SARO - NYSE

Good afternoon, and welcome to StandardAero's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the call over to Rama Bondada, Senior Vice President of Investor Relations. Please proceed.

Thank you, and good afternoon, everyone. Welcome to StandardAero's Fourth Quarter and Full Year 2025 Earnings Call. I'm joined today by Russell Ford, our Chairman and Chief Executive Officer; Dan Satterfield, our Chief Financial Officer; and Alex Trapp, our Chief Strategy Officer. Alongside today's call, you can find our earnings release as well as the accompanying presentation on our website at ir.standardaero.com. An audio replay of this call will also be made available, which you can access on our website or by phone. The phone number for the audio replay is included in the press release announcing this call. Before we begin, as always, I would like to remind everyone that today's earnings release and statements made during this call include forward-looking statements under federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission, including in the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2025. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, during today's call, we will discuss certain non-GAAP financial measures such as adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share, free cash flow and net debt to adjusted EBITDA leverage ratio. A definition and reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings release and in the appendix to the earnings slide presentation. Non-GAAP financial measures should be considered in addition to and not as a substitute for GAAP measures. I would now like to turn the call over to Russ. Russ?

Thank you, Rama, and thank you to everyone for joining our call today. I'll start on Slide 3 of our earnings presentation with a review of several highlights from 2025, our 114th year as a company and our first full year as a publicly traded company. 2025 was another record year for StandardAero and one in which we made significant progress on our strategic objectives, enabled by a relentless focus and dedication to quality and performance by our 8,000 employees worldwide. We saw excellent growth with revenues increasing 16% year-over-year and adjusted EBITDA up 17%. This strong financial performance was underpinned by continued robust demand for our solutions and high-quality execution. We also generated meaningful free cash flow of $209 million. This included more than $300 million generated in the second half of the year, in line with typical seasonal trends and is reinforced by our asset-light business model and cash management initiatives. We accomplished this while investing $90 million in our growth platforms and navigating a supply chain that continues to be characterized by part availability delays. Importantly, we expect to see continued growth in our free cash flow generation again in 2026 and into the future. A key highlight in 2025 was the strong progress we made on our LEAP program, where we saw a substantial ramp in work throughout the year and continue to progress along the learning curve. Specifically, we inducted 60 LEAP engines in 2025, up from 10 in 2024 and generated revenues in the second half of 2025 that were approximately 2.5x the revenues we generated in the first half of the year. As we look ahead, we had several significant customer wins during the year that provide very good visibility for 2026 with most of our planned slots already filled. Equally important is how we are expanding the content and value of what we do on LEAP. We've now developed more than 475 LEAP component repairs, which directly support turnaround time, customer value and long-term economics as the fleet matures. And we recently delivered our first full overhaul on the platform, which marks a meaningful milestone for us in our ability to address the full market opportunity. As we stated before, we continue to see the market for LEAP MRO only getting stronger, and we expect this program to continue to demonstrate substantial growth for many decades to come. We completed the expansion of our Augusta business aviation facility during the year, adding additional MRO capacity and expanded hangar space to handle large cabin jets. This additional capacity will help us accelerate growth on the popular HTF7000 engine, where we are the market leader and have the worldwide exclusive independent heavy overhaul license. We also fortified our already market-leading position on the CF34 engine, which powers the majority of the world's regional jets. We're seeing even stronger demand on this platform than we expected, both near and long term, leading us to announce late last year that we're expanding our flagship CF34 facility in Winnipeg. We expect the expansion to be complete in the second half of 2026. Combining this initiative with the expanded license relationship with GE from earlier in 2025 as well as the long-term contracts we have with some of the largest operators around the world, we feel really confident in our position on this platform. We've only just begun to realize the value creation from these strategic investments. Next, performance excellence remains core to our culture and how we operate. As discussed last quarter, we made progress in restructuring customer contracts to get rid of pass-through material, which will eliminate $300 million to $400 million of low-margin