StandardAero, Inc. (SARO) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. Thanks for joining. My name is Russell Ford, I'm the Chairman and CEO of StandardAero. StandardAero is the world's largest independent manufacturer of maintenance repair and overhaul for jet engines. We operate in more than 50 countries around the world. We have a high degree of contracted work and about 80% of our overall volume is done on aircraft engine platforms where we hold #1 or #2 market share. We have a business that is set up in two broad segments. The primary segment is exactly that engine services overhaul. And that crosses multiple subsectors, commercial aerospace, military aircraft, helicopters and private biz jets. The second segment where we operate is doing proprietary component repair for components that go into these engines. And you'll see the rough revenue split there. We work with all five of the major engine manufacturers across different engine platforms. There's only five in the free world. We also operate with some of -- with the -- some of the largest airline operators, trunk airlines in the world, you'll see some of them listed there as well as for multiple militaries, both the U.S. government as well as foreign military sales to other NATO partners and then, of course, we work with high net worth individuals as well as fractional jet operators to provide service for their engines and aircraft. The aircraft engine aftermarket is the largest, fastest-growing and most profitable piece of the overall aerospace aftermarket, which is more than $100 billion a year. Roughly half of that is working on the engine. That's where we focus. Like I said, the engine is the fastest growing, most profitable. It's also the most highly regulated part of an aircraft. The engine is the single most important system for safety of flight on an aircraft. Therefore, it is the most highly regulated. It has the most intellectual property, has the highest barriers to entry. That is the right place for us to be. So you can see that, coupled with things like the aging global fleet of aircraft, it's at the highest point it's ever been. And as a result, that generates increased demand for maintenance. In the commercial world, the growth of airline flight demand for customers continues to rise at a higher rate than the delivery of new aircraft. Consequently, what that means is as new airplanes enter into service, they are not displacing existing aircraft one for one, but rather the flight requirements need all the existing airplanes to continue to fly plus they need the new airplanes coming on board. So the embedded base of operating aircraft continue to grow and that's good news for companies like ours that do maintenance on the aircraft engine. If you think about the ecosystem in which we operate, the ecosystem in aerospace has been the same since the 1920s with the beginning of commercial aviation. And that is, on one side of the spectrum, you have the OEM, the original equipment manufacturers that are manufacturing either the airframes or the engine. On the far end of the spectrum, you have the operators of those aircraft and engines, which are typically airlines, militaries and fractional jet operators. In between the two, the bridge between those two is the maintenance. So you got the design development, the operation and the maintenance is the ecosystem. The people on the left-hand side, the people that do the design and development, the OEs their primary focus is to spend their capital on the design and the development of new engines. They do not want to spend their scarce resources, which is not only money, but it's also engineering capacity. They do not want to spend that scarce resource on developing capacity to service the thousands of engines that they have put into play over the last 25 years. They want to spend their resources on developing the next-generation engine. So consequently, the benefit we provide is they can move that work after a new engine is designed, developed and enters into service, then they can begin to transition the maintenance of that engine to close business partners like StandardAero, who will then own the engine, which will live another 40 years. Aircraft engines live a very long life. And during that time span, they are rebuilt three or four times completely. So that's the benefit we provide to the OEMs. On the flip side, on the other side of the ecosystem, the operators. The airlines they're not in business to deploy their scarce resources in doing engine maintenance. That's not the reason an airline exists. An airline exists to move people from point A to point B, and they want to invest their money in flight operations, and they want to invest their money in new aircraft and new equipment that is more efficient. They are not in business to do engine maintenance. So that's where we come in as we provide that bridge that connects those two elements of the ecosystem. This slide here shows the array of engines that we work on. This is unique. An airline for example, Delta Airlines, they don't operate on all engines. Any work that they might do is focused on the engines that their airline flies. We have the ability to work across airlines, across platforms, across OEs and that provides a natural hedge when we get into periods of uncertainty. If you are over-concentrated on just one engine platform or two engine platforms, if anything happens to that particular platform because of the airplane that it operates on, then you have no more revenue. The fact is that we are authorized to operate on more than 40 different engine platforms across all of the OEs. And if you look at the biggest engine platforms that are out there flying today. On the bottom of this chart, you'll see some of those engine platforms that we operate on. So this is where we have the #1, #2 position. So when you look at the platforms like the CFM56, which is the most ubiquitous commercial aircraft engine on the planet today, powering the classic 737. If you look at the CF34, which is a primary engine on a lot of the regional jets, if you move over to Turboprops, things like PT6As, that fly on King Airs and the PW100 series that flies on ATR 72, these are the biggest embedded engine platforms on the commercial side. Then you continue to move across the road here, if you look at military, we do work that's pretty evenly split between air transport aircraft as well as fighters because they perform different missions, and they perform under different economic circumstances dependent upon what type of threat exists. So for instance, we do work on the J85, which is the engines that is used for the training aircraft, the T-38. All NATO pilots are trained on the T-38. We do work on the T56 and the AE2100. Those are the engines that power the current and older generations of the C-130, that's a transport aircraft. So regardless of whether we're involved in some type of a shooting war or not, the transport aircraft are flying all the time. They're like a commercial airline. That's a good place to be. If you look at the 1107, that's the engine goes on the V-22 tiltrotor, the Osprey. There is no other aircraft on the planet today that can perform the mission of the V-22 nor is there any aircraft on the drawing boards to replace the V-22 and the U.S. military, the Marines have stated that they intend to fly