Good afternoon, everyone, and welcome back to the Aerospace and Defense Track here at the 2026 JP Morgan Industrials Conference. 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. I guess, Dan, maybe just to kinda start off and level set us, you reported the fourth quarter recently, you know, how are things looking into 2026? 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? Yeah, great. Thanks. Thanks for inviting me. Happy to be here. Hi, everybody. 2026 is, you know, shaping up as we expected, and you pointed out, you know, the key drivers. You know, there's some little bumps in the road that we'll talk about with our Phoenix fire and the government shutdown, which have, you know, a small impact and temporary impact in Q1. We can get into that in more detail. You know, in a larger sense, you know, 2026 is a lot about the ramp programs where we do expect those to double in size, in revenue size. That'll be, you know, 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, you know, cut by 60%, you know, second half versus first half. 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? Well, there's really two impacts on both LEAP and CFM56 profitability. Number one is, you know, burning down the industrialization costs, in particular on LEAP being, you know, such an important program for us and for our customers. We put in the entire direct and indirect workforce in place in San Antonio. That results in industrialization costs, you know, that weren't absorbed when revenues were ramping. As revenues ramp, those costs are absorbed, and we're seeing profitability improve. 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, it's to get to their entitlement efficiency on that engine. For LEAP, we expect that to take three to five 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. 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 we talk about the revenue on those programs doubling, I've been thinking that maybe in terms of what those programs contributed in 2025, maybe it was kind of a high single-digit percentage of sales, something in that. More mid-single-digit. Mid-single? Okay, cool. Mid-single, and then those dollars doubling this year. I guess a couple of questions to follow-up. You know, first of all on LEAP, 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? You know, is the workforce kinda taking to the engine? Yeah. Certainly turn times aren't where we want them to be at, you know, I call entitlement level, which is more near the end of the decade. Yes, as evidenced by, you know, the improving cost position and profitability of these programs, and frankly, the working capital burden, it's occurring as anticipated. 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, you know, booked. The San Antonio facility, which is our largest facility in terms of square feet, is, you know, all the gantries are full of LEAP engines. 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 four gates, ending with testing and then shipping of the engine. 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. You'd say to yourself, "Well, okay, how are you gonna get better?" 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. We're satisfied that the capacity we've put in place, both in Dallas and in San Antonio are what we need. Okay. Excellent. When you think about the go-to-market strategy for that capacity and, you know, maybe for LEAP in particular, population of engines is 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 wanna have a certain amount of capacity that's open and kind of more available in the moment? You know, how do you think about what the right level of filling that up over several years is? 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 those contracts for work that might not be done? Sure Until years in the future? Sure. Yeah, right now, you know, the majority of the work coming in for LEAP is under a long-term agreement. Mm-hmm. In different work scopes, of course, the work scopes will change. Work scope is best defined as really the amount of material versus labor in a work scope, with PRSV or Performance Restoration Shop Visit being the maximum amount of material required and typically the longest turn time. 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 PRSVs. We're smart about allocating our capacity towards having the ability for customers to have access to both types of work scopes, even within their long-term agreements. A long-term agreement with a particular airline will be a mixed work scope of a number of engines, both, you know, of both flavors that I've mentioned. Mm-hmm. We'll ensure that's always the case, that a customer does have the opportunity to bring in an engine for a CTEM or even a shop visit. Listen, these are long-term customers that we have. They're blue-chip customers. They're the type of airlines that you wanna work with on a long-term basis. We are developing custom maintenance portfolios for them or profiles for them that make sense for them over the long term. That was the question of how that looks. Yeah Yeah, the majority of it is long term. Interestingly, you didn't ask, but a lot of the business for LEAP right now is international. You know, a lot of people, they're not certain that engines can be shipped globally, and that's certainly the case. 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. On the risk side, in terms of Oh, yeah. If you've got a contract- Yeah You might be doing work in 2020, how do you- Yeah think about the risk? You know, it's a form of time and material type of contracts. 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. Mm-hmm. Where we do take risks on labor, which is, you know, 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. 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 know, you talked about getting to that sort of entitlement margin out around the end of the decade, I guess, you know, four years or so from Yeah ...from now. How does that margin look compared to the current engine services offering? Sure. Yeah. The intent and the belief and the business case is that those margins will be accretive to engine services. It's proceeding, you know, according to the pace that we designed in the original business case. Okay. Not a lot of surprises there. You know, one of the bigger, you know, obstacles to getting there, more on the cash flow side, Seth, is parts availability, right? That's rarely, you know, 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. Mm-hmm. That's where a lot of the focus is. It's difficult to predict what the constrained part will be. Mm-hmm. 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. I think we've said we've got about 475 authorized repairs now for LEAP, and that's a constantly growing number. 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 wanna 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 repaired parts. We have the full support of CFM as we expand our repair portfolio on the LEAP engine. 