StandardAero, Inc. ($SARO)

Okay. Well, maybe we'll get going. Good afternoon, everyone, and welcome back to the aerospace and defense track here at the 2026 JPMorgan Industrials Conference. And I'm Seth Seifman, the A&D analyst here. And we are very grateful to have StandardAero with us, and we have the company's CFO, Dan Satterfield. Dan, thanks very much for coming.

Thanks, Seth. Appreciate it.

We'll do some Q&A for a little while, and we'll also go out to the room and see if anyone in the room has any questions as well. But I guess, Dan, maybe just to kind of start off and level set us, you reported the fourth quarter recently. How are things looking into 2026? And specifically, how is the ramp proceeding on some of the capacity that you've added recently for CFM56 engines in Dallas and to be one of the early network providers for LEAP engines in San Antonio?

Yes. Great. And thanks for inviting me. Happy to be here. Hi, everybody. So 2026 is shaping up to as we expected, and you pointed out the key drivers. There's some little bumps in the road that we'll talk about with our Phoenix fire and the government shutdown, which have a small impact and temporary impact in Q1. We can get into that in more detail. But in a larger sense, 2026 is a lot about the ramp programs where we do expect those to double in size in revenue size. That will be pretty significant, not only from a revenue standpoint, but also profitability. One of the things we're very happy about with -- on LEAP and CFM56 is during 2025, the industrialization costs or losses on those programs cut by 60% second half versus first half. So the ramp to profitability on those is proceeding as planned. We anticipate both programs to reach profitability in the first half of 2026 and then begin their march up. What does that mean march up? There's really 2 impacts on both LEAP and CFM56 profitability. Number one is burning down the industrialization costs. In particular, on LEAP being such an important program for us and for our customers, we put in the entire direct and indirect workforce in place in San Antonio. And so that results in industrialization costs that weren't absorbed when revenues were ramping. As revenues ramp, those costs are absorbed, and we're seeing profitability improve. And then the other key point is what we call the learning curve that if you've met us, you've heard about the learning curve. It's the amount of time it takes for a technician approaching a new engine for him or her to get to their entitlement efficiency on that engine. For LEAP, we expect that to take 3 to 5 years, over which time the technicians will become fully proficient on the engine. Turn times will increase, profitability increases as well as working capital efficiency. So all of that is now in its second year for both programs and proceeding according to plan.

Okay. Excellent. Really briefly, I guess, to level set, when you talk about the revenue on those programs doubling, I have been thinking that maybe in terms of what those programs contributed in '25, maybe it was kind of a high single-digit percentage of sales, something in that.

More mid-single digits.

Mid-single. Okay. Cool. Okay. So mid-single and then those dollars doubling this year. I guess a couple of questions to follow-up. First of all, on LEAP, what are you -- you talked about learning. What are you learning as you work on the engine? Are turn times at this life cycle stage of the program about what you've expected? Is the workforce kind of taking to the engine?

Yes. So certainly, turn times aren't where we want them to be at, I call entitlement level, which is more near the end of the decade. But yes, as evidenced by the improving cost position and profitability of these programs and frankly, the working capital burden, it's occurring as anticipated. As matter of fact, tonight, I'll be there to be with the team and celebrate some of the great work they've done on the early PRSVs or performance restoration shop visits. What's great about that is as we get better on these big heavy work scopes, we're actually creating more capacity. Right now, LEAP is fully booked. The San Antonio facility, which is our largest facility in terms of square feet, is -- all the gantries are full of LEAP engines. And so you say, well, what does that mean for the future? What that means for the future is as the technicians get better, get faster, come down the learning curve, those engines move faster through the MRO process, which is a series of 4 gates, ending with testing and then shipping of the engine. And so as that speeds up, we create capacity. The same thing is happening in Dallas at the CFM56 facility in Dallas. All of the gantries and a gantry is a big structure upon which an engine hangs and then is serviced, they're all full. So you'd say to yourself, well, okay, how are you going to get better? But through our 115 years of history, we've seen very clearly as technicians get better at the engine, faster at the engine, and that's through all of the cycles of component repair or kitting or rebuild, testing, the engine moves faster through the cycle, and you create capacity. And so we're satisfied that the capacity we've put in place, both in Dallas and in San Antonio are what we need.