that platform to 2055 and beyond. So again, it's a very good place to be because we have a strong market position, we have #1 position on a lot of these and similarly on the BizAv aircraft. Up above, you see the life cycle. This is typically where engines exist in their 40-year lifespan. It's important to notice not only the number of dots we have, the array of dots across different OEs, but also they're not all in the harvest stage of their life or they're not only in the new stage of their life. You have to maintain a nice even balance across the life cycle of all the various engine platforms, and it takes different skill sets to do work on a brand-new engine platform versus one that is approaching maturity. So that's a nice part of our business. Geographically, as I mentioned, we operate across the world, 50 different locations, all continents. We have about a little less than 2/3 of our business sites are located in North America. We have facilities in Central Europe as well as Australia and even in Africa. So we pretty much cover the world. The reason that we do that is because that provides us close proximity to the operators. And when they need to have maintenance work done on their engine, they can generally ship them to a location that is close to their same time zone and that just facilitates faster turnaround time. The other thing that's a differentiator are test cells. In the aircraft engine world, the most expensive part of capital investment is an engine test cell. Aircraft engines are not like automotive engines where you can do work on it, return it to the customer, they go drive it. And if something is wrong, you bring it back to the shop. An aircraft engine, you can't bring it back to the shop when you're at 30,000 feet, and there's a problem. Therefore, aircraft engines, once you touch them, they have to be put in a purpose-built test cell that is quite expensive on the order of anywhere around $40 million, $50 million and upwards of $60 million per test cell and they have to be run at all different flight conditions for hours before you can go bolt them on an airplane and fly people on it. That's good news. Next time you get on an airplane, you'll be happy to know that the engines on that plane went through that protocol. It's a safety issue. But the barrier there is those test cells. Imagine if you had to build 50 test cells at $50 million each. That's a huge barrier to entry, and it is a huge advantage. A lot of MRO shops out there will have no test cells. They actually -- if they do maintenance work, they have to send the engine to places like us to do the test for them, or they may have a handful of test cells. But this is an incredible investment that we've made over the years that gives us a huge differentiation. One of the other parts of our business, I mentioned earlier, the primary part is engine maintenance or repair. But we have a segment that focuses on component repair. We have specifically and purposefully grown that part of our business. A few years ago, it was a $100 million a year business. Today, it's well over $0.5 billion. It is one of the largest single component repair businesses on the planet. And what that means is we have also the broad array of repairs that we can do to various components, return them to service in the engines and that allows us to shrink the turn time on the engine instead of waiting for some supply-constrained part as there always exists in the aerospace industry. This is a great part of our business because it does enhance our turn time, the ability to return the engine to service, which is very important to the operator. It is highly IP protected because when you start talking about the coatings and things that go into various components and subassemblies inside of an aircraft engine, this is where a lot of IP exists. The hot section of an aircraft engine operates at 3,000 degrees Fahrenheit under takeoff conditions, that is above the melting point of every component inside the engine. So think about that for a minute. How do you do that? How do you -- how does an engine last if it's operating at a temperature above the melting point of everything in there. The answer is it's done through some very tricky coating and cooling techniques that are protected by IP, and we have access to that. So that's a very important part of this business, not to mention the fact that it's the highest margin part of our business. So obviously, we are focused on growing this business even beyond what we've done so far. Another element of our growth is also acquisition. We are a very purposeful, disciplined allocator of capital and acquisition is one of those levers that we can use for our cash. Over the last 7 to 8 years, we have acquired 11 companies. So we're pretty good at this. We have a playbook of how to find, how to develop a synergy plan, how to buy at an attractive multiple and then to be able to integrate this within StandardAero, take our StandardAero operating system and stamp it on top of the acquired company to rapidly inculcate that company into StandardAero and get the benefits of our operating system that comes through as part of the synergy plan. So we will continue to exercise this as a public company is a good way for us to further accelerate our growth. How did we do last quarter? Well, 16% on the top line, 20% on the bottom line. Any questions? That's not too bad. And that is not an unusual quarter for us. If you look back over the last decade or more well prior to the pandemic, these were representative growth rates of StandardAero. So we are a rapidly growing company. We have many ways to do that, new engine platforms like LEAP, expanding existing platforms like CFM56 and through acquisitions, as I just talked about. So we feel very good about our performance in the first quarter and is representative of what we will continue to do with the company. And finally, just to follow up on what are the elements and levers of our growth plan. It's not limited to just one thing, right? First of all, we've got strong market tailwinds. As I talked about earlier, things like the aging fleet, the increasing number of airline passenger miles on the commercial side faster than new airplanes are being put into service, hence, the growth in the embedded base. Number 2 is recent investments. We've invested more than $100 million in the LEAP program, which will become the largest commercial airplane engine program in the history of aviation by the mid-2030s, we have 1 of only 6 licenses at the highest level on that particular engine platform and also on CFM56, which is currently the largest aircraft engine platform in service in the history of aviation, and we just made an investment to double our capacity at our Dallas-Fort Worth site for that particular engine program. We have an array of performance excellence initiatives. Our CI program is very healthy. At any given time, we have more than 400 employee-led continuous improvement programs going on in our company, and we have awards for that, that we recognize teams around the world every quarter, every year. New platform wins like LEAP, as I mentioned, and finally, continued acquisitions. So those are the primary elements for our continued growth. And with that, I will stop and I'll turn it over to my friend, Ron, to help moderate some questions that you might have.