revenue and result in higher reported margins that better reflect our true operating performance of the underlying business. We continue to make progress in capturing more high-value component repair work in-house with in-source component repair revenue increasing by 15%. And importantly, ATI synergies are producing above plan, which supported performance and strong margin expansion at CRS. On capital allocation, we ended the year with our leverage ratio improving to 2.4x, giving us meaningful capital allocation flexibility. We are well positioned to invest organically pursue strategic M&A when it's value accretive and return capital to shareholders. Consistent with this third point, we authorized a $450 million share repurchase program in December. Turning to Slide 4. Market demand remains strong for our MRO solutions and the groundwork we've laid in key end markets is driving growth. In commercial aerospace, we saw nearly 18% growth year-over-year, driven by the strong ramp in LEAP, CFM56, our investments in the CF34 platform and continued global demand for turboprop MRO needs. In business aviation, revenues grew 12% year-over-year, driven by continued strength on both mature engine platforms such as the TFE731 and growth platforms such as the HTF7000. In military, revenues grew 9% despite the longest government shutdown in U.S. history, which impacted the fourth quarter. We saw a healthy rebound in the AE1107 platform and continued steady demand on key engines that operate on military transport aircraft, which makes up the vast majority of our military business. Turning to margins. Even while ramping our LEAP and CFM56 DFW growth programs, we delivered margin expansion in 2025. Margin progress was not accidental. It was driven by deliberate actions and a focus on continuous improvement. As Dan will discuss shortly, we are only in the early stages of our margin expansion journey. Driving the total company margin improvement was strong component repair growth and synergy realization on our 2024 acquisition of ATI, which helped push the margin profile of our CRS segment into the high 20s from the mid-20s previously. Turning to Slide 5. I'll talk about 2026 and our priorities for the year. We continue to see a really positive market backdrop with robust demand, particularly in the commercial end market that will lead to double-digit earnings growth, continued margin expansion and accelerating free cash flow generation in 2026. From a strategic and operational standpoint, we remain focused on the same pillars that have defined our success. Starting first with LEAP. Our top priority here in 2026 continues to be execution and specifically achieving profitability in the first half of the year while continuing to build commercial momentum by winning additional contracts. The way to improve margins is by continuing to improve throughput and productivity as we progress down the learning curve, expanding our repair and process capabilities and delivering the high quality and turnaround performance our customers expect. As we prove out scalability and performance, we expect to continue converting demand into incremental long-term customer wins. Second, we're focused on fully leveraging our investments in CFM56 and CF34. On CFM56, the key is to drive higher utilization and efficiency in our DFW Center of Excellence to support profitable growth. On CF34, we're focused on fully leveraging our expanded license and completing the Winnipeg expansion. The rationale for this expansion is to support demand visibility and position StandardAero to continue to take share on a platform where we have deep experience and a durable competitive position. Third, on component repair. CRS remains a strategic engine for value creation, and our priorities this year are to continue to accelerate new repair development while also expanding in-sourcing capture. This means continuing to industrialize additional repairs, increasing the breadth of what we can do internally and intentionally pulling more repair content into our network. All of this supports better turn times, stronger margin mix and improved overall economics across the enterprise. Fourth, continuous improvement. It remains core to what we do and our culture, and we're looking to lean even more into this in 2026 to execute continuous improvement and pricing opportunities across the portfolio to enhance productivity and margin improvement. Practically, this means continuing to standardize best practices, drive operating discipline at the shop level, reduce variability and ensure our pricing reflects the value we deliver, especially in an environment where capacity remains constrained and customer demand remains strong. Then finally, on capital deployment. We will continue the disciplined pursuit of high-return organic growth investments, remain active in evaluating accretive M&A and be opportunistic on share repurchases, all with a consistent focus on strategic fit and long-term shareholder returns. Our priorities are consistent. We're centered on strengthening our long-term competitive position, delivering service excellence to our customers and driving consistent and predictable double-digit growth. And we remain, as always, committed to delivering on what we say we will do. With that, I'd like to turn the call over to Dan to walk through our results and outlook with additional detail. Dan?

