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

Good morning, everyone. I'll just start off since we're a minute late, and it's our fault because the elevators are slow, and I know that. So we have the StandardAero team here, Dan Satterfield, who's the CFO; and Rama Bondada, who's Investor Relations.

Maybe we'll just kick it off with a few questions, Dan, if that's okay to start. How do you think about StandardAero today? You've gone through the IPO now. I think it's been 2, 3 years. You're in a growth phase, both the commercial business that represents 60% of sales in military and business aviation. How do you think about the growth of your business from 2026 to 2030?

Yes. Well, we're in a great phase. Number one, coming out of the IPO, we significantly delevered, right? And now we're enjoying the fruits of that deleverage and the enormous cash flows coming in. The most satisfying part of being part of our business in the aerospace industry is the cash flow that we're generating. And you're going to see our liquidity position continue to improve, billions of dollars of cash flow available to us that we will deploy. And we've talked a lot about, Sheila, about our 5 capital deployment areas, organic growth. Just this month, we opened the expanded CFM -- sorry, CF34 facility in Winnipeg, increased our capacity by 1/3, and that's already full. So a great example of capital deployment in organic area. In terms of license expansions, we did in Q2, the $180 million investment for expanded licenses. That's returning $25 million a year at a minimum in a couple of years, and it will peak up to about $30 million. So a fantastic return on capital there where we're getting access to new licenses and new repairs that we haven't had access to before. Of course, M&A, we acquired Unified Turbines, a great bolt-on to the CRS business, new repairs that we didn't have before that we were able to require -- sorry, acquire. And that fits right into the CRS platforms that they already serve, but now new repairs on existing platforms. And remember, the great part about that is that we are reducing turnaround times for our customers by repairing parts instead of having to wait for new ones. And then, of course, stock repurchases through the first half, $100 million of share repurchases. We will continue that and are very, very proud to do it. So I think during the next second half of the decade, you're going to see additional capital deployment from StandardAero.

Sheila, I'll just add on there. When you think about StandardAero, right, we used to operate at 7x leverage in the private equity world. We IPO-ed at 4x. And now a few years later, we're down to about 2.5x. So that ties to what Dan was talking about the amount of deleveraging that's occurred. We're a 115-year-old company. You don't last that long if you don't generate cash. And we are -- through cycle, we're 100% free cash flow converter of GAAP net income. We've just gone through a heavy growth investment phase with LEAP over the last 3 years with CFM56 Dallas, doubling our footprint there. HTF7000, we are the exclusive heavy overhaul provider on that engine, which is the new engine for super mid cabin, which is becoming the fractionals. So these are huge fleets. And we've also done CF34, the expansion that we just completed. So all of these growth platforms that are setting us up for double-digit earnings growth and free cash flow growth over the -- not just a few years, but for decades. That's starting to unwind. We're coming down the learning curve on LEAP. That's a 3- to 5-year learning curve that started really in 2025. And so as that comes down, the learning curve is not just about training the engines faster and getting better margins. It's also about getting more efficient on the working capital. These are all things that are going to generate tremendous amount of free cash flow as we go forward in the next few years. So the last 2 years was deleveraging. The next few years is going to be a lot of fun because there's going to be a lot of opportunities for us to put things to work. And we have the natural growth drivers already built in.

I guess how do we think about where oil prices are today and how do we think about your backlog, which is baseball for the next 6 to 12 months? And how do you think about the high level of oil and when that actually impacts demand?

Yes. We talked about this before. It's a great question. We're not a components business. We're a long-cycle business. The MRO events that we are servicing today were built on flight hours over the last 5 years, beginning in 2022. So that demand profile isn't day-to-day. It's built up over many periods. And we've not seen a single shop visit impacted this year as a result of disruption in the market. Again, long-cycle business. As a matter of fact, 2027, Sheila, is baked. On the commercial side of the business, it's booked out. Of course, we're always going to maintain some flexibility for transactional business in our capacity. But for the long-term agreements and the demand into 2027 and into 2028, that is very clear. As you recall, almost 80% of our business is already under long-term agreement. So the transactional side of the house, we maintain for flexibility. But 2027 is solid, high visibility into demand all the way into 2028 on the commercial platforms.

And I think that's a misunderstanding that people don't understand about engine MRO is that it's not long cycle 15 and 20 years like OEM. It's not short cycle like aerospace components. It's driven by 5 years of previous flight cycle. So you'd have to be like a terminator and travel back in time and destroy demand in 2022 or 2023 to affect us this year or next year or even into early 2025 at this point.

That's a new one, terminator.

I saved that for you.