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. Yeah. Where do you think I wanna say it was a low double-digit percentage of sales from component repair- Yeah. segment last year were internal sales to engine services. Right. If LEAP is up at $1 billion of sales around the end of the decade. Yeah. What portion of component repair could you see going, being directed internally? Well, that's assuming everything's sort of static, right? Yeah. It's probably better to say steady state. Will that low double digits get bigger? Yeah. Yes, it will. That's 100% the intent because of the pure economic reasons for the company as component repair with its approximately, you know, 30% EBITDA margin that grows, 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. By the way, in-source repairs increased 16%, 15.7% in 2025, which is great. We've put aside additional capital in our plan in 2026 to enable an even larger expansion of what we call new repair development. 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? 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. Famously, you know, 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. When you talk about devoting capital to that, is that just the having your engineers doing the work to investigate and test new repairs? Oh, not just that. 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. Okay. on equipment. You know, the component repair business, it's not very complex equipment, but they are, you know, CNC machines. Mm-hmm. You know, 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. Sure. 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. Yeah. What is the target environment like these days in terms of potential acquisitions and, you know, how are you thinking about that here in 2026? Yep. It's great. It's clearly the, you know, larger target environment between, you know, 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 CR, a component repair shop. We found small businesses out there, even with one or two specific repairs, that person might have done for an OE or somehow developed that competency, and they'll open up a shop and have a great sort of captive market for that specific repair. Fascinating. There's dozens and dozens of these. I hesitate to call them mom and pops because they're quite successful businesses. There's lots of those. There's larger component repair businesses, you know, as evidenced by the ATI acquisition I think you were referring to. Yeah. By the way, that's been a home run, not only, you know, on two counts, right? Not only is it a component repair business, it's also a military component repair business. Right. Which is fantastic. We love to see our military business get larger. You know, 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 US 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. Are there more of those out there? Yeah, I'd like to find another military component repair business, but you know, we're looking at all of them. I guess one of the things, if we talk about margin in the engine services business that I thought was notable is that margin's been pretty steady for the past years, which I think is probably pretty good given two things. One is we look at, you know, 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. 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. Even though the industrialization costs of the new programs are adjusted out of EBITDA, they're still coming in at zero. Yeah. It's still growing. Right. There's a mixed headwind from that. Those two absorbing the cost of higher materials. Yeah. This mixed headwind, the engine services margin has managed- Yeah. to stay about flattish. What would you attribute that to? Yeah. What would you guys do to maintain that margin? Yeah, great question. You know, this same dynamic is now happening in 2026 in a good way. I think we've talked about, you know, the headwinds. Where does the, you know, the underlying growth come from, and where is it gonna 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. There's a total of 41 platforms at StandardAero services. Mm-hmm. You know, a whole suite of turboprop engines that is accretive to margins 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 are primarily up in Prince Edward Island in Canada. Those technicians are at the peak of their learning curve, right? So they're where we wanna get everybody to. But that learning curve continues, you know, even on programs that get quite old are quite mature. You know, for example, the TFE731 is a fantastic Honeywell business aviation platform that's being slowly replaced by the HTF7000. Mm-hmm. An even better engine. We have the leading position on both of those. Does the TFE731 accrete margins every year? Yes, it does. It does through really that continuous improvement methodologies that we put in place. There are thousands of projects across our 50+ sites on continuous improvement every year. You know, we obviously are still continuing to leverage our fixed costs. That'll happen again in 2026. You know, the big. You're probably gonna get to this stuff. You know, the big margin drivers in 2026 are number one, yes, the dilutive impact of LEAP and CFM56. Even though those margins will flip from negative to positive, they'll still be dilutive. Mm-hmm. Those programs will double, and we kinda sized it with your earlier question. Yeah. 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-$400 million, where we're taking out, and rightly so, revenue with low to zero margin, contribution to earnings, contractually out of the programs. Those two items will more or less offset each other. Then what's left, according to the midpoint of our guidance, is about 70 basis points. Right. Of margin improvement. That comes from the continuous improvement on all of those other, you know, 39 platforms, from the continuing improvement of the CRS business and the, you know, outsized growth there as well. It's great to have, you know, such a broad scope of business across three 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, you know, the continued stuff that you guys do day in and day out, is there kind of a path to, if we talk about this end of decade period, is there high teens realistic for a margin? That's putting me on the spot. Yes. I'll repeat what we're doing, right? Yeah. Component repair, will it max out at 30%? I don't know, right? They can probably do better as, you know, the insourcing 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? That's accretive, and then the overall growth of that business. At the same time, you know, the evidence of the LEAP profitability curve is just very black and white to us at this point, and we're watching it, you know, go straight up. 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. Mm-hmm. You can do your own math, and you know, the number's gonna go increase. CFM56, I wanted to ask a couple questions about that. One is, I think I know the answer. There's some people in the room who look like you guys probably do. You know, I'll get the question sometimes. Okay, there are no more CFM56s being built, and there's a potential, you know, GE will talk about maybe sometime later in the decade, the number of shop visits starting to decline. Mm-hmm. StandardAero has just invested in new capacity to maintain CFM56 engines, this very mature engine. Why did you do that? The business case was compelling. It's a great question. First of all, you know, 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. Okay. Our data is a little bit different, and it makes sense because we do, you know, we do the whole scope of work scopes from low to high. Our peak year of shop visits is a little bit later than GE. Mm-hmm. 