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

Welcome to the Jefferies Aerospace Defense and Airlines Equity Research team. Thanks so much for being here. We have StandardAero here. We have Dan Satterfield, who's CFO; and Alex Trapp, who's Chief Strategy Officer. Dan is going to kick it off with a presentation for the first 10 to 15 minutes, and then we're going to go into questions. Thanks, Dan.

Thanks, Sheila, and good morning. My name is Dan Satterfield, as Sheila said. Sheila said she's got lots of questions, so we'll work through the slides, and we'll get right to everything else. Okay. StandardAero. We are the leading engine aerospace aftermarket services provider. Very important about us. We have a pure-play focus on the aero engine aftermarket. And two statistics that I love, 80% of our revenue is from platforms with either the #1 or #2 market position and 77% of our revenue is from customers with long-term agreements, all of which gives us great visibility over our long-cycle business. We are organized into two segments, Engine Repair and Overhaul or the MRO side of the Business and Component repair services. Together, there are great synergies, obviously, between the two as we partner with both the OEMs and the airlines. Our pure-play focus on the engine aftermarket is the largest portion of the aerospace aftermarket at $111 billion, 48% of that is engines. The engines is the highest growing and most profitable, most highly regulated portion of the aerospace aftermarket and the greatest barriers to entry. Our long-term tailwinds include, of course, strong pent-up demand, constrained capacity, which continues to be a factor in our industry, an aging global fleet and greater outsourcing from the OEs to MRO providers such as ourselves. We love our highly coveted position between the engine OEMs and the operators. The engine OEMs, there's only 5 of those in the world, all 5 of which we have very long-term relationships. These are strong relationships, and we consider ourselves OE aligned. What we provide to the OEs is, of course, strong MRO service providing, and it allows them to focus on engine development. We expand their network of aftermarket support, and we mitigate market erosion from non-OEM parts, again, our OEM alignment. For the operators, working across all the OEMs, we can provide creative customized solutions that they can't get from the OEM engine providers and as opposed to airline aligned shops, we're able to provide superior service performance and customized solutions. This is a fantastic chart that shows all of our engine platforms, over 40 of which across the life cycle and maturity life cycle of their lives. Again, all of these engines, we have either the #1 or #2 market position, and we have a heavy narrow-body focus within commercial turbofans, of course, our strong emerging positions with the CFM56 and LEAP programs as well as very strong position on the CF34 regional engine that provides power to the regional aircraft and the AE3007. All of these are either in the maturity cycle very new. You see the LEAP and the CFM56 in the new generation and moving into midlife. Our wonderful suite of Turboprop engines, of course, are within the mid-life to mature side of the maturity cycle and are very strong growth drivers for us in 2025 and beyond. Within Military, we're strong -- we appreciate our positions on the AE2100 and the AE1107. The 2100 flies on the C-130 and the AE1107 flies on the V-22 Marine transport aircraft. Within Business Aviation, we have strong positions on what we consider both the pitch and catch. So the rising engine, the newer engine in the Business Aviation segment that we provide services on is the HTF7000. That is replacing the TFE731, which continues to fly. So as the TFE731 matures, the HTF7000 grows, and we have a great pitch and catch position. We have a strategically located global footprint. And most of our locations are in North America, but 40% of our revenue is generated externally. We have a global sales force and a very strong set of infrastructure, 6 million square feet and importantly, 55 global test cells. When we talked earlier about barriers to entry, that's one of them. Global test cells are difficult to build. They're expensive to build, and we have 55 of them. We love our Component Repair Service business. Now with our guidance as of August 13 at almost $700 million of revenue, we believe that if this revenue -- this business were to stand alone, it would be one of the largest component repair businesses in the world. They have attractive margins, 26% in 2024 and in the first half of 2025, 28.7% margins. What's great about the component repair service business with 20,000 unique repairs, this offers an alternative to waiting for a new OEM part. You can repair your part, improve your tat times and lower your cost with a strong component repair services business. It's highly accretive, and it's a very fragmented and competitive landscape where we have the strongest position. We also have the opportunity for a large in-sourcing opportunity with our MRO businesses, which we are continuing to capitalize on. As this business gets larger and has more capabilities, it's able to service more of its sister divisions on the MRO side of StandardAero. And it has the ability to develop new repairs, especially on the LEAP program, where we've developed almost 300 repairs on the LEAP engine since launch. We are and have a great track record of successful M&A, 11 acquisitions since 2017. We're quite good at this. we are able to cut in half our acquisition multiple with the synergies that we have exercised. And two of the great examples that are there on the right. We're able to -- with M&A, we're able to access new capabilities, new customers and new platforms, most recently with the Aero Turbine acquisition in our Component Repair Services space and within the military end market. A great first half in the second quarter. Commercial Aerospace grew 14%, Military and Helicopter 12%; and Business Aviation, 9%. This reflects the diversity of our end markets and the ability to ride through economic cycles, very low volatility within our businesses. With a 19.9% earnings growth in the first half, we consider ourselves a boring double-digit earnings grower. During 2025, our big 4 strategic initiatives include the industrialization of LEAP. Very happy that LEAP revenue is taking off as anticipated. It grew 3x quarter-over-quarter in Q2. We now have $1.5 billion LEAP awards to date, and our long-term outlook is even more robust. Of course, the LEAP engine being serviced out of our San Antonio facility. Our second major strategic priority in 2025 is capitalizing on our organic investments. A great example of that is the CFM56 Dallas-Fort Worth facility, which conducted its first PRSV and our CFM56 6 wins continue, 11 gantries and a doubling of our capacity in Dallas. Also last week, we cut the ribbon on our Augusta Business Aviation facility in Augusta, Georgia. Over 80,000 square feet expansion, not only for airframes, but for the HTF7000 MRO capabilities. The expansion of CRS remains one of our strategic priorities with record margins in the quarter, almost 30% and continuing new repair development. Also very happy with the in-sourcing activity, which occurs on a daily basis, again, where CRS has the capability to in-source activity that's currently done by third parties, by the MRO shops within StandardAero, these are being brought in-house. And we continue to pursue accretive M&A. The ATI synergy realization has been fantastic. The ATI business focuses, including on the J85 engine where we already have a strong MRO capability in San Antonio. Of course, we do have a strong M&A pipeline and ample balance sheet capacity with our leverage as of the second quarter just hitting below 3. Our latest guide as of August 13 has revenue growing 12% to 15% and earnings growing 19% to 22% with strong underlying growth in the Commercial, Military and Business Aviation markets, mid-teen growth expected in Commercial Aerospace, high single-digit growth expected in Military Helicopters and high single-digit growth in Business Aviation as well as free cash flow between $155 million and $175 million. And that includes major platform investments this year of $90 million within that cash flow figure. We've been growing at a 22% CAGR on EBITDA since 2021, up until our last fiscal year of 2024, and we have strong initiatives and tailwinds to continue EBITDA growth. That includes the market tailwinds within the engine aerospace aftermarket, harvesting our recent investments, those include, of course, CFM56 and an expansion of our relationship with General Electric on the CF34 engine. Performance excellence initiatives, which include CRS margin expansion proven in Q2; new platform wins, most notably the LEAP platform, of which we're very proud and continued M&A as evidenced by the Aero Turbine acquisition in August of last year. Again, we consider ourselves a steady, boring double-digit earnings compounder, and we have multiple opportunities for high ROIC capital deployment opportunities available to us. That's StandardAero, and we're happy to answer any questions.