Thank you, Russ. I will begin on Slide 6 with some highlights from our fourth quarter and full year 2025 results. For the quarter ended December 31, 2025, we generated revenue of $1.6 billion as compared to $1.4 billion for Q4 2024, representing 13.5% growth, all organic. This helped drive 2025 full year total company revenue growth of 15.8% versus 2024 or about 14.5% on an organic basis. We saw strong growth in both our Engine Services and Component Repair Services segments, which I will get into in a moment. Adjusted EBITDA increased to $210 million for the fourth quarter 2025 compared to $186 million for the prior year period, representing 12.7% growth. Growth was primarily driven by continued end market strength, productivity gains and pricing improvement. As a result, adjusted EBITDA for the year was $808 million, representing 17% growth year-over-year. We reported net income of $79 million in the fourth quarter of 2025 versus a net loss of $14 million in the prior year period. This year-over-year improvement was primarily driven by growth in our operating earnings, along with lower interest and lower onetime costs as Q4 of 2024 was burdened by costs related to the IPO and the refinancing of our debt post-IPO. Full year 2025 net income was $277 million, representing a $266 million year-over-year increase. Adjusted net income came in at $398 million with adjusted EPS at $1.19 per share. Free cash flow for the fourth quarter 2025 improved to $308 million as we were able to complete and deliver engines that were previously held up by supply chain constraints for a significant part of the year. On a full year basis, we generated free cash flow of $209 million. Now to our segment performance, starting with Engine Services on Slide 7. Engine Services revenue increased to $5.35 billion in 2025, representing 15.3% growth compared to 2024. Notable drivers included the CF34, HTF7000, our turboprop platforms, LEAP and CFM56, with the latter 2 contributing several hundred million dollars in revenue growth. On the earnings front, Engine Services adjusted EBITDA grew 15.7% in 2025, driven by the strong revenue growth and mix. Margins were flat year-over-year with operating leverage and productivity offsetting the initially dilutive LEAP and CFM56 DFW programs. For the fourth quarter, adjusted EBITDA margins of 13.4% were up 60 basis points year-over-year, which was driven by mix and productivity gains. Turning to Component Repair Services on Slide 8. CRS revenue increased to $709 million in 2025, representing 19.6% growth compared to 2024. We continue to see strong demand for our Aero derivative solutions in the segment and growth in our military helicopter and other end markets, including at our Aero Turbine acquisition, which was impacted by the U.S. government shutdown in Q4, but overall had strong performance this year. CRS adjusted EBITDA grew 31%, which was driven by volume growth, price, mix and synergies from the ATI acquisition. These combined to drive a 250 basis points margin increase year-over-year. There were 2 situations that affected CRS performance in Q4 worth noting. First, we experienced a small fire at our Phoenix CRS facility in early December. It was in the overnight hours, and fortunately, no employees, civilians or firefighters were injured. However, the facility was shut down for nearly all of December, and this did impact revenue growth and margins in the quarter. The facility came back online in the second half of January, but it will take a few months for it to reach its previous levels of activity. Second, our military business, which had seen strong demand and had been performing very well through September was affected by the U.S. government shutdown, which impacted its growth. Now moving to Slide 9. I'll dive a little deeper into our free cash flow for the quarter and the full year. We generated free cash flow of $308 million in the fourth quarter as we delivered engines that had been awaiting parts in some cases, for several quarters. This drove a reduction in our inventory and contract assets of $183 million, marking a meaningful improvement in our working capital. On a full year basis, 2025 free cash flow was $209 million, which compared to a use of $45 million in 2024. This represents a 75% free cash flow conversion on net income in 2025. Driving this year-over-year cash improvement was primarily our EBITDA growth, the reduction in interest expense to a more normalized level, our lower investments in LEAP and CFM56 DFW facility and the reduction in capital market expenses related to the IPO and refinancing of debt in 2024. These cash flow improvements were partially offset by the increase in working capital year-over-year, much of which was related to our ramping of LEAP and CFM56 programs that continue to come down the learning curve. Moving on