Excellent. Excellent. When you think about the go-to-market strategy for that capacity and maybe for LEAP in particular, population of engines that's growing quickly and a lot of maintenance required for those engines. Is the idea to go out and build kind of as big of a backlog as possible and fill things up? Do you want to have a certain amount of capacity that's open and kind of more available in the moment? How do you think about what the right level of filling that up over several years is? And then also to the extent that you do have long-term agreements with customers on LEAP, what is the type of risk that you take on, on those contracts for work that might not be done until years in the future?

Sure. Yes. So right now, the majority of the work coming in for LEAP is under a long-term agreement. And different work scopes. And of course, the work scopes will change. Work scope is best defined as really the amount of material versus labor in a work scope. PRSV or performance restoration shop visit being the maximum amount of material required and typically the longest turn time and CTEM or continuous time engine maintenance being a work scope that's much lighter. And what it's intended to do is to bridge that engine to its next PRSV just to keep it going until a heavy overhaul where that engine will be taken out of service for a much longer amount of time. Customers need both. They need both CTEMs and they need PRSV. So we're smart about allocating our capacity towards having the ability for customers to have to both types of work scopes, even within their long-term agreements. So a long-term agreement with a particular airline will be a mixed work scope of a number of engines of both flavors that I've mentioned. And we'll ensure that, that's always the case that a customer does have the opportunity to bring in an engine for a CTEM or even a hospital visit. Listen, these are long-term customers that we have. They're blue-chip customers. They're the type of airlines that you want to work with on a long-term basis. And we are developing custom maintenance portfolios for them or profiles for them that makes sense for them over the long term. So that was the question of how that looks. And yes, the majority of it is long term. Interestingly, you didn't ask, but a lot of the business for LEAP right now is international. A lot of people, they're not certain that engines can't be shipped globally, and that's certainly the case. And we're definitely seeing it with LEAP. Great demand out of the Middle East, great demand even out of Asia. It's a total global marketplace, and we're able to service it out of San Antonio.

Excellent. And on the risk side in terms of if you've got a contract and you might be doing work in 2028, how do you think about the risk?

Yes. So it's a form of time and material type of contracts. So we typically don't put ourselves at risk on material. Certainly, we've got escalation clauses in or it's linked to the OEM catalog, that's rarely a risk for us. We do take risk on labor, which is the true value add of the individual -- these technicians that we've talked about so much today. We are taking -- that's where we take our risk, and that's where most of the value comes. Work scopes, we are protected against work scope creep is what we call it. So as that might expand during the inspection process, there might be something that's uncovered that wasn't anticipated. In particular, on the LEAP contracts that we're signing now, we're protecting ourselves against that.

Okay. Excellent. When you talked about getting to that sort of entitlement margin out around the end of the decade, I guess, 4 years or so from now. How does that margin look compared to the current Engine Services?

Sure. Yes. So the intent and the belief in the business case is that those margins will be accretive to Engine Services. So that -- and it's proceeding according to the pace that we designed in the original business case. Not a lot of surprises there. One of the bigger obstacles to getting there more on the cash flow side, Seth, is parts availability, right? That's really -- there is some inefficiency about not having parts available that has an impact to margins, but it's more immediately evident in working capital and as a result, cash flow. So that's where a lot of the focus is. And it's difficult to predict what the constrained part will be. As we've talked about before, it's usually in the casting and forging space, and that's been the case here on LEAP. But we've also seen some constraints on part repair from the OE. Our response to that is to expand our repair portfolio for LEAP. So I think we've said we've got about 475 authorized repairs now for LEAP, and that's a constantly growing number. And in tight cooperation with CFM, we're expanding that portfolio. Everybody likes more repairs on LEAP, including CFM, including the OE. Why? It takes pressure off of their supply chain. You would say, well, don't they want to sell a new part? Of course, they do. Not every customer wants new parts in every case. And certainly, if you only had new parts, that engine would be less economically feasible than if you had repair parts. So we have the full support of CFM as we expand our repair portfolio on the LEAP engine. And so it lowers the overall cost to the customer. It speeds up the turnaround times. In particular, it's probably the biggest impact, and that's better for the customer to get that engine back in service. And it's good for StandardAero, we have lower working capital.