So maybe as a place to start, because sometimes it's the question we get asked. And maybe if you could give an example, it would be illustrative to folks. What is a repair? So when you do a component repair, I think people get their heads around maintenance on an engine, but what is a component repair? And just to -- I don't know, pick a component, like -- just give an example.

It's a good question, and it's important to differentiate. When you talk about a component repair, first of all, what is a component? A component for us is an engine component. So we're not talking about doing repairs on flaps and fuselages and [indiscernible]. We're talking about an engine component and a component can be an individual piece part like a fan case or a blade or it could be a subsystem like a pneumatic system or a fuel metering system. And the repairs can range anywhere from some type of welding and machining on exotic materials like Hastelloy or Waspaloy or titanium that has to be done in an argon environment, very complicated metallic repairs as well as coatings. Thermal coatings, as I mentioned, in the hot section of a jet engine, we can strip and we can refinish the thermal coatings on a part to make it brand new. We do plasma spray, we do various other types of coatings. We do repairs on composites. Some of the newer engines are moving towards composite fan blades in the cold section of the engine, and that's a whole different set of repair skills to repair a composite versus a metallic part. So that's kind of some of the examples of things that we would do repairs on.

And just to maybe just illustrate this a little bit more. So I have an engine. I give it to you, it has a broken whatever. You're doing the MRO on the engine, you could repair whatever, put it back in the engine and then give it back to me?

That's exactly right.

And then me as the owner of the engine I'm not buying a new component somewhere, you're repairing the component that I have.

Yes. So if you have an engine that typically what happens is, look, you have engines that have some type of a bird strike or foreign object damage and they are one-offs. That's the exception, not the rule. The rule is an engine reaches a certain maintenance period, which is based upon the number of flight cycles that it's been through. And then the engine will be sent to us, we will disassemble the engine, knowing the number of flight hours on that engine. This will be the standard list of repairs that we would need to do, but we'll inspect the engine. And if we find other damage, then we go back to the customer and say, this is what we found, and this is what we recommend it, is done to the engines, that customer is not surprised when they get the bill, we always are our billing versus our estimates are highly aligned. And customers like that, we've found some other companies don't necessarily do that. But for us, we will do a full inspection of all the parts. We will note anything that needs to be repaired. We will price that out, give that to the customer. They will authorize that set of repairs which is called a work scope. And once we have the authorization for the work scope, then we will begin the repairs. And then once that's done, those repairs go back into the engine, we test it and then we return the fully serviced tested engine ready to be bolted onto your airplane.

And so the outlook for component repair, as you look into the future, do you expect it to become a bigger piece of the business over time?