How do you, I guess, think about your commercial aerospace business? It represents 60% of your sales or maybe your top 5 platforms. Can you go through the top 5 platforms, how you think about growth? LEAP is about $400 million of revenues going to $1 billion by 2030. And how CFM56 changes in RB211 in that top 5 mix?

Yes. So first of all, look, RB211 is not in the top 5. But the...

I'm wrong again on my demand model. There we go.

LEAP is, of course, an entitlement that we earned being a very, very trusted partner to the OEs and to the end markets. There are only 8 CBSA license holders in the world. We're one of them. And we have an earlier ramp-up in our industrialization on LEAP than anyone else with very few exceptions. Also already building the repair portfolio for LEAP in conjunction with GE and Safran. And as we've said, we're very confident in $1 billion of LEAP revenue by the end of the decade and LEAP achieving incremental margins incremental to ES, our Engine Services segment by that same time period, and that has to do with a very predictable learning curve improvement as you ramp up the program. Very satisfied with the LEAP pipeline, very satisfied with the type of customers that are coming in. It's quite international from Asian to European, even Middle Eastern growth on the LEAP engine. So it's broad-based and fundamental represented by long-term agreements and capacity for transactional work. Also on LEAP, we've got the ability to grow capacity. Of course, LEAP is being serviced out of our San Antonio facility, the largest of all of our facilities. And there's 2 ways that you can grow capacity in a program like that without expanding footprint. Number one is the learning curve. So the learning curve is the number of hours that a technician takes to push an engine through a shop. And for a brand-new engine like LEAP, of course, at the beginning, it's much slower. We're already seeing the improvement both in revenue and turnaround times as the technicians get more proficient on the engine. That's a way to increase capacity without changing footprint. Also, the test cell capacity. Test cell, of course, the key, very highly expensive barrier to growth. And for LEAP, we have a full test cell fully dedicated to LEAP, 100%, and we have a test cell in waiting. San Antonio has a very large test cell array, and all we have to do the second test cell is correlation. Correlation is making the test cell specific to the parameters of the engine that it's servicing. So we can do that as well. And then we've specifically put LEAP next to RB211 in San Antonio. RB211, nice program. Really at this point, it's not significant in its demand profile to the company as a whole in relation to the other programs. But as LEAP changes its demand profile, those technicians simply absorb the work for LEAP and the capacity goes up. Other platforms that are growth, of course, are CFM56. And a lot of you have had the opportunity to visit us in Dallas, beautiful facility and where we've doubled our capacity on CFM56. And we have 7 test cells, not all dedicated to CFM56, but a test cell array that can grow with time as well. And there, it's a similar dynamic on the learning curve. Even though we've done 1,000 CFM56s up in our Winnipeg facility in the Dallas facility, it's a new platform for them. So they're going through a similar learning curve as the LEAP technicians. It's somewhat shorter because this is a program that we do know and our colleagues up north have experience with. But as that learning curve goes up and the turnaround times come down, we have additional capacity and CFM56 demand looks great. Other platforms where we're seeing growth, of course, are the turboprop engines. One of my favorite set of platforms because they're highly fuel efficient and really immune to the extent of jet fuel prices, and we're seeing that on the turboprop programs. Also, the customer base is extremely varied, not just commercial operators, but fire and rescue, municipal operators there as well. And that is where we invested most recently in expanded licenses on turbofans on the biz av side, but then turboprops on the commercial side. We have additional licenses on that already robust and very profitable suite of engine programs, the turboprops. HTF7000 on the biz av side, it's really the #1 engine from my former employer, Honeywell. It is the engine of choice for the super midsized engine -- sorry, aircraft platforms, and it continues to grow at a very impressive rate. And remember, on the HTF7000, we are the exclusive heavy shop visit provider globally.

And then also -- you talked about the top 5, right? CFM56 wasn't even the top 10 for us last year. It's just entering into the top 10, right? We've never really focused on that until we doubled our footprint here. And it's purposeful, right? You have the second, third mover advantage when you're an OEM. You can wait until you get to a much more mature platform where USM starts increasing and you could start taking share because we have the CRS business that creates USM. You do need retirements to pick up to get USM. So we're preparing for that as retirements pick up to be able to take share, make faster turnaround times through stub builds or module swaps or whatever the market is looking for at that time. So that's still growing pretty tremendously. It will eventually get to top 5, but it's not even -- they just entered the top 10. AE2100, which is the ubiquitous engine on the C-130, that is a top program for us as is the AE1107 on V-22 Osprey. So there's a pretty good blend of military, commercial, biz av where we have exclusive positions on where that are all going to be growing as we look into.