to our balance sheet and liquidity on Slide 10. Over the course of 2025, our net debt to adjusted EBITDA leverage ratio declined from 3.1x to 2.4x. This reduction was driven by both cash generation and our adjusted EBITDA growth. We are now well within our target leverage ratio range of 2 to 3x with ample liquidity and financial flexibility to continue to pursue accretive capital deployment for our shareholders. To that end, we are in an attractive position with multiple avenues where we can allocate our capital to drive strong returns. This includes continued focus on organic investments, investing in new engine platforms as we have with LEAP, license expansions, such as we did with the CF34 program and accretive and synergistic acquisitions. We also now have the additional tool of share repurchases available to us. Underpinning all of this is a disciplined approach focused on strategic fit and return on investments, which are key criteria whenever we make a significant investment decision. Now let's review our outlook for fiscal year 2026, as shown on Slide 11. We are entering 2026 with solid momentum, driven by our entrenched positions on key engine platforms, visibility into new wins and opportunities to expand our portfolio. As a result, we are forecasting revenue in the range of $6.275 billion and $6.425 billion. Underpinning this outlook is continued strong demand in our core end markets, where we expect low double-digit to mid-teens growth from our commercial aerospace end market and high single-digit growth in both our business aviation end market and our military and helicopter end market. I'd note that the 4% to 6% growth in our company revenue guidance includes the previously disclosed elimination of $300 million to $400 million of low-margin material pass-through revenue from restructured contracts in our Engine Services segment. This pass-through revenue consumed a significant amount of working capital with little earnings benefit. For Engine Services, we are forecasting revenue in the range of $5.5 billion and $5.625 billion or 4% year-over-year growth at the midpoint. Excluding this pass-through revenue impact, segment revenue guidance implies greater than 10% year-over-year growth at the midpoint. Our Engine Services guidance incorporates a year-over-year doubling of our LEAP and CFM56 DFW revenues. For Component Repair Services, we are guiding to a revenue range of $775 million to $800 million or 11% year-over-year growth at the midpoint. For full year 2026, we expect total company adjusted EBITDA of $870 million to $905 million or approximately 10% year-over-year growth at the midpoint. This implies a 70 basis point margin improvement year-over-year to about 14%. We forecast 2026 Engine Services adjusted EBITDA of $755 million to $780 million. This reflects a 60 basis point margin improvement versus the previous year at the midpoint. We continue to expect our growth platforms, namely LEAP and CFM56 DFW to reach profitability in the first half of this year. CRS segment adjusted EBITDA is expected to be in the range of $220 million to $230 million, which at the midpoint implies 11% year-over-year growth with margins in the 28.5% to 29.5% range. With many of the onetime IPO and capital market expenses behind us, we are adding adjusted EPS to our guidance metrics. For 2026, we expect adjusted EPS of $1.35 to $1.45 versus 2025 adjusted EPS of $1.19, which implies 18% EPS growth at the midpoint. On free cash flow, we expect cash generation of $270 million to $300 million or 36% growth at the midpoint. Remember, we are historically a second half cash-generating business, and we do not expect 2026 to be much different. I would also like to provide some additional color on the expected cadence of our financials through this year. As evident in our results, there is seasonality to our business. The fourth quarter is typically our strongest revenue quarter, followed by the second quarter, then the third quarter and finally, the first quarter. We expect 2026 to be no different. We don't usually provide quarterly information, but given how far we are into the first quarter, we thought it would be helpful to provide some color on Q1, which is already baked into our full year 2026 guidance, specific to the Component Repair segment. We expect growth in margins in Q1 in CRS to be below our normal levels and likely below what you have come to expect. There are 2 main drivers: First, the spillover effect of the U.S. government shutdown in the fourth quarter last year; and second, the previously mentioned small fire at our Phoenix CRS facility. Again, both of these situations are factored into our full year 2026 CRS segment guidance of double-digit revenue and earnings growth. With that, I'll turn it back over to Russ on Slide 12 to wrap up our prepared comments. Russ?