Yes. Where do you think -- I want to say it was a low double-digit percentage of sales from component repair segment last year were internal sales to Engine Services. If LEAP is up at $1 billion of sales around the end of the decade, what portion of component repair could you see going -- being directed internally?

Well, that's assuming everything is sort of static, right? So it's probably better to say steady state. Will that low double digits get bigger? Yes, it will. That's 100% the intent. Because of the pure economic reasons for the company, as component repair with its approximately 30% EBITDA margin grows, that's -- has an enterprise impact for StandardAero margins. Again, it lowers the working capital burden for the customer and for ourselves and increases their turnaround time. And by the way, in-sourced repairs increased 16%, 15.7% in 2025, which is great. And we've put aside additional capital in our plan in 2026 to enable an even larger expansion of what we call new repair development. And so new repair development is not only for the in-source parts. It's also for brand-new repairs that we might not have today. Certainly, the in-source parts, it's sort of a captive audience, right? Why wouldn't I bring that work in. But we can also develop new repairs that's brand-new revenue for the company and for platforms that we might not service today on the MRO side. So famously, we do great work on the GTF engine, even though we don't service it. On the MRO side of the house, we do component repairs for that. And that's an area of potential expansion of our repair catalog as well.

So when you talk about devoting capital to that, is that just having your engineers doing the work to investigate tests new repairs?

Not just that. So certainly, we do have a dedicated team of engineers, and we've told that team, you can grow as large as you need to, right? There's no limitations on how big that group should be because the entitlement of new repairs is extremely large. What I meant by capital is actual capital expenditures on equipment. So the component repair business, it's not very complex equipment, but they are CNC machines, thermal spray machines. We've got some robotic welding that requires some capital, and they have great return on investment. That is the easiest capital to deploy.

Since we're talking about component repair, I imagine there -- or you guys have talked in the past about having thoughts about doing M&A in that business, and it's something that we saw prior to the IPO. What is the target environment like these days in terms of potential acquisitions? And how are you thinking about that here in 2026?

Yes, it's great. So it's clearly the larger target environment between traditional MRO and CRS opportunities, there's simply more. Why is that? Because there are -- it's not really that hard to set up a component repair shop. We found small businesses out there even with 1 or 2 specific repairs that, that person might have done for an OE or somehow develop that competency, and they'll open up a shop and have a great sort of captive market for that specific repair, fascinating. And there's dozens and dozens of these. I hesitate to call them mom-and-pops because they're quite successful businesses. So there's lots of those. There's larger component repair businesses as evidenced by the ATI acquisition, I think you were referring to. And by the way, that's been a home run, not only on 2 counts, right? Not only is it a component repair business, it's also a military component repair business, which is fantastic. We love to see our military business get larger. The DoD and the military are fantastic customers. They want StandardAero to be successful. And we've really turned around the J85 program for the U.S. Air Force. That's the engine that flies on the U.S. Air Force trainer jet. So it's the first jet you'll fly as you're learning -- jet turbine engine that you'll fly as you're learning to become a pilot. And we're the premier provider of services on that engine. We already were the heavy MRO service provider. And then with the acquisition of ATI, we are now doing component repairs on that engine. So double home run. Yes. And are there more of those out there? Yes, I'd like to find another military component repair business, but we're looking at all of them.