Yes. On those 2 fixed wing military platforms that Rama just mentioned, we have 80% of the work there on those programs and high visibility into the future. As I mentioned earlier, 77% of our business is under long-term agreements. So our ability to see out into the future, 18, 24, 36 months and even beyond is quite unique.

And Sheila, that on those 2 platforms, future variants, we also get 80% rights though.

Can we talk back about the LEAP, if that's okay. As you think about the revenues going from $400 million today to about $1 billion in 2030, how do we think about the number of shop visits that includes how you think about the market share and then from a profitability perspective, how we think about the learning curve?

Sure. So really 2 types of shop visits on LEAP. Right now, it's dominated by the CTEMs, continued time engine maintenance programs, shop visits. Those are really shop visits that are intended to bridge an operator to his next PRSV or performance restoration shop visit, the heavier shop visits. So right now, early on the ramp of LEAP, we're seeing more of the CTEMs. And that is now shifting to the PRSVs. Those are where we are being swamped with RFPs every day on PRSV slot availability out into the future. We're booking those up. And so you'll see shop visits -- you'll see the revenue increase steeply towards that $1 billion mark and then continuing on into about a $3 billion mark...

[Audio Gap] you go from CTEMs to PRSVs?

Yes, the PRSVs are more valuable shop visits. So per shop visit, you're going to see the revenue increase. And so that's fueling the climb from where we are today to that $1 billion mark.

And we don't stop at $1 billion, right? It goes from $1 billion to several billion by the middle of next decade. And that's just simple math based upon what the delivery schedules have been and what they will be and based upon the way the engines are flying and the amount of work that comes out of there. And we don't really need to do much to capture that several billion. It would be adding the second test cell in terms of correlating it, which takes about 12 to 18 months, at least it's already there and then adding a second shift. So it's not like we need to do an expansion or anything for that.

In terms of the margin profile, great success story there, right? LEAP achieving profitability here in Q2 and right on schedule from double-digit million industrialization costs at the beginning of the program to black numbers here in Q2, it's right on schedule, and we're very, very happy. Two of the reasons that we've got there, and these are the same reasons that will drive profitability up. Remember that we've said at the $1 billion mark of revenue, we expect the LEAP margins to be accretive to Engine Services segment margins. Very confident in that because of the following. First of all, revenue growth, right? We did put in the right amount of indirect costs early in the program to make sure that it's successful. And so as we increase revenue, we're absorbing those indirect costs. And then the learning curve. Again, that's the amount of time -- amount of hours a technician needs to push an engine through the shop up to what we call specified margins -- sorry, hours or spec hours. And for the LEAP engine, we anticipate that to take about 5 years, and we're already seeing it happen because of the turnaround times are decreasing on LEAP, revenues going up because we're pushing the engines through faster. And of course, all of that has a positive effect on margins. So very confident in achieving that level. Remember also being in the exclusive club of the CBSA license holders, we have commercial advantages that non-CBSA license holders do not have, and we're taking advantage of those as well. That not only makes us competitive in the marketplace, but also greater margins.

Is that just parts agreements with the OEMs, the CBSA?

It primarily has to do with parts agreements.

There's also a technical engineering access. So when you're doing an MRO repair, we're sharing notes with GE sharing their notes with us that if you're not part of that network, you don't get that sort of.

Well, and that's driving -- good point. That's driving the repair side of the house. Because we have that full access to the engineering teams at GE, together, we're developing component repairs. We're well ahead of anybody else in the CBSA license network outside of the OE in building that repair portfolio. Remember, our CRS business has already 20,000 license approved repairs at very accretive margins. And that LEAP entitlement will grow as the shop visits grow. Actually, the repair guys should be running at a little bit faster pace and providing that accretive growth, not only there, but also on CFM56, we're continuing to develop new repairs. Customers love our component repair business because not only is a repair less expensive than a new part, it's increasing your turnaround time -- sorry, decreasing your turnaround time.

Can I ask any metrics you could provide around that 5-year mark of how you expect LEAP to improve profitability to be accretive, whether it's the amount of time a shop visit takes?

It's primarily that. It's primarily the amount of time that the engine technicians take. And then they are able to increase capacity simply by being faster. And then less time in the shop means higher profitability. And like I said, we've tracked this on a line to the point now where we've hit black numbers. There's really nothing in the way to continue to improve profitability. And then the additional kicker there are the LEAP repairs that we will be performing as well. That repair portfolio has already grown to 500 repairs. It continues to grow every single day, and that will provide additional juice in the LEAP margins.