Thank you, Dan. Putting it all together, 2025 was another record year for StandardAero with exceptional growth driven by robust demand across our end markets, accretive organic and inorganic investments we've made over the last several years, our focus on continuous improvement and margin expansion, all of which we believe position us to continue to drive compounding growth and value creation for our shareholders. We are really excited about what lies ahead in 2026, and we're confident we have the right strategy in place to capitalize on the strong market demand and the opportunities we're seeing. Thank you again for joining us today. And with that, operator, we're now ready to move into Q&A.

[Operator Instructions] And our first question comes from the line of Krista Friesen from CIBC.

Maybe just a clarification on the last comment you made there on CRS margins in Q1. Are you speaking to the growth in margins being less than what we've seen or that we could expect to see margins down on a year-over-year basis?

Yes. I mean what we're -- Krista, by the way, good to hear from you. We're talking about the 2 impacts, the government shutdown and the fire are obviously going to impact both revenue and earnings. So we mean both. And as a result, that would also imply the growth of those items.

Okay. Perfect. And then maybe a higher-level question. Just thinking about your military business and the exposure there and as we're seeing a rearmament in Europe that's expected kind of over the next 5 to 10 years, are there any thoughts to expanding your European exposure or just exposure outside of North America?

If you think about military, the bulk of the work we do in military is on transport aircraft C-130. There's really no good equivalent to that. On the fighter side, there are European fighters that would be comparable to F-15, F-16, Joint Strike Fighter, F-22s. But from an MRO side, there's a lagged effect of anything that would come our way. The flight hours have to occur and then you start seeing MRO picking up from that. So I would say, at this stage, we don't see anything that would significantly impact growth in military in the near term. But if there was some type of a conflict perhaps in Central Europe or other parts of the world, then there could be hours that are flown that would generate some additional uplift in MRO work on some of the fighter engines that we work on specifically for the F-15 and F-16 and Joint Strike Fighter, but we would likely not see those in the near term.

Krista, it's Alex. I would also add that we serve customers globally. So it's allied nations, U.S. government. So it's more a question of where they fly more so than it is where they're serviced. And so I think wherever aircraft are operating, we will be able to take advantage of those opportunities.

And our next question comes from the line of Seth Seifman with JPMorgan.

I was wondering if you could speak a little bit more. You mentioned fairly robust demand environment. I think that's the signal we get from a bunch of different sources. But can you talk about the quality of conversations that you're having with customers now? I think you mentioned most of the slots for this year are full. When we think out how -- are you looking to kind of keep slots full for multiple years? Are you looking to have kind of spare capacity? Maybe just some additional color on the state of the market right now.

Yes. Thanks, Seth. I'll talk about it from an end market perspective, right? We talked just previously with Krista about military. But specifically on the commercial side of the business, the big growth drivers, you have to look at it by platform and by mission, obviously, for MRO. So the big platforms are going to be driving growth for us in the near term are LEAP, CFM, CF34 and turboprops, all of which remain highly active. And so we have excellent pipeline of long-term contracts lined up. Now some of those engines dependent upon the age of those engines and the age in service like LEAP being newer than, for instance, CF34. There are more light work scopes than heavy work scopes and so we try to leave a certain amount of capacity available to do those types of work scopes on top of the heavy work scopes. But right now, for all the engine platforms, we pretty much have filled the slots that we need for 2026. We have some open capacity for lighter work scopes that might come along. But then as we continue down the learning curve, specifically on the additional capacity that we've added for CFM56 and the new capacity on LEAP, we will generate incremental capacity simply from the learning curve as we produce another 100, 150 engines through each one of those sites. So that's what will give us incremental capacity over the next year or 2 to be able to increase our growth presence there.

Great. And just maybe following up, Dan, if you could talk about the -- in terms of the cash conversion, it looks like maybe there's -- if we think about taxes and CapEx and interest, maybe there's $200 million plus or approaching $250 million of kind of working capital growth that's in there, I guess. Is that, a, the right way to think about it? And then b, how can we think about that evolving beyond 2027?

Yes. So interest, of course, significantly reduced 2024 over 2025 on the IPO proceeds, and that's going to remain at a manageable level. Working capital, we had the great working capital performance in Q4, where we took working capital down $168 million. And now it's at a more manageable level. So the 75% free cash flow conversion that we achieved in 2025. We should expand on that. We will expand on that next year and beyond. We should be an 80% to 100% free cash flow conversion company. Capital expenditures next year will be -- we're guiding you to $100 million to $110 million. That seems to be the right number as well to invest in the business. And all of that's going to contribute to that 80% to 100% conversion rate that we're anticipating.

And our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Maybe if I could ask on the margins. If we think about the margin profile, it looks like margins are expanding an implied 60 basis points, but the pass-through helps. So what are the puts and takes of margins and why are margins essentially flattish ex pass-through?

Ex -- next year?

Yes.

Yes. Margins are going to expand next year. And of course, the pass-through reduction is a benefit. Counteracting that, as we've talked about before, will be LEAP and CFM56 as those volumes grow. And even though those programs, of course, they will become more profitable during 2026, and we expect them to reach profitability in the second half, that will continue to be a dilutive headwind. So all of the things that contributed to good margin performance in 2025 are still there. But now we've got the extra good guide of the material takeout. So material takeout is a good guide on margins. The LEAP and CFM will continue to be dilutive. And then the rest of the business, the operating leverage and the productivity and the pricing were fantastic upsides for us this year in 2025 and will continue to contribute in 2026.

Is there any way to quantify that LEAP and CFM dilution, Dan? I guess...

No. We've talked about the revenue growth there doubling -- it doubled in the -- for the first half versus the second half. It's going to double again year-over-year. And of course, we booked those at 0 margins in adjusted EBITDA. And next year, it will be 0 margins until they hit profitability. So I think you could run your models, and that will be an accurate representation.