Okay. Okay. I guess one of the things if we talk about margin in the Engine Services business that I thought was notable is the margin has been pretty steady for the past 2 years, which I think is probably pretty good given 2 things. One is we look at -- I follow GE and we look at all the price increases on spares and you look at everybody else and the price increases that they put on spares. And to some extent, those need to be absorbed, not so much into your profits because you can pass them through, but they do affect your margin rate. And also, even though the industrialization costs of the new programs adjusted out of EBITDA, but it's still coming in at 0, but still growing. There's a mix headwind from that. So those 2 absorbing the cost of higher materials and this mix headwind, the Engine Services margin has managed to stay about flattish. What would you attribute that to? What do you guys do to maintain that margin?

Yes, great question. And the same dynamic is now happening in 2026 in a good way. And that's why I think we've talked about the headwinds. Where does the underlying growth come from? And where is it going to come from in 2026? It's really operating leverage and productivity on the existing programs. We talk a lot about the ramp programs, and we should, right? They're significant. But there's a total of 41 platforms that StandardAero services. a whole suite of turboprop engines that is accretive to margins in -- on Pratt & Whitney and Rolls-Royce engines with a very diverse customer base of small operators, search and rescue police type operators, small tourism operators for turboprops. It's a fantastic business. It's greater than $1 billion, and it's mature. Those technicians, and they're primarily up in Prince Edward Island in Canada, those technicians are at the peak of their learning, right? So they're where we want to get everybody to. And -- but that learning curve continues even on programs that get quite old, quite mature. For example, the TFE731 is fantastic Honeywell business aviation platform that's being slowly replaced by the HTF7000, an even better engine. We have the leading position on both of those. Does the TFE731 accrete margins every year? Yes, it does. And it does through really that continuous improvement methodologies that we put in place. There are thousands of projects across our 50-plus sites on continuous improvement every year. And we obviously are still continuing to lever our fixed costs. So that will happen again in 2026. The big -- you're probably going to get to this stuff, the big margin drivers in '26 are, number one, yes, the dilutive impact of LEAP and CFM56. So even though those margins will flip from negative to positive, they'll still be dilutive. And then those programs will double, and we kind of sized it with your earlier question, so you can start running those models. Offsetting that and almost exactly offsetting that is the material cost takeout that we've talked about of $300 million to $400 million, where we're taking out and rightly so revenue with low to 0 margin contribution to contractually out of the programs. Those 2 items will more or less offset each other. And then what's left according to the midpoint of our guidance is about 70 basis points of margin improvement, and that comes from the continuous improvement on all of those other 39 platforms from the continuing improvement of the CRS business and the outsized growth there as well. So it's great to have such a broad scope of business across 3 end markets and a whole different segment with component repair to allow us to fund the growth of the ramp programs.

Not to put you on the spot, but if we think about the ramp programs getting to that accretive place and we think about growth in component repair and the continued stuff that you guys do day in and day out, is there kind of a path to the -- we talk about this end of decade period, is there -- is high teens realistic for a margin?

That's putting me on the spot. I'll repeat what we're doing, right? So component repair, will it max out at 30%? I don't know, right? They can probably do better as the in-sourcing effort is pure margin, right? It's a pure margin play for the company. New repair development is always accretive. We would never create a new repair that would be dilutive. Why would you do that? So that's accretive and then the overall growth of that business. And then at the same time, the evidence of the LEAP profitability curve is just very black and white to us at this point, and we're watching it go straight up. So if you look at both of those elements -- and then when I said the business case is being fulfilled to anticipate an accretive margin at Engine Services for LEAP and then you run your model about how big that is for you, you can do your own math. And the number is going to increase.

Yes. CFM56, I wanted to ask a couple of questions about that. One is, I think I know the answer. Some people in the room that you guys probably do, but I'll get the question sometimes, okay, there are no more CFM56s being built and there's a potential GE will talk about maybe sometime later in the decade, the number of shop visits starting to decline. And so StandardAero has just invested in new capacity to maintain CFM56 engines mature engine. Why did you do that?

