0,79 -0,04 0,00 0,00
Bond issue - 51 - g -2,00 rtin BAE aer Irkut Total debt 565 583 522 r SAAB b
-4,00 Ma EADS
Cash & cash equivalents 22 13 115 Boein ckheed o -6,00 Em L
-8,00 Bombardier Source: Company data -10,00 32 Growth potential valuation
Irkut has an upside potential to growth by EV/EBITDA and P/E*.
EV/EBITDA of international aerospace and defense P/E of international aerospace and defense companies, 2004 companies, 2004
18 16,1 16,5 38,0 40,0 16 11.8x aerospace weighted- 21.9x aerospace weighted- average 35,0 14 12,2 average 28,6 12 30,0 22,0 10 8,4 25,0 6,4 16,3 8 5,7 20,0 5 5,4 6 15,0 11,7 8,0 8,6 8,8 4 10,0 2 5,0 0 0,0 t in t aer rt ng in ku r a rdier ku raer rt ng dier Ir b BAE a Ir b a r SAAB EADS M b Boei SAAB BAE a EADS M Boei b Em m Em m kheed Bo Bo c kheed o c L o L
Irkut has growth potential by EV/EBITDA from 5.7x to 11.8x of Aerospace weighted-average Irkut has growth potential by P/E from 8.0x to 21.9x of Aerospace weighted-average
Source: Companies annual reports, CSFB Aerospace and Defense report 33 * MCap at August 01, 2005