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. In that environment, with the rising number of shop visits, we were the only, you know, big MRO to put in, you know, significant additional capacity. The other thing that we see over time, and this is the longer business case. You know, this is a long cycle business. Mm-hmm. The business case on CFM56 and LEAP, they go out, you know, 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. That's typically us. Right. 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. Yeah. A little bit different lower number of customers being served there. You see that consolidation. Right. You know, the businesses that have put in the capacity that have the high technician efficiency, and that can still, you know, 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. That's what we're anticipating will also happen at CFM56, and which supports the business case. Yeah. 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, you know, from a multiple perspective, there's probably gonna be some kind of freak out. From an actual business perspective, to the extent that you started to see engines being torn down. Yeah. Does that affect your profitability? Does that create a further margin enhancement potential for StandardAero? Yeah. Thanks. That was a layup. Thank you. That's a good one. You know, from my perspective, in particular, as a CFO, retirements are a good thing when you're StandardAero. We do expect you know, retirements you know, ultimately to increase at CFM56. Will they increase as a result of the [Iranian conflict? Way too early to say. Yeah, there'll be some older engines that'll get retired during this little period that we're in right now. We'll see if it extends. 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, you know, capability to bring them on. Then there's multiple ways to prosecute that retired engine. We can part it out and deploy it into our sales channel of used parts, which is fantastic, right? You know, when I was at Honeywell has a very active used part business, even an online business, 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 quarters ago, which, by the way, is still continuing successfully. There's good margins for StandardAero on all sides of that. We like retirements. Mm-hmm. We're not afraid of them. On a program like CFM56, I wouldn't anticipate any level of sort of forecasted retirements to change that overall revenue picture. Again, remember the consolidating effect that we anticipate to happen. Yeah. 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, you know, your position as a maintainer of that engine and its profitability within the portfolio? Yeah. Thank you. CF34, it's a great program. You know, one of the proudest programs that we're on. First of all, it's a fantastic engine that flies on the regional aircraft. You know, the very small narrow-body 130-seat aircraft that rarely are grounded. Those airplanes are always flying. We're the leading provider of CF34, which is serviced today in our Winnipeg facility where the company was founded. That facility has typically done CF34 and CFM56. The CF34 business was getting so large, it caused, you know, that expansion of the CFM56 to result in the new Dallas facility. That's where the expansion occurred down in Dallas. We, you know, doubled the size. We added a whole new, you know, part of our campus there for CFM56. Now, as you might remember, we had the additional license agreement, we call it the GBSA with CFM on the CF34 engine, and that has worked out fantastic. The investment in that has resulted in even greater volumes of business, which is now forcing that site in Winnipeg to need to expand. We're expanding that. It'll be done this summer. Low double-digit $9 million 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. That's gonna be a great growth driver, not so much in 2026, but definitely in 2027 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. Great program and happy to expand it. Just gonna check to see how we're doing on time? Cool. Are any questions in the room? Okay. One question. You brought up earlier some of the maybe near-term challenges in the component repair business. Mm-hmm. I think you spoke about those on the Q4 call. Just to make sure everyone understands what's coming up, you know, 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? All right. Thanks for asking. Yeah, so two things have occurred on CRS that we discussed at the last earnings call. One was a fire at our plating facility in Phoenix. Happened early December. No employees were hurt, but the facility was taken down until really sort of the second half of January. Now it's ramping back up, and that impact will have a resulting 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 un-gum it. 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'll all come back and get caught up, but we'll see the impact of it in Q1. Right. If I recall, that was that we should expect a lower growth rate. Yeah. We should still expect growth. Yes. Okay. Likewise, a lower pace of margin expansion, but margin still expanding. Also correct. Yeah. Okay. Maybe just in our last few minutes here, could we just talk about cash conversion? Mm-hmm. 'Cause I know that's been a concern for investors as we're in this investment heavy period. When should we think about, you know, I think last year's conversion was about 75%. Yep. You know, when should we think about cash conversion getting into that 80% or solidly north of 80%? I think if you look at our guidance, you know, we're guiding you to, again, about 75% in 2026. Again, I think that'll be, you know, 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. You know, 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, you know, what it should be for the ramp programs, right? 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 a HTF7000, the turn times are greater. The working capital sits there longer. The good news is, we control that algorithm to an extent outside of supply chain constraints. As the technicians get better at that learning curve, all of that improves. 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. A little bit of capital there. Some more capital expenditures to enable CRS growth, as we talked about earlier. Capital expenditures will be similar year-over-year, and then we'll achieve that 75%. Okay. At some point, that cycle on LEAP and Dallas will end. Okay. We're also putting, you know, a few dollars into Winnipeg. That's gonna be a great payback. That 80%-100%, certainly in this decade, and certainly 100% is something that we should look and target. Excellent. Very good. Dan, thanks so much for being here. Appreciate it. Thank you. Thanks.