Got it. And can I just ask one more related to that? You mentioned, I think, 75 repairs that you guys have developed on the LEAP. How do we think about those repairs being additive to margins of an engine platform?

Yes. I mean the in-house repairs that we develop are always accretive. And as a matter of fact, the CRS margins that are 30% or so, the in-house margins are at similar levels. And so as we increase our capacity and our number of LEAP repairs, that's going to add to LEAP profitability for sure.

And our next question comes from the line of Kristine Liwag with Morgan Stanley.

Russ, in your prepared comments, you had talked about pricing and making sure that you are getting paid for the value that you're adding. I was wondering, can you expand more about what that environment is like? And it seems like in the market, there continues to be significant engine shortage. Everybody wants engines and then the MRO shops are also pretty tight with capacity. So can you talk about what that dynamic is like? What's the customer reception potentially for higher pricing? Is there price inelasticity here? And what other MRO shops are doing on pricing?

Yes. Thanks, Kristine. And yes, in fact, what we're seeing is the market is still accepting of what I would consider to be above-average price increases compared to what we saw pre-COVID. In the decade of 2010 to 2020, price increases have pretty much settled down in the 3%, 3.5% range. And then COVID came along, they tripled. And then there became on top of that, a stress in the supply chain. So part shortages leading to MRO constraints as well as new production constraints as well. So that condition still persists. And as a result, I think there is still a higher appetite for price increases than what we've seen historically. Now it has begun to moderate from what it was in 3 or 4 years ago, right, at the height of COVID. So as more capacity comes online, then I think you'll see the prices return to a more stable level. But that's not the case yet. So we are actively aware of what market pricing is for the various commodities that we do repairs on, if there's IP involved as well as on the engine services side with respect to capacity and slot availability. And so we price to the market in all of our proposals. And I don't see that changing real soon, frankly. So I think we're pretty much in line with the market there.

And the next question comes from the line of Ken Herbert with RBC.

This is actually Steve Strackhouse on for Ken Herbert. I wanted to focus on the significant growth that you had called out within the Aero derivatives within your CRS segment. Can you talk about how much revenue that generated in 2025? Or how much you maybe expect that business to evolve into '26 or into the next few years?

Stephen, it's Alex. We're not really giving out specific numbers there. I mean what we do see is obviously an uptick in activity for those platforms that are pointed at that market. For example, in the CRS business, we do repairs on LM2500, LM6000. We've been doing that for a decade. And like I said, we've seen an uptick there. So we're happy to see that. We're going to continue to look to add to our catalog of repairs on those platforms and others and studying the end market in general, just making sure that we understand the different ways to take advantage of that market, to invest in that market and just stay ahead of the developments that occur out there.

And then maybe just shifting gears a little bit. Could you maybe talk about your ability or likelihood to sign kind of a long-term agreement with -- directly with an airline, something similar to Ryanair signing with the big deal with CFM. Is that eventually work it could come to you guys? I'm kind of looking at that as maybe an out-year opportunity again kind of into filling that backlog in those slots.

Yes, Stephen. So I think what we understand to be the case there is Ryanair is on an agreement with the OEM, and they'll continue to be through the end of the decade. And then after that, if they go forward with some of the plans that they've been discussing on starting up an MRO shop, that's what they'll do, and that will take time and effort to get industrialized similar to how we're experiencing the LEAP and the CFM56 industrialization that we started a few years ago, right? They'll have to get going, get moving down the learning curve, and it's sort of a several years from now dynamic that we see.

And our next question comes from the line of Doug Harned with Bernstein.

When you talk about your end market revenue growth assumptions, when I -- if I look at your guide and adjust for the pass-through revenue, it looks like you're -- it's about a little over 10% growth rate for '26, which if I'm trying to tie that back to your view on the end markets, how should we think about that? I mean, do you expect to grow kind of in sync with the end markets or higher in some cases or lower? How do you interpret that?