Okay. I got 23 minutes to ask these questions, and I would definitely not call you boring Dan. So even though you are a double-digit EPS grower. Maybe to talk about your Engine portfolio, you started a little bit on LEAP and how it's going to grow to $1 billion by 2030. Can you talk about your 3 big platforms, LEAP, CFM56 and CF-34? Just an update on the growth profile in '25 and how we envision them growing over the next few years?

Yes. Thanks, Sheila. You mentioned 3 of the top 4. We'd like to talk about the top 4 growers in 2025, and that includes LEAP, CFM56 in Dallas, CF34, which is the regional aircraft -- powers the regional aircraft, including SkyWest as a customer and our Turboprop businesses, of which we have a suite of engines in a very fragmented market with multiple customers. Those remain, Sheila, our top 4 growers in 2025. We expect those to be the top 4 growers for the balance of the year and into 2026. As far as LEAP is concerned, $1.5 billion of new wins. Of course, those stretch over many years. And the LEAP industrialization is going according to plan. We were just recently in San Antonio and the LEAP industrialization is right on track. That includes profitability. Of course, LEAP begins its journey as a zero margin contributor to EBITDA, and we expect that to accrete over time. Same with CFM56 in Dallas, I was just there last week. Really great expansion there with a new clean line installed, 11 gantries with 11 engines hanging on them and all those new customers joining the CFM56 customer suite in Dallas. That's going according to plan as well. No changes also in profitability. That business begins as a zero margin business and we expect it to be accreting up the learning curve over the next 3 years. And then, of course, the CF34. Really happy about CF34, kind of a mid-life mature engine within our -- its maturity cycle. And what we recently did is part of our $90 million of expansion opportunities and investments, we spent $50 million this year, expanding our license with GE. That is a 10-year investment that returns $10 million every year in earnings accretion. So -- and we're seeing that. CF34 predominantly serviced out of Winnipeg is a great, great engine. And that's -- we don't expect any flattening of demand there, strong backlog on CF34. And the same with the Turboprop engines, very, very strong backlog and strong accretion on these engines as they get serviced in our shops but also has a big USM capability as well on the CF34.

Maybe let's go back to LEAP again. GE raised its target for -- with a 25% CAGR for shop visits through 2028. Can you talk about how your revenue is slated to grow to $1 billion target and the mix of expected shop visits?

Do you want to take that one?

