StandardAero, Inc. (SARO) Q3 2025 Earnings Call Transcript

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Overview

The earnings call indicates strong financial performance with increased net income and revenue growth across segments. Despite supply chain challenges, the company expects significant cash flow improvements and sustained supply chain recovery. Positive developments in the LEAP and CFM56 programs, along with strategic contract adjustments, suggest long-term margin benefits. The Q&A reveals confidence in overcoming current constraints, and the company maintains strong future growth prospects, particularly in business aviation. The positive sentiment, coupled with optimistic guidance, supports a positive stock price prediction.

Key Financial Performance

Revenue $1.5 billion, growing 20% year-over-year. Growth driven by demand strength across end markets and operational discipline.

Adjusted EBITDA $196 million, up 16% year-over-year. Growth driven by volume growth, pricing, and mix, particularly within component repair services.

Commercial Aerospace Revenue Grew 18% year-over-year. Growth led by a near doubling of LEAP revenues and strong contributions from CF34, CFM56, and Turboprop engine platforms.

Business Aviation Revenue Up 28% year-over-year. Growth driven by mid- and super mid-sized aircraft and the HTF7000 program.

Military and Helicopter Revenue Grew 21% year-over-year. Growth fueled by AE1107 engine volumes, C-130 transport aircraft programs, and J85 engine contributions.

Adjusted EBITDA Margin 13.1%, compared to 13.5% year-over-year. Decline due to lower-margin work scopes and ramping of LEAP and CFM56 DFW programs.

Net Income $68 million, an increase of $52 million year-over-year. Growth due to higher operating income, reduced interest expense, and lower nonrecurring costs.

Free Cash Flow $4 million use in Q3. Reflects challenging supply chain issues and record levels of contract assets. Expected to improve significantly in Q4.

Engine Services Revenue Increased 21% to $1.32 billion. Growth driven by LEAP, CFM56, CF34, Turboprop platforms, and HTF7000 business aviation platform.

Engine Services Adjusted EBITDA Increased 12% year-over-year with margins of 12.5%. Growth impacted by lower-margin work scope mix and growth on LEAP and CFM56 DFW platforms.

Component Repair Services Revenue Increased 14% to $154 million. Growth driven by military platforms, land and marine business, and ATI acquisition.

Component Repair Services Adjusted EBITDA Grew 32% year-over-year to $54 million. Margins marked a record quarter due to favorable mix and synergy capture from ATI acquisition.

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Operating Highlights

LEAP engine program: LEAP revenues nearly doubled sequentially from Q2, with nearly 50 engines inducted and over 60 expected by year-end. Long-term demand is robust, with revenues projected to reach $1 billion annually in the next few years.

CFM56 expansion: Progressing well at the DFW facility with strong bookings, including a significant 3-year award from a major North American carrier.

HTF7000 program: Growth supported by the expansion of the Augusta facility, driving demand for mid- and super mid-sized business jets.

Winnipeg MRO facility expansion: Adding 70,000 square feet to support CF34 and CFM56 programs, increasing footprint by over 40%. Supported by the government of Manitoba with a net investment in the high single-digit millions.

Component Repair Services (CRS): Expanded portfolio of OEM-authorized LEAP repairs to over 450, including exclusive fan blade repairs. CRS segment awarded new OEM authorizations for CF34-8 engine repairs.

Operational efficiency: Achieved record margins in CRS, with 32% adjusted EBITDA growth year-over-year. Structural changes to contracts expected to eliminate $300-$400 million in low-margin material pass-through revenue in 2026, improving cash flow and margins.

Cash flow improvement: Free cash flow guidance raised to $170-$190 million for 2025, with significant Q4 cash generation expected due to working capital unwinding.

Strategic priorities: Focus on ramping growth platforms, expanding CRS repair capabilities, and investing in long-term growth opportunities through organic and M&A activities.

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Risk or Challenges

Supply Chain Disruptions: Persistent delays in key constrained parts have led to record levels of contract assets and delayed engine shipments, impacting cash flow and working capital. This issue is expected to improve but remains a timing challenge.

Lower-Margin Work Scope Mix: The ramp-up of LEAP and CFM56 DFW programs has resulted in lower-margin work, which is currently dilutive to overall margins. These programs are expected to become margin positive by early 2026.

Material Pass-Through Revenue: Historically, contracts with low or zero-margin material pass-through revenue have consumed significant cash and obscured operating performance. Structural changes to these contracts are being implemented but will take time to fully impact results.

Economic Uncertainty: The company operates in a complex environment with potential economic uncertainties that could impact demand across its end markets.

Learning Curve Challenges: The rapid expansion of new programs like LEAP and CFM56 DFW involves a learning curve, which is currently impacting profitability and operational efficiency.