Absolutely. And that will happen partially just organically because of things like the LEAP program that are growing and there are repairs that are being added that are new repairs that don't exist in over the last 10 years for a new engine. We will be able to do that because we're doing the engine as well as the repairs on the engine. So that will help grow it. And then the other part will be us consciously growing through acquisition. And the third is, every time we acquire a new company that adds an additional process to our list of capabilities. Suddenly, that means that we weren't doing that process before. And if that process had to occur, we were sending those parts outside to another company. Now we can keep those parts inside, which speeds up the turn time and helps grow the component repair business.

And then as you pointed out in your presentation the margins in that business tend to be higher than sort of call it the plain vanilla MRO. Why is that?

Yes. So it's a great question. Our margins in Q1 of 2025 was 28% on the component repair business. The interesting dynamic there is that a component -- the component repair business, cost of goods sold profile is 80% labor and 20% material. On that -- and you're generating 28% EBITDA margins out of that COGS profile, so you can guess what our labor margins are, pretty good. Interestingly, a lot of people ask what's your labor? What's your margin profile on the engine services side? Well, those same margins for labor are evident on the engine services side. However, they have a different COGS profile where 80% of an engine overhaul is material COGS and 20% labor. So we have the same strong labor component of our margin profile. The great thing is that the margin profile on labor, we improve year-over-year really based on two things: efficiency and utilization. So as our technicians get better at a repair, and they do, we plot it out. Every year, they become more efficient, faster. They can determine what needs to be done quicker and then get through that repair. That leads to margin accretion on labor. And then utilization as the facility becomes more full and as production ramps up, of course, we're absorbing more cost there as well.

Got it. And then attracting labor and retaining labor to the point you just made, the more experienced the labor is, the better you're going to do, right?

Yes, labor is key to the aerospace industry because the big driver for people entering the aerospace industry, when I was growing up was the space program. And that didn't exist anymore to the extent that it did in the 1960s and '70s. And so you have to have -- first of all, you have to have mechanisms to continue to attract new people into the industry, but also you need to retain the people that you've got because the cheapest person to hire is the person that already works for you, and you don't have to go through the learning curve and all of that. So we look at two things to determine how well we're doing there. First is we look at attrition. And typical attrition is spurious attrition, just people moving, having life events, that sort of thing is about 7% for us. During the COVID time frame, we saw those numbers go up 3x that level, 15%, 18%, 20%. As we sit today, our attrition level is back down to about 9%. So it's pretty much at spurious levels. And then the second thing you look at is you look at tenure because tenure tells you whether or not people are staying with your company, which says a lot about the company culture and things of that nature. If you look at a company our size that has thousands of people across the world, so you've got a statistically significant sample size, you'll find that average tenures across the new people at 2 years and the more experienced people at 30 years, the average tenure usually runs somewhere around 10 or 11 years as average tenure. StandardAero operates double that. So what that says to us is that along with other measures we do, it says that people that join our company like the business, they like the culture, they like the environment and they stay, they dedicate their life. And those are exactly what -- those are the dynamics we want to create because it takes several years to get someone certified to -- or licensed to do work on an engine. You can do work on other parts of the aircraft without certain licenses but in order to touch an engine, you have to have a very specific set of licenses, and you don't want to spend 2 or 3 years investing in the person to have them leave a year later. You really do want the people to stay with you because it cuts way down on the exposure. The other thing is people that have been around 20, 25, 30 years, they've done the process 10,000 times. Their level of quality is much higher. So those are some of the measures that we look at. And for us, labor is a real strength. Part of that is driven also by the fact that we are very careful where we have located our large facilities, we put them in locations in cities where there is a very good pool of labor resources, many times aerospace labor that's available.

That makes a ton of sense. You showed a map of the regional diversity of the company. And one thing that did jump out of me, however there's not a lot in Asia. And not a heck of lot in South America. Are those opportunities? Or are there reasons that you're not there?

Yes. I'll ask Alex to talk about that.

Sure. Yes. I mean certainly, opportunities. The way we think about it is we've grown up creating our footprint around where the airplanes are. And so now we're looking at where the airplanes are going. And so we're in the more mature markets, we'll on an opportunistic basis, swing in some of these other markets, and that's all in our kind of long-term plan.

Typically, the way that we will enter a market though is we will do it with a strong business partner so that -- we found that instead of just showing up and hanging out a shingle and spending 25 years trying to figure out how the culture works, it's better for us to have a strong business partner as we enter a new market that's indigenous to that area, that understands the culture. And so that we can match that with StandardAero's culture and also has good connections to regulatory agencies or other business partners that we will need to grow and be successful in that theater. So we're very careful about that.