Depending upon the market you're talking about, so I'm assuming, Doug, that you're talking about the commercial market. On the commercial market, our throughput capacity is actually greater right now than the supply chain can support. So we have the ability to accelerate, bring -- there is revenue upside for us with commercial programs. So we're obviously trying to stay ahead of that and generating more capacity through learning curve effects. On business aviation, similarly, there is still a high demand for the platforms that we service, namely the midsized jets that fly the TFE731. We've got leading position there and all of the super midsized jets that are now coming online that are using the newer HTF7000, we've got the worldwide independent heavy license authorization to do all that work, and we just expanded our engine shop in Augusta to get ahead of that demand. So I think we're very optimistic about our ability to take advantage of additional growth and frankly, to be able to drive disproportionate market share.

And you -- Russ, you got right to my follow-on question, which is when you -- how significant is the supply constraint in terms of parts? And do you see that being relieved over the next -- I'm not sure how long, next couple of years that would increase growth?

Supply chain is still a constraint. What we're seeing today is better than it was during the summer, last summer, but still not as good as it was at the beginning of the year last year. And we look at the top level, which is the on-time delivery metric, same thing that we're held accountable for to our end customers like the airlines. We look at our suppliers, which is their on-time delivery. On-time delivery had been in the 90% range, and it dropped down in the 60% range last summer. It's improved from that, but the leading indicator to on-time delivery is depth of delay. And that's where we began to see improvements in the fourth quarter last year as the depth of delays started to come down, and that gave us a better feel for engines we would be able to put through the shop, which is why we gave the guidance that we did during the fourth quarter for improving cash flow. And that's exactly what happened. So if you look at depth of delay, it matters if you miss the on-time delivery by 20%, it matters if that miss is 1 month or if it's 1 day. So as the depth of delay starts approaching 0, then you start seeing the on-time delivery tick up. And that's exactly what we're seeing is the depth of delay is coming down. It's still there. The on-time delivery is still lower than it needs to be. And I suspect that we will continue to see improving depth of delay as we go through the entire year of 2026. Our guidance and our assumptions don't say that supply chain is going to return to fantastic 90% plus on-time deliveries in the next 12 months. It will likely take longer than that.

And our next question comes from the line of Ron Epstein with Bank of America.

Maybe a couple of follow-ups to some stuff. You talked about the supply chain getting better, but still being a little bit of a headwind. How is it on the labor front? Are you in the supply chain? Are there labor challenges? And as you ramp, do you have any challenges finding capable mechanics? My understanding is there is -- correct me if I'm wrong, there is competition now out there for folks to work on industrial gas turbines and aero derivatives and everything else. I mean spinning equipment right now is sort of very, very in favor. So I mean, how are you thinking about that from a labor perspective?

Yes. Thanks, Ron. That's a good question. It's something that we have been focused on for several years now because it became apparent actually pre-COVID that there was a fair amount of retirements that were going to be occurring across the aerospace industry. So we started a multiphased approach to building the input for getting people into the aerospace industry and with enough lead time to get the proper training and certifications. As you know, technicians, particularly that work on flight critical systems like the engine, they generally have to have certain certifications, right? They have to have A&P licenses and things that take a couple of years to get. So we started down that path early. We started with different recruiting techniques using more advanced versions of social media to get access to people to recruit. We also beefed up our internship programs with selected universities around the world that help develop A&P types of mechanics. We also -- in addition to the intern program programs that we have, we created StandardAero University, our own internal university at our site in San Antonio, Texas, where we have a dozen full-time instructors teachers, if you will, that are running people through classes every 16 weeks to get them through essentially basic training and then they are returned to their sites where they receive engine-specific certifications. And so that's one element. The other element is the cheapest labor to find is people that you already have. And so what that means is you got to look at your attrition rate. And fortunately, for us, our attrition rate is low, has been low. And one of the proxies for that is the average tenure. And if you look at the average tenure for StandardAero employees, it's roughly double what the average tenure is that you would expect for a company like ours. So people tend to -- we recruit them and they tend to stay. They will spend their entire professional career with us. And that helps minimize the number of people that we have to recruit and train. So we've done actually very well on the labor front, and we expect to be able to continue that. We've not had any labor constraints that have prevented us from expanding.

Got it. Got it. Got it. And then if we can maybe revisit just quickly. When we think about potential new opportunities on maybe platforms that you're not that concentrated on today, -- is there -- I mean, is there an opportunity with Pratt? Is there an opportunity on some other biz jet engines that you guys aren't currently exposed to? Maybe wide-body. I know we've talked about that in the past, Russ, that if the right conditions came up, that maybe there would be an opportunity in wide-body. What are you thinking there?