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Guidance & Outlook

MRO supply demand environment: The MRO supply demand environment remains tight globally, and this favorable dynamic is expected to continue for the foreseeable future.

LEAP program profitability: The ramping LEAP program is expected to turn profitable in early 2026 and continue to accrete from there.

LEAP revenues: LEAP revenues are projected to reach $1 billion annually in the next few years, supported by robust long-term demand and multiple wins.

CFM56 expansion at DFW facility: The CFM56 expansion at the DFW facility is progressing well, with strong bookings momentum, including a significant 3-year award from a major North American carrier.

Winnipeg MRO facility expansion: The Winnipeg MRO facility expansion is expected to be completed in the second half of 2026, increasing the footprint for CF34 and CFM56 programs by more than 40%.

Component Repair Services (CRS) growth: CRS is expected to drive third-party sales growth and strengthen synergies with Engine Services, supported by new OEM authorizations and expanded repair capabilities.

2025 financial guidance: The company raised its 2025 guidance across all key metrics: revenue, earnings, and free cash flow. Revenue is expected to grow by 14.5%, adjusted EBITDA by 16.5%, and free cash flow is projected to be in the range of $170 million to $190 million.

Structural changes to customer contracts: Structural changes to reduce or eliminate low-margin material pass-through revenue are expected to improve working capital efficiency and free cash flow conversion starting in 2026.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Are you targeting $1 billion in revenues for LEAP in the next few years?

A:Yes, the target remains towards the end of the late '29, '30 time frame. No change from the previous target.

Q:What are the choke points causing the increase in contract assets with receivables and inventory up $185 million sequentially?

A:The choke points are due to constrained parts, primarily forgings and castings. This has delayed engine shipments into Q4. However, the depth of delay on constrained parts is improving, leading to better cash flow visibility.

Q:Do the adjustments in long-term contracts, eliminating $300 million to $400 million of revenues at 0 margin, benefit 2026 or bleed into 2027?

A:Most of the benefit happens in 2026, but some will feather into 2027 as existing inventory is burned down.

Q:What is the backlog on the LEAP business?

A:The backlog was reported as a little over $1 billion last quarter, with about 5% growth this quarter.

Q:Is the improvement in supply chain sustainable or just a surge?

A:The improvement is sustainable. The depth of delay on constrained parts, such as forgings and castings, is improving, which gives confidence in the supply chain's recovery.

Q:What is the target for long-term cash flow conversion, and how does DSO impact it?

A:The target is 80% to 90% free cash flow conversion on net income. DSO is not a significant driver as payments are received on time. The main issue is supply chain constraints on specific parts.

Q:Why was the revenue outlook for CRS trimmed at the top end?

A:The CRS business is lumpy, and supply chain issues affecting MRO operators also impact CRS demand. However, the business remains strong with growth in in-sourcing and authorized repairs.

Q:What is the cash flow benefit of the $300 million to $400 million reduction in sales from contract adjustments?

A:The reduction will feather into 2026 as inventory winds down, with significant cash flow benefits seen in 2027.

Q:What visibility do you have on supply-constrained parts for Q4 and beyond?

A:Visibility for Q4 is strong, and supply chain changes are being made to address constrained parts. However, constraints can vary quarter-to-quarter.

Q:What have you learned from servicing LEAP engines, and how does it impact cost reduction?

A:The company is coming down the learning curve as expected, with full performance shop visits increasing. This will lead to margin-positive results in 2026 and accretive levels in the third year.

Q:What is driving the Q4 margin rate increase for Engine Services?

A:Better mix from BizAv and military programs is driving the increase. LEAP and CFM56 programs are growing at 0% margins but are expected to turn positive in 2026.

Q:Will the $300 million to $400 million contract adjustment impact revenue and margin beyond 2027?

A:No, it is a one-time impact. The margin benefit is ongoing, but the revenue adjustment will not recur beyond 2027.

Q:What is the growth outlook for the business aviation segment, particularly the HTF7000 engine?

A:The HTF7000 engine is expected to drive strong growth due to increasing flight hours and expanded capacity in the Augusta facility. The engine shop is ramping up, providing growth in 2026 and beyond.

Q:Why would an airline engine OEM agree to the contract pass-through change?

A:The change is value accretive to the end customer, allowing them to work directly with the OE without additional handling fees.

Q:What is the status of the M&A pipeline?

A:The M&A pipeline remains robust with many opportunities, but the company is waiting for the right fit.

Q:Review of Unclear Management Responses

A:Management avoided directly answering the question about why they are not currently providing an update on the LEAP business backlog, despite having provided such updates in previous quarters.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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