And another comment that you made was you mentioned how the fleet is kind of older than it maybe ever has been, right? When would you expect that trend to reverse?

That trend is very slow to change. First of all, it has very large momentum because of the length of time that an airframe and an engine live, they're designed for 40 years of life. So even if you started to see a strong -- much stronger investment in production and higher production rates from the aircraft engine manufacturers, it would take a very long time before you would start to see this trend even flatten much less go the other direction.

Got it. And then another point you mentioned that we get questions on, I'm certain you guys do all the time, but if you could explain to folks what's the growth profile looks like for the CFM family, the 56 and the LEAP.

The growth of the CFM56...

And the LEAP. Both of them. 56 and LEAP.

56 and LEAP. So this year is our ramp year. Of course, we had our first significant revenue on LEAP in Q1, and that will continue to grow throughout the rest of the year as well as 56. When we think about our top 4 revenue drivers in 2025, we've talked about this before, that includes LEAP and CFM. CFM56 will be our #1 revenue driver in 2025, followed by the group of 3 LEAP, CF34, which is a fantastic platform we run out of Winnipeg and our turboprop programs.

Got you. Got you. And then I think you mentioned on the quarter, Turboprops and CF34 were really strong. What's underlying that strength right now?

Yes, CF34 is the regional platform, one of the big customers there is SkyWest. And that's having a lot of traffic here, especially post-COVID. We are the go-to shop for SkyWest in particular on that program. Turboprops is a different business. We like it because it has many, many customers across different value chains. Fleet operators, individual operators, fire and rescue, all sorts of different operators. So that goes across many different economic cycles. And we are the major player in the turboprop business.

I think it's primarily on the turboprop side. A lot of it is driven just by the enormously large embedded base of turboprop engines that, like Dan said, go across many different subsegments and many different customers. And so there is enduring strength to that entire revenue stream.

If you can, just not trying to -- here, but off the top of your head, like roughly how big is that base of engine? I don't think people appreciate how humongous that could be.

Yes. It should be on the order of -- if you look at all the different platforms, PT6s, all the PW100s and PW150s and PW300s and PW500s, I would guess on the order of 50,000 engines.

Yes. Huge. And there are -- a lot of those are old platforms too?

They need lots of maintenance. Yes. As engines get older, they typically need more and heavier maintenance.

Yes, it's kind of like people.

Exactly. Largely outside the U.S., too, is where those operate. And that is a good example of where we have a global footprint. We're in Brisbane, Joburg, Singapore, including North America, too, so France. We're all over the world servicing those Turboprops.

Got it. Got it. Got it. We only maybe have 1.5 minutes left. So one question I'm certain you got bombarded on in the quarter, but I'll ask it again because people are always wondering tariffs impact, how you think about it, what it could mean?

Yes. Tariffs is a complex, rapidly changing element of all industries that are being impacted over the last 90 days. We got very serious about this very quickly. As soon as there were discussions about this early in the year, the first thing that we did, we didn't really have a clear picture of what the elements of the tariff would be nor did anyone else because the federal action register had not been updated in detail. But we knew this was being considered. So the first thing that we did was we did a complete and thorough review of all of our contracts, both military and commercial, to make sure that we didn't have any language that caused any unnecessary exposure. So that was the first thing. And fortunately, for us, we have, by and large, the ability for any tariffs to pass the impact of this along either through contractual or through normal escalation of pricing. So that provided us some level of comfort. Then as the tariffs began to develop more. We understood that the USMCA agreement, we didn't know if that was going to stay in place. Now that has survived. That's good because that removes concerns about parts that we get from Canadian companies that we operate with. The next thing was we looked at the U.K., we do a lot of work with Rolls-Royce, and a couple of weeks ago, it looks like even though it's not papered up yet, there is a trade deal with the U.K. that will be very favorable. We're still looking at the rest of the EU to see what type of deals are going to be done there. The recent announcements just two days ago with the progress in China, I think is -- while we don't have a lot of China exposure, the point is that it's an indicator that the negotiations are moving in the right direction. So overall, tariffs looked pretty scary back in February, but now they're looking like they're going to be -- they're going to settle and be a lot more reasonable. We're going to be able to handle these, take them in stride. So I think that we've got exposure that we can manage.

Well, I think we got to wrap it up there, but so perfect. Thank you guys.

Thanks, everyone. Appreciate it.