The business case was compelling. It's a great question. So first of all, a lot of talk about when the peak year will be for shop visits for CFM56 and a lot of different discussion about what that is. It's important to note that when we talk about it, when StandardAero talks about that peak year, we're talking about total shop visits. When GE has been talking about it, they've been talking about just heavy shop visits. So our data is a little bit different, and it makes sense because we do the whole scope of work scopes from low to high. And so our peak year of shop visits is a little bit later than GE. And that business case that we put together back in 2023 still is holding, right? We still expect that total shop visit peak to be near the end of the decade. Okay. So -- and in that environment, with the rising number of shop visits, we were the only big MRO to put in significant additional capacity. The other thing that we see over time, and this is the longer business case. This is a long-cycle business. And the business case on 56 and LEAP, they go out as long as you want. What we have seen over our 115-year history as engine programs get even more mature, there's consolidation around some suppliers, and it's the big suppliers. And that's typically us. And if you look at some of our very mature platforms like the Tay, like the Spey, like the TFE731...

RB211?

RB211 to an extent as well, a little bit different market because that's kind of freighters, a little bit different, lower number of customers being served there. But you see that consolidation. And the businesses that have put in capacity that have the high technician efficiency that can still grow new programs while maintaining the old. That's what we can do with our 50 facilities and 8,000 employees, then we're the consolidator of record. So that's what we're anticipating will also happen at 56 and which supports the business case.

Another thing about profitability on the mature engines that I've been thinking about. I imagine from a stock perspective, when we start seeing some CFM56 retirements, from a multiple perspective, there's probably going to be some kind of freak out. But from an actual business perspective, to the extent that you started to see engines being torn down, does that affect your profitability? And does that create a further margin enhancement potential for StandardAero?

Thanks. That was a layup. That's a good one. From my perspective, in particular, as a CFO, retirements are a good thing when you're StandardAero. And we do expect retirements ultimately to increase at CFM56. Will they increase as a result of the Arabian conflict? Way too early to say. But yes, there will be some older engines that will get retired during this little period that we're in right now. We'll see if it extends. But when those retirements occur, it's nothing but opportunity for a provider like ourselves. First of all, we're usually first in line and with a really high degree of visibility of those engines or even those aircraft being retired, and we have the financial capability to bring them on. And then there's multiple ways to prosecute that retired engine. A, we can part it out and deploy it into our sales channel of used parts, which is fantastic, right? When I was at Honeywell, Honeywell has a very active used part business, even an online business, very, very profitable and customers love it, so does StandardAero, number one. Number two, we can tear down that engine and deploy it into MRO events and lower the overall cost of the event for the customer and increase profitability for StandardAero. Number three, we can rebuild that engine, put more green time on it and offer it as an engine perhaps within that asset exchange thing we talked about a couple of ago, which, by the way, is still continuing successfully, and there's good margins for StandardAero on all sides of that. So we like retirements. We're not afraid of them. And on a program like CFM56, I wouldn't anticipate any level of sort of forecasted retirements to change that overall revenue picture. Again, remember that consolidating effect that we anticipate to happen.

Yes. Absolutely. Okay. Another engine I wanted to ask about is CF34 because that's another place where you guys have been adding some capacity. How do we think about the incremental growth that comes from that capacity and then the kind of the scale of CF34 in your portfolio, your position as a maintainer of that engine and its profitability within the portfolio?