Sure. No problem. That was our of reach. Right. So with LEAP, it's... we signed that license 2 years ago, there was a forecast from the OEM, a forecast that we did externally as well to double check the numbers. And it was great. So we invested, and we've redone that forecast recently as has the OEM and the forecast is substantially stronger. It just shows kind of the demand set that's out there, both in terms of embedded base. The LEAP engine is winning over the last few years, they've won 70% of the A320 campaigns where they're competing with GTF, and they, of course, get all the MAXs. So bigger embedded base, more maintenance requires -- requirements than it were originally foreseen. So it's a really robust market, makes us feel really good about that $1 billion in revenue by the end of the decade, further bolstered by the win rate that Dan mentioned, the pipeline that we see out there. So we're actually seeing it in the pipeline and winning it in the marketplace. So all that makes us feel good about the volume requirements. And then mix-wise, it's going to be mostly the lighter shop visits, they're called CTEMs. And so it's mostly that. We inducted our first PRSV last year, and we expect those to start growing with time. But the mix is mostly CTEMs as we see it at the moment.

Maybe if you could talk about the difference between a CTEM and PRSV.

Sure. So CTEM tends to be specific to going into the engine to fix one issue that's there, right? Like the OEMs will write work scopes to resolve a durability or reliability issue that's going on in the engine. And so you're not sort of bringing it in, opening up every module of the engine, right, to inspect and then either repair, replace. You're going to a lesser scope within the engine, right, maybe one module, maybe two modules that may be going in to just fix one thing, replace one part that's having a durability issue. And so that's kind of the difference, the lighter work scope, more surgical.

And I know Chloé Lemarié is here, my European counterpart. So she wants to know what StandardAero does. And at least one investor in here wants to know how StandardAero is different than MTU or Safran or GE or [indiscernible], but this brings us to the exchange program that you recently announced on the CFM56-7B and that got a lot of hype. So can you talk about what that exchange program looks like and how you do that for your other engines?

No, we're really glad that there's a lot of excitement about a great initiative that's really not that big of a one. So the CFM56, of course, we're doubling our capacity down in Dallas and expanding the opportunity for customers to get additional service on that important engine. Of the menu of options we're providing our customers, we're now providing an additional option, which includes an exchange program. This is a single-digit investment -- single-digit million dollar investment on a one-off program that we expect that we can continue. So what it really represents is there's a particular customer, customer A, who called StandardAero and said, I'd love to get an exchange engine with a certain amount of cycles on it. We procured that engine for them. We are going to sell that engine in a swap program. So we procure it and we'll sell it to them back to back and receive a core. The great thing about receiving the core from that customer is that we have multiple opportunities to deal with the core. We can part it out, use it as USM. We can part it out and repair those parts and sell those parts or we can overhaul the entire core with our suite of capabilities and then have a new engine available for another swap. So we expect to do this on a one-off basis, 1, 2, 3, 4. And this customer is really excited to do it. It's not a -- certainly not a major investment of working capital or capital, but it's another option for customers with CFM56 requirements.

Maybe sticking to the commercial engines to continue on that, how do you think about engines that are rolling off in that great chart that you had that are no longer in mid-life and end of life? And how does that capacity coming off change?

Yes. It's interesting. We look at that. And when I first joined StandardAero, of course, I went straight to the programs that were rolling off. What's interesting is on the.

Did you were at Honeywell before, so?

I was Honeywell before. And of course, StandardAero is a great service provider to Honeywell engines, which include the HTF7000, of course, which I'm giving another pitch to, great engine. And I asked, okay, same question, where are these engines going? Engines, of course, as a lot of us know, have a 30- to 40-year life, and these engines continue to fly. And so we're not seeing in our long-range planning really significant drop-offs in any of these engines in a material way. Actually, what happens with -- as engines age, the number of providers that provide MRO services to those engines actually decreases and the center of gravity moves towards the biggest player. That's typically StandardAero, and we continue to service these engines whatever is left for many, many years. So in our long-term planning, Sheila, we don't see a big drop-off. We love these engines. Of course, as they're more mature, there's more opportunity for USM. The technicians are very skilled on them and the profit margins are nice.

Any -- sorry, I'm throwing this at you, but any share you have as you think about an engine as it hits its first shop visit, second, third, how you think about that share changing over the life of an engine?

The share?

Yes, because you mentioned as the engine ages, you are the center of gravity and there's less providers.

Yes. Well, I mean, on LEAP, of course, there are 6 CBSA license holders. That's an example at the very, very beginning of the maturity cycle. And of course, we have a 30-year license as a CBSA license holder, and there's 6 of us in the world that have that license. It gives us distinct competitive advantages. And so that network, we expect to not grow as the CFM56 did, but stay pretty tight within those providers and for the majority of the service events that will occur over the next 30 years and beyond. And we expect StandardAero with our big capacity to service LEAP and our strong relationship with CFM that we'll maintain a very strong share. That's an example. CFM56 is a little bit different. Over 40 providers on CFM56 today. However, StandardAero is, we believe, the only one to have increased capacity on an engine that continues to require shop visits, of course, as only 50% of CFM56s have seen their first performance restoration shop visit. So as these engines come off wing on a set of aircraft that's being flown heavily, we're the ones with capacity. And so we're seeing that exact strategy unfold in terms of demand. So two examples where sort of a tighter service network and a broader service network where we can take advantage of our position.