Ron, it's Alex. Absolutely, that's a big part of my job is making sure that we're talking to OEMs about obtaining licenses in markets that we think are accretive to our business. So always an ongoing discussion across the different end markets.

Anything we can double click on?

Not at the moment.

I think it's fair to say though, Ron, we've got a couple of engine platforms that look quite interesting in the commercial side of the business. We have a couple on the military side of the business. And there's even a couple in the biz app side of the business. So it's not just limited to commercial engine platforms that we can add to our product portfolio. It's across all 3 of our end markets.

Got you. Correct me if I'm wrong, you guys are the largest MRO for business aviation in the world, right?

For business aviation?

Yes.

Yes. Ron, we service the ubiquitous engine platforms in the sort of the big part of the market like super midsize and long-range cabins. So yes, I mean, we definitely are a big player in engine MRO. But of course, you've got the OEMs as well, and I can't speak to size-wise how big that part of their business is.

That's the wildcard. But as far as external, I think we are.

And our next question comes from the line of Michael Ciarmoli with Truist Securities.

Maybe, Dan, just to hone in a little bit more on the margins and kind of back to Sheila's question just to make sure I've got it understand it. I guess those underlying ex pass-through in ES look to be 12.9% maybe down 30 bps. And that dilution is stemming primarily from a doubling of LEAP and CFM56, but it sounds like your sort of core business, you're still getting pricing productivity efficiencies and those core margins are still trending in line with kind of your expectations?

That's exactly right. Even the LEAP and CFM56 programs, if you look at their losses during 2025 have been narrowing. They've declined over 60%. And then so next year, that will be a loss early on probably in Q1 and then for the rest of the year, it will flip to profitability, still dilutionary and revenues double again in 2026. But the underlying business has really been satisfying in order to offset that. And then now in 2026, we've got the material takeout.

Okay. Okay. Got it. And then on the CRS margins, you talked about the shutdown, you talked about the fire being a drag. You've got flattish margins this year. As we get -- as you guys digest that and get through it, is there more runway to push those margins higher as you expand repairs, license capabilities? I mean, how should we think about the potential on CRS margins?

I mean we're giving you guidance next year of 28.5% to 29.5%, which is good guidance for 2026. Looking beyond that, of course, we're going to grow that segment as fast as we can through NPI or what we call new repair development, acquisition opportunities where they become available, the in-sourcing effort, all of that is accretive for sure. As we develop new repairs, we will ensure that those are accretive. So I think expanding beyond the guidance we have for next year is definitely possible.

And our next question comes from the line of Gavin Parsons with UBS.

Can you hear me?

Yes. We can just hear you barely, Gavin. Go ahead.

Sorry about that. Hopefully, it's a little bit clearer. You guys have talked about expanding the in-source repair capture. I think that's still only something like 10% of engine services repairs are done by CRS. How much can you mix that up? And what are the bottlenecks to doing that?

That's a really interesting area of expansion for CRS because as we mentioned, it's tied to two things. It's tied to our repair development processes, and we are actively expanding that, investing in engineering resources to go develop more repairs. And it's also tied to any of the acquisition work that we do. Anytime we do an acquisition in that end market, it brings new repairs. That's one of the things we look for is we're not just buying the same repairs at the same capacity. We're buying new repairs. So every time we get a new repair, either one that we've developed or one that we have added into the portfolio, that gives us the ability to in-source more of the work from our Engine Services segment that presently would be going out simply because we -- it would be ostensibly for something that we don't have that process in-house. But as we add those processes, all that work comes in, number one. Number two -- and we've increased that amount of work by 15% just in 2025. There's still more work to do there. But more importantly, every time we add one of those repairs or acquire one of those repairs, it's something we can sell to the market. And nearly 90% of the work that our CRS division does is for outside of StandardAero. So adding to that portfolio of repairs gives us a very strong expansion tool into the overall market as well as internally.

And you mentioned being growth constrained at Engine Services by the availability of parts. Are you also supply constrained at CRS?

Not so much because CRS, someone is typically supplying you the part to be repaired versus in an engine services area, you may be waiting for an actual part. So it's a different situation where you're doing repair on existing parts.

And with that, this now does conclude our question-and-answer session. I would now like to turn the floor back to Russell Ford for any closing comments.

Okay. Thank you. Thanks again, everybody, for joining us today. We appreciate your continuing interest in StandardAero, and we look forward to speaking with you again next quarter.