Yes. Thank you. So CF34 is a great program. One of the proudest programs that we're on. First of all, it's a fantastic engine that flies on the regional aircraft, the very small narrow-body 130-seat aircraft that rarely are grounded. Those airplanes are always flying. And we're the leading provider of CF34, which is a service today in our Winnipeg facility where the company was founded. That facility has typically done CF34 and CFM56. And the CF34 business was getting so large, it caused that expansion into the CFM56 to result in the new Dallas facility. So that's where the expansion occurred down in Dallas. We doubled the size. We added a whole new part of our campus there for 56. Now as you might remember, we had the additional license agreement, we call the GBSA with CFM on the CF34 engine, and that has worked out fantastic. The investment in that has resulted in greater -- even greater volumes of business, which is now forcing that site in Winnipeg to need to expand. So we're expanding that. It will be done this summer, low double-digit million dollars of expansion capital and a significant help from the Manitoba government, where we have a very strong relationship. Of course, that's where the company was founded many years ago. So that's going to be a great growth driver, not so much in '26, but definitely in '27 for CF34. You asked about the profitability. CF34 is accretive to Engine Services margins for all the reasons we've given. More of a mature platform, the engineers have come down the learning curve. I can't tell you how many thousands of CF34s we've done, but the CI engine there is very tight, plus the new license, which not only expanded volumes, it also had some profitability drivers in there as well. So great program and happy to expand it.

Just going to check to see how we're doing on time. Cool. Any questions in the room? Okay. One question. You brought up earlier some of the maybe near-term challenges in the component repair business. I think you spoke about those on the Q4 call. But just to make sure everyone understands what's coming up, kind of what's happened there? And then what's the progress like in moving beyond those challenges to give you the confidence to reach the component repair guidance?

Thanks for asking. Yes, so 2 things have occurred on CRS that we discussed at the last earnings call. One was a fire at our plating facility in Phoenix. It happened early December. No employees were hurt, but the facility was taken down until really sort of the second half of January. And now it's ramping back up and that impact will have a resultant impact on revenue and margins for CRS. Really, the greater impact for CRS in Q1 was the government shutdown, which still has a spillover effect. When you gum up that whole process, which includes the Tinker Air Force Base, where a lot of the component repairs are coming out of, when that gets gummed up, it takes a while to on gum. Is the demand gone? No. We might have lost some revenue on the plating facility and the fire, but the larger impact on the government shutdown, that will all come back and get caught up, but we'll see the impact of it in Q1.

Right. And if I recall, that was that we should expect a lower growth rate but we should still expect growth?

Yes.

Okay. And likewise, a lower pace of margin expansion, but margins still...

That's correct.

Yes. Okay. Okay. Maybe just in our last few minutes here, if we just talk about cash conversion. I know that's been a concern for investors as you're in this investment heavy period. When should we think about -- I think last year's conversion was about 75%. When should we think about cash conversion getting into that 80% or solidly north of 80%?

So I think if you look at our guidance, we're guiding you to, again, about 75% in 2026. Again, I think that will be a great success for the company with the growth that we're experiencing and the investment we're still putting in, it's a pretty good number. What are the headwinds to keeping that greater than 75%? Again, it's really the turn times and the amount of time that a part or material sits on an engine in our shop greater than what it should be for the ramp programs, right? So the turn times on a LEAP engine and the turn times on a CFM56 Dallas engine are greater than they would be for the other programs we talked about, CF34 or HFT7000, the turn times are greater. So the working capital sits there longer. The good news is we control that algorithm to an extent outside of supply chain constraints as the engines -- as the technicians get better at their learning curve, all of that improves. So that's number one reason why we're still at 75% in 2026. The other one is that still some capital to deploy. We're enabling another test cell for LEAP. That's a good thing that increases capacity, and I'll be looking at that again also this week. So a little bit of capital there, some more capital expenditures to enable CRS growth that we talked about earlier. So capital expenditures will be similar year-over-year, and then we'll achieve that 75%. Okay. So at some point, that cycle on LEAP in Dallas will end. And then we're also putting a few dollars into Winnipeg. That's going to be a great payback. So that 80% to 100% certainly in this decade. And certainly, 100% is something that we should look about -- look and target.

Excellent. Very good. Dan, thanks so much for being here. Appreciate it.

Thank you.

Thanks.